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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ________________
COMMISSION FILE NUMBER: 0-26470
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-365417
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FISCHER AVENUE, D-1 COSTA MESA, CA 92626
--------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Properties, at cost:
Land $ 2,224 $ 2,224
Buildings and improvements, less accumulated
depreciation of $3,400 and $2,976 at September 30,
2000 and December 31, 1999, respectively 12,363 12,768
Furniture, fixtures and equipment, less accumulated
depreciation of $655 and $527 at September 30, 2000
and December 31, 1999, respectively 637 746
-------- --------
Net properties 15,224 15,738
Cash 2,706 2,190
Restricted cash 174 168
Loan fees, less accumulated amortization of $448 and $240 220 401
at September 30, 2000 and December 31, 1999, respectively
Other assets 393 289
-------- --------
$ 18,717 $ 18,786
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 13,211 $ 13,323
Notes payable to others 2,315 2,342
Accounts payable 105 116
Accrued expenses 566 486
Amounts payable to affiliate 104 118
Distributions payable to partners 109 286
-------- --------
Total liabilities 16,410 16,671
-------- --------
Minority interest 136 115
-------- --------
Partners' capital (deficit):
General partners' deficit (137) (139)
Limited partners' capital, 18,666 units outstanding 2,308 2,139
-------- --------
Total partners' capital 2,171 2,000
-------- --------
Commitments and contingencies $ 18,717 $ 18,786
======== ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Consolidated Statements of Operations
(unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------ ------- ------ -------
<S> <C> <C> <C> <C>
REVENUES:
Rent $1,902 $ 1,704 $5,662 $ 5,313
Assisted living 278 234 829 753
Interest and other 66 89 223 399
------ ------- ------ -------
Total operating revenues 2,246 2,027 6,714 6,465
------ ------- ------ -------
COSTS AND EXPENSES:
Rental property operations 1,112 1,085 3,297 3,210
Assisted living 171 172 500 485
Depreciation and amortization 280 279 822 798
Interest 380 383 1,033 1,119
General and administrative 106 67 278 254
Property taxes 58 57 172 195
Advertising 20 21 78 69
------ ------- ------ -------
Total operating costs and
expenses 2,127 2,064 6,180 6,130
------ ------- ------ -------
Operating income 119 (37) 534 335
Income tax expense 3 -- 8 --
------ ------- ------ -------
Income (loss) from continuing operations
before minority interest in income of
majority owned entities, gain on sale
of properties and change in
accounting principle 116 (37) 526 335
Minority interest in income of
majority owned entities 65 43 183 130
------ ------- ------ -------
Net income (loss) before gain on sale
of properties and change in
accounting principle 51 (80) 343 205
Gain on sale of properties -- -- -- 4,562
------ ------- ------ -------
Net income (loss) before cumulative effect
of change in accounting principle 51 (80) 343 4,767
Cumulative effect of change in
accounting principle -- -- -- (96)
------ ------- ------ -------
Net income (loss) $ 51 $ (80) $ 343 $ 4,671
====== ======= ====== =======
Net income (loss) per limited partner
unit before cumulative effect of
change in accounting principle 2.71 (4.29) 18.19 255.33
Cumulative effect of change in
accounting principle -- -- -- (5.09)
------ ------- ------ -------
Net income (loss) per limited partner
unit $ 2.71 $.(4.29) $18.19 $250.24
====== ======= ====== =======
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 343 $ 4,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 822 798
Gain on sale of properties -- (4,562)
Cumulative effect of change in
accounting principle -- 96
Increase in minority interest 184 13
Change in assets and liabilities:
Increase in restricted cash (6) (4)
Increase in other assets (103) (660)
Increase (decrease) in accounts payable and
accrued expenses 69 (436)
Increase (decrease) in amounts payable to
affiliates, net (14) 95
------- --------
Net cash provided by operating activities 1,295 11
------- --------
Cash flows used in investing activities:
Proceeds from sale of properties -- 3,962
Additions to furniture, fixtures and equipment, net (127) (47)
------- --------
Net cash provided by (used in)
investing activities (127) 3,915
------- --------
Cash flows from financing activities:
Proceeds from notes payable -- 13,361
Principal repayments on notes payable to
banks and others (139) (10,144)
Proceeds from note receivable -- 2,765
Distributions paid (513) (9,447)
------- --------
Net cash used in financing activities (652) (3,465)
------- --------
Net increase in cash 516 461
Cash at beginning of period 2,190 1,900
------- --------
Cash at end of period $ 2,706 $ 2,361
======= ========
Supplemental disclosure of cash flow information-
Cash paid during the period for interest $ 1,145 $ 1,090
======= ========
Supplemental schedule of non-cash investing and
financing activities:
Notes payable assumed by the buyer of the senior
apartments -- $ 10,605
======= ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
September 30, 2000
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
We prepared the accompanying condensed consolidated financial statements of
American Retirement Villas Properties III, L.P. following the requirements of
the Securities and Exchange Commission ("SEC") for interim reporting. As
permitted under those rules, certain footnotes or other financial information
that are normally required by generally accepted accounting principles ("GAAP")
can be condensed or omitted.
The financial statements include all normal and recurring adjustments that we
consider necessary for the fair presentation of our financial position and
operating results. These are condensed financial statements. To obtain a more
detailed understanding of our results, one should also read the financial
statements and notes in our Form 10-K for 1999, which is on file with the SEC.
The results of operations can vary during each quarter of the year. Therefore,
the results and trends in these interim financial statements may not be the same
as those for the full year.
USE OF ESTIMATES
In preparing the financial statements conforming to GAAP, we have made estimates
and assumptions that affect the following:
o Reported amount of assets and liabilities at the date of the financial
statements;
o Disclosure of contingent assets and liabilities at the date of the
financial statements; and
o Reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) TRANSACTIONS WITH AFFILIATES
We have an agreement with ARV Assisted Living, Inc. ("ARV"), our Managing
General Partner, providing for a property management fee of five percent of
gross revenues amounting to $ 110,346 and $ 104,941 for the three-month period
and $330,340 and $315,368 for the nine-month period ended September 30, 2000 and
1999 respectively. Additionally, a partnership management fee of 10 percent of
cash flow before distributions, as defined in the Partnership Agreement,
amounted to $ 53,206 and $ 23,798 for the three-month period and $ 141,680 and $
115,737 for the nine-month period ended September 30, 2000 and 1999
respectively.
(3) SALE OF SENIOR APARTMENT PROJECTS
On February 19, 1999 we sold the three senior apartment projects for
approximately $17.4 million, net of costs. In connection with the sale, we
received cash of approximately $4.0 million, $2.8 million in notes receivable
paid in June 1999, and assumption of mortgage balances of approximately $10.6
million by the buyer.
(4) NOTES PAYABLE
On June 28, 1999, we obtained financing of $13.2 million on two owned
communities. As part of the loan requirements, we created a wholly owned
subsidiary Retirement Inns III, LLC. The loan is for 24 months and is secured by
the various properties; in addition, ARV Assisted Living Inc., our managing
general partner, is a guarantor on the loan for fraud, material
misrepresentation and certain covenants. The mortgage loans are due June 2001
and are in the process of being refinanced with 35-year loans. We have received
a commitment letter on one of the loans and anticipate closing in the fourth
quarter of 2000. However, the partnership can not guaranty that the long-term
loan will be obtained.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
This 10-Q report contains forward-looking statements, including statements
regarding, among other items:
o our business strategy;
o our liquidity requirements and ability to obtain financing;
o the level of future capital expenditures;
o the impact of inflation and changing prices; and
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These forward-looking statements are based on our expectations and are subject
to a number of risks and uncertainties, some of which are beyond our control.
These risks and uncertainties include, but are not limited to:
o access to capital necessary for acquisitions and development;
o our ability to manage growth;
o governmental regulations;
o competition; and
o other risks associated with the assisted living industry.
Although we believe we have the resources required to achieve our objectives,
actual results could differ materially from those anticipated by these
forward-looking statements. There can be no assurances that events anticipated
by these forward-looking statements will in fact transpire as expected.
CONDENSED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------ Increase/
2000 1999 (decrease)
----- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Rent $5.66 $5.31 6.6%
Assisted living 0.83 0.76 10.2%
Interest and other revenue 0.22 0.40 (44.2)%
----- ----- ------
Total revenue 6.71 6.47 3.86%
----- ----- ------
Costs and expenses:
Rental property operations 3.30 3.21 2.7%
Assisted living 0.50 0.49 3.0%
General and administrative 0.36 0.32 10.3%
Depreciation and amortization 0.82 0.80 3.1%
Property taxes 0.17 0.19 (11.7)%
Interest 1.03 1.12 (7.7)%
----- ----- ------
Total costs and expenses 6.18 6.13 0.9%
----- ----- ------
Operating income 0.52 0.34 59.3%
Minority interest in operations 0.18 0.13 41.6%
----- ----- ------
Net income before gain (loss) on sale of
properties and change in accounting principle 0.34 0.21 66.7%
----- ----- ------
Net profit on sale of property -- 4.56 (100.0)%
----- ----- ------
Net income before cumulative effect of change in
accounting principle 0.34 4.77 (92.8)%
Cumulative effect of change in accounting principle -- (0.10) (100.0)%
----- ----- ------
Net income $0.34 $4.67 (96.8)%
===== ===== ======
</TABLE>
The increase in rental revenue is attributable to:
o average occupancy for our assisted living communities increased to 96.5%
for the nine-month period ended September 30, 2000 compared to 93.3% for
the nine-month period ended September 30, 1999; and
o an increase in average rental rate per occupied unit to $1,719 per month
for the nine-month period ended September 30, 2000 compared to $1,566 per
month for the nine-month period ended September 30, 1999; offset by
o only one and a half month of rent from senior apartments in 1999 due to
the sale of the three apartment projects on February 19, 1999.
The increase in the assisted living revenue is attributable to an increase in
assisted living rate from $683 per month for the nine-month period ended
September 30, 1999 compared to $707 per month for the nine-month period ended
September 30, 2000.
The decrease in interest and other revenue is attributable to:
o a decrease in processing and other resident fees for the nine-month period
ended September 30, 2000 due to competitor's waiving such fees to increase
occupancy; and
o a lack of interest income from notes receivable in connection with the
sale of three apartment projects in February 1999; and
o a lack of other income from Claremont Senior Partner note; offset by
o an increase in interest earned from bank accounts which utilize commercial
paper investments.
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The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy in assisted living communities; and
o staffing requirements related to increased assisted living services
provided; and
o increased salaries of staff and fringe benefits; offset by
o a decrease in expenses from senior apartments which were sold in 1999.
The increase in general and administrative expenses is attributable to:
o increased administration fees paid to our managing general partner; and
o increased marketing and advertising expenses; and
o increased legal expenses related to the recovery of the interest rate
lock and commitment fees incurred in connection with the failed
refinancing of certain notes payable in 1998; offset by
o a reduction of expenses, that were previously allocated to G&A due to
cost-cutting efforts.
Property taxes decreased due to the sale of the senior apartments in February
1999.
The decrease in interest expense is related to the following:
o a recovery of $112,000 of the interest rate lock and commitment fees
incurred in connection with the failed refinancing of certain notes
payable in 1998; and
o buyer's assumption of the notes payable for the three senior apartments
sold on February 19, 1999; offset by
o an increase in expense from refinancing in June 1999 of two communities.
Minority interest in income of majority owned entities increased due to an
increased in net income of an affiliated partnership.
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
-------------------- Increase/
2000 1999 (decrease)
----- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Rent $1.90 $ 1.70 11.7%
Assisted living 0.28 0.23 18.5%
Interest and other revenue 0.07 0.09 (26.1)%
----- ------ ------
Total revenue 2.25 2.02 10.8%
----- ------ ------
Costs and expenses:
Rental property operations 1.11 1.08 2.5%
Assisted living 0.17 0.17 (0.5)%
General and administrative 0.14 0.09 44.1%
Depreciation and amortization 0.28 0.28 0.2%
Property taxes 0.06 0.06 0.7%
Interest 0.38 0.38 (0.8)%
----- ------ ------
Total costs and expenses 2.14 2.06 3.2%
----- ------ ------
Operating income (loss) 0.11 (0.04) 415.7%
Minority interest in operations 0.06 0.04 51.0%
----- ------ ------
Net income (loss) $0.05 $(0.08) 163.8%
===== ====== ======
</TABLE>
The increase in rental revenue is attributable to:
o average occupancy for our assisted living communities increased to 95% for
the three-month period ended September 30, 2000 compared to 93% for the
three-month period ended September 30, 1999; and
o an increase in average rental rate per occupied unit to $1,762 per month
for the three-month period ended September 30, 2000 compared to $1,612 per
month for three-month period ended September 30, 1999.
The increase in assisted living revenue is attributable to an increase, noted
earlier, in the assisted living rate from $651 per month for the three-month
period ended September 30, 1999 compared to $711 per month for the three-month
period ended September 30, 2000.
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The decrease in interest and other revenue is attributable to:
o a decrease in processing and other resident fees for the three-month
period ended September 30, 2000 due to a competitor's waiving such fees to
increase occupancy; while
o interest income remained relatively constant between periods.
The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy in assisted living communities; and
o staffing requirements related to increased assisted living services
provided; and
o increased salaries of staff and fringe benefits; offset by
o a reduction of expenses due to cost-cutting efforts.
General and administrative expenses increased due to:
o increased administration fees paid to our managing general partner; and
o increased legal expenses related to the recovery of the interest rate
lock and commitment fees incurred in connection with the failed
refinancing of certain notes payable in 1998.
Property taxes and interest expense remained relatively constant between
periods.
Minority interest in operation increased due to an increase in net income of an
affiliate partner.
LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
and an ability to refinance certain assisted living communities will be adequate
to pay operating expenses, fund necessary capital improvements, meet required
principal payments of one of the debt and pay quarterly distributions. On a
long-term basis, our liquidity is sustained primarily from cash flow provided by
operating activities.
During the nine-month period ended September 30, 2000, cash provided by
operating activities increased to $1.3 million compared to $0.01 million cash
provided by operating activities for the corresponding period in 1999.
During the nine-month period ended September 30, 2000, our net cash used in
investing activities was $0.1 million compared to cash provided by investing
activities of $3.9 million for the corresponding period in 1999. The decrease
was primarily a result of the sale of the three senior apartment projects in
1999.
During the nine-month period ended September 30, 2000, our net cash used in
financing activities was $0.6 million compared to $3.5 million for the
corresponding period in 1999. The components of which are as follows:
o Cash provided by proceeds from refinancing of two properties in June 1999;
offset by
o repayments of bridge loan in 1999;
o Collection of $2.8 million receivable from the sale of apartments in the
first quarter of 1999; offset by
o Distribution of the sale proceeds from the senior apartment sale and
refinancing proceeds, as noted above, to the partners.
The $13.2 million mortgage loans are due June 2001 and, are in the process of
being refinanced with 35-year loans. We have received a commitment letter on one
of the loans and anticipate closing in the fourth quarter of 2000. However, the
partnership can not guaranty completion of this long term financing.
Our debt agreements contain restrictive covenants requiring us to maintain a
certain level of debt service coverage. At September 30, 2000, we were not in
compliance with the debt service coverage ratio. We have obtained waivers for
those covenants with which we were not in compliance. Had we not obtained
waivers we would have been in default on certain debt agreements.
We have accepted an offer to sell one of the assisted living communities we own
in partnership with Bradford Square, LP. We anticipate closing this transaction
in the fourth quarter of 2000.
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We anticipate spending approximately $200,000 for capital expenditures during
2000 for physical improvements at our communities. Funds for these improvements
are expected to be available from operations.
We are not aware of any trends, other than national economic conditions which
have had, or which may be reasonably expected to have, a material favorable or
unfavorable impact on the revenues or income from the operations or sale of
properties. We believe that if the inflation rate increases they will be able to
pass the subsequent increase in operating expenses onto the residents of the
communities by way of higher rental and assisted living rates. The
implementation of price increases is intended to lead to an increase in revenue,
however, those increases may result in an initial decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our
fixed rate notes payable. Currently, we do not utilize interest rate swaps. You
should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with our disclosures under the
heading "Forward-Looking Statements."
For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our earnings or cash flows. Conversely,
for variable rate debt, changes in interest rates generally do not impact fair
market value of the debt instrument, but do affect our future earnings and cash
flows. We do not have an obligation to prepay fixed rate debt prior to maturity,
and as a result, interest rate risk and changes in fair market value should not
have a significant impact on the fixed rate debt until we would be required to
refinance such debt.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RETIREMENT VILLAS PROPERTIES III,
A CALIFORNIA LIMITED PARTNERSHIP
By: ARV Assisted Living, Inc.,
a Delaware Corporation
(Managing General Partner)
By: /s/ Douglas M. Pasquale
--------------------------------------
Douglas M. Pasquale
President, Chief Executive Officer
and Chairman of the Board of
ARV Assisted Living, Inc.,
General Partner
Date: November 14, 2000
By: /s/ Abdo H. Khoury
-------------------------------------
Abdo H. Khoury
Senior Vice President and
Chief Financial Officer of
ARV Assisted Living, Inc.,
General Partner
Date: November 14, 2000
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