-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QvfcptPL5R/e/JZJdGCKqzqpVJDAV6kldDkePzOafWV7u7uS7KFR5Ib1HNWELuL3 ww4YspE4YhKLTLrnamkpuA== 0000892569-99-000898.txt : 19990403 0000892569-99-000898.hdr.sgml : 19990403 ACCESSION NUMBER: 0000892569-99-000898 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES III LTD PARTNERSHIP CENTRAL INDEX KEY: 0000853274 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330365417 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-30084 FILM NUMBER: 99583571 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STE D 1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES III L P DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED DECEMBER 31, 1998 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. ================================================================================ 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
PAGE ---- 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
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 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 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 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 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 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.
COMMENCED COMMUNITY LOCATION OPERATIONS UNITS INTEREST - --------- -------- ---------- ----- -------- 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
- ------------- (a) We commenced operations of Villa Las Posas in December 1997. (b) We sold all of the senior apartments on February 19, 1999. 6 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 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.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except unit data) 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
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 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
Increase/ 1998 1997 (decrease) (DOLLARS IN MILLIONS) --------------------------------- 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)% ======== ======= ======
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 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
Increase/ 1997 1996 (decrease) (DOLLARS IN MILLIONS) --------------------------------- 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)% ======= ======= =====
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 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 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.
EXPECTED MATURITY DATE FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- (DOLLARS IN THOUSANDS) 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%
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 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 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 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 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
17 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 21 ANNUAL REPORT - FORM 10-K Items 8 and 14(a) Index to Consolidated Financial Statements and Schedule
Page ---- 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
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. 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 23 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Balance Sheets December 31, 1998 and 1997 (IN THOUSANDS, EXCEPT UNITS)
1998 1997 -------- -------- ASSETS 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 ======== ========
See accompanying notes to consolidated financial statements. F-2 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)
1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 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)
TOTAL GENERAL LIMITED PARTNERS' PARTNERS PARTNERS CAPITAL -------- -------- ------- 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 ======= ======= =======
See accompanying notes to consolidated financial statements. F-4 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)
1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 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 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):
1998 1997 ----------------------------------------------------- GAAP TAX BASIS GAAP TAX BASIS BASIS (1) BASIS (1) ------- --------- -------- ---------- Total assets $31,678 $31,939 $31,241 $31,989 ======= ======= ======= ======= Total liabilities $24,710 $24,305 $22,620 $22,428 ======= ======= ======= =======
F-7 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):
1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
- ------------ (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 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 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.
COMMENCED COMMUNITY LOCATION OPERATIONS UNITS --------- ------------ ---------- --------- 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
- ------------- (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 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):
1998 1997 -------- ------- 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 ------- ------
F-11 33 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements - (Continued)
1998 1997 --------- --------- 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 ======== =======
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 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):
DECEMBER 31 -------------------------------------------------------- 1998 1997 -------------------------- ------------------------- FINANCIAL BOOK FAIR BOOK FAIR INSTRUMENT VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- --------- Notes payable $ 23,071 $ 23,974 $ 20,889 $ 22,085 ========== ========== ========== =========
F-13 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 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)
INITIAL COST GROSS AMOUNT --------------------- COSTS ----------------------------------- BUILDINGS CAPITALIZED BUILDINGS AND SUBSEQUENT AND ENCUM- IMPROVE- TO IMPROVE- DESCRIPTION BRANCES LAND MENTS ACQUISITION LAND MENTS TOTAL(1) - ----------- -------- ------- ---------- ----------- -------- --------- -------- 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 ======= ======= ======= ======= ======= ======= =======
ACCUMULATED DEPRECIABLE DEPRECIATION DATE OF ACQUISITION LIVES (YEARS) ------------ ------------------- ------------ 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 =======
Following is a summary of investment in properties for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
Following is a summary of accumulated depreciation and amortization of investment in properties for the years ended December 31, 1998, 1997, and 1996:
1998 1997 1996 ------ ------ ------- 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 ====== ====== ======
- --------- (1) Aggregate cost for Federal income tax purposes is $31,989 at December 31, 1997. See Accompanying Independent Auditors' Report F-15 37 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ---------- ----------- Exhibit 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,900 0 0 0 0 0 34,692 5,572 31,678 0 23,071 0 0 0 6,873 31,678 0 9,490 0 7,445 0 0 2,557 (378) 0 (378) 0 0 0 (378) (20.06) (20.06) Net income per limited partner unit.
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