1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0278155
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 92626
COSTA MESA, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
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
--- ---
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Balance Sheets
ASSETS MARCH 31, 1997 DEC. 31, 1996
---------------- ----------------
(UNAUDITED) (AUDITED)
(In thousands except unit data)
Properties, at cost:
Land $ 2,903 2,903
Buildings and improvements, less accumulated
depreciation of $5,393 in 1997 and $5,250 in 1996 14,614 14,723
Leasehold property and improvements, less accumulated
depreciation of $4,208 in 1997 and $5,545 in 1996 336 349
Furniture, fixtures and equipment, less accumulated
depreciation of $879 in 1997 and $888 in 1996 994 940
------- -------
Net properties 18,847 18,915
Cash 691 370
Other assets, including impound accounts of $815 in 1997
and $672 in 1996 1,536 1,516
------- -------
$21,074 20,801
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,520 6,562
Accounts payable and accrued expenses 1,102 1,063
Amounts payable to affiliate 374 189
Distributions payable to Partners 46 742
------- -------
Total liabilities 8,042 8,556
------- -------
Partners' capital
General partners' capital 276 270
Limited partners' capital, 35,020 limited partnership
units authorized, issued and outstanding 12,756 11,975
------- -------
Total partners' capital 13,032 12,245
$21,074 20,801
======= =======
3
American Retirement Villas Properties II
(a California limited partnership)
Statements of Income
(unaudited)
(In thousands, except unit data)
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 31, 1997 MARCH 31, 1996
--------------------------------
Revenues:
Rent $3,928 3,696
Assisted living 745 555
Interest 3 4
Other 95 48
------ ------
Total revenues 4,771 4,303
------ ------
Costs and expenses:
Rental property operations 2,233 2,182
Assisted living (all related to 294 240
affiliates)
General and administrative) 513 466
Facilities rent 294 293
Depreciation and amortization 349 478
Property taxes 129 99
Advertising 33 31
Interest 131 148
------ ------
Total costs and expenses 3,976 3,937
------ ------
Net income (loss) $ 795 366
====== ======
Net income (loss) per limited partner unit $22.47 10.34
====== ======
4
American Retirement Villas Properties II
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
1997 1996
------ ------
Cash flows from operating activities:
Net income ................................................. 795 366
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 349 478
Change in assets and liabilities:
Decrease in loan fees .............................. 0 1
(Increase) in other assets ......................... (20) (114)
Increase in accounts payable and accrued expenses .. 39 111
Increase in amounts payable to affiliates .......... 185 10
------ ------
Net cash provided by operating activities ...... 1,348 852
------ ------
Cash flows used in investing activities
Capital expenditures ..................................... (281) (67)
------ ------
Net cash used in investing activities ........... (281) (67)
------ ------
Cash flows from financing activities:
Borrowings on line of credit ............................... 0 400
Principal repayments on line of credit ..................... 0 (725)
Principal repayments on notes payable ...................... (41) (39)
Distributions paid ......................................... (705) (589)
------ ------
Net cash used by financing activities .......... (746) (953)
------ ------
Net increase (decrease) in cash .............................. 321 (168)
Cash at beginning of period .................................. 370 489
------ ------
Cash at end of period ........................................ 691 321
====== ======
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(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference. The financial statements
reflect all adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation. All such adjustments are of a normal
recurring nature.
CARRYING VALUE OF REAL ESTATE
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
LOAN FEES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
RENTAL INCOME
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
INCOME TAXES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
NET INCOME PER LIMITED PARTNER UNIT
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
CASH
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
RECLASSIFICATIONS
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
(2) ORGANIZATION AND PARTNERSHIP AGREEMENT
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
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(3) TRANSACTIONS WITH AFFILIATES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference, and is supplemented as
follows. For the three months ended March 31, 1997, property management fees and
partnership administration fees of $239,000 and $116,000 respectively, were paid
or accrued to the Managing General Partner.
(4) PROPERTIES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
(5) NOTES PAYABLE
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(1) LIQUIDITY
Currently, the Partnership has approximately $319,000 of debt maturing within
the next six months. It is the Managing General Partner's intention to extend
the maturity of this debt. The lender has committed to extend the maturity of
the note for a period of five years. Currently, the extension is being
documented. To the extent such an extension is received, the General Partners
expect that the cash to be generated from operations of all the Partnership's
properties will be adequate to pay operating expenses, make necessary capital
improvements, make required principal reductions, and provide distributions to
the Partners. In the event the Managing General Partner is unsuccessful in
extending these obligations, the Partnership's ability to provide distributions
to the Partners over the near term could be temporarily impaired as operating
funds would be required for the retirement of debt. On a long-term basis, the
Partnership's liquidity is sustained primarily from cash flow provided by
operating activities. During the three months ended March 31, 1997, cash
provided by operating activities was $1.3 million compared to cash provided by
operating activities of $852,000 for the three months ended March 31, 1996.
During three months ended March 31, 1997, the Partnership used net cash in
investing activities of $281,000 compared to $67,000 for the three months ended
March 31, 1996. The Partnership's investing activities consisted of capital
improvements made to its ten facilities.
During the three months ended March 31, 1997, the Partnership used net cash in
financing activities of $746,000 compared to $953,000 for the three months ended
March 31, 1996. The Partnership's financing activities consisted of net
repayments under its line of credit, principal reduction on notes payable and
distributions paid to the Partners.
The Managing General Partner is 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 revenue or income from
the operations or sale of properties. Six of the facilities in the Partnership's
portfolio are leased to the Partnership.
Of the partnership's ten facilities, five are operated pursuant to long-term
operating leases, four facilities are owned directly, and one facility is owned
by the partnership subject to a ground lease.
On June 27, 1996, the Partnership filed actions seeking declaratory judgements
against the landlords of the Retirement Inn of Campbell ("Campbell") and the
Retirement Inn of Sunnyvale ("Sunnyvale"). The Partnership leases the Campbell
and Sunnyvale assisted living facilities under long-term operating leases. A
dispute has arisen as to the amount of rent due during the 10-year lease renewal
periods which commenced in August 1995 for Campbell and March 1996 for
Sunnyvale. The Partnership seeks a determination that it is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against the Partnership, rent for the Campbell
and Sunnyvale facilities could increase significantly, which will reduce future
distributions to Unitholders. These rent increases would be retroactive to the
commencement of the lease renewal periods.
The other facilities operated by the Partnership, pursuant to long-term
operating leases, the Retirement Inn of Fremont ("Fremont") and the Retirement
Inn at Burlingame ("Burlingame"), are owned by entities which are related to the
entities that own the Campbell and Sunnyvale facilities. It is not known whether
the landlords of those facilities will dispute the amount of rent due during the
renewal periods beginning January 1997 for Fremont and August 1997 for
Burlingame. If so, the Partnership may be required to file litigation to
determine its rights under those leases as well.
8
Increases in rent for the facilities may not be offset by an increase in rental
and assisted living rates and may result in a decrease in revenue or income from
the operations of the facilities. The Managing General Partner believes that if
expenses increase as a result of inflation, the subsequent increases in
operating expenses will most likely be able to be passed on to the residents of
the facilities by way of higher rental and assisted living rates. The
Partnership had long term debt of $6.2 million as of March 31, 1997. Of this
amount, $319,000 was due May 10, 1997 but repayment was extended to June 1997
and a further extension for a period five years, as discussed above, is
expected. The balance of the Partnership's debt is due through regularly
scheduled payments of principal and interest (primarily on mortgage debt)
through August 2018.
(2) CAPITAL RESOURCES
The Managing General Partner contemplates incurring approximately $1.4 million
for physical improvements and normal recurring preventative maintenance at its
ten facilities during 1997. Of this amount, approximately $250,000 has been
expended as of March 31, 1997. Funds for these improvements should be available
from operations.
There are no known material trends, favorable or unfavorable, other than those
disclosed above, in the Partnership's capital resources. There is no expected
change in the mix of such resources.
(3) RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1996.
Revenue for the three month periods ended March 31, 1997 and 1996 includes
rental income, assisted living income, interest earned on cash balances and
other revenue. Total revenue for the three months ended March 31, 1997 was $4.8
million representing an increase of approximately 11% over revenues of $4.3
million for the three months ended March 31, 1996.
The largest component of revenue, rental income, increased approximately 6% for
the three months ended March 31, 1997 from the comparable period in the prior
year. Meanwhile, assisted living revenue increased approximately 34% to $745,000
for the three months ended March 31, 1997 from $555,000 for the three months
ended March 31, 1996. The increase in assisted living revenue was primarily the
result of an aggressive marketing campaign for assisted living services and more
residents using the services.
Interest income decreased slightly to $3,000 for the three months ended March
31, 1997 from $4,000 for the same period one year ago.
Other revenue increased approximately 98% from $48,000 for the three months
ended March 31, 1996 to $95,000 for the three months ended March 31, 1997,
primarily due to recognition of forfeited security deposits as income during the
period.
Sources of revenue for the three months ended March 31, 1997 and March 31, 1996
are summarized as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
( In thousands)
1997 1996
------ ------
Rent $3,928 $3,696
Assisted Living 745 555
Interest 3 4
Other 95 48
------ ------
Total Revenue $4,771 $4,303
------ ------
9
Total costs and expenses for the three months ended March 31, 1997 were $4.0
million, a 1% increase compared to costs and expenses of $3.9 million for the
three months ended March 31, 1996.
The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operations expenses
increased approximately 2% to $2.2 million for the three months ended March 31,
1997 from $2.2 million for the three months ended March 31, 1996. This increase
is due mainly to increases in payroll, maintenance and repair expenses and other
miscellaneous supplies.
Assisted living expenses consist primarily of the related payroll expense. This
expense increased approximately 23% to $294,000 for the three months ended March
31, 1997 from $240,000 for the three months ended March 31, 1996. The increase
corresponds directly to the increase in assisted living services revenue in the
current year and the staffing required to provide these services.
General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt, data processing, investor
relations, insurance and professional services. General and administrative
expenses increased by over 10% to $513,000 for the three months ended March 31,
1997 from $466,000 for the three months ended March 31, 1996. The increase in
general and administrative expenses was primarily due to legal expenses incurred
as a result of the ongoing litigation regarding the leases of the Retirement Inn
of Campbell and the Retirement Inn of Sunnyvale.
Depreciation and amortization expense decreased by 27% from $478,000 for the
three months ended March 31, 1996 to $349,000 for the three months ended March
31, 1997. The primary reasons for this decrease is the full amortization of
assets associated with the expiration of the initial lease term of two of the
facility operating leases, the extension of the lease terms on the six leased
properties which concurrently led to a decrease in depreciation expense and the
change in accounting estimate which adjusted the depreciable life of the
building from 27.5 years to 35 years.
Interest expense decreased over 11% to $131,000 for the three months ended March
31, 1997 compared with $148,000 for the three months ended March 31, 1996. The
decrease is primarily the result of the elimination of borrowings under the
Partnership's line of credit.
Selected costs and expenses for the three months ended March 31, 1997 and March
31, 1996 are summarized as follows:
THREE MONTHS ENDED
------------------------------
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
(In thousands)
Rental Property Operations $2,233 $2,182
Assisted Living 294 240
General and Administrative 513 466
Depreciation and amortization 349 478
Property Taxes 129 99
Interest 131 148
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, the Partnership filed actions seeking declaratory
judgments against the landlords of the Retirement Inn of Campbell (Campbell) and
the Retirement Inn of Sunnyvale (Sunnyvale). The Partnership leases the Campbell
and Sunnyvale assisted living facilities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against the Partnership, rent for the Campbell
and Sunnyvale facilities could increase significantly, which will reduce
distributions to unit holders in the future. These rent increases would be
retroactive to the commencement of the lease renewal periods. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
Two other facilities leased by the Partnership, the Retirement Inn of Fremont
(Fremont) and the Retirement Inn at Burlingame (Burlingame) are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
facilities. It is not known whether the landlords of those facilities will
dispute the amount of rent due during the renewal periods which began January
1997 for Fremont and beginning August 1997 for Burlingame. If so, the
Partnership may be required to file litigation to determine the rights under
those leases.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RETIREMENT VILLAS PROPERTIES II
A CALIFORNIA LIMITED PARTNERSHIP
By: ARV Assisted Living, Inc.
a California Corporation
(General Partner)
By: /s/ Gary L. Davidson
-------------------------------
Gary L. Davidson
Chairman of the Board
Date: May 21, 1997
By: /s/ Graham P. Espley-Jones
-------------------------------
Graham P. Espley-Jones
Chief Financial Officer
Date:May 21, 1997