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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 SEPTEMBER 30, 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
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0278155
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
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(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
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Balance Sheets
(In thousands except unit data)
Sept 30, Dec. 31,
1997 1996
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(UNAUDITED)
ASSETS
Properties, at cost:
Land $ 2,903 $ 2,903
Buildings and improvements, less accumulated depreciation of
$5,681 at September 30, 1997 and $5,250 at December 31, 1996 14,467 14,723
Leasehold property and improvements, less accumulated
depreciation of $4,228 at September 30, 1997 and $5,545 at
December 31, 1996 389 349
Furniture, fixtures and equipment, less accumulated depreciation
of $912 at September 30, 1997 and $888 at December 31, 1996 978 940
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Net properties 18,737 18,915
Cash 901 370
Other assets 1,678 1,516
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$21,316 $ 20,801
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LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,435 $ 6,562
Accounts payable and accrued expenses 850 1,063
Amounts payable to affiliate 554 189
Distributions payable to Partners 38 742
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Total liabilities 7,877 8,556
Partners' capital
General partners' capital 282 270
Limited partners' capital, 35,020 units outstanding 13,157 11,975
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Total partners' capital 13,439 12,245
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$21,316 $ 20,801
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See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Statements of Income
(unaudited)
(In thousands, except per unit data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
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REVENUE:
Rent..................................... $3,904 $3,826 $11,671 $11,255
Assisted living.......................... 775 650 2,271 1,822
Interest and other....................... 62 59 315 167
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Total revenue................... 4,741 4,535 14,257 13,244
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COSTS AND EXPENSES:
Rental property operations............... 2,488 2,431 7,438 7,330
Assisted living.......................... 308 259 908 740
General and administrative............... 360 265 933 1,021
Facilities rent.......................... 296 294 880 881
Depreciation and amortization............ 256 371 858 1,262
Property taxes........................... 108 114 361 352
Advertising.............................. 37 17 103 62
Interest................................. 138 143 424 437
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Total costs and expenses........ 3,991 3,894 11,905 12,085
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Net income...................... $ 750 $ 641 $ 2,352 $ 1,159
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Net income per limited partner unit...... $21.20 $18.15 $ 66.49 $ 32.78
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See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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Cash flows from operating activities:
Net income............................................................ $ 2,352 $ 1,159
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 858 1,262
Change in assets and liabilities:
Increase in other assets....................................... (162) (49)
Increase (decrease) in accounts payable and accrued expenses... (213) 99
Increase (decrease) in amounts payable to affiliates........... 365 (44)
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Net cash provided by operating activities................. 3,200 2,427
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Cash flows used in investing activities:
Capital expenditures................................................ (680) (394)
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Net cash used in investing activities...................... (680) (394)
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Cash flows from financing activities:
Borrowings on line of credit.......................................... -- 810
Principal repayments on line of credit................................ -- (1,160)
Principal repayments on notes payable................................. (127) (120)
Distributions paid.................................................... (1,862) (1,561)
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Net cash used by financing activities..................... (1,989) (2,031)
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Net increase in cash.................................................... 531 2
Cash at beginning of period............................................. 370 489
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Cash at end of period................................................... $ 901 $ 491
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Supplemental disclosure of cash flow information -
Cash paid during the period for interest............................ $ 424 $ 437
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See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
SEPTEMBER 30, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
All adjustments, including recurring accruals, have been made that are necessary
to present fairly the financial position and results of operations for the
periods covered by this report. The results of operations for the nine months
ended September 30, 1997, are not necessarily indicative of the operating
results for the full year.
Pursuant to Regulation S-X Rule 10-1(5), American Retirement Villas Properties
II, L.P.'s ( the "Partnership") significant accounting policies are described in
the Partnership's December 31, 1996 Form 10-K filed with the Securities and
Exchange Commission. The Partnership follows the same accounting policies for
interim reporting purposes. This quarterly report should be read in conjunction
with such financial statements.
Certain prior period amounts have been reclassified to conform to the current
period financial statement presentation.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARV Assisted Living, the Partnership's
Managing General Partner, providing for a property management fee of 5 percent
of gross revenues and a partnership management fee of 10 percent of cash flow
before distribution, as defined in the Partnership Agreement. Property
management fees and partnership administration fees were $237,000 and $109,000
for the three months ended September 30, 1997, respectively, and $662,000 and
$309,000 for the nine month ended September 30, 1997, respectively.
(3) COMMITMENTS AND CONTINGENCIES
Litigation
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 August 1997 for Burlingame. If so, the Partnership may be
required to file litigation to determine the rights under those leases.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue
Revenue includes rental income, assisted living income, interest earned on cash
balances and other revenue. Revenue increased $206,000 and $1,013,000 for the
three month and nine month periods ended September 30, 1997, respectively,
compared with the corresponding periods of 1996. The increase resulted primarily
from higher occupancy rates, higher average rental rate per resident and
additional residents using assisted living services during 1997.
Costs and Expenses
Total costs and expenses includes rental property operations (consisting of, but
not limited to, property management costs, payroll related expenses, utilities,
food, and maintenance expenses), assisted living expenses, general and
administrative (comprised of, but not limited to, costs for accounting,
partnership administration, bad debt, data processing, investor relations,
insurance and professional services), facilities rent, depreciation and
amortization, property taxes, advertising and interest. Costs and expenses
increased $97,000 and decreased $180,000 for the three month and nine month
periods ended September 30, 1997, respectively, compared with the corresponding
periods of 1996.
For the three month period ended September 30, 1997, rental property operations
and assisted living expenses increased due to higher occupancy and additional
residents using the assisted living services. General and administrative
expenses increased primarily due to legal service associated with the litigation
against landlords of two communities. Depreciation and amortization expenses
decreased as a result of the full amortization of the leasehold assets
associated with the expiration of the initial lease term of four communities
operating leases.
For the nine month period ended September 30, 1997, rental property operations
and assisted living expenses increased as a result of higher occupancy and
additional residents using the assisted living services. General and
administrative expenses decreased in 1997 as a one time charge of $389,000 was
recognized in 1996 for costs related to soliciting the Partnership's unit
holders with respect to the anticipated sale of certain properties to a health
care real estate investment trust. This was partially offset by increased legal
service in 1997 associated with the litigation against landlords of two
communities. Depreciation and amortization expenses decreased in 1997 as a
result of the full amortization of the leasehold assets at two communities whose
operating leases expired in 1997.
Liquidity and Capital Resources
Currently, the Partnership has approximately $315,000 of debt maturing within
the next three 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. The extension is currently being
documented. To the extent such an extension is received, the General Partners
expect that the cash generated from operations of all the Partnership's
properties will be adequate to pay operating expenses, make necessary capital
improvements, make required principal reductions of debt, 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 nine months ended September
30, 1997, cash provided by operating activities increased to $3.2 million
compared to $2.4 million for the corresponding period in 1996.
During nine months ended September 30, 1997, the Partnership's net cash used in
investing activities increased to $680,000 compared to $394,000 for the
corresponding period in 1996. The Partnership's investing activities consisted
of capital improvements made to its ten communities.
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During the nine months ended September 30, 1997 and 1996, the Partnership's net
cash used in financing activities was $2.0 million. 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.
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 September 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 would reduce future
distributions to unit holders. 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 of 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.
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 debt of $6.4 million at September 30, 1997. Of this amount,
$315,000 is due December 10, 1997 and a five-year extension, 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.
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 $680,000 has been
expended as of September 30, 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.
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
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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/ John A. Booty
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John A. Booty
President
Date: November 14, 1997
By: /s/ Graham P. Espley-Jones
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Graham P. Espley-Jones
Chief Financial Officer
Date: November 14, 1997
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EXHIBIT INDEX
Exhibit Description
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27 Financial Data Schedule