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 FISCAL PERIOD ENDED September 30, 1998
-----------------------------------
[ ] 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: 33-44980
THE CHESTNUT REAL ESTATE PARTNERSHIP THE CHESTNUT PARTNERSHIP
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(Exact names of registrants as specified in their charters)
MARYLAND
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(State or other jurisdiction of incorporation or organization)
52-1640655 42-1352739
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(IRS Employer Identification No.) (IRS Employer Identification No.)
2330 West Joppa Road Lutherville, Maryland 21093
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 245-7616
-----------------------------
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Former name, former address and former fiscal year, if changed since last report
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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date
N/A
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Page 1 of 18
<PAGE>
THE CHESTNUT PARTNERSHIP
AND
THE CHESTNUT REAL ESTATE PARTNERSHIP
INDEX
Page
----
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 Financial Statements
The Chestnut Real Estate Partnership
and The Chestnut Partnership
* Separate and Combined Balance Sheets,
September 30, 1998 and December 31, 1997 3
* Separate and Combined Statement of
Operations, for the nine months ended
September 30, 1998 and September 30, 1997 5
* Separate and Combined Statements of Partner's
Equity (Deficit) for the nine months ended
September 30, 1998 and for December 31, 1997 7
* Separate and Combined Statement of Cash Flow,
for the nine months ended September 30, 1998
and September 30, 1997 8
* Notes to Financial Statements 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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- 2 -
<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------------
The
The Chestnut
Chestnut Real Estate Combined
(UNAUDITED) Partnership Partnership Partnerships
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,920,901 $ -- $ 1,920,901
Accounts receivable 259,043 -- 259,043
Prepaid expenses and other 444,480 -- 444,480
Assets whose use is limited or restricted:
Under bond indenture agreements, held in escrow
by trustee 592,062 -- 592,062
Under letter of credit agreement, held in escrow 0 -- 0
------------ ------------ ------------
Total current assets 3,216,485 -- 3,216,485
Assets whose use is limited or restricted:
Under bond indenture agreements, held in escrow
by trustee 1,739,299 -- 1,739,299
Under residency agreements, held in escrow 1,118,209 -- 1,118,209
Health Center reserves 2,930,066 -- 2,930,066
Phase III and IV construction funds 849,895 -- 849,895
Operating property, at cost, net of depreciation 1,033,022 52,672,755 53,705,777
Costs of acquiring intitial contracts, net of amortization 1,787,668 -- 1,787,668
Deferred bond financing costs, net of amortization 1,055,174 -- 1,055,174
------------ ------------ ------------
Total assets $ 13,729,818 $ 52,672,755 $ 66,402,573
============ ============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Bonds payable, current portion $ 165,000 $ -- $ 165,000
Notes payable, current portion 37,524 -- 37,524
Accounts payable 305,879 -- 305,879
Accrued expenses 224,025 -- 224,025
Accrued property taxes 19,325 -- 19,325
Accrued interest payable 548,731 -- 548,731
Advances payable 204,837 -- 204,837
Refundable deposits, residency agreements 1,375,825 -- 1,375,825
------------ ------------ ------------
Total current liabilities 2,881,147 -- 2,881,147
Construction costs payable 0 -- 0
Bonds payable, less current portion 13,415,000 -- 13,415,000
Loan Payable 1,844,653 -- 1,844,653
Loans from residents 52,576,950 -- 52,576,950
Advances payable to partners 400,000 -- 400,000
Refundable deposits, escrowed 0 -- 0
Deferred revenues from admission fees 2,515,584 -- 2,515,584
Equity in deficit of the Chestnut Partnership -- 59,903,516 --
Commitments and Contingencies
------------ ------------ ------------
Total liabilities 73,633,334 59,903,516 73,633,334
Partners' equity (deficit) (59,903,516) (7,230,761) (7,230,761)
------------ ------------ ------------
Total liabilities and partners' equity (deficit) $ 13,729,818 $ 52,672,755 $ 66,402,573
============ ============ ============
</TABLE>
-3-
<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,242,588 $ -- $ 1,242,588
Accounts receivable 258,317 -- 258,317
Prepaid expenses and other 307,057 -- 307,057
Assets whose use is limited or restricted:
Under bond indenture agreements, held in escrow
by trustee 398,426 -- 398,426
Under letter of credit agreement, held in escrow 0 -- 0
------------ ------------ ------------
Total current assets 2,206,388 -- 2,206,388
Assets whose use is limited or restricted:
Under bond indenture agreements, held in escrow
by trustee 1,888,017 -- 1,888,017
Under residency agreements, held in escrow 698,721 -- 698,721
Health Center reserves 2,149,560 -- 2,149,560
Phase III and IV constuction funds 888,670 -- 888,670
Operating property, at cost, net of depreciation 672,690 54,193,360 54,866,050
Costs of acquiring intitial contracts, net of amortization 1,541,209 -- 1,541,209
Deferred bond financing costs, net of amortization 864,575 -- 864,575
------------ ------------ ------------
Total assets $ 10,909,830 $ 54,193,360 $ 65,103,190
============ ============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Bonds payable, current portion $ 155,000 $ -- $ 155,000
Notes payable, current portion 37,524 -- 37,524
Accounts payable 270,639 -- 270,639
Accrued expenses 274,590 -- 274,590
Accrued property taxes 144,013 -- 144,013
Accrued interest payable 233,538 -- 233,538
Advances payable 282,257 -- 282,257
Refundable deposits, residency agreements 823,628 -- 823,628
------------ ------------ ------------
Total current liabilities 2,221,189 2,221,189
Construction costs payable 194,578 -- 194,578
Bonds payable, less current portion 13,500,000 -- 13,500,000
Loan Payable 1,862,476 -- 1,862,476
Loans from residents 48,264,400 -- 48,264,400
Advances payable to partners 2,012,258 -- 2,012,258
Refundable deposits, escrowed 247,340 -- 247,340
Deferred revenues from admission fees 2,683,146 -- 2,683,146
Equity in deficit of the Chestnut Partnership -- 60,075,557 --
Commitments and Contingencies
------------ ------------ ------------
Total liabilities 70,985,387 60,075,557 70,985,387
Partners' equity (deficit) (60,075,557) (5,882,197) (5,882,197)
------------ ------------ ------------
Total liabilities and partners' equity (deficit) $ 10,909,830 $ 54,193,360 $ 65,103,190
============ ============ ============
</TABLE>
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<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED STATEMENT OF OPERATIONS
For the nine month period ended September 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Amortization of nonrefundable admission fees $ 931,632 $ -- $ 931,632
Apartment service fees 4,760,661 -- 4,760,661
Health Center revenues 1,600,160 -- 1,600,160
Capital reserve fees 86,519 -- 86,519
Other revenue 10,838 -- 10,838
Income from The Chestnut Partnership -- 947,844 --
----------- ----------- -----------
Total revenues 7,389,810 947,844 7,389,810
----------- ----------- -----------
Operating expenses:
Development fee amortization 230,266 -- 230,266
General and administrative 1,837,071 -- 1,837,071
Resident care 1,259,158 -- 1,259,158
Dietary 1,075,340 -- 1,075,340
Plant 726,232 -- 726,232
Housekeeping 336,106 -- 336,106
Depreciation and amortization 181,024 1,106,408 1,287,432
----------- ----------- -----------
5,645,196 1,106,408 6,751,604
----------- ----------- -----------
Income (loss) from operations 1,744,614 (158,564) 638,206
----------- ----------- -----------
Other income (expense)
Interest income 224,776 -- 224,776
Interest expense (1,021,545) -- (1,021,545)
----------- ----------- -----------
(796,770) -- (796,770)
----------- ----------- -----------
Net income (loss) $ 947,844 $ (158,564) $ (158,564)
=========== =========== ===========
</TABLE>
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<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED STATEMENT OF OPERATIONS
For the nine month period ended September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Amortization of nonrefundable admission fees $ 622,340 $ -- $ 622,340
Apartment service fees 3,761,916 -- 3,761,916
Health Center revenues 1,376,724 -- 1,376,724
Capital reserve fees 100,036 -- 100,036
Other revenue 12,542 -- 12,542
Income from The Chestnut Partnership -- 693,163 --
------------ ------------ ------------
Total revenues 5,873,558 693,163 5,873,558
------------ ------------ ------------
Expenses:
Development fee amortization 146,918 -- 146,918
General and administrative 1,241,803 -- 1,241,803
Resident care 1,171,666 -- 1,171,666
Dietary 974,566 -- 974,566
Plant 650,918 -- 650,918
Housekeeping 263,084 -- 263,084
Depreciation and amortization 159,156 922,509 1,081,665
------------ ------------ ------------
$ 4,608,111 922,509 5,530,620
------------ ------------ ------------
Income (loss) from operations 1,265,447 (229,346) 342,938
------------ ------------ ------------
Other income (expense)
Interest income 327,016 -- 327,016
Interest expense (899,300) -- (899,300)
------------ ------------ ------------
(572,284) -- (572,284)
------------ ------------ ------------
Net income (loss) 693,163 $ (229,346) $ (229,346)
============ ============ ============
</TABLE>
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<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the nine month period ended September 30, 1998 and the year ended
December 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1996 $(51,182,222) $(2,567,017) $(2,567,017)
Net income (loss) 839,566 (395,180) (395,180)
Transfer ownership of land preacquisition and
project development assets to The Chestnut
Real Estate Partnership (6,812,901) -- --
Distribution to partners (2,920,000) (2,920,000) (2,920,000)
------------ ----------- -----------
Balance, December 31, 1997 $(60,075,557) $(5,882,197) $(5,882,197)
============ =========== ===========
Balance, December 31, 1997 $(60,075,557) $(5,882,197) $(5,882,197)
Net income (loss) 947,844 (158,564) (158,564)
Transfer ownership of land preacquisition and
project development assets to The Chestnut
Real Estate Partnership 414,197 --
Contributions from partners -- -- --
Distributions to partners (1,190,000) (1,190,000) (1,190,000)
------------ ----------- -----------
Balance, September 30, 1998 $(59,903,516) $(7,230,761) $(7,230,761)
============ =========== ===========
</TABLE>
- 7 -
<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED STATEMENT OF CASH FLOWS
For the nine month period ended September 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 947,844 $ (158,564) $ (158,564)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation -- 1,106,408 1,106,408
Other amortization 181,024 -- 181,024
Amortization of nonrefundable admission fees (931,632) -- (931,632)
Amortization of development fees 230,266 -- 230,266
Admission fees received 671,396 -- 671,396
Partnership income -- (947,844) --
Change in operating assets and liabilities:
Accounts receivable (726) -- (726)
Prepaid expenses and other (137,423) -- (137,423)
Accounts payable 35,240 -- 35,240
Accrued expenses 139,941 -- 139,941
------------ ------------ ------------
Net cash provided by operating activities 1,135,930 -- 1,135,930
------------ ------------ ------------
Cash flows from investing activities:
Increase in funds escrowed under residency agreements (419,488) -- (419,488)
Additions to operating property (176,401) -- (176,401)
Decrease in construction payable (194,578) -- (194,578)
Decrease in Phase III and IV construction funds from partner advances 38,775 -- 38,775
Increase in cost of acquiring intitial contracts and bond financing
costs - Phase III (618,082) (618,082)
Increase in assets held by trustee (44,918) -- (44,918)
Decrease in funds escrowed under letter of credit agreement 0 -- 0
Increase in Health Center reserves (780,506) -- (780,506)
------------ ------------ ------------
Net cash used in investing activities (2,195,197) -- (2,195,197)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of partner advances -- -- --
Contributions from partners -- -- --
Distributions to partners (1,190,000) -- (1,190,000)
Repayments of partner advances (1,612,258) -- (1,612,258)
Decrease in advances payable (77,420) -- (77,420)
Principal payments on notes payable (17,823) -- (17,823)
Principal payments on bonds (75,000) -- (75,000)
Proceeds from loans from residents, deferred revenues
and refundable deposits, net 4,710,081 -- 4,710,081
------------ ------------ ------------
Net cash provided by financing activities 1,737,580 -- 1,737,580
------------ ------------ ------------
Net increase in cash 678,313 -- 678,313
Cash, beginning of period 1,242,588 -- 1,242,588
------------ ------------ ------------
Cash, end of period $ 1,920,901 $ -- $ 1,920,901
============ ============ ============
</TABLE>
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<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
SEPARATE AND COMBINED STATEMENT OF CASH FLOWS
For the nine month period ended September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
The
The Chestnut
Chestnut Real Estate Combined
Partnership Partnership Partnerships
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 693,163 $ (229,346) $ (229,346)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation -- 922,509 922,509
Other amortization 159,156 -- 159,156
Amortization of nonrefundable admission fees (622,340) -- (622,340)
Amortization of development fees 146,918 -- 146,918
Admission fees received 866,570 -- 866,570
Partnership income -- (693,163) --
Change in operating assets and liabilities:
Accounts receivable (9,722) -- (9,722)
Prepaid expenses and other (75,919) (75,919)
Accounts payable 31,480 -- 31,480
Accrued expenses 299,815 -- 299,815
------------ ------------ ------------
Net cash provided by operating activities 1,489,121 -- 1,489,121
------------ ------------ ------------
Cash flows from investing activities:
Increase in funds escrowed under residency agreements (360,873) -- (360,873)
Additions to project operating property (7,003,847) -- (7,003,847)
Decrease in construction payable (1,394,580) -- (1,394,580)
Increase in loans payable 1,900,000 -- 1,900,000
Increase in Phase III and IV construction funds from partner advances (1,347,732) -- (1,347,732)
Increase in assets held by trustee (273,351) -- (273,351)
Decrease in funds escrowed under letter of credit agreement 0 -- 0
Increase in Health Center reserves (1,343,663) -- (1,343,663)
------------ ------------ ------------
Net cash used in investing activities (9,824,045) -- (9,824,045)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from partner advances -- -- --
Distribution to partners (2,020,000) -- (2,020,000)
Proceeds from partner advances 2,863,318 -- 2,863,318
Increase in advances payable 263,522 -- 263,522
Principal payments on bonds (150,000) -- (150,000)
Proceeds from loans from residents, deferred revenues
and refundable deposits 7,427,354 -- 7,427,354
------------ ------------ ------------
Net cash provided by financing activities 8,384,194 -- 8,384,194
------------ ------------ ------------
Net increase in cash 49,270 -- 49,270
Cash, beginning of period 1,394,227 -- 1,394,227
------------ ------------ ------------
Cash, end of period $ 1,443,497 $ -- $ 1,443,497
============ ============ ============
</TABLE>
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<PAGE>
THE CHESTNUT REAL ESTATE PARTNERSHIP
AND THE CHESTNUT PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
A. Basis for Presentation
The accompanying unaudited financial statements of The Chestnut Real
Estate Partnership (the Real Estate Partnership) and its subsidiary The
Chestnut Partnership (the Partnership), in the opinion of management,
reflect all adjustments (none of which were other than normal recurring
items), eliminations, and reclassification considered necessary for a
fair statement of the results of the interim periods presented. For
purposes of preparing the combined financial statements, all material
transactions between the Partnerships have been eliminated but not
displayed, including the elimination of the Real Estate partnership's
obligation to the Partnership.
Both the Real Estate Partnership and the Partnership are general
partnerships, and are sometimes referred to as "the Partnerships."
The Real Estate Partnership is owned 50% by Blakehurst Joint Venture
(Venture) and 50% by West Joppa Road Limited Partnership (West Joppa)
(collectively the "Partners").
The Partnership is owned 1% by Venture, 1% by West Joppa, and 98% by
the Real Estate Partnership.
The Real Estate Partnership and the Partnership were formed to develop,
own, and operate a life care retirement community called Blakehurst
(Project) in the Towson area of Baltimore County, Maryland.
The Real Estate Partnership was organized by the Partnership solely for
the purpose of owning the property and buildings and other improvements
thereon that constitute the Project in order to minimize certain
mortgage recordation taxes, and to act as a general partner of the
Partnership. The publicly-held debt (both Series I and II) is a direct
obligation of the Partnership, and is guaranteed by the Real Estate
Partnership. The guaranty, however, is not intended to provide any
additional security for payment of the principal and interest on the
bonds than if the Partnership directly held the property and related
improvements itself. The partners of the Real Estate Partnership own no
other assets other than their interests in the Partnership. Therefore,
management believes the combining financial statements of the
Partnership and the Real Estate Partnership are the most informative,
because of the guaranty and because of the Operating and Use Agreement,
which obligates the Partnership to develop, operate and manage the
Project at its expense and which grants the Partnership use of the
property until dissolution, liquidation or other termination by mutual
agreement. The Partnerships have common, ultimate ownership and do not
have independent operating activities. Management believes this
presentation best portrays the relationship between the two entities.
B. Certain Accounting Policies
Cash
The Partnerships consider investments with maturities of three months
or less when purchased, to be cash equivalents.
Assets Where Use is Limited
All assets whose use is limited or restricted are cash equivalents as
of September 30, 1998, and December 31, 1997.
- 10 -
<PAGE>
Deferred Revenues from Admission Fees
Admission fees are not advance fees in payment for future services of
for use of facility, because of the manner in which all operating
expenditures are allocated to the current residents. The non-refundable
admission fee is a payment in compensation to the Partnership for the
development risk and is non-refundable except in isolated cases where
the Partnership would cancel the Residency Agreement. In such cases,
the resident could be due a portion of the Administration Fee if
cancellation occurred within the first two years of the contract. The
refund is based on the remaining life of the resident, actuarially
determined. Accordingly, the Admission Fee and Resident Loan (together
the Entrance Payment) is amortized using the Life Table of the U.S.
Department of Health and Human Services, which in practice results in
amortization of the Admission Fee portion of the Entrance Payment on a
straight line over approximately two years. To date, the Partnership
has never canceled a Residency Agreement and accordingly has never had
to refund any portion of the non-refundable admission fee after
occupancy. Nonetheless, the unamortized admission fees are reported as
deferred revenue.
Capitalization of Operating Expenses and Certain Revenues
Initial occupancy of the Project occurred in August of 1993, with
cessation of major construction of Phase I occurring in December 1993,
at which time occupancy was 60%. Construction continued for tenant
requested improvements and an auditorium addition.
The Partnership ceased capitalization of operating expenses and certain
revenues of Phase I in August 1994, because of the extended time frame
between initial occupancy, completion of major construction, and
achievement of substantial occupancy.
The Partnership has also capitalized operating revenues, net of costs
(except for admission fees and capital reserve fees) for Phase III from
July 1997 (when initial Phase III-related resident occupancy commenced)
through March 31, 1998, (when substantial occupancy was achieved) in
the amount of $77,858. The Phase III portion of the Community had
reached substantial occupancy at March 31, 1998, with 32 of the 35
units occupied. As of September 30, 1998, only one of the 35 units of
Phase III was sold, but not closed.
Costs of Acquiring Initial Contracts
Costs of acquiring initial contracts are expected to be recovered from
the future contract revenues and are therefore capitalized. These costs
capitalized are amortized over the life expectancy of the initial
residents, which based on actuarial data, is estimated to be
approximately 13 years.
Development Fee
The development fee incurred in connection with the development of the
Project, both Phase I and III, is amortized on a pro rata basis as
admission fee revenue is recognized. Admission fees are being
recognized over a 24 month period from the date of move-in for those
being received from Return of Capital Contracts. Admission Fees from
Traditional contracts are amortized over the expected life of the
resident.
C. Results of Operations
Admission fees are amortized over a twenty-four month period.
At the time of initial occupancy, residents are required to make a
non-refundable payment to a capital replacement reserve. This payment
is reported as income when received by the Partnerships.
The development fee incurred in connection with the development of the
Project (Phase I and Phase III) is amortized on a pro-rata basis and
admission fee revenue is recognized.
- 11 -
<PAGE>
D. Financing
In May, 1992, the Partnership completed the issuance of $14,000,000 of
Ten Year - Put Option Mortgage Bonds, 1992 Series I. The bonds carry an
initial rate of 9.5%.
In August, 1992, the Venture and West Joppa, each of which had
purchased $3,000,000 of Series I Bonds, sold their bonds back to the
Partnership in conjunction with the Partnership sales of $6,000,000 of
Ten Year - Put Option Mortgage Bonds, 1992 Series II. These bonds carry
an initial rate of 8.75%.
In addition, $20,000,000 has been provided by Venture and West Joppa.
As of December 31, 1995, all such advances from Partners had been
repaid, together with interest thereon.
For the construction of Phase II, an auditorium and miscellaneous
additional improvements, the Partners funded the cost of approximately
$800,000.
For construction of Phase III, a 35-unit addition, West Joppa and Life
Care Services Corporation (LCS) advanced $7,600,000 and the
Partnerships arranged to borrow an additional $1,900,000 of long-term
financing, for a total of $9,500,000. As of September 30, 1998,
$7,600,000 plus interest thereon had been repaid to West Joppa and LCS,
and development fees of $654,449 paid to West Joppa and LCS.
West Joppa and LCS have advanced $400,000 for initial design of Phase
IV.
E. Operating Property
As of September 30, 1998, $9,275,631 of costs had been incurred and
capitalized for Phase III. As of September 30, 1998, $290,033 of costs
had been incurred for Phase IV design and initial development efforts.
Both of these amounts are included in operating property. As of
December 31, 1997, $9,441,517 had been incurred for construction of
Phase III and IV.
F. Transactions with partners
The Partnerships have agreements with Life Care Services Development
Corporation (LCSD) and Life Care Services Corporation (LCS), affiliates
through common ownership of Chestnut Village, Inc., a general partner
of Venture for development and for management of the community
respectively. LCSD administers planning, development, financing, and
marketing functions for the partnerships. LCS has been retained to
supervise the day-to-day operations of the community.
The Partnerships entered into a construction management agreement with
Mullan Contracting Company (Mullan), an affiliate through common
ownership of one partner of West Joppa for Phase III.
During the nine months ended September 30, 1998, LCS was reimbursed
$315,189 for its services and $260,452 for the nine months ended
September 30, 1997. In addition, LCS was reimbursed in the nine months
ended September 30, 1998, $711,297 for reimbursement of salaries and
marketing costs, and $682,840 for the nine months ended September 30,
1997.
In the nine months ended September 30, 1998, LCSD was reimbursed
$249,573 for development fees and was reimbursed $445,443 in the nine
months ended September 30, 1997.
In the nine months ended September 30, 1997, Mullan was paid $55,520 of
construction management fees, and reimbursed $5,793,349 for
construction costs; in the nine months ended September 30, 1998, no
payments were made to Mullan.
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<PAGE>
G. Income Taxes
Income and losses of the Partnerships are included in the income tax
returns of the partners. Accordingly, the financial statements make no
provision for income taxes.
H. Contingencies
The realization of the costs and long-term success of the Project is
contingent upon the resale of units vacated due to death or transfer to
the health center, and maintenance and efficient operation.
- 13 -
<PAGE>
THE CHESTNUT PARTNERSHIP
AND
THE CHESTNUT REAL ESTATE PARTNERSHIP
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Overall Financial Condition
The Project contains a total of 212 (177 in Phase I and 35 in Phase III)
residential units, and a 50-bed health center. As of September 30, 1998, ten
residential units were vacant, of which only one was not sold, a decrease of
three. Subsequently, in October, 5 of the sales were closed, and the vacant
units occupied.
As of September 30, 1998, the project had 98 full-time employees, and 110
part-time employees, none of whom were members of a collective bargaining
agreement.
Results of Operations
As of September 30, 1998, 201 units (95%) were occupied and/or paying monthly
service fees. This occupancy compares to 190 (90%) of the units at September 30,
1997 (assuming Phase III had been available), and 192 units (91%) at December
31, 1997.
Amortization of non-refundable admission fees increased because more residents
moved in during the nine months ended September 30, 1998, than moved in during
the nine months ended September 30, 1997. The two-year amortization period
causes the decline to not be apparent for one year.
On January 1, 1998, a 4.0% increase in the monthly service fees became
effective. That increase, together with an increase in occupancy from September
30, 1997, to September 30, 1998, and an increase in double occupancy accounted
for the increase in revenue from apartment service fees.
Health center revenues increased even though patient days declined in the nine
months ended September 30, 1998, compared to the nine months ended September 30,
1997. Reimbursable rates from Medicare and semi-private rates increased 20% and
10% respectively in the nine months ended September 30, 1998, compared to the
nine months ended September 30, 1997.
Capital reserve fees, which are a one-time payment from new residents, decreased
because fewer new residents moved in during the nine months ended September 30,
1998, than moved in during the nine months ended September 30, 1997.
Operating expenses, excluding depreciation and amortization, increased from
$2,796,477 during the first half of 1997 to $3,485,276 during the first half of
1998. This was due primarily to the 22% increase in number of residents.
Depreciation and amortization increased because of the increase in operating
property since September 30, 1997.
Liquidity and Capital Resources
During 1997, the partners received $2,920,000 in distributions from Phase I; in
the first three quarters of 1998, they received $1,190,000.
Phase III expansion, described under Item 1, was estimated to cost approximately
$10,600,000, which includes the construction management fee to Mullan and
development fee to LCSD. To fund the expansion, the Partners obtained permanent
parity debt financing of $1,900,000 and resident loans and fees of $8,700,000.
Construction period financing was provided by the West Joppa Road Limited
Partnership (WJR) and Life Care Services Corporation (LCS) in the total amount
of $7,600,000.
- 14 -
<PAGE>
The Partners advanced $1,600,000 to the Partnerships in 1996 in connection with
Phase III. During the first quarter of 1997, the Partners advanced $6,000,000
for the construction of Phase III. At December 31, 1997, $2,012,258 of such
advances were still owed to the Partners, of which $2,012,258 was repaid in the
first quarter of 1998.
During 1997, the Partners also funded $400,000 towards the beginning design work
for Phase IV, of which $200,000 was advanced during the first quarter of 1997.
Net cash provided by operating activities in 1998 declined approximately
$353,000. Major contributing factors to this were:
* Decrease in net operating loss $ 70,800
* Increase in depreciation and amortization due to
completion of Phase III 205,800
* Increase in amortization of non-refundable admission
fees revenue due to more move-ins (309,300)
* Increase in amortization of development fees
operating expense due to more move-ins 83,300
* Change in operating assets and liabilities (208,400)
* Decrease in Admission fees received due to fewer
move-ins (195,200)
Net cash used by investing activities in 1998 declined significantly,
essentially because major construction activity had been concluded by 1998.
Cash provided by financing activities declined in 1998 compared to 1997 because
of construction period funding not being required.
Because of the level of occupancy, the resident financing, and the long-term
financing described above, the Partnership believes adequate capital resources
are available to the Partnerships.
The long-term success of the Project is ultimately dependent upon maintaining
adequate levels of occupancy and operating of the Project efficiently.
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have date-sensitive software must recognize the date using "00" as the year
2000, rather than the year 1900. Among other things, this problem could lead to
a temporary inability to process transactions, send invoices, or engage in
normal business transactions.
The management firm retained by the Partners, LCS, has assured the Partners and
provided evidence that it has a substantial Y2K program underway. With regard to
MIS applications which LCS has subcontracted, their vendor continues to provide
status reports indicating that the Y2K compliance efforts are on schedule, and
that recent tests of portions of the system were successful. The MIS work has
been underway beginning in early 1997.
In addition, LCS has been addressing the issue with certain third-party
providers of communications, administrative services, as well as its significant
suppliers of services and products, in an effort to determine whether the
partnership is vulnerable to these parties' failures to remediate their
own year 2000 issues. Generally this phase of the work was completed during the
second quarter of 1998. It has not been possible to make detailed evaluations of
the most critical third-party initiatives, and LCS has relied upon
representations that their progress is appropriate.
There can be no guarantee that the systems of other companies on which the
partnership's operations or systems rely will be timely remediated, or
that a failure by another company to remediate its systems in a timely way would
not have a material adverse effect on the partnership. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the partnership is unable to determine at this time whether the consequences of
a year 2000 failure will have a material impact on the company's results
of operations, liquidity, or financial condition. The year 2000 project efforts
by LCS, the partnership believes, will reduce the partnership's level of
uncertainty about the year 2000 problems, but there can be no guarantees as to
the ability to avoid such problems.
- 15 -
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Reports on Form 8-K
None
- 16 -
<PAGE>
SIGNATURES
THE CHESTNUT REAL ESTATE PARTNERSHIP
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Chestnut Real Estate Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE CHESTNUT REAL ESTATE PARTNERSHIP
By: BLAKEHURST JOINT VENTURE, a
General Partner
By: CHESTNUT VILLAGE, INC.,
General Partner
Date: November 13, 1998 by: /s/ Stan G. Thurston
-------------------------------------
Stan G. Thurston, President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 by: /s/ Arthur V. Neis
-------------------------------------
Arthur V. Neis, Treasurer
(Principal Financial and Accounting
Officer)
And By: THE WEST JOPPA ROAD LIMITED
PARTNERSHIP, General Partner
By: ROSEDALE CARE, INC.,
General Partner
Date: November 13, 1998 by: /s/ T. F. Mullan
-------------------------------------
Thomas F. Mullan III, President
Date: November 13, 1998 by: /s/ J. A. Luetkemeyer, Jr.
-------------------------------------
John A. Luetkemeyer, Jr., President
- 17 -
<PAGE>
SIGNATURES
THE CHESTNUT PARTNERSHIP
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Chestnut Partnership has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE CHESTNUT PARTNERSHIP
By: BLAKEHURST JOINT VENTURE, a
General Partner
By: CHESTNUT VILLAGE, INC.,
General Partner
Date: November 13, 1998 by: /s/ Stan G. Thurston
-------------------------------------
Stan G. Thurston, President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 by: /s/ Arthur V. Neis
-------------------------------------
Arthur V. Neis, Treasurer
(Principal Financial and Accounting
Officer)
And By: THE WEST JOPPA ROAD LIMITED PARTNERSHIP,
General Partner
By: ROSEDALE CARE, INC.,
General Partner
Date: November 13, 1998 by: /s/ T. F. Mullan
-------------------------------------
Thomas F. Mullan III, President
Date: November 13, 1998 by: /s/ J. A. Luetkemeyer, Jr.
-------------------------------------
John A. Luetkemeyer, Jr., President
And By: THE CHESTNUT REAL ESTATE
PARTNERSHIP, General Partner
By: BLAKEHURST JOINT VENTURE, a
General Partner
By: CHESTNUT VILLAGE, INC.,
General Partner
Date: November 13, 1998 by: /s/ Stan G. Thurston
-------------------------------------
Stan G. Thurston, President
Date: November 13, 1998 by: /s/ Arthur V. Neis
-------------------------------------
Arthur V. Neis, Treasurer
- 18 -
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<NAME> CHESTNUT PARTNERSHIP
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<PERIOD-END> SEP-30-1998
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<COMMON> 0
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<NAME> CHESTNUT REAL ESTATE PARTNERSHIP
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<PERIOD-END> SEP-30-1998
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