<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 JUNE 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)
<TABLE>
<S> <C>
CALIFORNIA 33-365417
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
</TABLE>
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)
Balance Sheets
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Properties, at cost:
Land $ 4,674 $ 4,674
Buildings and improvements, less accumulated
depreciation of $4,606 and $4,122 at June
30, 1998 and December 31, 1997, respectively 24,478 24,126
Furniture, fixtures and equipment, less
accumulated depreciation of $405 and $373 at
June 30, 1998 and December 31, 1997,
respectively 964 760
-------- --------
Net properties 30,116 29,560
Cash 1,765 1,086
Restricted cash 158 153
Loan fees, less accumulated amortization of
$192 and $175 at June 30, 1998 and December
31, 1997, respectively 53 70
Amounts receivable from affiliates -- 265
Other assets 239 107
-------- --------
$ 32,331 $ 31,241
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 16,685 $ 16,086
Notes payable to others 4,775 4,803
Accounts payable 1,266 974
Accrued expenses 461 328
Amounts payable to affiliate 694 383
Distributions payable to Partners 281 46
-------- --------
Total liabilities 24,162 22,620
-------- --------
Commitments and contingencies
Minority interest 84 74
-------- --------
Partners' capital (deficit):
General partners' deficit (78) (74)
Limited partners' capital, 18,666
units outstanding 8,163 8,621
-------- --------
Total partners' capital 8,085 8,547
-------- --------
$ 32,331 $ 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)
Statements of Operations
(unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Rent $ 1,987 $ 1,375 $ 3,895 $ 2,752
Assisted living 231 141 448 278
Interest and other 141 25 206 52
------- ------- ------- -------
Total revenues 2,359 1,541 4,549 3,082
------- ------- ------- -------
COSTS AND EXPENSES:
Rental property operations 1,054 685 2,022 1,376
Assisted living 89 52 176 107
Depreciation and amortization 379 228 714 455
Interest 495 358 968 719
General and administrative 144 133 280 244
Property taxes 70 66 141 131
Advertising 29 14 50 23
Minority interest in
operations 37 16 72 38
------- ------- ------- -------
Total costs and
expenses 2,297 1,552 4,423 3,093
------- ------- ------- -------
Net income (loss) $ 62 $ (11) $ 126 $ (11)
======= ======= ======= =======
Net income (loss) per limited
partner unit $ 3.29 $ (0.58) $ 6.69 $ (0.58)
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
3
<PAGE> 4
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 126 $ (11)
Adjustments to reconcile net income to net cash
provided by
Operating activities:
Depreciation and amortization 714 455
Interest expense on notes payable to bank
added to principal 74 --
Change in assets and liabilities:
(Increase) decrease in restricted cash (5) (4)
Increase in other assets (218) (100)
Increase in accounts payable and accrued
liabilities 425 405
Increase in amounts payable from
affiliates, net 576 (58)
Increase in minority interest 12 16
------- -------
Net cash provided by operating
activities 1,704 703
------- -------
Cash flows used in investing activities:
Improvements and building construction (835) (2,802)
Additions to furniture, fixtures and
equipment, net (333) (50)
------- -------
Net cash used in investing activities (1,168) (2,852)
Cash flows from financing activities:
Proceeds from notes payable 663 2,403
Principal repayments on notes payable to
banks and others (166) (139)
Distributions paid (354) --
------- -------
Net cash provided by financing
activities 143 2,264
------- -------
Net increase in cash 679 115
Cash at beginning of period 1,086 892
------- -------
Cash at end of period $ 1,765 $ 1,007
======= =======
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 968 $ 719
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
4
<PAGE> 5
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
June 30, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
All adjustments, consisting only of recurring accruals, have been made that are
necessary to present fairly the financial position and results of operations for
the periods covered by this report. The results of operations for the three
months and six months ended June 30, 1998, are not necessarily indicative of the
operating results for the full year.
Pursuant to Regulation S-X Rule 10-1(5), American Retirement Villas Properties
III, L.P.'s (the "Partnership") significant accounting policies are described in
the Partnership's December 31, 1997 Form 10-K filed with the Securities and
Exchange Commission. The Partnership follows the same accounting policies for
interim reporting purposes. This quarterly report should be read in conjunction
with such financial statements.
Certain prior period amounts have been reclassified to conform to the current
period financial statement presentation.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARV Assisted Living, Inc., the
Partnership's Managing General Partner, providing for a property management fee
of five percent of gross revenues amounting to $113,000 and $223,000, for the
three-month and the six-month periods ended June 30, 1998, respectively.
Additionally, a partnership management fee of 10 percent of cash flow before
distributions, as defined in the Partnership Agreement, amounted to $46,000 and
$97,000 for the three-month and the six-month periods ended June 30, 1998,
respectively.
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 $818,000 and $1.5 million for the
three-month and six-month periods ended June 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 $745,000 and $1.3
million for the three-month and six-month periods ended June 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.
5
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
The General Partners expect that the cash to be generated from operations of all
the Partnership's 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, the Partnership's liquidity
is sustained primarily from cash flow provided by operating activities. During
the six-month period ended June 30, 1998, cash provided by operating activities
increased to $1.7 million compared to $703,000 for the corresponding period in
1997.
During the six-month period ended June 30, 1998, the Partnership's net cash used
in investing activities decreased to $1.2 million compared to net cash used in
investing activities of $2.9 million for the corresponding period in 1997. The
Partnership's investing activities consisted of capital improvements and the
purchase of furniture and fixtures at its operating properties. During 1997,
additional cash was used in the construction of Villa Las Posas.
During the six-month period ended June 30, 1998, the Partnership's net cash
provided by financing activities was $143,000 compared to net cash provided by
financing activities of $2.3 million for the corresponding period in 1997. The
Partnership's financing activities consisted of borrowings from its construction
loan and principal reduction on its notes payable to banks and others. During
the six-month period ended June 30, 1998, the Partnership made $354,000 in
distributions to the partners.
The General Partners 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. The General Partners believe that if the
inflation rate increases they will be able to pass the subsequent increase in
operating expenses onto the residents of the facilities by way of higher rental
and assisted living rates.
On March 12, 1997, ARVP III obtained a $7.7 construction loan from Bank United
of Texas for financing the construction of Villa Las Posas. The terms of the
construction loan provide for the interest rate to be equal to the 30 day LIBOR
rate plus 2.75 percent. As of June 30, 1998, the Partnership had $5.9 million
outstanding under this construction loan. In addition, the Partnership has
long-term notes payable to banks and others of $15.6 million as of June 30,
1998.
In July 1998, the Board of Directors of the Managing General Partner approved
the refinancing of the Partnership's three assisted living communities. This
refinancing will allow the Partnership to refinance the existing Villa Las Posas
construction debt before its September maturity, to take advantage of lower
interest rates available in the current environment and to provide a return of
capital to the limited partners by borrowing against the increased value of
these properties. As a result of this refinancing, the Partnership's long-term
debt is expected to be approximately $30.0 million. In order to refinance
certain long-term debt, the Partnership will pay a prepayment penalty of
approximately $145,000. The savings on the interest rate of the new debt will
mitigate the effect of the prepayment penalty.
The Partnership contemplates spending approximately $800,000 for capital
expenditures during 1998 for physical improvements at its communities. Of this
amount, approximately $130,000 has been contracted as of June 30, 1998. 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, in the
Partnership's capital resources, and there is no expected change in the mix of
such resources.
There are no known material trends, favorable or unfavorable, other than those
disclosed above, in the Partnership's capital resources. There is no expected
change in the mix of such resources.
YEAR 2000 ISSUE
Certain computer programs utilized by the Partnership 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 the Partnership's 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 replaced substantially all of its accounting
information systems software during 1998/1999. 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.
6
<PAGE> 7
The Partnership is assessing its 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. This assessment is expected to be completed during the fourth
quarter of 1998.
The Partnership has initiated communications with the third-party providers of
certain of its administrative services, as well as its significant suppliers of
services and products to determine the extent to which the Partnership is
vulnerable to those parties' failures to remediate their own Year 2000 Issues.
The Partnership plans to have completed its evaluation of those suppliers during
the first quarter of 1999. The Partnership does not presently believe that third
party Year 2000 Issues will have a material adverse effect on the Partnership.
However, there can be no guarantee that the systems of other companies on which
the Partnership's 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 the Partnership.
The Partnership expects to successfully implement the changes necessary to
address these Year 2000 Issues, and does not believe that the cost of such
actions will have a material effect on the Partnership. There can be no
assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and the Partnership's
inability to implement such changes could have a material adverse effect on the
Partnership's business, operating results, and financial condition.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
7
<PAGE> 8
SIGNATURES
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: August 14, 1998
By: /s/ Paul Kuliev
---------------------------
Vice President, Controller
Date: August 14, 1998
8
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,765
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,127
<DEPRECIATION> 5,011
<TOTAL-ASSETS> 32,331
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 8,085
<TOTAL-LIABILITY-AND-EQUITY> 32,331
<SALES> 0
<TOTAL-REVENUES> 2,359
<CGS> 0
<TOTAL-COSTS> 1,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495
<INCOME-PRETAX> 62
<INCOME-TAX> 0
<INCOME-CONTINUING> 62
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.29
</TABLE>
