<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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:
TITLE OF CLASS
--------------
UNITS OF LIMITED PARTNERSHIP
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 the voting units held by non-affiliates of
registrant, computed by reference to the price at which units were sold, was
$18,666,480 (for purposes of calculating the preceding amount only, all
directors, executive officers and shareholders holding 5% or greater of the
registrant's units are assumed to be affiliates). The number of Units
outstanding as of March 25, 1999 was 18,666.
================================================================================
<PAGE> 2
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1:. Business............................................ 1
Item 2: Properties.......................................... 6
Item 3: Legal Proceedings................................... 7
Item 4: Submission of Matters to a Vote of Unit Holders..... 7
PART II
Item 5:. Market for Registrant's Common Equity and
Related Stockholders Matters........................ 8
Item 6: Selected Financial Data............................. 8
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 8
Item 7a: Quantitative and Qualitative Disclosures About
Market Risk......................................... 12
Item 8: Financial Statements and Supplementary Data......... 12
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 12
PART III
Item 10: Directors and Executive Officers of the Registrant.. 12
Item 11: Executive Compensation.............................. 14
Item 12: Security Ownership of Certain Beneficial Owners
and Management...................................... 15
Item 13: Certain Relationships and Related Transactions...... 15
PART IV
Item 14: Exhibits and Financial Statement Schedules,
and Reports on Form 8-K............................. 16
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
American Retirement Villas Properties III, L.P. ("ARVP III"), is the
owner and operator of three assisted living communities, which house and provide
personal care and support services to senior residents, and three senior
apartment complexes in California and Arizona. The three assisted living
communities currently in operation are located in California and Arizona and
contain an aggregate of 379 units. All three senior apartments are located in
Southern California and contain an aggregate of 416 units. During the Fourth
Quarter of 1998, we decided to sell our three senior apartments. On February 19,
1999, we sold the three senior apartment projects for approximately $17.9
million.
ARVP III is a California limited partnership that was formed in June of
1989 to develop, finance, acquire and operate senior citizen 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 the "General Partners"). Our
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 our assets.
On September 15, 1989, we began offering a total of 35,000 units at
$1,000 per unit. The offering terminated on October 31, 1992 and we realized
gross offering proceeds of $18,664,000. In January and March of 1993, we
repurchased and effectively retired 10 units for $8,500 and 3 units for $2,550,
from Limited Partners. During 1993, we applied for and earned block grants
totaling a gross amount of approximately $1,081,000 allocated to two of our
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 we either own outright
or through our interest as managing general partner that holds title to the
respective property.
Although the expiration of the minimum holding period (stipulated in the
offering memorandum as five to seven years) is approaching for certain Assisted
Living Communities ("ALCs"), there is no definite plan to sell any ALCs in
accordance with a timetable. Any determination regarding sale will be dependent
upon the current and projected operating performance, our needs, the
availability of buyers and buyers' financing and, in general, the relative
merits of continued operation as opposed to sale. On any sale, we 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.
THE ASSISTED LIVING MARKET
ASSISTED LIVING. Assisted living is a stage in the elder care continuum,
midway between home-based care for lower acuity residents and the more acute
level of care provided by skilled nursing facilities and acute care hospitals.
Assisted living represents a combination of housing, personalized support
services, and health care designed to respond to the individual needs of the
senior population who need help in activities of daily living, but do not need
the medical care provided in a skilled nursing facility.
We believe our assisted living business benefits 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 our residents falling within the fastest growing segment 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
trend 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 to patients in acute care hospitals and skilled nursing
facilities. Assisted living offers a cost-effective, long-term care alternative
while preserving a more independent lifestyle for seniors who do not need the
broader array of medical services that acute care hospitals and skilled nursing
facilities are required to provide. Other beneficial trends include increases in
the financial net worth of the elderly population, the number of individuals
living alone, and the number of women who work outside the home who are
1
<PAGE> 4
less able to care for their elderly relatives. We believe these trends will
result in a growing demand for assisted living services and communities to 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 the U.S. Bureau of
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.
We believe that growth in the assisted living industry is being driven
by several factors. Advances in the medical and nutrition fields have increased
life expectancy, resulting in larger numbers of elderly people. Greater numbers
of women in the labor force have reduced the supply of caregivers. Historically,
unpaid women (mostly daughters or daughters-in-law) represented a large portion
of the caregivers for the non-institutionalized elderly. The population of
individuals living alone has increased significantly since 1960, largely as a
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 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 elderly. Cost factors are placing
pressure on skilled nursing facilities to shift their focus toward higher acuity
care, which enables them to charge more. This contributes to a shortage of lower
acuity care and thereby increases 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 ALCs 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 ALC,
provide an additional barrier to entry into 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 encourage 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
and skilled nursing facility reimbursement to pre-established 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
discounted rates for hospital services and by monitoring and decreasing
hospitalization. We anticipate that both HMOs and PPOs increasingly may direct
patients away from higher cost 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 acuity
level of skilled nursing facility patients rises, the supply of nursing facility
beds will be filled by patients with higher acuity needs who pay higher fees.
This will provide opportunities for assisted living communities to increase
their occupancy and services to residents requiring lower levels of care than
patients in skilled nursing facilities generally receive.
2
<PAGE> 5
OUR ASSISTED LIVING SERVICES
We provide services and care which are designed to meet the individual
needs of our residents. The services provided are designed to enhance both the
physical and mental wellbeing of seniors in each of our ALCs by promoting their
independence and dignity in a home-like setting. Our assisted living program
includes the following:
o PERSONALIZED CARE PLAN. The focus of our strategy is to meet the specific
needs of each resident. We customize our services beginning with the
admissions process; when the ALC's management staff, the resident, the
resident's family, and the resident's physician discuss the resident's
needs and develop a "personalized" care plan. 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.
o BASIC SERVICE AND CARE PACKAGE. The basic service and care package at our
ALCs generally include:
- meals in a communal, "home-like" setting;
- housekeeping;
- linen and laundry service
- social and recreational programs;
- utilities; and
- transportation in a van or minibus.
Other care services can be provided under the basic package based upon
the individual's personalized health care plan. Our policy is to charge base
rents that are competitive with similar ALCs in the local market.
o ADDITIONAL SERVICES. Our assisted living services program offers
additional levels of care beyond what is offered in the basic package. The
level of care a resident receives is determined through an assessment of a
resident's physical and mental health which is conducted by the
community's assisted living director, with input from other staff members.
The six-tiered rate structure is based on a point system. We assign points
to the various care tasks required by the resident, based on the amount of
staff time and expertise needed to accomplish the tasks. The point scale
and pricing are part of the admissions agreement between the community,
the resident and the resident's family. The community performs
reassessments after the initial 30 days and periodically throughout the
resident's stay to ensure that the level of care we provide corresponds to
changes in a resident's condition. The types of services included in the
assessment point calculation are:
- Medication management
- Assistance with dressing and grooming
- Assistance with showering
- Assistance with continence
- Escort services
- Status checks related to a recent hospitalization, illness,
history of falls, etc.
- Help with psychosocial needs, such as memory deficit or depression
- Special nutritional needs and assistance with eating
In addition to the above services, we provide other levels of assistance
to residents at selected ALCs in order to meet individual needs, such as
assistance with diabetic care and monitoring, catheter, colostomy and
ileosotomy care, minor wound care needs and light to moderate transferring
needs. Specially trained staff provide personalized care and specialized
activity programs and medical directors oversee the medication regimens.
In addition to the base rent, we typically charge between $375 and
$1,375 per month plus an additional $10 per point for higher levels of assisted
living services. Fee levels vary from community to community and we may charge
additional fees for other specialized assisted living services. We expect that
an increasing number of residents will use additional levels of services as they
age in our ALCs. Our internal growth plan is focused on increasing revenue by
continuing to improve our ability to provide residents with these services.
There can be no assurance that any ALC will be substantially occupied at
assumed rates at any time. In addition, we may only be able to lease up our ALCs
to full occupancy at rates below those assumed. If operating expenses increase,
local market conditions may limit the extent to which we may increase rates.
Because we must provide advance notice of rate increases, generally at least 30
days, increases may lag behind increases in operating expenses.
3
<PAGE> 6
WELLNESS PROGRAM. We have implemented a Wellness Program for residents
of our communities designed to identify and respond to changes in a resident's
health or condition. Together with the resident and the resident's family and
physician, as appropriate, we design a solution to fit that resident's
particular needs. We monitor the physical and mental wellbeing of our residents,
usually at meals and other activities, and informally as the staff performs
services around the facility. Through the Wellness Program we work with:
o home health care agencies to provide services the community cannot
provide;
o physical and occupational therapists to provide services to
residents in need of such therapy; and
o long-term care pharmacies to facilitate cost-effective and reliable
ordering and distribution of medications.
We arrange for these services to be provided to residents as needed in
consultation with their physicians and families.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
Our 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, our performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. We have 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 us. 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", "Legal Proceedings" 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 as of the date of
this report. We disclaim 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 we expect that the
assisted living business, in particular, will become more competitive in the
future. Sources of competition include:
o family members providing care at home;
o numerous local, regional and national providers of assisted living
and long-term care whose facilities and services range from
home-based health care to skilled nursing facilities; and
o acute care hospitals.
In addition, we believe that as assisted living receives increased
attention among the public and insurance companies, new competitors focused on
assisted living will enter the market, including hospitality companies expanding
into the market. Some of our competitors operate on a not-for-profit basis or as
charitable organizations, while others have, or are capable of obtaining,
greater financial resources than those available to us.
We also expect to face increased competition for the acquisition and
development of ALCs. Some of our present and potential competitors are
significantly larger or have, or may obtain, greater financial resources than we
have. These forces could limit our ability to attract residents, attract
qualified personnel, expand our business, or increase the cost of future
acquisitions, each of which could have a material adverse effect on our
financial condition, results of operations and prospects.
4
<PAGE> 7
GOVERNMENT REGULATION
ASSISTED LIVING. Health care is subject to extensive regulation and
frequent regulatory change. Currently, no federal rules explicitly define or
regulate assisted living. However, we are and will continue to be subject to
varying degrees of regulation and licensing by health or social service agencies
and other regulatory authorities in California and Arizona and localities where
we operate or intend to operate. Changes in such laws and regulations, or new
interpretations of existing laws and regulations could have a significant effect
on methods and costs of doing business, and on reimbursement levels from
governmental and other payers. In addition, the President and Congress have
proposed in the past, and may propose in future, health care reforms that could
impose additional regulations on the Company or limit the amounts that we may
charge for our services. We cannot assess the ultimate timing and impact that
any pending or future health care reform proposals may have on the assisted
living, home health care, skilled nursing or 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 our results of operations.
SSI PAYMENTS. A portion of our revenue (approximately 1% of our assisted
living revenue) comes from residents who receive SSI payments. Revenue from
these residents is generally lower than the amounts we receive from our other
residents and could be subject to payment delay. We cannot assure that our
percentage of revenue received from SSI will not increase, or that the amounts
paid by SSI programs will not be further limited. In addition, if we were to
become a provider of services under the Medicaid program, we would be subject to
Medicaid regulations designed to limit fraud and abuse. Violations of these
regulations could result in civil and criminal penalties and exclusion from
participation in the Medicaid program.
RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS
STAFFING AND LABOR COSTS. We compete with other providers of assisted
living and senior housing to attract and retain qualified personnel. We also
rely on the available labor pool of employees, and unemployment rates are low in
many areas where we operate. We make a genuine effort to remain competitive with
other companies in our industry. Therefore, if it is necessary for us to
increase pay and/or enhance benefits to maintain our competitive status in our
industry, our labor costs could rise. We cannot provide assurance that if our
labor costs do increase, they can be matched by corresponding increases in
rental, assisted living or management revenue.
OBTAINING RESIDENTS AND MAINTAINING RATES. As of December 31, 1998, our
ALCs had a combined occupancy rate of 94.5%. Occupancy may drop in our existing
ALCs, primarily due to:
o changes in the health of residents;
o increased competition from other assisted living providers,
particularly those offering newer ALCs;
o the reassessment of residents' physical and cognitive state.
We can provide no assurance that, at any time, any ALC will be
substantially occupied at assumed rents. In addition, we may only achieve
lease-up and full occupancy at rental rates below those assumed. If operating
expenses increase, local rental market conditions may limit the extent to which
we may increase prices. The implementation of rate increases for residents of
new acquisitions may lag behind increases in operating expenses. In addition, if
we fail to generate sufficient revenue, we may be unable to make interest and
principal payments on our indebtedness.
GENERAL REAL ESTATE RISKS. The performance of our ALCs is influenced by
factors affecting real estate investments, including the general economic
climate. Other real estate risks include:
o an oversupply of, or a reduction in demand for, ALCs in a particular
market;
o the attractiveness of properties to residents;
o zoning, rent control, environmental quality regulations or other
regulatory restrictions;
o competition from other forms of housing;
o our ability to provide adequate maintenance and insurance;
o our ability to control operating costs, including maintenance,
insurance premiums and real estate taxes.
Real estate investments are also affected by such factors as applicable
laws, including tax laws, interest rates and the availability of financing. Real
estate investments are relatively illiquid and, therefore, limit our ability to
vary our portfolio
5
<PAGE> 8
promptly in response to changes in economic or other conditions. If we fail to
operate our ALCs effectively, it may have a material adverse effect on our
business, financial condition and operating results.
RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS. Under the
Americans with Disabilities Act of 1990, all places of public accommodation are
required to meet certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and local laws exist
that also may require us to modify existing and planned properties to allow
disabled persons to access the properties. We believe that our properties are
either substantially in compliance with present requirements or are exempt from
them. However, if required changes cost more than anticipated, or must be made
sooner than anticipated, we would incur additional costs. Further legislation
may impose additional burdens or restrictions related to access by disabled
persons, and the costs of compliance could be substantial.
GEOGRAPHIC CONCENTRATION. Two of our ALCs are located in California and
one ALC is located in Arizona. The market value of these ALCs and the income
generated from properties could be negatively affected by changes in local and
regional economic conditions, specific laws and the regulatory environment in
these states, and by acts of nature. We cannot provide assurance that such
geographic concentration will not have an adverse impact on our business,
financial condition, operating results and prospects.
INSURANCE. We believe that we maintain adequate insurance policies,
based on the nature and risks of our business, historical experience and
industry standards. Our business entails an inherent risk of liability. In
recent years, we and other assisted living providers have become subject to an
increasing number of lawsuits alleging negligence or related legal theories,
which may involve large claims and significant legal costs. From time to time we
are subject to such suits because of the nature of our business. We cannot
assure that claims will not arise that exceed our insurance coverage or are not
covered by it. A successful claim against us that is not covered by, or is in
excess of our insurance, could have a material adverse effect on our financial
condition, operating results or liquidity. Claims against us, regardless of
their merit or eventual outcome, may also have a material adverse effect on our
ability to attract residents or expand our business and would consume
considerable management time. We must review our insurance policies annually and
can provide no assurance that we will be able to continue to obtain liability
insurance coverage in the future or that it will be available on acceptable
terms.
ITEM 2. PROPERTIES
The following table sets forth, as of December 31, 1998 the location,
the date on which operations commenced, number of units, and our 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 92 Fee Owned
Chandler Villas Chandler, AZ 1992 164 Fee Owned
Villa Las Posas (a) Camarillo, CA 1997 123 Fee Owned
SENIOR APARTMENTS (b)
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) We commenced operations of Villa Las Posas in December 1997.
(b) We sold all of the senior apartments on February 19, 1999.
6
<PAGE> 9
PROMISSORY NOTES RESULTING FROM THE SALE OF HERITAGE POINTE CLAREMONT
In September 1993, we contracted to sell the Heritage Pointe Claremont
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. We took back notes receivable to
finance a portion of the sale.
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 secured by certain CSP partners'
interests in CSP and are due January 25, 2010.
Upon the receipt of the principal and interest payment from CSP in April
1996, a sufficient investment as defined by Statements of Financial Accounting
Standards Board No. 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 1998, we received interest payments
totaling $134,000 on these notes.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending to which we are a party, or
to which some of our properties are subject, arising in the normal course of
business. We do not believe the ultimate resolution of those proceedings will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, we submitted the sale of
three senior apartment properties for a purchase price of no less than their
appraised value of $17,650,000 to the Limited Partners. They were told that,
so long as a majority of the limited partner units represented by valid consents
returned to the Managing General Partner voted in favor of the sale, the sale
would proceed. Of the approximately 18,666 limited partner units outstanding,
approximately 8,837 units were voted in favor of the sale, approximately 245
units were voted against it, and approximately 165 units were voted to abstain.
Therefore, of the units voted, approximately 95.6% voted in favor of the sale,
approximately 2.6% against and approximately 1.8% abstained.
7
<PAGE> 10
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 1998, there were approximately 1,849 Unit Holders of
record owning 18,666 units. For the years ended December 31, 1998, 1997 and
1996, we made distributions of $68.75 per unit, $0 per unit and $25.02 per unit,
respectively. All of the distributions during 1998 represented a return of
capital to the Unit Holders and during 1996 represented a distribution of
earnings 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 our 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>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except unit data)
<S> <C> <C> <C> <C> <C>
Revenues $ 9,490 $ 6,333 $ 6,140 $ 6,095 $ 6,136
Net Income (Loss) (378) 229 483 (464) (699)
Net Income (Loss) (per Limited Partner Unit) (20.06) 12.27 25.63 (24.62) (37.07)
Total Assets 31,678 31,241 25,300 32,794 34,794
Partners' Capital 6,873 8,547 8,318 8,307 9,054
Notes Payable to Banks and Others 23,071 20,889 16,023 20,746 21,279
Distributions of Earnings (per Limited
Partner unit) -- -- 25.02 -- --
Distributions - Return of Capital (per
Limited Partner units) 68.75 -- -- 15.03 150.71
Total Distributions (per Limited
Partner unit) 68.75 -- 25.02 15.03 150.71
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY
We expect that the cash to be generated from the operations of all our
properties will be adequate to pay operating expenses and provide distributions
to the Partners. On a long-term basis, our liquidity is sustained primarily from
cash flow provided by operating activities. For the year ended December 31,
1998, net cash provided by operating activities was $0.6 million compared to
$1.4 million for the year ended December 31, 1997 and $1.3 million for the year
ended December 31, 1996. The primary difference for the decrease in cash
provided from operating activities during 1998 was due to the lease up expenses
incurred for Villa Las Posas and the payment of interest rate lock and loan
commitment fees.
Net cash used in investing activities was $915,000 for the year ended
December 31, 1998 as compared to $6.0 million for the year ended December 31,
1997, and $71,000 for the year ended December 31, 1996. Our investing activities
consisted of:
o payment of invoices related to the construction of Villa Las Posas;
o furniture, fixtures and equipment additions to the other ALCs and
senior apartments;
offset by:
o interest payments received from Heritage Pointe Claremont for the
property sold under contract.
Net cash provided by financing activities was $1.2 million for the year
ended December 31, 1998 as compared to $4.8 million for the year ended December
31, 1997 and net cash used in financing activities of $862,000 for the year
ended 1996. Our financing activities consisted of:
o proceeds from the Villa Las Posas construction note payable;
offset by:
o principal repayments on notes payable;
o distributions made to partners.
8
<PAGE> 11
Our Managing General Partners' Board of Directors approved the
refinancing of the assisted living communities in July 1998 to:
o take advantage of lower fixed interest rates available at the time
through the commercial mortgage backed security market;
o provide a return of equity to the limited partners; and
o borrow against the increased value of these properties.
In conjunction with this financing, we paid the lender approximately
$0.7 million of fees for an interest rate lock and $0.1 million for loan
commitment and other fees. The lender terminated the loan commitment and
underlying interest rate lock in October 1998 due to adverse market conditions.
The lender returned $0.2 million of the interest rate lock fees in January 1999.
We have included the remaining $0.6 million of fees in interest expense in the
accompanying statements of income. We believe that we are entitled to a full and
complete return of the rate lock fees paid. We intend to pursue a return of all
fees and are investigating our legal alternatives to that end; however, there
can be no assurances that additional interest rate lock fees will be recovered.
On February 19, 1999, we sold the three senior apartment projects for
approximately $17.4 million, net of costs. In connection with the sale, we
received cash of approximately $4.0 million, notes receivable due in November
1999 of approximately $2.8 million and paid off the outstanding mortgage
balances of approximately $10.6 million.
Our 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. Our General Partners believe that if the
inflation rate increases they will be able to pass the subsequent increases in
operating expenses onto the residents at the properties by way of higher rental
and assisted living rates.
CAPITAL RESOURCES
We contemplate spending approximately $200,000 for capital expenditures
during 1999 for physical improvements at our three ALCs. The funds for these
improvements should be available from operations.
There are no known material trends, favorable or unfavorable, in our
capital resources, and there is no expected change in the mix of such resources.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Increase/
1998 1997 (decrease)
(DOLLARS IN MILLIONS) ---------------------------------
<S> <C> <C> <C>
Revenue:
Assisted living community revenue........ $ 9.2 $ 6.2 48.0%
Interest and other revenue............... 0.3 0.1 160.7%
------- ------- -----
Total revenue.................... 9.5 6.3 49.9%
------- ------- -----
Costs and expenses:
Assisted living operating expenses....... 4.8 3.1 53.2%
General and administrative............... 0.5 0.5 6.0%
Depreciation and amortization............ 1.4 0.9 57.6%
Property taxes........................... 0.4 0.3 48.9%
Advertising.............................. 0.1 0.1 70.1%
Interest................................. 2.6 1.4 78.7%
Minority interest in operations.......... 0.2 0.1 112.0%
------- ------- -----
Total costs and expenses......... 10.0 6.4 56.4%
------- ------- -----
Operating loss................... (0.5) (0.1) 739.3%
Profit on sale of property............... 0.1 0.3 (53.8)%
-------- -------- -----
Net income (loss)............... $ (0.4) $ 0.2 (265.1)%
======== ======= ======
</TABLE>
The increase in assisted living community revenue is attributable to:
o the operations of Villa Las Posas, which opened in December 1997,
versus being open for the entire year of 1998;
o the increase in average occupancy for our two stabilized ALCs to
96.4% for the year ended December 31, 1998 as compared with 95.4%
for the year ended December 31, 1997;
o the increase in assisted living penetration for our two stabilized
ALCs to 34.9% for the year ended December 31, 1998 compared with
32.3% for the year ended December 31, 1997; and
o the increase in average rate per occupied unit for our two
stabilized ALCs to $1,445 for the year ended December 31, 1998 as
compared with $1,326 for the year ended December 31, 1997.
9
<PAGE> 12
The increase in interest and other revenue is attributable to:
o interest bearing bank accounts used during 1998; and
o the increase in processing and other resident fees for the year
ended December 31, 1998.
The increase in assisted living operating expenses is attributable to:
o the operation of Villa Las Posas, which opened in December 1997,
versus being opened for the entire year in 1998;
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
General and administrative costs remained constant between years.
The increase in depreciation and amortization and property taxes is due
to the operation of Villa Las Posas during 1998.
Advertising expenses remained constant between years.
The increase in interest expense is related to:
o interest expense for the Villa Las Posas construction loan; and
o $0.6 million of interest rate lock and commitment fees incurred in
connection with the failed refinance of certain notes payable.
The decrease in profit on sale is due to the decreased interest
payments received from Heritage Pointe Claremont during 1998.
THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Increase/
1997 1996 (decrease)
(DOLLARS IN MILLIONS) ---------------------------------
<S> <C> <C> <C>
Revenue:
Assisted living community revenue........ $ 6.2 $ 5.9 5.9%
Interest and other revenue............... 0.1 0.3 (55.6)%
------- ------- -------
Total revenue.................... 6.3 6.2 3.1%
------- ------- ------
Costs and expenses:
Assisted living operating expenses....... 3.1 2.8 9.8%
General and administrative............... 0.5 0.4 24.0%
Depreciation and amortization............ 0.9 1.0 (9.0)%
Property taxes........................... 0.3 0.3 (6.1)%
Advertising.............................. 0.1 0.1 (157.7)%
Interest................................. 1.4 1.6 (10.7)%
Minority interest in operations.......... 0.1 0.1 45.6%
------- ------- -----
Total costs and expenses......... 6.4 6.3 1.1%
------- ------- -----
Operating loss.................. (0.1) (0.1) (29.1)%
Profit on sale of property............... 0.3 0.6 (49.0)%
-------- -------- -----
Net income....................... $ 0.2 $ 0.5 (52.6)%
======= ======= =====
</TABLE>
The increase in assisted living community revenue is attributable to:
o the increase in assisted living penetration to 32.3% for the year
ended December 31, 1997 compared with 29.2% for the year ended
December 31, 1996;
o the increase in average rate per occupied unit to $1,326 for the
year ended December 31, 1997 as compared with $1,187 for the year
ended December 31, 1996;
offset by:
o the slight decrease in average occupancy for our ALCs to 95.4% for
the year ended December 31, 1997 as compared with 95.9% for the year
ended December 31, 1996.
10
<PAGE> 13
The increase in interest and other revenue is attributable to the
increase in processing and other resident fees for the year ended December 31,
1997.
The increase in assisted living operating expenses are attributable to
staffing requirements related to increased assisted living services provided.
General and administrative costs remained consistent between years.
Depreciation and amortization, property taxes, advertising and interest
expenses remained constant between years.
The decrease in profit on sale is due to decreased interest payments
received from Heritage Pointe Claremont during 1997.
FUTURE CASH DISTRIBUTIONS
Our General Partners believe that our ability to make cash distributions
to limited partners depends on factors such as our ability to rent the available
units and maintain high occupancies and rates, our ability to control both
operating and administrative expenses, our ability to maintain adequate working
capital, the absence of any losses from uninsured property damage (e.g.,
earthquakes) or future litigation, our ability to generate proceeds from the
sales of our properties under favorable terms.
YEAR 2000
GENERAL
We use certain computer programs that were written using two digits
rather than four to define the year. As a result, those programs may recognize a
date using "00" as the year 1900 rather than the year 2000. In the event this
were to occur with any of our computer programs, a system failure or
miscalculation causing disruptions of operations could occur. Such a failure
could cause the temporary inability to process transactions, send invoices or
engage in similar normal business activities. We have developed a comprehensive
program to test and modify our information technology to address the Year 2000
Issue. We believe that our program is on schedule for completion by the end of
1999, and that there will be no material impact on our business, results of
operations, financial position or liquidity as a result of Year 2000 Issues.
PROGRAM
Our program is focused on the following three main projects:
o information technology infrastructure - all of our hardware and
software systems;
o community maintenance - community specific systems, including
alarms (security, fire and emergency call), elevator, phone,
HVAC, and other systems; and
o third party suppliers/vendors.
For each component, we are addressing the Year 2000 Issues in the
following six phases:
o taking inventory of systems with potential Year 2000 Issues;
o assigning priorities to systems identified with Year 2000 Issues;
o assessing items which may have a material effect on our operations;
o testing items assessed as material;
o replacing or repairing material non-compliant items; and
o designing and implementing business continuation plans.
We have initiated communications with the third-party providers of
certain of our administrative services, as well as our significant suppliers of
services and products, to determine the extent to which we are vulnerable to
those parties' failures to remediate their own Year 2000 Issues. We completed
our evaluation of those suppliers during the third quarter of 1998. We do not
presently believe that third party Year 2000 issues will have a material adverse
effect on us. However, there can be no guarantee that the systems of other
companies on which our operations or systems rely will be remedied on a timely
basis or that a failure by another company to remediate its systems in a timely
manner would not have a material adverse effect on us.
11
<PAGE> 14
COSTS
We expect to successfully implement the changes necessary to address our
Year 2000 Issues, and do not believe that the cost of such actions will have a
material adverse effect on our financial position, results of operations or
liquidity. We are currently unable to assess the costs to remediate any Year
2000 Issues that may result from the assessment.
RISKS
We believe that our Year 2000 program will be completed by the end of
the second quarter of 1999. Our program's schedule is based on a number of
factors and assumptions, such as:
o the accuracy and completeness of responses to our inquiries; and
o the availability of skilled personnel to complete the program.
Our program's schedule could be adversely impacted if any of the factors
and assumptions is incorrect. The failure to correct a material Year 2000 Issue
could result in an interruption in our normal business operations. There can be
no assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and our inability to
implement such changes could have a material adverse effect on our business,
operating results, and financial condition.
We intend to determine if contingency plans are needed for any aspect of
our business with respect to Year 2000 Issues (including most likely worst case
Year 2000 scenarios), and to create those contingency plans by the end of the
second quarter of 1999.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates
on our notes payable. Currently, we do not utilize interest rate swaps. The
purpose of the following analysis is to provide a framework to understand our
sensitivity to hypothetical changes in interest rates as of December 31, 1998.
You should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with our disclosures under
the heading "Forward-Looking Statements."
For our variable rate debt, changes in interest rates generally impact fair
market value of the debt instrument since two of our notes payable only re-price
every seven years. Holding the variable rate debt balance constant, each one
percentage point increase in interest rates would result in an increase in
variable rate interest incurred for the coming year of approximately $77,000.
The table below details the principal amount and the average interest
rates of notes payable in each category based upon the expected maturity
dates. The fair value estimates for notes payable are based upon future
discounted cash flows of similar type notes or quoted market prices for similar
loans. We have excluded approximately $10.6 million in debt from the
presentation below, as the debt was paid off in February 1999 in connection with
the senior apartment sale.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt...... $7,767 $ 34 $ 30 $ 29 $ 27 $4,561 $12,448 $13,351
Average interest rate... 8.34% 13.20% 13.20% 13.20% 13.20% 13.20%
</TABLE>
We do not believe that the future market rate risks related to the above
securities will have a material adverse impact on our financial position,
results of operations or liquidity.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). 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. We evaluate performance and make resource allocation
decisions on a community by community basis. Accordingly, each community is
considered an "operating segment" under SFAS 131. However, SFAS 131 did not have
an impact on the financial statements because the communities have similar
economic characteristics, as defined by SFAS 131, and meet the criteria for
aggregation into one "reportable segment".
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
OUR INDIVIDUAL GENERAL PARTNERS
JOHN A. BOOTY, age 60, one of ARVAL's founders, retired in September 1996 after
serving as president since the date of ARVAL's inception in 1985. Since his
retirement he has served as a consultant to ARVAL and a Director. He also served
as interim president of ARVAL from October 1997 to January 1998 and as interim
chief executive officer from October 1997 to December 1997.
DAVID P. COLLINS, age 61, has served ARVAL in several capacities since 1981. He
currently is president of ARV Assisted Living International, Inc., a
wholly-owned subsidiary of ARVAL. From 1985 to January 1998, Mr. Collins was a
senior vice president of ARVAL, responsible for investor relations and for
capital formation for ARVAL and affiliated entities.
GARY L. DAVIDSON, age 64, an attorney and one of ARVAL's founders, 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.
12
<PAGE> 15
JOHN S. JASON, age 63, was associated with KPMG 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, age 70, 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, age 50, was appointed chairman and chief executive officer
and a Director of ARVAL on December 5, 1997 and resigned on March 23, 1999.
Prior to joining ARVAL he was executive vice president, finance and information
systems, of Wellpoint Health Networks, Incorporated, a large managed care
company, from December 1994 to September 1997. 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.
DOUGLAS M. PASQUALE, age 44, was appointed president and chief executive officer
of ARVAL on March 26, 1999. He joined ARVAL as president and chief operating
officer on June 1, 1998, and was named a Director in October 1998. Prior to
joining ARVAL, Mr. Pasquale was employed for 12 years by Richfield Hospitality
Services, Inc., and Regal Hotels International-North America, a leading hotel
ownership and hotel management company based in Englewood, Colorado. He served
as its president and chief executive officer from 1996 to 1998 and as chief
financial officer from 1994 to 1996.
SHEILA M. MULDOON, age 43, served as secretary and general counsel for ARVAL
from 1996 until her resignation in March 1999. She joined ARVAL as vice
president and assistant general counsel in 1994. She was named a senior vice
president in March 1998. Prior to joining ARVAL Ms. Muldoon was the general
counsel of Osprey Financial Group, Inc. from 1993 to 1994.
PATRICIA J. GIFFORD, MD, age 51, a geriatrician, was appointed senior vice
president and chief medical officer of ARVAL on June 12, 1998. Prior to joining
ARVAL she served as medical director for the Monarch Healthcare medical group,
an independent practice association made up of 130 primary care physicians in
Southern California. She joined Monarch in 1996 as clinical director, Subacute
Service. From 1995 to 1998 Dr. Gifford also served as medical director of
Wellness and Geriatrics for Saddleback Memorial Medical Center in Laguna Hills,
California, a role that became a part-time position when she joined Monarch.
From 1995 to 1997 she also served part-time as medical director of the Freedom
Village Continuing Care Residential Community in Lake Forest, California. Dr.
Gifford was clinical director of Geriatrics at Huntington Memorial Hospital in
Pasadena, California from 1990 to 1995.
ABDO H. KHOURY, age 49, was appointed senior vice president and chief financial
officer of ARVAL on March 30, 1999. Previously he had served ARVAL as vice
president, asset strategy and treasury, since January 1999, and as president of
the Apartment Division since coming to ARVAL in May 1997. Mr. Khoury's prior
background includes more than 25 years in accounting and real estate. He was a
principal with Financial Performance Group in Newport Beach, CA, from 1991 to
1997.
DIRECTORS OF ARVAL
For a description of Messrs. Phanstiel, Pasquale, Booty and Collins, please see
above.
ROBERT P. FREEMAN, age 54, is a principal and chief investment officer of Lazard
Freres Real Estate Investors LLC, as well as a managing director of Lazard
Freres & Co. LLC, which he joined in 1992. He currently is a director of
American Apartment Communities, Atlantic American Properties Trust, Commonwealth
Atlantic Properties, The Fortress Group and Kapson Senior Quarters Corp.
KENNETH M. JACOBS, age 40, is a managing director in the Banking Group of Lazard
Freres & Co., LLC, a position he has held since 1991.
13
<PAGE> 16
MAURICE J. DEWALD, age 59, is chairman and chief executive officer of Verity
Financial Group, Inc., a firm he founded in 1992. He currently is a director of
Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California and Monarch
Funds.
MURRY N. GUNTY, age 32, is a principal of Lazard Freres Real Estate Investors
LLC, which he joined in 1995. From 1993 to 1995 he was associated with J. E.
Robert Company, a real estate investment company. He currently is a director of
Atlantic American Properties Trust, Kapson Senior Quarters Corp., The Fortress
Group and The Rubenstein Company.
R. BRUCE ANDREWS, age 58, has served as president, chief executive officer and a
director of Nationwide Health Properties, Inc., a real estate investment trust,
since 1989. He is also a director of Center Trust Retail Properties. Effective
January 13, 1999, Mr. Andrews resigned from ARVAL's Board of Directors.
JOHN J. RYDZEWSKI, age 46, is an investment banker specializing in health care
finance and has been a principal of Benedetto, Gartland & Company, Inc. since
1993. From October 1997 to December 1997, he served as interim chairman of the
Company's Board. Effective January 13, 1999, Mr. Rydzewski resigned from ARVAL's
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes our potential compensation and the compensation
that our General Partners are earning.
Acquisition Fees A property acquisition fee of 2% of Gross Offering
(ARV Assisted Living, Inc.) 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 communities and the
development, processing or construction of
Projects developed by us. There were no property
acquisitions, development, processing and
renovation fees for the years ending December 31,
1998, 1997 and 1996.
Rent-Up and Staff Rent-up and staff training fees of 4.5% of the
Training Fees (ARV Gross Offering Proceeds allocated to each specific
Assisted Living, Inc.) 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, 1998, 1997 and 1996.
Property Management Fees A property management fee of 5% of gross revenues
(ARV Assisted Living, Inc.) paid for managerial services including general
supervision, hiring of onsite management personnel
employed by the Registrant, renting of units,
installation and provision of food service,
maintenance, and other operations. Property
management fees for the years ending December 31,
1998, 1997 and 1996 were $472,000, $316,000 and
$298,000, respectively.
Partnership Management Fees A partnership management fee of 10% of cash flow
(ARV Assisted Living, Inc.) before distributions is paid for implementing our
business plan, supervising and management of our
affairs including general administration,
coordination of legal, audit, tax, and insurance
matters. Partnership management fees for the years
ending December 31, 1998, 1997 and 1996 were
$140,000, $119,000 and $112,000, respectively.
14
<PAGE> 17
Sale of Partnership Projects The Limited Partnership Agreement neither
(ARV Assisted Living, Inc.) specifically authorizes nor prohibits 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
1998, 1997 and 1996, no real estate selling
commissions were paid to our General Partner.
Subordinated Incentive ARVAL is entitled to receive 15% of the Proceeds
Compensation (ARV Assisted of Sale or Refinancing subordinated to a return of
Living, Inc.) initial Capital Contributions plus cumulative, but
not compounded return on capital contributions
varying from 8% to 10% per annum. In 1998, 1997
and 1996, no subordinated incentive compensation
was paid.
Partnership Interest 1% of all items of capital, profit or loss, and
(General Partners) liquidating Distributions, subject to a capital
account adjustment.
Reimbursed Expenses & General Partners may receive fees for personal
Credit Enhancement guarantees of loans made to us. All of our
(General Partners) expenses shall be billed directly to and paid by
us. General Partners may be reimbursed for the
actual cost of goods and materials obtained from
unaffiliated entities and used for or by us. Our
Managing Partner will be reimbursed for
administrative services necessary to our prudent
operation, provided that such reimbursement is at
the lower of its actual cost or the amount which
we would be required to pay to independent parties
for comparable administrative services in the same
geographic location. The total reimbursements to
ARVAL amounted to $2.5 million, $1.6 million and
$1.4 million for the years ending December 31,
1998, 1997 and 1996, respectively.
Finder Fees (ARV Assisted General Partners received finders fees in
Living, Inc.) 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 us. No finder fees for the years
ending December 31, 1998, 1997 and 1996 were paid.
Indemnity Fees Our General Partners received $96,000 for
(General Partners) indemnifying and holding UHSI, Costa and Husky
harmless from any liabilities as a result of our
buy out of them. No indemnity fees for the years
ending December 31, 1998, 1997 and 1996 were
paid.
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 our General Partners, as set out
under ITEM 11 above, no General Partner or Affiliate receives any direct or
indirect compensation from us. Our Managing Partner receives a management fee of
5% of Gross Revenues. Because these fees are payable without regard to whether
particular communities are generating Cash Flow or otherwise benefiting us, a
conflict of interest could arise in that it might be to the advantage of our
General Partners that a community 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 our funds in properties or
entities in which they or any affiliate has an interest, provided we acquire a
controlling interest. In any such investment, duplicate property management or
other fees will not be permitted. Our General Partners or Affiliates may,
however, purchase property in their own names and temporarily hold title to
facilitate acquisition for us, provided that such property is purchased by us at
cost (including acquisition, closing and carrying costs). Our General Partners
will not commingle our 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
our General Partners and
15
<PAGE> 18
Affiliates in the same geographic area. Our General Partners will seek to reduce
any such conflicts by offering such persons their choice of residence or
employment on comparable terms in any community.
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 who are at least 21 years of age 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. Employees are eligible to enroll at the first enrollment
date following the start of their employment (July 1 or January 1). ARVAL
matches employees' contributions beginning on the first enrollment date
following one year of service or 1,000 hours of service. Total Savings Plan
expense was $8,000 and $6,000 for the years ended December 31, 1998 and 1997,
respectively.
Further conflicts may exist if and to the extent that other affiliated
owners of ALCs seek to refinance or sell at the same time as us. 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:
o Independent Auditors' Report;
o Consolidated Balance Sheets - December 31, 1998 and 1997;
o Consolidated Statements of Operations - Years ended December 31,
1998, 1997 and 1996;
o Consolidated Statements of Partners' Capital - Years ended December
31, 1998, 1997 and 1996;
o Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996; Notes to Consolidated Financial Statements;
o Financial Statement Schedule - Schedule III - Real Estate and
Related Accumulated Depreciation and Amortization - December 31,
1998.
(b) Reports on Form 8-K. The registrant did not file any 8-K reports during
the last quarter of 1998.
(c) Exhibit 27 - Financial Data Schedule
16
<PAGE> 19
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
By: /s/ DOUGLAS M. PASQUALE
------------------------------
Douglas M. Pasquale,
President, Chief Executive
Officer and Director of ARVAL,
Managing General Partner
By: /s/ ABDO H. KHOURY
----------------------------
Abdo H. Khoury,
Senior Vice President, Chief
Financial Officer 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 our behalf of and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DOUGLAS M. PASQUALE President, Chief Executive Officer and March 31, 1999
- ---------------------------- Director of ARVAL, Managing General
Douglas M. Pasquale Partner
/s/ ABDO H. KHOURY Senior Vice President and Chief March 31, 1999
- ---------------------------- Financial Officer of ARVAL, Managing
Abdo H. Khoury General Partner
</TABLE>
17
<PAGE> 20
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, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
18
<PAGE> 21
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, 1998 and 1997 F-2
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Partners' Capital - Years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - Years
ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Schedule
- --------
Real Estate and Related Accumulated Depreciation and
Amortization - December 31, 1998 Schedule III
</TABLE>
All other schedules are omitted, as the required information is not applicable
or the information is presented in the consolidated financial statements or
related notes.
<PAGE> 22
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 our
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, 1998 and 1997 and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 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 LLP
Orange County, California
March 31, 1999
F-1
<PAGE> 23
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Balance Sheets
December 31, 1998 and 1997
(IN THOUSANDS, EXCEPT UNITS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Properties, at cost:
Land $ 4,674 $ 4,674
Building and improvements, less accumulated depreciation 23,572 24,126
of $5,177 and $4,122 in 1998 and 1997, respectively
Furniture, fixtures and equipment, less accumulated depreciation
of $395 and $373 in 1998 and 1997, respectively 874 760
-------- --------
Net properties 29,120 29,560
Cash 1,900 1,086
Restricted cash 162 153
Loan fees, less accumulated amortization of $210 and
$175 in 1998 and 1997, respectively 35 70
Amounts receivable from affiliates -- 265
Other assets 461 107
-------- --------
$ 31,678 $ 31,241
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 18,326 $ 16,086
Notes payable to others 4,745 4,803
Accounts payable 677 974
Accrued expenses 441 328
Amounts payable to affiliates 122 383
Distributions payable to Partners 399 46
-------- --------
Total liabilities 24,710 22,620
-------- --------
Commitments and contingencies
-------- --------
Minority interest 95 74
-------- --------
Partners' capital (deficit):
General partners (90) (74)
Limited partners, 18,666 units outstanding at
December 31, 1998 and 1997 6,963 8,621
-------- --------
Total partners' capital 6,873 8,547
-------- --------
$ 31,678 $ 31,241
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 24
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rent $ 8,195 $ 5,610 $ 5,446
Assisted living 977 601 419
Interest 58 11 178
Other 260 111 97
-------- -------- --------
Total operating revenues 9,490 6,333 6,140
-------- -------- --------
Costs and expenses:
Rental property operations (including $2,450,
$1,518 and $1,367 related to affiliates in 1998,
1997 and 1996, respectively) 4,403 2,880 2,639
Assisted living (including $361, $231 and $195
related to affiliates in 1998, 1997 and 1996, 368 235 197
respectively)
General and administrative (including $298,
$264,and $210 related to affiliates in 1998,
1997 and 1996, respectively) 552 521 420
Depreciation and amortization 1,439 913 1,003
Property taxes 393 264 281
Advertising 114 67 26
Interest 2,557 1,431 1,603
Minority interest in operations 176 83 57
-------- -------- --------
Total operating costs and expenses 10,002 6,394 6,226
-------- -------- --------
Operating loss (512) (61) (86)
Profit on sale of property 134 290 569
-------- -------- --------
Net income (loss) $ (378) $ 229 $ 483
======== ======== ========
Basic and diluted income (loss) per limited
partner unit $ (20.06) $ 12.27 $ 25.63
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 25
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Partners' Capital
Years ended December 31, 1998, 1997 and 1996
(IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNERS PARTNERS CAPITAL
-------- -------- -------
<S> <C> <C> <C>
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
Distribution to partners ($68.75 per limited
partner unit) (13) (1,283) (1,296)
Net loss (3) (375) (378)
------- ------- -------
Balance (deficit) at December 31, 1998 $ (90) $ 6,963 $ 6,873
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 26
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (378) $ 229 $ 483
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,439 913 1,003
Gain recognized on property sold (134) (290) (569)
(Gain) loss on disposal of property
and equipment -- (12) 53
Change in assets and liabilities:
Increase in restricted cash (9) (16) (7)
Decrease in net amounts receivable from affiliate 265 -- --
Increase in other assets (268) (14) (1)
Increase (decrease) in accounts payable and
accrued expenses (111) 568 246
Increase (decrease) in net amounts payable to affiliates (261) (20) 72
Increase in minority interest 21 33 57
Other -- -- 11
------- ------- -------
Net cash provided by operating activities 564 1,391 1,348
------- ------- -------
Cash flows from investing activities:
Improvements and building construction (885) (6,183) (1,455)
Additions to furniture, fixtures and equipment, net (164) (69) (90)
Cash received for property sold under contract 134 290 1,474
------- ------- -------
Net cash used in investing activities (915) (5,962) (71)
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable 2,429 5,046 7
Principal repayments on notes payable to banks and others (321) (282) (256)
Distributions paid (943) -- (613)
------- ------- -------
Net cash provided by (used in) financing
activities 1,165 4,764 (862)
------- ------- -------
Net increase in cash 814 193 415
Cash at beginning of year 1,086 893 478
------- ------- -------
Cash at end of year $ 1,900 $ 1,086 $ 893
======= ======= =======
Supplemental cash flow information - cash paid
during the year for interest (net
of capitalized interest of $35,
$151 and $0 in 1998, 1997 and 1996, respectively) $ 2,553 $ 1,415 $ 1,893
======= ======= =======
Noncash - application of deposits to sale of property $ -- $ -- $ 4,601
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 27
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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, 1998, 1997 and 1996 and for the year then ended and
Heritage Pointe Claremont Partners, L.P. (HPCP) for the year ended December
31, 1996. In April 1996, the sale of HPCP was recorded under the
requirements of Statement of Financial Accounting Standards No. 66 ("SFAS
66"), "Accounting for Sale of Real Estate". As a result, our consolidated
financial statements as of and for the year ended December 31, 1998 and 1997
do not include the accounts of HPCP. The Partnership is a 50% general
partner in ARVP III/BS. All intercompany balances and transactions have been
eliminated in consolidation. We consolidate these limited partnerships since
we have 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
We maintain our records on the accrual method of accounting for
financial reporting and Federal and state tax purposes.
CARRYING VALUE OF REAL ESTATE
Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements............. 27.5 to 35 years
Furniture, fixtures and equipment...... 3 to 7 years
We review our long-lived assets for impairments when events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. In reviewing recoverability, we estimate 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
In the preparation of our financial statements in conformity with
generally accepted accounting principles, 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.
F-6
<PAGE> 28
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
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.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities," which is effective for fiscal years beginning after December
15, 1998. The SOP provides guidance on the financial reporting of start-up
activities and organizational costs. It requires costs of start-up
activities and organizational costs to be expensed when incurred and, upon
adoption, the write-off as a cumulative effect of a change in accounting
principle of any previously capitalized start-up or organizational costs. We
plan to adopt the provisions of SOP 98-5 in the first quarter of 1999. The
carrying amounts of capitalized start-up costs are approximately $96,000 as
of December 31, 1998.
LOAN FEES
We amortize loan fees 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. We apply
advance deposits to the first month's rent. Revenue is recognized in the
month earned for rent and assisted living services.
ADVERTISING COSTS
We expense all advertising costs as they are incurred.
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.
We have not requested a ruling from the Internal Revenue Service to the
effect that we 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>
1998 1997
-----------------------------------------------------
GAAP TAX BASIS GAAP TAX BASIS
BASIS (1) BASIS (1)
------- --------- -------- ----------
<S> <C> <C> <C> <C>
Total assets $31,678 $31,939 $31,241 $31,989
======= ======= ======= =======
Total liabilities $24,710 $24,305 $22,620 $22,428
======= ======= ======= =======
</TABLE>
F-7
<PAGE> 29
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
Following are the differences between the financial statement and tax
return income (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income (loss) per financial statements $ (378) $ 229 $ 483
Guaranteed payments (1) 502 435 410
Depreciation differences on properties (1) 92 156 208
Amortization differences on intangible assets (1) 128 57 57
Deferred income (1) 20 5 --
Capitalized costs (1) -- 477 --
Interest expense (1) -- -- (470)
Interest income (1) -- -- 771
Loss on sale of assets (1) -- (2) (254)
Other (1) (3) (12) 75
------- ------- -------
Total income per Federal tax return (1) $ 361 $ 1,345 $ 1,280
======= ======= =======
</TABLE>
- ------------
(1) Unaudited.
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
We based net income (loss) per limited partner unit on the weighted
average number of limited partner units outstanding of 18,666 in 1998, 1997
and 1996. 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 our financial statements.
RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). 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. We
evaluate performance and make resource allocation decisions on a community
by community basis. Accordingly, each community is considered an "operating
segment" under SFAS 131. However, SFAS 131 did not have an impact on the
financial statements because the communities have similar economic
characteristics, as defined by SFAS 131, and meet the criteria for
aggregation into one "reportable segment".
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the
December 31, 1998 presentation.
(2) ORGANIZATION AND PARTNERSHIP AGREEMENT
We were 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. We 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 $18,654,000, net of units
repurchased. Under the Partnership Agreement, the maximum liability of the
Limited Partners is the amount of their capital contributions.
Our Managing General Partner is ARV Assisted Living, Inc. (ARVAL), a
Delaware corporation, and the individual General Partners are John A. Booty,
John S. Jason, Gary L. Davidson, Tony Rota and David P. Collins. Our 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.
F-8
<PAGE> 30
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
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 our 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 us are to be
distributed in accordance with positive capital account balances.
(3) TRANSACTIONS WITH AFFILIATES
Our properties are managed by ARVAL. For this service we pay a property
management fee of 5% of gross revenues totaling $472,000, $316,000 and
$298,000, for the years ended December 31, 1998, 1997 and 1996,
respectively. Additionally, we pay a Partnership management fee of 10% of
cash flow before distributions, as defined in the Partnership Agreement,
amounting to $140,000, $119,000 and $112,000 for the years ended December
31, 1998, 1997 and 1996, 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.
We reimburse ARVAL for certain expenses, such as repairs and
maintenance, supplies, payroll and retirement benefit expenses they pay on
our behalf. The total reimbursements to ARVAL, are included in rental
property operations and general and administrative expenses in the
accompanying statements of operations and amounted to $2,497,000, $1,578,000
and $1,365,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
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. There were no property acquisition and development or
processing and renovation fees paid during the three years ended December
31, 1998.
Amounts payable to affiliates at December 31, 1998 and 1997 include
expense reimbursements and accrued property management and partnership
management fees.
F-9
<PAGE> 31
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
(4) PROPERTIES
The following table sets forth, as of December 31, 1998, the location,
the date on which operations commenced and the number of units in the
community.
<TABLE>
<CAPTION>
COMMENCED
COMMUNITY LOCATION OPERATIONS UNITS
--------- ------------ ---------- ---------
<S> <C> <C> <C>
ASSISTED LIVING
COMMUNITIES
Bradford Square Placentia, CA 1992 92
Chandler Villas Chandler, AZ 1992 164
Villa Las Posas Camarillo, CA 1997(a) 123
SENIOR APARTMENTS (b)
Cedar Villas Ontario, CA 1992 137
Pacific Villas Pomona, CA 1992 132
Villa Azusa Azusa, CA 1993 147
</TABLE>
- -------------
(a) We commenced operations of Villa Las Posas in December 1997.
(b) We sold the senior apartments on February 19, 1999.
ARVP III/BRADFORD SQUARE LTD.
On December 18, 1990, we 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. We are 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 community (Bradford Square), to ARVP III/BS, and, we contributed
cash. 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 Bradford Square Ltd.,
and us, we receive a 9% preferred return on 125% of amounts contributed to
the partnership. The remaining cash flow from operations is divided equally
between Bradford Square Ltd and us. During 1998, 1997 and 1996, we received
a preferred return of $218,000, $221,000 and $253,000, respectively.
(5) SALE OF PROPERTY - HERITAGE POINTE CLAREMONT
In September 1993, we contracted to sell Heritage Pointe Claremont 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. We took back notes receivable to
finance a portion of the sale.
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 secured by certain CSP
partners' interests in CSP and are due January 25, 2010.
F-10
<PAGE> 32
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
Upon the receipt of the principal and interest payment from CSP in April
1996, a sufficient investment as defined by Statements of Financial
Accounting Standards Board No. 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 1998, we
received interest payments totaling $134,000 on these notes.
(6) NOTES PAYABLE TO BANKS AND OTHERS
At December 31, 1998 and 1997, notes payable to banks and others
included the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Notes Payable to Banks:
Note payable in favor of a bank and not formally
assumed by us, secured by deed of trust on Pacific
Villas, interest at 2.25% above the eleventh
district cost of funds (4.76% at December 31, 1998)
adjusted quarterly; terms of promissory note
required full payment of amounts due when the
property was sold us in 1992, otherwise monthly
principal and interest installments of $32 and all
unpaid principal and interest is due on November 1,
2017, repaid in February 1999 $ 4,046 $ 4,150
Note payable in favor of a bank and not formally
assumed by us, secured by deed of trust on Cedar
Villas, interest at 2.25% above the eleventh
district cost of funds (4.76% as of December 31,
1998) and in no event shall the interest rate be
less than 8% or more than 14%; terms of promissory
note required full payment of amounts due when the
property was sold to us in 1992, otherwise monthly
principal and interest installments of $31 and all
unpaid principal and interest is due on February 1,
2019, repaid in February 1999 3,727 3,805
Note payable in favor of a bank and not formally
assumed by us, secured by deed of trust on Villa
Azusa, interest at 2.25% above the monthly eleventh
district cost of funds (4.76% at December 31, 1998)
adjusted semi-annually; terms of promissory note
required full payment of amounts due when the property
was sold to us in 1992, otherwise payable in monthly
principal and interest installments of $23 with all
unpaid principal and interest due on February 1, 2017,
repaid in February 1999 2,853 2,934
Construction loan to bank secured by deed of trust on
Villa Las Posas and guaranteed by the General
Partners, interest at 2.75% above the 30-day LIBOR
rate (5.55% at December 31, 1998); all unpaid principal
and interest is due on September 30, 1999 7,700 5,197
------- -------
Notes payable to banks 18,326 16,086
------- ------
</TABLE>
F-11
<PAGE> 33
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Notes Payable to Others:
Note payable secured by deed of trust on Chandler
Villas and guaranteed by our 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 2,369 2,396
Note payable secured by deed of trust on Bradford
Square and guaranteed by our 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 2,369 2,396
Other 7 11
-------- -------
Notes payable to others 4,745 4,803
-------- -------
$ 23,071 $20,889
======== =======
</TABLE>
The annual principal payments of notes payable as of December 31, 1998
are as follows (in thousands):
Year ending December 31:
1999 (see below) $ 18,390
2000 34
2001 30
2002 29
2003 27
Thereafter 4,561
----------
$ 23,071
==========
Our Managing General Partners' Board of Directors approved the
refinancing of the assisted living communities in July 1998 to:
o take advantage of lower fixed interest rates available at the time
through the commercial mortgage backed security market;
o provide a return of equity to the limited partners; and
o borrow against the increased value of these properties.
In conjunction with this financing, we paid the lender approximately
$0.7 million of fees for an interest rate lock and $0.1 for loan commitment
and other fees. The lender terminated the loan commitment and underlying
interest
F-12
<PAGE> 34
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
rate lock in October 1998 due to adverse market conditions. The lender
returned $0.2 million of the interest rate lock fees in January 1999. We
have included the remaining $0.6 million of fees in interest expense in the
accompanying statements of income. We believe that we are entitled to a full
and complete return of the rate lock fees paid. We intend to pursue a return
of all fees and are investigating our legal alternatives to that end;
however, there can be no assurances that additional interest rate lock fees
will be recovered.
(7) GRANT INCOME
During 1993, we entered into 30-year rehabilitation and affordable
housing subsidy agreements with the cities of Azusa and Ontario. In
conjunction with the agreements, we are 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 we default on the provisions of the agreement within 15 years,
including, but not limited to, eliminating the low income housing status of
the apartment community, the grant money must be returned to the respective
city. No default existed at December 31, 1998 and the properties were sold
on February 19, 1999.
(8) EMPLOYEE BENEFIT PLANS
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 who are at least 21 years of age 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. Employees are eligible to
enroll at the first enrollment date following the start of their employment
(July 1 or January 1). ARVAL matches employees' contributions beginning on
the first enrollment date following one year of service or 1,000 hours of
service. Our Savings Plan expense was $8,000 and $6,000 (as a reimbursement
to ARVAL) for the years ended December 31, 1998 and 1997.
(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 required to interpret
market data to develop the estimates of fair value. Accordingly, these
estimates 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.
The carrying amounts reported in the balance sheets for cash, accounts
payable, accrued expenses, and amounts payable to affiliates approximate
fair value due to the short-term nature of these instruments. The notes
payable bear interest at rates that approximate current rates. Therefore, we
believe that carrying value approximates fair value.
Fair value information related to financial instruments is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1998 1997
-------------------------- -------------------------
FINANCIAL BOOK FAIR BOOK FAIR
INSTRUMENT VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Notes payable $ 23,071 $ 23,974 $ 20,889 $ 22,085
========== ========== ========== =========
</TABLE>
F-13
<PAGE> 35
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements - (Continued)
(10) SUBSEQUENT EVENT (unaudited)
On February 19, 1999, we sold the three senior apartment projects for
approximately $17.4 million, net of costs. In connection with the sale, we
received cash of approximately $4.0 million, notes receivable due in
November 1999 of approximately $2.8 million and paid off the outstanding
mortgage balances of approximately $10.6 million.
F-14
<PAGE> 36
SCHEDULE III
AMERICAN RETIREMENT VILLAS PROPERTIES III
(A California Limited Partnership)
Real Estate and Related Accumulated Depreciation and Amortization
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT
--------------------- COSTS -----------------------------------
BUILDINGS CAPITALIZED BUILDINGS
AND SUBSEQUENT AND
ENCUM- IMPROVE- TO IMPROVE-
DESCRIPTION BRANCES LAND MENTS ACQUISITION LAND MENTS TOTAL(1)
- ----------- -------- ------- ---------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Villa Azusa $ 2,853 $ 800 $ 3,705 $ 166 $ 800 $ 3,871 $ 4,671
Villa Las Posas 7,700 1,210 572 8,754 1,249 9,044 10,293
Bradford Square 2,369 675 2,977 347 675 3,324 3,999
Chandler Villas 2,369 300 2,902 235 300 3,137 3,437
Cedar Villas 3,727 650 4,078 385 650 4,463 5,113
Pacific Villas 4,046 1,000 4,545 365 1,000 4,910 5,910
------- ------- ------- ------- ------- ------- -------
$23,064 $ 4,635 $18,779 $10,252 $ 4,674 $28,749 $33,423
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIABLE
DEPRECIATION DATE OF ACQUISITION LIVES (YEARS)
------------ ------------------- ------------
<S> <C> <C> <C>
Villa Azusa $ 782 March 1993 27 1/2 years
Villa Las Posas 359 December 1989 27 1/2 years
Bradford Square 928 December 1990 27 1/2 years
Chandler Villas 934 September 1990 27 1/2 years
Cedar Villas 1,014 October 1992 27 1/2 years
Pacific Villas 1,160 October 1992 27 1/2 years
-------
$ 5,177
=======
</TABLE>
Following is a summary of investment in properties for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $32,922 $26,969 $25,562
Improvements/construction 501 5,953 1,758
Disposals -- -- (351)
------- ------- -------
Balance at end of year $33,423 $32,922 $26,969
======= ======= =======
</TABLE>
Following is a summary of accumulated depreciation and amortization of
investment in properties for the years ended December 31, 1998, 1997, and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Balance at beginning of year $4,122 $3,373 $2,658
Additions charged to expense 1,055 749 715
------ ------ ------
Balance at end of year $5,177 $4,122 $3,373
====== ====== ======
</TABLE>
- ---------
(1) Aggregate cost for Federal income tax purposes is $31,989 at December 31,
1997.
See Accompanying Independent Auditors' Report
F-15
<PAGE> 37
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,900
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 34,692
<DEPRECIATION> 5,572
<TOTAL-ASSETS> 31,678
<CURRENT-LIABILITIES> 0
<BONDS> 23,071
0
0
<COMMON> 0
<OTHER-SE> 6,873
<TOTAL-LIABILITY-AND-EQUITY> 31,678
<SALES> 0
<TOTAL-REVENUES> 9,490
<CGS> 0
<TOTAL-COSTS> 7,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,557
<INCOME-PRETAX> (378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (378)
<EPS-PRIMARY> (20.06)<F1>
<EPS-DILUTED> (20.06)
<FN>
<F1>Net income per limited partner unit.
</FN>
</TABLE>
