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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 JUNE 30, 1998
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 [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Balance Sheets
(Unaudited)
(In thousands)
ASSETS
........
JUNE 30, DECEMBER 31,
1998 1997
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Properties, at cost:
Land $ 2,903 $ 2,903
Buildings and improvements, less accumulated
depreciation of $6,127 and $5,827 at June
30, 1998 and December 31, 1997, respectively 14,405 14,521
Leasehold property and improvements, less
accumulated depreciation of $5,716 and $5,686
at June 30, 1998 and December 31, 1997,
respectively 539 468
Furniture, fixtures and equipment, less
accumulated depreciation of $1,089 and $976 at
June 30, 1998 and December 31, 1997, respectively 1,038 1,098
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Net properties 18,885 18,990
Cash 2,217 1,857
Other assets 1,323 1,082
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$22,425 $21,929
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LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,294 $ 6,403
Accounts payable 120 832
Accrued expenses 571 414
Amounts payable to affiliate 955 277
Distributions payable to Partners 478 480
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Total liabilities 8,418 8,406
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Commitments and contingencies
Partners' capital
General partners' capital 288 283
Limited partners' capital, 35,020 units outstanding 13,719 13,240
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Total partners' capital 14,007 13,523
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$22,425 $21,929
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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 unit data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
REVENUE:
Rent $3,816 $3,908 $7,651 $7,767
Assisted living 936 751 1,808 1,496
Interest and other 160 85 215 253
------ ------ ------ ------
Total revenue 4,912 4,744 9,674 9,516
------ ------ ------ ------
COSTS AND EXPENSES:
Rental property operations 2,595 2,458 5,077 4,885
Assisted living 341 306 650 600
General and administrative 311 343 625 659
Communities rent 287 291 576 584
Depreciation and
amortization 266 253 534 602
Property taxes 137 123 266 253
Advertising 55 33 103 66
Interest 125 130 253 265
------ ------ ------ ------
Total costs and
expenses 4,117 3,937 8,084 7,914
------ ------ ------ ------
Net income $ 795 $ 807 $1,590 $1,602
====== ====== ====== ======
Net income per limited
partner unit $22.47 $22.83 $44.94 $45.30
====== ====== ====== ======
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 SIX MONTHS
ENDED JUNE 30,
1998 1997
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Cash flows from operating activities:
Net income $ 1,590 $ 1,602
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 534 602
Change in assets and liabilities:
Increase in other assets (241) (61)
Decrease in accounts payable & accrued
expenses (555) (181)
Increase in amounts payable to
affiliates 678 290
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Net cash provided by operating
activities 2,006 2,252
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Cash flows used in investing activities:
Capital expenditures (429) (440)
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Net cash used in investing activities (429) (440)
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Cash flows from financing activities:
Principal repayments on notes payable (109) (84)
Distributions paid (1,108) (887)
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Net cash used by financing activities (1,217) (971)
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Net increase in cash 360 841
Cash at beginning of period 1,857 370
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Cash at end of period $ 2,217 $ 1,211
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Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 253 $ 287
======= =======
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)
JUNE 30, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
All adjustments, consisting only of normal 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 three months and six months ended June 30, 1998, 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, 1997 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, Inc., the
Partnership's Managing General Partner, providing for a property management fee
of five percent of gross revenues amounting to $244,000 and $482,000, for the
three-month and the six-month periods ended June 30, 1998, respectively.
Additionally, a partnership management fee of 10 percent of cash flow before
distribution, as defined in the Partnership Agreement, amounted to $120,000 and
$236,000 for the three-month and the six-month periods ended June 30, 1998,
respectively.
(3) COMMITMENTS AND CONTINGENCIES
LITIGATION
On September 27, 1996, the Partnership filed actions in the Superior Court of
the State of California, County of Santa Clara, 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 communities 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 communities could increase significantly, which will reduce net
income and distributions to unit holders in the future. These rent increases
would be retroactive to the commencement of the lease renewal periods.
Two other communities 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
communities. It is not known whether the landlords of those communities 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.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
the Partnership and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the pendency of the escrow. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
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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 $168,000 and $158,000 for the
three-month and six-month periods ended June 30, 1998, respectively, compared
with the corresponding periods of 1997. The increase resulted primarily from an
increase in assisted living services provided partially offset by lower
occupancy rates during 1998.
COSTS AND EXPENSES
Total costs and expenses include 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), communities rent, depreciation and
amortization, property taxes, advertising and interest. Costs and expenses
increased $180,000 and $170,000 for the three-month and six-month periods ended
June 30, 1998, respectively, compared with the corresponding periods of 1997.
For the three-month and six-month periods ended June 30, 1998, rental property
operations and assisted living expenses increased due to additional payroll
expenses. Depreciation and amortization expenses decreased during the six-month
period as a result of the full amortization of the leasehold assets associated
with the expiration of the initial lease term of one community's operating
lease. Advertising expenses have increased as a result of new marketing programs
aimed at increasing occupancy.
LIQUIDITY AND CAPITAL RESOURCES
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.
The Partnership's liquidity is sustained primarily from cash flows provided by
operating activities. During the six-month period ended June 30, 1998, cash
provided by operating activities decreased to $2.0 million compared to $2.3
million for the corresponding period in 1997. Cash provided by operating
activities for the six months ended June 30, 1998 resulted primarily from net
income plus a non-cash charge for depreciation and amortization partially offset
by the changes in operating assets and liabilities.
During the six-month period ended June 30, 1998, the Partnership's net cash used
in investing activities decreased to $431,000 compared to $440,000 for the
corresponding period in 1997. The Partnership's investing activities consisted
of capital improvements made to its ten communities.
During the six-month period ended June 30, 1998, the Partnership's net cash used
in financing activities increased to $1.2 million compared to $1.0 million for
the corresponding period in 1997. The Partnership's financing activities
consisted of repayments on notes payable and distributions paid to the Partners.
Distributions paid in the six-month period ended June 30, 1998 increased by
approximately $219,000 compared to the same period in the prior year.
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 communities, five are operated pursuant to long-term
operating leases, four communities are owned directly, and one community is
owned by the Partnership subject to a ground lease.
Increases in rent for the communities 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 $6.3 million at June 30, 1998. The Partnership's
debt is due through regularly scheduled payments of principal and interest
(primarily on mortgage debt) through August 2018.
In July 1998, the Board of Directors of the Managing General Partner approved
the refinancing of four of the Partnership's communities. This refinancing will
allow the Partnership to take advantage of lower interest rates available in the
current environment and provide a return of capital to the Managing General
Partner and the limited partners by borrowing against the increased value of
these properties. As a result of this refinancing, the Partnership's long-term
debt is expected to be approximately $25.6 million.
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The Managing General Partner contemplates incurring approximately $2.1 million
for physical improvements and normal recurring preventative maintenance at its
ten communities during 1998. Of this amount, approximately $923,000 has been
contracted as of June 30, 1998. Funds for these improvements are expected to 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.
YEAR 2000 ISSUE
Certain computer programs utilized by the Partnership were written using two
digits rather than four to define the year. As a result, those programs may
recognize a date using "00" as the year 1900 rather than the year 2000. In the
event this were to occur with any of the Partnership's computer programs, a
system failure or miscalculation causing disruptions of operations could occur.
Such a failure could cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities.
Unrelated to the Year 2000 Issue, the Managing General Partner, which provides
accounting services, intends to replaced substantially all of its accounting
information systems software during 1998/1999. The Managing General Partner
believes that with the conversion to the new accounting software, the Year 2000
Issue will not pose significant business or operating issues.
The Partnership is assessing its remaining software to determine whether any
existing programs will have to be modified or replaced so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. This assessment is expected to be completed during the fourth
quarter of 1998.
The Partnership has initiated communications with the third-party providers of
certain of its administrative services, as well as its significant suppliers of
services and products to determine the extent to which the Partnership is
vulnerable to those parties' failures to remediate their own Year 2000 Issues.
The Partnership plans to have completed its evaluation of those suppliers during
the first quarter of 1999. The Partnership does not presently believe that third
party Year 2000 Issues will have a material adverse effect on the Partnership.
However, there can be no guarantee that the systems of other companies on which
the Partnership's operations or systems rely will be timely remedied or that a
failure by another company to remediate its systems in a timely manner would not
have a material adverse effect on the Partnership.
The Partnership expects to successfully implement the changes necessary to
address these Year 2000 Issues, and does not believe that the cost of such
actions will have a material effect on the Partnership. There can be no
assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and the Partnership's
inability to implement such changes could have a material adverse effect on the
Partnership's business, operating results, and financial condition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, the Partnership filed actions in the Superior Court of
the State of California, County of Santa Clara, 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 communities 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 communities could increase significantly, which will reduce net
income and distributions to unit holders in the future. These rent increases
would be retroactive to the commencement of the lease renewal periods.
Two other communities 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
communities. It is not known whether the landlords of those communities 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.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
the Partnership and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the
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pendency of the escrow. Management is of the opinion, based in part upon
opinions of legal counsel, that an adverse outcome is unlikely.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
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SIGNATURES
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 Delaware Corporation
(General Partner)
By: /s/ Howard G. Phanstiel
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Howard G. Phanstiel
Chief Executive Officer and
Chairman of the Board of Directors
Date: August 14, 1998
By: /s/Paul Kuliev
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Vice President, Controller
Date: August 14, 1998
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule