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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO
___________
COMMISSION FILE NUMBER: 0-26468
AMERICAN RETIREMENT VILLAS
PROPERTIES II, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0278155
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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
$16,696,569 (for purposes of calculating the preceding amount only, all
directors, executive officers and unitholders holding 5% or greater of the
registrant's units are assumed to be affiliates). The number of Units
outstanding as of August 10, 2001 was 35,020.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II, L.P.
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
Properties, at cost:
Land $ 11,453 $ 11,453
Buildings and improvements, less accumulated depreciation
of $8,561 and $8,120 at June 30, 2001 and December 31,
2000, respectively 20,272 20,157
Leasehold property and improvements, less
accumulated depreciation of $1,291 and $1,274 at
June 30, 2001 and December 31, 2000, respectively 225 222
Furniture, fixtures and equipment, less accumulated
depreciation of $1,253 and $1,497 at June 30, 2001 and
December 31, 2000, respectively 1,167 1,190
-------- --------
Net properties 33,117 33,022
Cash and cash equivalents 3,643 2,177
Other assets, including impound accounts of $2,429 and $2,974
at June 30, 2001 and December 31, 2000, respectively 3,984 4,357
-------- --------
$ 40,744 $ 39,556
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 41,792 $ 41,226
Accounts payable 254 341
Accrued expenses 1,630 1,492
Amounts payable to affiliate 164 128
Distributions payable to Partners 4 25
-------- --------
Total liabilities 43,844 43,212
-------- --------
Partners' capital (deficit):
General partners' capital 1 1
Special limited partners 116 111
Limited partners' capital, 35,020 units outstanding (3,217) (3,768)
-------- --------
Total partners' capital (3,100) (3,656)
-------- --------
Commitments and contingencies
$ 40,744 $ 39,556
======== ========
See accompanying notes to the unaudited condensed consolidated
financial statements.
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American Retirement Villas Properties II, L.P.
(a California limited partnership)
Consolidated Statements of Operations
(Unaudited)
(In thousands, except unit data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Rent ................................ $ 4,735 $ 4,230 $ 9,405 $ 8,387
Assisted living ..................... 974 965 1,901 1,877
Interest and other .................. 153 101 273 207
-------- -------- -------- --------
Total revenue .............. 5,862 5,296 11,579 10,471
-------- -------- -------- --------
COSTS AND EXPENSES:
Rental property operations .......... 2,917 2,775 5,929 5,565
Assisted living ..................... 709 623 1,393 1,323
General and administrative .......... 191 132 357 252
Communities rent .................... 95 87 187 175
Depreciation and amortization ....... 360 578 800 1,156
Property taxes ...................... 194 152 397 316
Advertising ......................... 53 102 110 192
Interest ............................ 898 673 1,789 1,577
-------- -------- -------- --------
Total costs and expenses ... 5,417 5,122 10,962 10,556
-------- -------- -------- --------
Income (loss) before income tax
expense and extraordinary item .... 445 174 617 (85)
Income tax expense .................. (5) (2) (5) (5)
-------- -------- -------- --------
Income (loss) before extraordinary
items ............................. 440 172 612 (90)
Extraordinary loss from
extinguishment of debt ............ -- -- (56) --
-------- -------- -------- --------
Net income (loss) .......... $ 440 $ 172 $ 556 $ (90)
======== ======== ======== ========
Income (loss) per limited partner
unit .............................. $ 12.43 $ 4.86 $ 17.31 $ (2.56)
Income (loss) before
extraordinary item ................ -- -- (1.58) --
Net loss from extraordinary item...
-------- -------- -------- --------
Net income (loss) ................. $ 12.43 $ 4.86 $ 15.73 $ (2.56)
======== ======== ======== ========
See accompanying notes to the unaudited condensed
consolidated financial statements.
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American Retirement Villas Properties II, L.P.
(a California limited partnership)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 556 $ (90)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 800 1,156
Extraordinary loss from extinguishment of debt 56 ---
Change in assets and liabilities:
Decrease (increase) in other assets 617 (218)
Increase in accounts payable and accrued expenses 51 88
Increase (decrease) in amounts payable to affiliate 36 (70)
-------- --------
Net cash provided by operating activities 2,116 866
-------- --------
Cash flows used in investing activities:
Capital expenditures (798) (470)
Refund of purchase deposit, net -- (1)
-------- --------
Net cash used in investing activities (798) (471)
-------- --------
Cash flows from financing activities:
Principal repayments on notes payable (9,661) (233)
Proceeds from notes payable 10,227 --
Mortgage insurance (200) --
Loan fees (197) --
Distributions paid (21) (52)
-------- --------
Net cash provided by (used in) financing 148 (285)
activities ------- --------
Net increase in cash and cash equivalents 1,466 110
Cash and cash equivalents at beginning of period 2,177 2,002
-------- --------
Cash and cash equivalents at end of period $ 3,643 $ 2,112
======== ========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,497 $ 1,805
======== ========
See accompanying notes to the unaudited condensed
consolidated financial statements.
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American Retirement Villas Properties II, L.P.
(a California limited partnership)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2001
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
BASIS OF PRESENTATION
We prepared the accompanying condensed consolidated financial statements
of American Retirement Villas Properties II, L.P. following the requirements
of the Securities and Exchange Commission ("SEC") for interim reporting. As
permitted under those rules, certain footnotes or other financial information
that are normally required by accounting principles generally accepted in the
United States of America can be condensed or omitted.
The financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of our financial position and
operating results. To obtain a more detailed understanding of our results,
one should also read the financial statements and notes in our Form 10-K for
2000, which is on file with the SEC.
The results of operations can vary during each quarter of the year.
Therefore, the results and trends in these interim financial statements may
not be the same as those for the full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Partnership and its subsidiaries. Subsidiaries, which include limited
partnerships and limited liability companies in which we have controlling
interests, have been consolidated into the financial statements. Management
believes we have a controlling interest consistent with the requirements of
SOP 78-9 when we own more than 50% of an entity. All significant intercompany
balances and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
American Retirement Villas Properties II, L.P. maintains 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
Leasehold property and improvements.... Lease term
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.
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USE OF ESTIMATES
In the preparation of our financial statements in conformity with
accounting principles generally accepted in the United State of America, 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.
IMPOUND ACCOUNTS
The U.S. Department of Housing and Urban Development ("HUD") finances
certain of our properties. HUD holds our funds in impound accounts for
payment of property taxes, insurance and future property improvements
(replacement reserves) on these properties. We include these impound accounts
in other assets.
LOAN FEES
We amortize loan fees using the effective interest method over the term
of the respective notes payable and include them in other assets.
CAPITAL EXPENDITURES
We capitalize all assets, obtained by purchase, trade or capital lease
that have a useful life of more than one year, and costs exceeding $500,
or a group of similar assets purchased together where the total purchase
price exceeds $1000 and the cost of each asset exceeds $50. Improvements or
additions to existing assets are also capital expenditures when they extend
the useful life of the assets beyond their original life. Refurbishment
expenditures are expensed as incurred.
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 35,020 during the
periods ended June 30, 2001 and June 30, 2000.
REVENUE RECOGNITION
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.
(2) TRANSACTIONS WITH AFFILIATES
We have an agreement with ARV Assisted Living, Inc. ("ARV"), our Managing
General Partner, providing for a property management fee of five percent of
gross revenues. These payments amounted to $573,000 and $518,000 for the
six-month periods and $290,000 and $261,000 for the three-month periods ended
June 30, 2001 and 2000 respectively. Additionally, we pay ARV a partnership
management fee of 10 percent of cash flow before distributions, as defined in
the Partnership Agreement. These payments amounted to $122,000 and $109,000 for
the six-month periods and $38,000 and $66,000 for the three-month periods ended
June 30, 2001 and 2000 respectively.
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(3) NOTES PAYABLE
Notes payable consist of the following at June 30, 2001 and December 31,
2000 (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
-------- -----------
Notes payable, bearing interest at fixed rate of 9.15%, payable in
monthly installments of principal and interest totaling
$16.2 collateralized by property, maturities ranging from
January 2001 through January 2002 ................................ $ 1,864 $ 11,448
Notes payable, bearing interest at rates of 7.75% and 8.06%,
payable in monthly installments of principal and interest
totaling $283.0 collateralized by property, maturities ranging
from January 2036 to March 2036 .................................. 39,928 29,778
-------- --------
41,792 41,226
Less amounts payable in the next year ............................ (2,091) (3,866)
-------- --------
$ 39,701 $ 37,360
======== ========
The future annual principal payments of the notes payable at June 30, 2001
are as follows (in thousands):
Twelve month period ending June 30, 2002........................... $ 2,091
Twelve month period ending June 30, 2003........................... 245
Twelve month period ending June 30, 2004........................... 265
Twelve month period ending June 30, 2005........................... 287
Twelve month period ending June 30, 2006........................... 310
Thereafter......................................................... 38,594
--------
$ 41,792
========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Operating Results Before Extraordinary Item
For the Six Months Ended June 30, 2001 and 2000
(Unaudited)
(In millions)
(DOLLARS IN MILLIONS) For the Six Months Ended
June 30,
------------------------- Increase/
2001 2000 (decrease)
----------------------------------
Revenue:
Assisted living community revenue ..................... $ 11.3 $ 10.3 10.15%
Interest and other revenue ............................ 0.3 0.2 31.88%
------- ------- -------
Total revenue ...................................... 11.6 10.5 10.58%
------- ------- -------
Costs and expenses:
Assisted living operating expenses .................... 7.3 6.9 6.30%
General and administrative ............................ 0.4 0.2 41.67%
Communities rent ...................................... 0.2 0.2 6.87%
Depreciation and amortization ......................... 0.8 1.2 (30.80)%
Property taxes ........................................ 0.4 0.3 25.63%
Advertising ........................................... 0.1 0.2 (42.71)%
Interest .............................................. 1.8 1.6 13.44%
------- ------- -------
Total costs and expenses ........................... 11.0 10.6 3.85%
------- ------- -------
Income (loss) before taxes & extraordinary item .... $ 0.6 $ (0.1) 825.88%
======= ======= =======
The increase in assisted living community revenue is attributable to:
- an increase in average rental rate per occupied unit to $1,874 for the
six-month period ended June 30, 2001 as compared with $1,723 for the
six-month period ended June 30, 2000; and
- an increase in average occupancy to 91% for the six-month period ended
June 30, 2001 compared with 88% for the six-month period ended June 30,
2000.
Interest and other revenue increased primarily due to processing fees collected
as a result of the increased occupancy.
Assisted living operating expenses increased $0.4 million, or 6.30%, from $6.9
million for the six-month period ended June 30, 2000 to $7.3 million for the
six-month period ended June 30, 2001 primarily due to the following:
- increased wages of staff,
- incentive programs;
- increased worker's compensation premiums; and
- higher utility costs; partially offset by
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- lower cost of purchased services and variable expenses due to changes in
staffing.
General and administrative expenses increased $0.11 million, or 41.67%, from
$0.25 million for the six-month period ended June 30, 2000 to $0.36 million for
the six-month period ended June 30, 2001 primarily due to higher insurance and
bad debt expenses.
Depreciation and amortization expense decreased $0.4 million, or 30.80%, from
$1.2 million for the six-month period ended June 30, 2000 to $0.8 million for
the six-month period ended June 30, 2001 primarily due to the reduced
amortization of loan fees as a result of the refinancing of certain loans.
Property tax expense increased 25.63% due to increased property values for the
six-month period ended June 30, 2001 compared to the six-month period ended June
30, 2000.
Advertising expenses decreased 42.71% due to decreased advertising in the
six-month period ended June 30, 2001 compared to the six-month period ended
June 30, 2000.
Interest expense increased $0.2 million, or 13.44%, from $1.6 million for the
six-month period ended June 30, 2000 to $1.8 million for the six-month period
ended June 30, 2001 primarily due to the higher balances of mortgages due to
refinancing partially offset by lower interest rates.
Operating Results Before Extraordinary Item
For the Three Months Ended June 30, 2001 and 2000
(Unaudited)
(In millions)
(DOLLARS IN MILLIONS) For the Three Months Ended
June 30,
--------------------------- Increase/
2001 2000 (decrease)
-----------------------------------
Revenue:
Assisted living community revenue ................ $ 5.7 $ 5.2 9.89%
Interest and other revenue ....................... 0.2 0.1 51.49%
------ ------ ------
Total revenue ............................ 5.9 5.3 10.69%
------ ------ ------
Costs and expenses:
Assisted living operating expenses ............... 3.6 3.4 6.71%
General and administrative ....................... 0.2 0.1 44.70%
Communities rent ................................. 0.1 0.1 9.20%
Depreciation and amortization .................... 0.4 0.6 (37.72)%
Property taxes ................................... 0.2 0.1 27.63%
Advertising ...................................... 0.1 0.1 (48.04)%
Interest ......................................... 0.9 0.7 33.43%
------ ------ ------
Total costs and expenses ................. 5.5 5.1 5.76%
------ ------ ------
Income before taxes and extraordinary item $ 0.4 $ 0.2 155.75%
====== ====== ======
Assisted living community revenue increased $0.5 million, or 9.89%, from $5.2
million for the quarter ended June 30, 2000 to $5.7 million for the quarter
ended June 30, 2001 primarily due to the following:
- an increase in the average rate per occupied unit to $1,887 for the
three-month period ended June 30, 2001 as compared with $1,723 for the
three-month period ended June 30, 2000; and
- an increase in average occupancy for our assisted living communities to
90.6% for the three-month period ended June 30, 2001 as compared with
88.4% for the three-month period ended June 30, 2000.
Interest and other revenue increased primarily due to processing fees collected
as a result of the increased occupancy.
Assisted living operating expenses increased $0.2 million, or 6.71%, from $3.4
million for the quarter ended June 30, 2000 to $3.6 million for the quarter
ended June 30, 2001 primarily due to the following:
- increased wages of staff;
- incentive programs;
- increased worker's compensation premiums; and
- higher utility costs; partially offset by
- lower cost of purchased services and variable expenses due to changes in
staffing.
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General and administrative expenses increased $0.06 million, or 44.70%, from
$0.13 million for the quarter ended June 30, 2000 to $0.19 million for the
quarter ended June 30, 2001 primarily due to the following:
- increased bad debt expense; and
- higher property insurance premiums
Depreciation and amortization expense decreased $0.2 million, or 30.72%, from
$0.6 million for the quarter ended June 30, 2000 to $0.4 million for the quarter
ended June 30, 2001 primarily due to the reduced amortization of loan fees as a
result of the refinancing of certain loans.
Property tax expense increased 27.63% due to increased property values for the
quarter ended June 30, 2001 compared to the quarter ended June 30, 2000.
Advertising expenses decreased 48.04% due to decreased advertising quarter ended
June 30, 2001 compared to the quarter ended June 30, 2000.
Interest expense increased $0.2 million, or 33.43%, from $0.7 million for the
quarter ended June 30, 2000 to $0.9 million for the quarter ended June 30, 2001
primarily due to the higher balances of mortgages due to refinancing partially,
offset by lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Our unrestricted cash balances were $3.6 million and $2.2 million at June 30,
2001 and December 31, 2000, respectively. We expect cash generated from
operations from our properties and our ability to refinance certain assisted
living communities ("ALCs") will be adequate to pay operating expenses, make
necessary capital improvements, and meet required principal reductions of debt.
On a long-term basis, our liquidity is sustained primarily from cash flow
provided by operating activities.
During the six-months ended June 30, 2001 cash provided by operating activities
was $2.1 million compared $0.9 million during the six-months ended June 30,
2000.
The cash provided by operating activities during the six-months ended June
30, 2001 was a result of net income of $0.5 million, adjusted for:
- 0.8 million non cash charge for depreciation and amortization expense;
- $0.6 million net decrease in other assets; and
- $0.1 million from extraordinary loss from write off of loan fees.
During the six-months ended June 30, 2001 cash used in investing activities was
$0.8 million compared to cash used in investing activities of $0.5 million
during the six-months ended June 30, 2000. The cash used by investing activities
six-months ended June 30, 2001 was primarily the result of $0.8 million for
purchase of furniture and equipment.
During the six-months ended June 30, 2001 cash provided by financing activities
was $0.1 million as compared to cash used in financing activities of $0.3
million for the six-months ended June 30, 2000.
The cash provided by financing activities during 2001 was a result of $10.2
million of borrowing under notes payable; offset by:
- $9.7 million of repayments of notes payable;
- $0.2 million of mortgage insurance; and
- $0.2 million of loan fees.
As of June 30, 2001, of our 10 assisted living communities, 8 are owned
directly, one is operated under a long-term operating lease, and one is owned
subject to a ground lease.
We contemplate spending approximately $1,000,000 for capital expenditures during
2001 for physical improvements at our communities. As of June 30, 2001 we have
made approximately $798,000 in capital expenditures. Funds for these
improvements are expected to be available from operations or from the respective
reserve accounts.
We are not aware of any trends, other than national economic conditions, which
have had, or which may be reasonably expected to have, a material favorable or
unfavorable impact on the revenues or income from the operations or sale of
properties. We believe that
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if the inflation rate increases we will be able to pass through the subsequent
increase in operating expenses to the residents of the communities by way of
higher rental and assisted living rates. The implementation of price increases
is intended to lead to an increase in revenue, however, those increases may
result in an initial or permanent decline in occupancy and/or a delay in
increasing occupancy. If this occurs, revenues may remain constant or decline.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in the interest rates on
our fixed rate notes payable. With respect to our fixed rate notes payable,
changes in the interest rates affect the fair market value of the notes payable,
but not our earnings or 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 the earlier of maturity and any required refinancing of such debt. We do
not currently have any variable interest rate debt and, therefore, are not
subject to interest rate risk associated with variable interest rate debt.
Currently, we do not utilize interest rate swaps.
Less than 1% of our total assets and total contract revenues as of and for the
periods ended June 30, 2001 and 2000 were denominated in currencies other than
the U.S. Dollar; accordingly, we believe that we have no material exposure to
foreign currency exchange risk. This materiality assessment is based on the
assumption that the foreign currency exchange rates could change unfavorably by
10%. We have no foreign currency exchange contracts.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ending June 30,
2001.
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Date: August 13, 2001
AMERICAN RETIREMENT VILLAS PROPERTIES II, A CALIFORNIA LIMITED PARTNERSHIP.
By: ARV ASSISTED LIVING, INC., MANAGING GENERAL PARTNER
/s/ DOUGLAS M. PASQUALE
- ---------------------------------------
Douglas M. Pasquale
Chief Executive Officer
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.
Date: August 13, 2001
SIGNATURE
----------
/s/ DOUGLAS M. PASQUALE
- ---------------------------------------
Douglas M. Pasquale
Chief Executive Officer
(Principal Executive Officer)
/s/ ANITA RYAN
- ---------------------------------------
Anita Ryan
Vice President and Controller
(Principal Accounting Officer)
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