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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 MARCH 31, 1999
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)
CALIFORNIA 33-0278155
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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 [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Properties, at cost:
Land $11,453 $ 2,903
Buildings and improvements, less accumulated depreciation
of $6,606 and $6,435 at March 31, 1999 and December 31,
1998, respectively 20,871 14,448
Leasehold property and improvements, less accumulated
depreciation of $1,224 and $5,752 at March 31, 1999 and
December 31, 1998, respectively 217 616
Furniture, fixtures and equipment, less accumulated
depreciation of $821 and $1,145 at March 31, 1999 and
December 31, 1998, respectively 1,250 1,193
------- -------
Net properties 33,791 19,160
Cash 1,671 953
Other assets 1,605 1,723
------- -------
$37,067 $21,836
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $20,787 $ 6,170
Accounts payable 259 698
Accrued expenses 833 569
Amounts payable to affiliate 858 453
Distributions payable to Partners 822 507
------- -------
Total liabilities 23,559 8,397
------- -------
Commitments and contingencies
Partners' capital
General partners' capital 283 282
Limited partners' capital, 35,020 units outstanding 13,225 13,157
------- -------
Total partners' capital 13,508 13,439
------- -------
$37,067 $21,836
======= =======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except unit data)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
------ ------
Revenues:
Rent $3,987 $3,813
Assisted living 993 871
Interest and other 130 78
------ ------
Total revenues 5,110 4,762
------ ------
Costs and expenses:
Rental property operations 2,619 2,474
Assisted living 424 316
General and administrative 300 313
Communities rent 299 290
Depreciation and amortization 337 268
Property taxes 148 129
Advertising 34 48
Interest 217 129
------ ------
Total costs and expenses 4,378 3,967
------ ------
Net income $ 732 $ 795
====== ======
Net income per limited partner unit $20.70 $22.48
====== ======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
-------- -------
Cash flows from operating activities:
Net income $ 732 $ 795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 337 268
Change in assets and liabilities:
Increase in other assets (82) (11)
Decrease in accounts payable and accrued expenses (175) (149)
Increase in amounts payable to affiliates 405 1,698
-------- -------
Net cash provided by operating activities 1,217 2,601
-------- -------
Cash flows used in investing activities:
Capital expenditures (332) (215)
Purchase of previously leased communities (14,636) --
Refund of purchase deposit, net 200 --
-------- -------
Net cash used in investing activities (14,768) (215)
-------- -------
Cash flows from financing activities:
Principal repayments on notes payable (60) (54)
Proceeds from notes payable 14,677 --
Distributions paid (348) (440)
-------- -------
Net cash provided by (used in) financing activities 14,269 (494)
-------- -------
Net increase in cash 718 1,892
Cash at beginning of period 953 1,857
-------- -------
Cash at end of period $ 1,671 $ 3,749
======== =======
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 122 $ 129
======== =======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We prepared the accompanying condensed consolidated financial statements of
American Retirement Villas Properties II 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 generally accepted accounting principles ("GAAP") 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. These are condensed financial statements. To obtain a more
detailed understanding of our results, you should also read the financial
statements and notes in our Form 10-K for 1998, 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.
USE OF ESTIMATES
In preparing the financial statements conforming with GAAP, we have made
estimates and assumptions that affect the following:
o reported amounts of assets and liabilities at the date of the
financial statements;
o disclosure of contingent assets and liabilities at the date of the
financial statements; and
o reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(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 amounting to $255,000 and $238,000 for the three-month and
periods ended March 31, 1999 and 1998, respectively. Additionally, we pay to ARV
a partnership management fee of 10 percent of cash flow before distributions, as
defined in the Partnership Agreement, which amounted to $124,000 and $116,000
for the three-month periods ended March 31, 1999 and 1998, respectively.
(3) COMMITMENTS AND CONTINGENCIES
LITIGATION
On September 27, 1996, we filed actions seeking declaratory judgements against
the landlords of the Retirement Inn of Campbell ("Campbell") and the Retirement
Inn of Sunnyvale ("Sunnyvale"). We leased the Campbell and Sunnyvale ALCs under
long-term leases, which were assumed when the ALCs were acquired. A dispute
arose as to the amount of rent due during the 10-year lease renewal periods that
commenced in August 1995 for Campbell and March 1996 for Sunnyvale.
Two other communities we leased, the Retirement Inn of Fremont and the
Retirement Inn at Burlingame were owned by entities that are related to the
entities that own the Campbell and Sunnyvale communities. We have purchased the
landlords' fee interest in all four ALCs on March 2, 1999, and the litigation
has been dismissed.
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(4) PURCHASE OF PREVIOUSLY LEASED COMMUNITIES
On March 2, 1999, we obtained a bridge loan of approximately $14.7 million,
enabling us to purchase four previously leased communities from our landlords
based upon mutually negotiated terms (Note 3). The loan bears interest at the
greater of the bank's prime rate or 7.75%, requires monthly interest payments
and all unpaid principal and interest is due on July 31, 2000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS) For the Three Months
Ended March 31,
-------------------- Increase/
1999 1998 (decrease)
------ ------ --------
Revenue:
Assisted living community revenue.......... $ 5.0 $ 4.7 6.3%
Interest and other revenue................. 0.1 0.1 66.7%
------ ------ -----
Total revenue...................... 5.1 4.8 7.3%
------ ------ -----
Costs and expenses:
Assisted living operating expenses......... 3.0 2.8 9.1%
General and administrative................. 0.3 0.3 (4.2)%
Communities rent........................... 0.3 0.3 0.3%
Depreciation and amortization.............. 0.3 0.3 25.7%
Property taxes............................. 0.2 0.1 14.7%
Advertising................................ 0.1 0.1 (29.2)%
Interest................................... 0.2 0.1 68.2%
------ ------ -----
Total costs and expenses........... 4.4 4.0 10.4%
------ ------ -----
Net income......................... $ 0.7 $ 0.8 (7.9)%
====== ====== =====
The increase in assisted living community revenue is attributable to:
o an increase in assisted living penetration to 55.9% for the three
month period ended March 31, 1999 compared with 50.3% for the three
month period ended March 31, 1998;
o an increase in average rate per occupied unit to $2,045 for the three
month period ended March 31, 1999 as compared with $1,866 the three
month period ended March 31, 1998; offset by:
o a decrease in average occupancy for our assisted living communities to
88.0% for the three month period ended March 31, 1999 as compared with
89.3% for the three month period ended March 31, 1998.
The increase in interest and other revenue is attributable to:
o bank accounts which utilize commercial paper investments were used
during 1999; and
o the increase in processing and other resident fees for the three month
period ended March 31, 1999.
The increase in assisted living operating expenses is attributable to:
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
General and administrative, communities rent, property taxes and advertising
expenses remained constant between periods.
The increase in interest expense is related to the loans for the purchase of
four previously leased communities during March 1999.
The increase in depreciation and amortization expense is related to the purchase
of four previously leased communities during March 1999.
LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
will be adequate to pay operating expenses, make necessary capital improvements,
make required principal reductions of debt and make quarterly distributions. On
a long-term basis, our liquidity is sustained primarily from cash flow provided
by operating activities.
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During the three-month period ended March 31, 1999, cash provided by operating
activities decreased to $1.2 million compared to $2.6 million for the
corresponding period in 1998. The decrease was primarily due to timing of
payments of amounts due to affiliates.
During the three-month period ended March 31, 1999, our net cash used in
investing activities increased to $14.8 million compared to $0.2 million for the
corresponding period in 1998. The increase was a result of a purchase our
landlords' interests in four previously leased assisted living communities.
During the three-month period ended March 31, 1999, our net cash provided by
financing activities was $14.3 million compared to cash used in financing
activities of $0.5 million for the corresponding period in 1998. The cash
provided by financing activities was the result of a $14.7 million bridge loan,
which enabled us to purchase four previously leased communities from our
landlords offset by principal repayments on notes payable and distributions paid
to partners.
As of March 31, 1999, of our ten 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 are currently working with a bank to refinance the above 8 owned ALCs
(inclusive of the four previously leased properties purchased on March 2, 1999)
and anticipate that the refinancing will be completed in June 1999, however, no
assurances can be given that the refinancing will be completed.
We contemplate spending approximately $900,000 for capital expenditures during
1999 for physical improvements at our communities. Funds for these improvements
are expected to be available from operations.
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 if the inflation rate increases we will be able to
pass the subsequent increase in operating expenses onto 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 decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
YEAR 2000 ISSUE
General
We use certain computer programs that 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 our 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. We have developed a comprehensive program to test and
modify our information technology to address the Year 2000 Issue. We believe
that our program is on schedule for completion by the end of 1999, and that
there will be no material impact on our business, results of operations,
financial position or liquidity as a result of Year 2000 Issues.
Program
Our program is focused on the following three main projects:
o information technology infrastructure - all of our hardware and
software systems;
o community maintenance - community specific systems, including alarms
(security, fire and emergency call), elevator, phone, HVAC, and other
systems; and
o third party suppliers/vendors.
For each component, we are addressing the Year 2000 Issues in the following six
phases:
o taking inventory of systems with potential Year 2000 Issues;
o assigning priorities to systems identified with Year 2000 Issues;
o assessing items which may have a material effect on our operations;
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o testing items assessed as material;
o replacing or repairing material non-compliant items; and
o designing and implementing business continuation plans.
We have received communications from third-party providers of our administrative
services, as well as our significant suppliers of services and products, to
determine the extent to which we are vulnerable to those parties' failures to
remediate their own Year 2000 Issues. We completed our evaluation of those
suppliers during the third quarter of 1998. We do not presently believe that
third party Year 2000 issues will have a material adverse effect on us. However,
there can be no guarantee that the systems of other companies on which our
operations or systems rely will be remedied on a timely basis or that a failure
by another company to remediate its systems in a timely manner would not have a
material adverse effect on us.
Costs
We expect to successfully implement the changes necessary to address our Year
2000 Issues, and do not believe that the cost of such actions will have a
material adverse effect on our financial position, results of operations or
liquidity. We are currently unable to assess the costs to remediate any Year
2000 Issues that may result from the assessment.
Risks
We believe that our Year 2000 program will be completed by the end of the third
quarter of 1999. Our program's schedule is based on a number of factors and
assumptions, such as:
o the accuracy and completeness of responses to our inquiries; and
o the availability of skilled personnel to complete the program.
Our program's schedule could be adversely impacted if either of the factors and
assumptions is incorrect. The failure to correct a material Year 2000 Issue
could result in an interruption in our normal business operations. There can be
no assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and our inability to
implement such changes could have a material adverse effect on our business,
operating results, and financial condition.
We intend to determine if contingency plans are needed for any aspect of our
business with respect to Year 2000 Issues (including most likely worst case Year
2000 scenarios), and to create those contingency plans by the end of the third
quarter of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our
notes payable. Currently, we do not utilize interest rate swaps. The purpose of
the following analysis is to provide a framework to understand our sensitivity
to hypothetical changes in interest rates as of March 31, 1999. 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. Holding the variable rate debt balance constant, each one
percentage point increase in interest rates would result in an increase in
variable rate interest incurred for the coming year of approximately $2,000.
The table below details the principal amount and the average interest rates of
notes payable in each category based upon the expected maturity dates. The fair
value estimates for notes payable are based upon future discounted cash flows of
similar type notes or quoted market prices for similar loans. The carrying value
of our variable rate debt approximates fair value due to the frequency of
re-pricing of this debt. Our fixed rate debt consists of mortgage payables and
capital leases. The fixed rate debt bears interest at rates that approximate
current market value.
EXPECTED MATURITY DATE - MARCH 31,
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed rate debt $ 189 $ 14,839 $ 169 $ 183 $ 198 $ 4,968 $ 20,546 $ 20,546
Average interest rate 8.38% 7.75% 7.86% 7.86% 7.86% 7.83%
Variable rate debt $ 64 $ 64 $ 64 $ 48 $ -- $ -- $ 241 $ 241
Average interest rate 8.75% 8.75% 8.75% 8.75% -- -- -- --
We do not believe that the future market rate risks related to the above
securities will have a material adverse impact on our financial position,
results of operations or liquidity.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, we filed actions seeking declaratory judgements against
the landlords of the Retirement Inn of Campbell ("Campbell") and the Retirement
Inn of Sunnyvale ("Sunnyvale"). We leased the Campbell and Sunnyvale ALCs under
long-term leases, which were assumed when the ALCs were acquired. A dispute
arose as to the amount of rent due during the 10-year lease renewal periods that
commenced in August 1995 for Campbell and March 1996 for Sunnyvale.
Two other communities we leased, the Retirement Inn of Fremont and the
Retirement Inn at Burlingame were owned by entities that are related to the
entities that own the Campbell and Sunnyvale communities. We have mutually
negotiated the terms of a purchase agreement involving the sale of the
landlords' fee interest in all four ALCs and settlement of all claims. On March
2, 1999, we obtained financing and, through a wholly owned subsidiary, purchased
the landlords' interests in four previously leased ALCs and the litigation has
been dismissed.
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
Date: May 14, 1999 By: ARV Assisted Living, Inc.,
a Delaware Corporation
(Managing General Partner)
By: /s/ Douglas M. Pasquale
--------------------------------
Douglas M. Pasquale
President, Chief Executive Officer
and Director of ARV Assisted Living, Inc.
Date: May 14, 1999 By: /s/Abdo H. Khoury
-------------------------------
Abdo H. Khoury
Senior Vice President, and Chief Financial
Officer of ARV Assisted Living, Inc.
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EXHIBIT INDEX
A. Exhibit 27 - Financial Data Schedule