-----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, SN7nnc6zJjMwpmviiW+V5lc2pye49MjcjfNONrJSh6q3iXuWgWNBw7U/D/CPrMtu e9oUpZP/7mpvfJ2yj1u78Q== 0001095811-00-000841.txt : 20000331 0001095811-00-000841.hdr.sgml : 20000331 ACCESSION NUMBER: 0001095811-00-000841 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588003 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 YEAR ENDED DECEMBER 31, 1999 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, 1999 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 92626 COSTA MESA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- 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, 2000 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, 1999
PAGE ---- PART I Item 1: Business............................................ 3 Item 2: Properties.......................................... 8 Item 3: Legal Proceedings................................... 9 Item 4: Submission of Matters to a Vote of Unit Holders..... 9 PART II Item 5: Market for Registrant's Common Equity and Related Unit Holders Matters........................ 10 Item 6: Selected Financial Data............................. 10 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10 Item 7a: Quantitative and Qualitative Disclosures About Market Risk......................................... 13 Item 8: Financial Statements and Supplementary Data......... 13 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 13 PART III Item 10: Directors and Executive Officers of the Registrant.. 14 Item 11: Executive Compensation............................. 15 Item 12: Security Ownership of Certain Beneficial Owners and Management...................................... 16 Item 13: Certain Relationships and Related Transactions...... 16 PART IV Item 14: Exhibits and Financial Statement Schedules, and Reports on Form 8-K............................. 17
2 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 previously owned 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. During the fourth Quarter of 1998, we decided to sell our three senior apartments and on February 19, 1999, we sold the 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 the Managing General Partner, Gary L. Davidson, John A. Booty, John S. Jason, Tony Rota, and David P. Collins (collectively known as "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 $18,665,000. 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 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. 3 4 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. 4 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: - - 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. - - Basic Service and Care Package. The basic service and care package at our ALCs generally include: - meals in a restaurant-style 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. - - 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 catheter, colostomy and ileosotomy care, minor wound care needs and light to moderate transferring needs. Specially trained staff provide personalized care, specialized activity programs and oversee the medication regimens. In addition to the base rent, we typically charge between $375 and $1,375 per month plus additional charges 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 5 6 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. 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 well being 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: - home health care agencies to provide services the community cannot provide; - physical and occupational therapists to provide services to residents in need of such therapy; and - 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. At the present time, all our ALCs have a comprehensive Wellness Program. 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: - family members providing care at home; - 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 - 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. 6 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 comes from residents who receive SSI payments. Approximately 1% of our residents are on SSI programs. 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, 1999, our ALCs had a combined occupancy rate of 99.5%. Occupancy may drop in our existing ALCs, primarily due to: - changes in the health of residents; - increased competition from other assisted living providers, particularly those offering newer ALCs; - 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: - an oversupply of, or a reduction in demand for, ALCs in a particular market; - the attractiveness of properties to residents; - zoning, rent control, environmental quality regulations or other regulatory restrictions; - competition from other forms of housing; - our ability to provide adequate maintenance and insurance; - 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 7 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. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of the removal or remediation of certain hazardous or toxic substances. These include, without limitation, asbestos-containing materials which could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knows of, or is responsible for, the presence of the hazardous or toxic substances. When we acquire land for development or existing facilities, we typically obtain environmental reports on the properties as part of our due diligence in order to lessen our risk of exposure. Nonetheless, the costs of any required remediation or removal of these substances could be substantial. The owner's liability is generally not limited under such laws and regulations and could exceed the value of the property and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Under these laws and regulations, an owner, operator, or any entity that arranges for the disposal of hazardous or toxic substances at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. 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, 1999 the location, the date on which operations commenced, number of units, and our interest in the Assisted Living Communities.
COMMENCED COMMUNITY LOCATION OPERATIONS UNITS INTEREST Bradford Square Placentia, CA 1992 92 Fee Owned Chandler Villas Chandler, AZ 1992 164 Fee Owned Villa Las Posas Camarillo, CA 1997(a) 123 Fee Owned
(a) Commenced operations in December 1997. PROMISSORY NOTES RESULTING FROM THE SALE OF HERITAGE POINTE CLAREMONT 8 9 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 1999, we received interest payments totaling $54,600 on these notes. ITEM 3. LEGAL PROCEEDINGS On June 15, 1999, six California limited partnerships of which the Company is the managing general partner and a majority limited partner - American Retirement Villas Properties II, American Retirement Villias Properties III, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (the "ARV Partnerships") - filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, promissory estoppel, fraud and negligent mispresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L.C. ("Defendants"). The parties are in the initial states of discovery. Defendants have not filed a counter-claim, but have threatened in verbal communications to seek payment by the ARV Partnerships of certain loan commitment fees allegedly owed to Defendants. The ARV Partnerships believe that they have substantial and meritorious defenses to the counter-claims threatened by Defendants. 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 UNIT HOLDERS No matters were submitted to Unit Holders in the fourth quarter of the fiscal year. 9 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, 1999, there were approximately 1,759 Unit Holders of record owning 18,666 units. For the years ended December 31, 1999, 1998 and 1997, we made distributions of $516.40 per unit, $68.75 per unit and $0.0 per unit, respectively. Distributions for 1999 represent a distribution of earnings of $255.36 and a return of capital of $261.04. All of the distributions during 1998 represented a return of capital to the Unit Holders. ITEM 6. SELECTED FINANCIAL DATA The following table presents 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.
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ( In thousands, except unit data) Revenues $ 8,645 $ 9,490 $ 6,333 $ 6,140 $ 6,095 Net Income (Loss) 4,767 (378) 229 483 (464) Net Income (Loss) (per Limited Partner 255.36 (20.06) 12.27 25.63 (24.62) Unit) Total Assets 18,786 31,679 31,241 25,300 32,794 Partners' Capital 2,000 6,873 8,547 8,318 8,307 Notes Payable to banks and others 15,665 23,072 20,889 16,023 20,746 Distributions of Earnings (per Limited 255.36 -- -- 25.02 -- Partner unit) Distributions - Return of Capital (per 255.89 68.75 -- -- 15.03 Limited Partner units) Total Distributions (per Limited 511.25 68.75 -- 25.02 15.03 Partner unit)
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, 1999, net cash provided by operating activities was $0.3 million compared to $0.6 million for the year ended December 31, 1998 and $1.4 million for the year ended December 31, 1997. Net cash provided by investing activities was $3.8 million for the year ended December 31, 1999 as compared to net cash used in investing activities of $0.9 million for the year ended December 31, 1998, and $6.0 million for the year ended December 31, 1997. The increase in 1999 was primarily a result of proceeds from the sale of the three senior apartment projects. Net cash used in financing activities was $3.8 million as compared to net cash provided by financing activities was $1.2 million for the year ended December 31, 1998 and $4.8 million for the year ended December 31, 1997. Our financing activities consisted of: - proceeds from notes payable as a result of refinancing; - and proceeds from notes receivable; offset by: - principal repayments on notes payable; - distributions made to partners. 10 11 Our Managing General Partner's Board of Directors approved the refinancing of the assisted living communities in July 1998 to: - take advantage of lower fixed interest rates available at the time through the commercial mortgage backed security market; - provide a return of equity to the limited partners; and - borrow against the increased value of these properties. We 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. We believe that if the inflation rate increases we 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. The implementation of price increases is intended to lead to an increase in revenue however, those increases may result in an initial decline in occupancy and/or a delay in increasing occupancy. If this occurs, revenues may remain constant or even decline. CAPITAL RESOURCES We contemplate spending approximately $336,000 for capital expenditures during 2000 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. YEAR 2000 Our Year 2000 program, implemented worldwide under the direction of our senior management, was completed on schedule. We did not experience any significant operational issues nor did our residents experience any problems at our ALCs. The total cost of our Year 2000 program is approximately $0.1 million. We are not aware of any obligations related to damages resulting from Year 2000 issues. We do not believe that any such obligations that may arise in the future will have a material effect on our business, results of operations, financial position or liquidity. RESULTS OF OPERATIONS The Year Ended December 31, 1999 as compared to the Year Ended December 31, 1998
(DOLLARS IN MILLIONS) Increase/ 1999 1998 (decrease) ------- ------- ------- Revenue: Assisted living community revenue $ 8.1 $ 9.2 (11.0)% Interest and other revenue 0.5 0.3 51.3 ------- ------- ------- Total revenue 8.6 9.5 (8.1)% ------- ------- ------- Costs and expenses: Assisted living operating expenses 4.8 4.8 1.8% General and administrative 0.4 0.5 (24.7)% Depreciation and amortization 1.1 1.4 (26.4)% Property taxes 0.2 0.4 (36.4)% Advertising 0.1 0.1 (32.1)% Interest 1.5 2.6 (41.3)% Minority interest in operations 0.2 0.2 2.7% ------- ------- ------- Total costs and expenses 8.3 10.0 (16.6)% ------- ------- ------- Operating income (loss) 0.3 (0.5) (158.8)% Cumulative effect of accounting change (0.1) --- 100.0% Net profit on sale of property 4.6 0.1 3,296.0% ------- ------- ------- Net income $ 4.8 $ (0.4) 1,360.3% ======= ======= =======
The decrease in assisted living community revenue is attributable to: - only one and one-half months of rent from the senior apartments in 1999 which were sold on February 19, 1999. 11 12 - average occupancy for our assisted living communities decreased to 94.1% for the year ended December 31, 1999 as compared with 96.4% the year ended December 31, 1998; - an increase in average rental rate per occupied unit to $1,580 for the year ended December 31, 1999 as compared with $1,445 for the year ended December 31, 1998. The increase in interest and other revenue is attributable to investments of excess cash during 1999. Assisted living operating expenses remained constant. General and administrative costs decreased due to cost cutting-measures. The decrease in depreciation and amortization expense is related to sale of the three senior apartments and the elimination of amortization of start-up costs due to the adoption of SOP 98-5 which required us to write-off all capitalized start-up costs in the first quarter 1999. The decrease in property tax expense is related to the sale of the three senior apartments sold on February 19, 1999. Advertising expenses remained constant between years. The decrease in interest expense is related to the buyer's assumption of the notes payable for the three senior apartments sold on February 19, 1999 and the $0.6 million rate lock fee incurred in 1998. Minority interest taxes remained constant between periods. Cumulative effect of change in accounting principle is a result of the adoption of SOP 98-5 which requires that costs of start-up activities and organizational costs be expensed as incurred and the write-off of previously deferred and unamortized amounts. The Year Ended December 31, 1998 as compared to the Year Ended December 31, 1997
(DOLLARS IN MILLIONS) Increase/ 1998 1997 (decrease) ----- ----- ----- 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% Gain 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: - the operations of Villa Las Posas, which opened in December 1997, versus being open for the entire year of 1998; - 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% the year ended December 31, 1997; - 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 12 13 - 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 the year ended December 31, 1997. The increase in interest and other revenue is attributable to: - interest bearing bank accounts used during 1998; and - 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: - the operation of Villa Las Posas, which opened in December 1997, for the entire year of 1998; - staffing requirements related to increased assisted living services provided; and - 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: - interest expense for the Villa Las Posas construction loan; and - $0.6 million of interest rate lock and commitment fees incurred in connection with the failed refinance of certain notes payable. The decrease in net profit on sale is due to the decreased interest payment received from Heritage Pointe Claremont during 1998. FUTURE CASH DISTRIBUTIONS We 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 or future litigation, our ability to generate proceeds from the sales of our properties under favorable terms. ITEM 7A. QUANATITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in interest rates on our fixed rate notes payable. Currently, we do not utilize interest rate swaps. You should be aware that many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements." For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt instrument, but do affect our future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until we would be required to refinance such debt. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated 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. 13 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OUR INDIVIDUAL GENERAL PARTNERS JOHN A. BOOTY, age 61, 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 most recently as a Director until September 1999. 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 62, has served ARVAL in several capacities since 1981. He previously was 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. Mr. Collins currently serves as a director of ARVAL. GARY L. DAVIDSON, age 65, an attorney and one of ARVAL's founders, previously practiced law in Orange County. 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. JOHN S. JASON, age 64, 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 71, 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") DOUGLAS M. PASQUALE, age 45, was appointed president and chief executive officer of ARVAL in March, 1999. He joined ARVAL as president and chief operating officer on June 1, 1998, and was named a Director in October 1998 and Chairman in December 1999 . 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. ABDO H. KHOURY, age 50, was appointed senior vice president and chief financial officer of ARVAL in March 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. Pasquale, and Collins, please see above. 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. JOHN A. MOORE, age 38, is a Principal of Lazard Freres Real Estate Investors L.L.C. and its Chief Financial Officer. He joined Lazard in 1998 from World Financial Properties, where he was Executive Vice President and Chief Financial Officer from 1996. Previously, he worked with Olympia and York as Senior Vice President, Finance. Mr. Moore joined Olympia and York in 1988. 14 15 JEFFREY D. KOBLENTZ, age 32, is a Vice President of Lazard Freres Real Estate Investors L.L.C. He joined Lazard in 1998 from Arthur Andersen LLP, where he was a Manager in the Real Estate Services Group. Mr. Koblentz joined Arthur Andersen in 1992. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes our potential compensation and the compensation that our General Partners are earning. Acquisition Fees (ARV Assisted Living, Inc.) A property acquisition fee of 2% of Gross Offering 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, 1999, 1998 and 1997. Rent-Up and Staff Training Fees (ARV Assisted Living, Inc.) Rent-up and staff training fees of 4.5% of the Gross Offering Proceeds allocated to each specific 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, 1999, 1998 and 1997. Property Management Fees (ARV Assisted Living, Inc.) A property management fee of 5% of gross revenues 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, 1999, 1998 and 1997 were $421,000, $472,000, and $316,000, respectively. Partnership Management Fees (ARV Assisted Living, Inc.) A partnership management fee of 10% of cash flow 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, 1999, 1998 and 1997 were $151,000 $140,000, and $119,000 and, respectively. Sale of Partnership Projects (ARV Assisted Living, Inc.) The Limited Partnership Agreement neither 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 1999, 1998, and 1997, no real estate selling commissions were paid to our General Partner. Subordinated Incentive Compensation (ARV Assisted Living, Inc.) ARVAL is entitled to receive 15% of the Proceeds of Sale or Refinancing subordinated to a return of initial Capital Contributions plus cumulative, but not compounded return on capital contributions varying from 8% to 10% per annum. In 1999, 1998 and 1997, no incentive compensation was paid. Partnership Interest
15 16 (General Partners) 1% of all items of capital, profit or loss, and liquidating Distributions, subject to a capital account adjustment. Reimbursed Expenses & Credit Enhancement (General Partners) General Partners may receive fees for personal guarantees of loans made to us. All of our 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 General 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 $3.7 million, 2.5 million, and $1.6 million for the years ending December 31, 1999, 1998 and 1997, respectively. Finder Fees (ARV Assisted Living, Inc.) General Partners received finders fees in 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, 1999, 1998 and 1997 were paid. Indemnity Fees (General Partners) Our General Partners received $96,000 for 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, 1999, 1998 and 1997 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 General 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 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 $10,000, $9,000 and $6,000 for years ended December 31, 1999, 1998 and 1997, respectively. 16 17 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: - Independent Auditors' Report; - Consolidated Balance Sheets - December 31, 1999 and 1998; - Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997; - Consolidated Statements of Partners' Capital - Years ended December 31, 1999, 1998 and 1997; - Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997; - Notes to Consolidated Financial Statements; - Financial Statement Schedule - Schedule III - Real Estate and Related Accumulated Depreciation and Amortization - December 31, 1999. (b) Reports on Form 8-K. The registrant did not file any 8-K reports during the last quarter of 1999. (c) Exhibit 27 - Financial Data Schedule 17 18 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 /s/ DOUGLAS M. PASQUALE - ------------------------------------- By: Douglas M. Pasquale, President, Chief Executive Officer and Chairman of the Board of ARVAL, Managing General Partner /s/ ABDO H. KHOURY - ------------------------------------- By: 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 30, 2000 Douglas M. Pasquale Chairman of the Board of ARVAL, Managing General Partner /s/ ABDO H. KHOURY Senior Vice President and Chief March 30, 2000 Abdo H. Khoury Financial Officer of ARVAL, Managing General Partner
18 19 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, 1999, 1998 and 1997 (With Independent Auditors' Report Thereon) 19 20 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, 1999 and 1998 F-2 Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statements of Partners' Capital - Years ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6 Schedule Real Estate and Related Accumulated Depreciation and Amortization - December 31, 1999 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. 21 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 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, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic 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 2, 2000 F-1 22 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Balance Sheets December 31, 1999 and 1998 (IN THOUSANDS, EXCEPT UNITS)
ASSETS 1999 1998 -------- -------- Properties, at cost: Land $ 2,224 $ 4,674 Building and improvements, less accumulated depreciation 12,768 23,669 of $2,976 and $5,177 in 1999 and 1998, respectively Furniture, fixtures and equipment, less accumulated depreciation of $527 and $395 in 1999 and 1998, respectively 746 874 -------- -------- Net properties 15,738 29,217 Cash 2,190 1,900 Restricted cash 168 162 Loan fees, less accumulated amortization of $240 and $210 in 1999 401 35 and 1998, respectively Other assets 289 365 -------- -------- $ 18,786 $ 31,679 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable to banks $ 13,323 $ 18,326 Notes payable to others 2,342 4,746 Accounts payable 116 677 Accrued expenses 486 441 Amounts payable to affiliates 118 122 Distributions payable to Partners 286 399 -------- -------- Total liabilities 16,671 24,711 -------- -------- Minority interest 115 95 -------- -------- Partners' capital (deficit): General partners (139) (90) Limited partners, 18,666 units outstanding at December 31, 1999 and 1998 2,139 6,963 -------- -------- Commitments and contingencies Total partners' capital 2,000 6,873 -------- -------- $ 18,786 $ 31,679 ======== ========
See accompanying notes to consolidated financial statements. F-2 23 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Operations Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------- -------- -------- (IN THOUSANDS EXCEPT PER UNIT DATA) Revenues: Rent $ 7,143 $ 8,195 $ 5,610 Assisted living 1,022 977 601 Interest 206 58 11 Other 274 260 111 -------- -------- -------- Total operating revenues 8,645 9,490 6,333 -------- -------- -------- Costs and expenses: Rental property operations (including $2,764, $2,450, and $1,518 related to affiliates in 1999, 1998 and 1997, respectively) 4,199 4,307 2,880 Assisted living (including $651 $361, and $231 related to affiliates in 1999, 1998 and 1997, 659 463 235 respectively) General and administrative (including $258 $349, and $264 related to affiliates in 1999, 1998 and 1997, respectively) 416 552 521 Depreciation and amortization 1,060 1,439 913 Property taxes 250 393 264 Advertising 78 115 67 Interest 1,502 2,557 1,431 Minority interest in operations 180 176 83 -------- -------- -------- Total operating costs and expenses 8,344 10,002 6,394 -------- -------- -------- Operating income (loss) 301 (512) (61) Gain on sale of properties 4,562 134 290 -------- -------- -------- Net income (loss) before cumulative effect of change in accounting principle 4,863 (378) 229 Cumulative effect of change in accounting principle (96) - - -------- -------- -------- Net income (loss) $ 4,767 $ (378) $ 229 ======== ======== ======== Net income (loss) per limited partner unit $ 255.36 $ (20.06) $ 12.27 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 24 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Partners' Capital Years ended December 31, 1999, 1998 and 1997
TOTAL GENERAL LIMITED PARTNERS' PARTNERS PARTNERS CAPITAL -------- -------- --------- (IN THOUSANDS EXCEPT PER UNIT DATA) 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 (13) (1,283) (1,296) unit) Net loss (3) (375) (378) ------- ------- ------- Balance (deficit) at December 31, 1998 (90) 6,963 6,873 Distribution to partners ($511.24 per limited partner (97) (9,543) (9,640) unit) Net income 48 4,719 4,767 ------- ------- ------- Balance (deficit) at December 31, 1999 $ (139) $ 2,139 $ 2,000 ======= ======= =======
See accompanying notes to consolidated financial statements. F-4 25 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------- -------- -------- (IN THOUSANDS EXCEPT PER UNIT DATA) Cash flows from operating activities: Net income (loss) $ 4,767 $ (378) $ 229 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,060 1,439 913 Gain on sale of properties (4,562) (134) (290) Cumulative effect of change in accounting principle 96 -- -- (Gain) loss on disposal of property and equipment -- -- (12) Change in assets and liabilities: Increase in restricted cash (6) (9) (16) Decrease in amounts receivable from affiliate -- 265 -- Increase in other assets (553) (268) (14) Increase (decrease) in accounts payable and accrued (515) (111) 568 expenses Increase (decrease) in amounts payable to affiliates (4) (261) (20) Increase in minority interest 20 21 33 -------- -------- -------- Net cash provided by operating activities 303 564 1,391 -------- -------- -------- Cash flows from investing activities: Improvements and building construction -- (885) (6,183) Additions to properties, net (187) (164) (69) Proceeds from sales of properties 3,962 -- -- Cash received for property sold under contract -- 134 290 -------- -------- -------- Net cash provided by (used in) investing 3,775 (915) (5,962) activities -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable 13,361 2,429 5,046 Principal repayments on notes payable to banks and others (10,162) (321) (282) Proceeds from note receivable 2,765 -- -- Distributions paid (9,752) (943) -- -------- -------- -------- Net cash provided by (used in) financing (3,788) 1,165 4,764 activities -------- -------- -------- Net increase in cash 290 814 193 Cash at beginning of year 1,900 1,086 893 -------- -------- -------- Cash at end of year $ 2,190 $ 1,900 $ 1,086 ======== ======== ======== Supplemental cash flow information - cash paid during the year for interest (net of capitalized interest of $0, $35, and $151 in 1999, 1998 and 1997, respectively) $ 1,473 $ 2,553 $ 1,415 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 26 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (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) and Retirement Inns III that was created as part of the loan requirements for the refinancing in June 1999, Heritage Pointe Ontario Partners, L.P. (HPOP), and Heritage Pointe Pomona Partners, L.P. (HPPP) for the years ended December 31, 1999, 1998 and 1997. 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 impairment 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: - reported amounts of assets and liabilities at the date of the financial statements; - disclosure of contingent assets and liabilities at the date of the financial statements; and - reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-6 27 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 and unamortized start-up or organizational costs. We adopted the provisions of SOP 98-5 in the first quarter of 1999 writing off capitalized start-up costs of approximately $96,000. 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):
1999 1998 ---------------------------------------------------------- GAAP TAX BASIS GAAP TAX BASIS BASIS (1) BASIS (1) ---------------------------------------------------------- Total assets $19,003 $19,153 $31,678 $31,939 ======= ======= ======= ======= Total liabilities $16,888 $16,770 $24,407 $24,305 ======= ======= ======= =======
F-7 28 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):
1999 1998 1997 ------- ------- ------- Net income (loss) per financial statements $ 4,767 $ (378) $ 229 Guaranteed payments (1) 459 502 435 Depreciation differences on properties (1) (105) 92 156 Amortization differences on intangible assets (1) 102 128 57 Deferred income (1) (89) 20 5 Capitalized costs (1) -- -- 477 Loss on sale of assets (1) 72 -- (2) Other (1) 15 (3) (12) ------- ------- ------- Total income per Federal tax return (1) $ 5,221 $ 361 $ 1,345 ======= ======= =======
(1) Unaudited. NET INCOME (LOSS) PER LIMITED PARTNER UNIT Net income (loss) per limited partner unit was based on the weighted average number of limited partner units outstanding of 18,666 in 1999, 1998 and 1997. RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the December 31, 1999 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 18,652 Limited Partner units sold through the end of the offering in October 1992 which represented a cumulative capital investment of $18,653,000, 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. 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. F-8 29 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements, Continued 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 $421,000, $472,000, and $316,000, for the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, we pay a Partnership management fee of 10% of cash flow before distributions, as defined in the Partnership Agreement, amounting to $151,000, $140,000, and $119,000 for the years ended December 31, 1999, 1998 and 1997, 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 payroll and retirement benefit expenses, repairs and maintenance, and supplies expenses that 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 $3,673,000, $2,497,000, and $1,578,000 for the years ended December 31, 1999, 1998 and 1997, 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, 1999. Amounts payable to affiliates at December 31, 1999 and 1998 include expense reimbursements and accrued property management and partnership management fees. F-9 30 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, 1999, 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
(a) We commenced operations of Villa Las Posas in December 1997. 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 1999, 1998 and 1997, we received a preferred return of $ 218,000, $218,000 and $221,000, 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. 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 1999, we received interest payments totaling $55,000 on these notes. F-10 31 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements, Continued (6) NOTES PAYABLE TO BANKS AND OTHERS At December 31, 1999 and 1998, notes payable to banks and others included the following (in thousands):
1999 1998 ----------- ----------- Notes Payable to Banks: Note payable to a bank. The loan is for 24 months and is secured by the two properties; in addition, ARV Assisted Living, our managing General Partner is a guarantor on the loan for fraud, material misrepresentation and certain covenants. As part of the loan requirements, we created a wholly owned subsidiary Retirement Inns III, LLC. The loan term is for 24 months with a lender option to extend for 10 years. The interest rate is 9.15% and the payments are based upon a 25 year principal and interest amortization schedule. $13,323 $ -- Note payable to 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 (4.78% at December 31, 1998) adjusted quarterly; repaid in February 1999 -- $4,046 Note payable to 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 (4.78% as of December 31, 1998) and in no event shall the interest rate be less than 8% or more than 14%; repaid in February 1999 -- 3,727 Note payable to 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 (4.78% at December 31, 1998) adjusted semi-annually; repaid in February 1999 -- 2,853 Construction loan payable to a 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 due and repaid on September 30, 1999 -- 7,700 ----------- ----------- Notes payable to banks 13,323 18,326 ----------- ----------- 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 %; repaid in 1999. -- 2,369
F-11 32 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements, Continued 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 %; repaid in 1999. 2,339 2,369 Other 3 8 ----------- ----------- Notes payable to others 2,342 4,746 ----------- ----------- $15,665 $23,072 =========== ===========
The annual principal payments of notes payable as of December 31, 1999 are as follows (in thousands):
Year ending December 31: 2000 $ 2,493 2001 13,172 ------- $15,665 =======
Our Managing General Partner's Board of Directors approved the refinancing of the assisted living communities in July 1998 to: - take advantage of lower fixed interest rates available at the time through the commercial mortgage backed security market; - provide a return of equity to the limited partners; and - borrow against the increased value of these properties. Due to a failed financing, in 1998 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 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 1998 in the accompanying statements of income. We believe that we are entitled to a full and complete return of the rate lock fees paid. Although there can be no assurances that additional interest rate lock fees will be returned, we intend to vigorously pursue a return of all fees and will seek legal recourse if necessary. On June 28, 1999 we completed the refinancing. The loan is for 24 months and is secured by the two properties; in addition, ARV Assisted Living, our managing General Partner is a guarantor on the loan for fraud, material misrepresentation and certain covenants. As part of the loan requirements, we created a wholly owned subsidiary American Retirement Villas III, LLC. The loan term is for 24 months with a lender option to extend for 10 years. The interest rate is 9.15% and the payments are based upon a 25 year principal and interest amortization schedule. (7) 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 F-12 33 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements, Continued 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 $10,000 $8,000 and $6,000 (as a reimbursement to ARVAL) for the years ended December 31, 1999, 1998 and 1997. (8) 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 consolidated balance sheets for cash and cash equivalents, fees receivable and other amounts due from affiliates and, accounts payable, accrued liabilities and accrued interest payable, approximate fair value due to the short-term nature of these instruments. The notes payable bear interest at rates that approximate current market rates. Therefore, we believe that the carrying value approximates fair value. F-13 34 SCHEDULE III AMERICAN RETIREMENT VILLAS PROPERTIES III (A California Limited Partnership) Real Estate and Related Accumulated Depreciation and Amortization December 31, 1999 (In thousands)
INITIAL COST COSTS BUILDINGS CAPITALIZED AND SUBSEQUENT DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS TO ACQUISITION LAND - ------------------------------------------------------------------------------------------------------ Villa Las Posas $ 8,175 1,210 572 8,700 1,249 Bradford Square 2,340 675 2,977 347 675 Chandler Villas 5,150 300 2,902 285 300 ------- ------ ------ ------ ------ $15,665 $2,185 $6,451 $9,332 $2,224 ==============================================================================
GROSS AMOUNT BUILDINGS AND ACCUMULATED DATE OF DEPRECIABLE LIVES DESCRIPTION IMPROVEMENTS TOTAL (1) DEPRECIATION ACQUISITION (YEARS) - ----------------------------------------------------------------------------------------------------- Villa Las Posas 9,233 10,482 876 December 1987 27 1/2years Bradford Square 3,324 3,999 1,051 December 1990 27 1/2years Chandler Villas 3,187 3,487 1,049 September 1990 27 1/2years ------- ------- ------ $15,744 $17,968 $2,976 =========================================
Following is a summary of investment in properties for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------- --------- --------- Balance at beginning of year $ 33,423 $ 32,922 $ 26,969 Transfer of cost from other fixed assets 189 -- -- Improvements/construction 51 501 5,953 Disposals (15,695) -- -- -------- --------- --------- Balance at end of year $ 17,968 $ 33,423 $ 32,922 ======== ========= =========
Following is a summary of accumulated depreciation and amortization of investment in properties for the years ended December 31, 1998, 1997, and 1996:
1999 1998 1997 ------- --------- --------- Balance at beginning of year $ 5,177 $ 4,122 $ 3,373 Transfer of accumulated depreciation from 92 -- -- other fixed assets Additions charged to expense 746 1,055 749 Disposals (3,039) -- -- ------- --------- --------- Balance at end of year $ 2,976 $ 5,177 $ 4,122 ======= ========= =========
(1) Aggregate cost for Federal income tax purposes is $19,153 at December 31, 1999. 35 INDEX TO EXHIBITS Index - ----- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,190 0 0 0 0 0 19,241 3,503 18,786 0 15,665 0 0 0 2,000 18,786 0 8,645 0 6,842 0 0 1,502 4,767 0 4,767 0 0 0 4,767 255.36 255.36
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