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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, 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, L.P.
(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 Balance Sheets
(Unaudited)
(In thousands)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Properties, at cost:
Land $ 11,453 $ 2,903
Buildings and improvements, less accumulated depreciation
of $6,784 and $6,435 at June 30, 1999 and December 31, 1998,
respectively 20,967 14,448
Leasehold property and improvements, less accumulated depreciation of
$1,231 and $5,752 at June 30, 1999 and
December 31, 1998, respectively 224 616
Furniture, fixtures and equipment, less accumulated depreciation
of $1,037 and $1,145 at June 30, 1999 and December 31, 1998,
respectively 1,326 1,193
-------- -------
Net properties 33,970 19,160
Cash 9,507 953
Other assets 3,122 1,723
-------- -------
$ 46,599 $21,836
======== =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 39,742 $ 6,170
Accounts payable 320 698
Accrued expenses 552 569
Amounts payable to affiliate 432 453
Distributions payable to Partners 7,897 507
-------- -------
Total liabilities 48,944 8,397
-------- -------
Commitments and contingencies
Partners' capital
General partners' capital 282 282
Limited partners' capital, 35,020 units outstanding (2,627) 13,157
-------- -------
Total partners' capital (2,345) 13,439
-------- -------
$ 46,599 $21,836
======== =======
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
REVENUE:
Rent .............................. $4,093 $3,816 $ 8,080 $7,628
Assisted living ................... 1,014 936 2,007 1,808
Interest and other ................ 113 160 243 238
------ ------ ------- ------
Total revenue ............ 5,220 4,912 10,330 9,674
------ ------ ------- ------
COSTS AND EXPENSES:
Rental property operations ........ 2,666 2,576 5,263 5,043
Assisted living ................... 456 349 880 665
General and administrative ........ 283 312 584 626
Communities rent .................. 86 287 386 576
Depreciation and amortization ..... 419 266 756 534
Property taxes .................... 177 137 325 266
Advertising ....................... 66 65 120 123
Interest .......................... 443 125 660 253
------ ------ ------- ------
Total costs and expenses . 4,596 4,117 8,974 8,084
------ ------ ------- ------
Net income ............... $ 624 $ 795 $ 1,356 $1,590
====== ====== ======= ======
Net income per limited partner unit $16.26 $22.47 $ 36.96 $44.94
====== ====== ======= ======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1999 1998
-------- -------
Cash flows from operating activities:
Net income $ 1,356 $ 1,590
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 756 534
Change in assets and liabilities:
Increase in other assets (1,599) (241)
Increase (decrease) in accounts payable & accrued expenses (423) 555
Increase (decrease) in amounts payable to affiliates (21) 678
-------- -------
Net cash provided by operating activities 69 2,006
-------- -------
Cash flows used in investing activities:
Capital expenditures (913) (429)
Purchase of previously leased communities (14,636) --
Refund of purchase deposit, net 200 --
-------- -------
Net cash used in investing activities (15,349) (429)
-------- -------
Cash flows from financing activities:
Principal repayments on notes payable (20,791) (109)
Proceeds from notes payable 54,380 --
Distributions paid (9,755) (1,108)
-------- -------
Net cash provided by (used in) financing
activities 23,834 (1,217)
-------- -------
Net increase in cash 8,554 360
Cash at beginning of period 953 1,857
-------- -------
Cash at end of period $ 9,507 $ 1,217
======== =======
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 443 $ 253
======== =======
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 Condensed Financial Statements
(Unaudited)
June 30, 1999 and 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We prepared the accompanying condensed 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 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, one 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 $259,000 and $244,000 for the three month periods
ended June 30, 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 $128,000 and $118,000
for the three month periods ended June 30, 1999 and 1998, respectively.
(3) PURCHASE OF PREVIOUSLY LEASED COMMUNITIES
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 mutually negotiated
the terms of a purchase agreement involving the sale of the landlords' fee
interest in all four ALCs and the litigation has been dismissed.
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Previously, 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 until we could secure more
permanent financing. The bridge loan was refinanced June 28, 1999 with proceeds
from the Banc One loan (Note 4).
(4) NOTE PAYABLE
On June 28, 1999, we obtained financing from Banc One on the 8 owned
communities. As part of the loan requirements, we established a wholly owned
subsidiary Retirement Inns II, LLC. The loan is for 24 months and is secured by
the properties; in addition, ARV Assisted Living, our general partner is a
guarantor on the loan for fraud, material misrepresentation and certain
covenants. The loan includes a lender option to extend for 10 years. The
interest rate is 9.15% and the payments are based upon a 25 year principal and
interest amortization schedule.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS) For the Six Months
Ended June 30,
------------------ Increase/
1999 1998 (decrease)
------- ------ ----------
Revenue:
Assisted living community revenue ... $ 10.1 $ 9.5 6.9%
Interest and other revenue .......... 0.2 0.2 1.9%
------- ------ -----
Total revenue ............... 10.3 9.7 6.8%
------- ------ -----
Costs and expenses:
Assisted living operating expenses .. 6.1 5.7 32.4%
General and administrative .......... 0.6 0.6 (6.7)%
Communities rent .................... 0.4 0.6 (23.0)%
Depreciation and amortization ....... 0.8 0.5 41.6%
Property taxes ...................... 0.3 0.3 21.9%
Advertising ......................... 0.1 0.1 (0.6)%
Interest ............................ 0.6 0.3 160.2%
------- ------ -----
Total costs and expenses .... 8.9 8.1 11.0%
------- ------ -----
Net income .................. $ 1.4 $ 1.6 (14.7)%
======= ====== =====
The increase in assisted living community revenue is attributable to:
o an increase in assisted living penetration to 56% for the six month
period ended June 30, 1999 compared with 52% for the six month period
ended June 30, 1998;
o an increase in average rate per occupied unit to $1,746 per month for
the six month period ended June 30, 1999 as compared with $1,477 per
month the six month period ended June 30, 1998;
o an increase in average rate for our assisted living communities to
$511 for the six month period ended June 30, 1999 as compared with
$496 for the six month period ended June 30, 1998.
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.
The decrease in communities rent is due to the purchase, during March 1999, of
four previously leased communities.
General and administrative and advertising expenses remained relatively constant
between periods.
The increase in depreciation and amortization is due to the four previously
leased communities that now are owned and incurring depreciation and
amortization expense. In addition, the increase in interest expense is also
related to the loans for the purchase, in March 1999, of four previously leased
communities.
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(DOLLARS IN MILLIONS) For the Three Months
Ended June 30,
-------------------- Increase/
1999 1998 (decrease)
------ ------ ----------
Revenue:
Assisted living community revenue ... $ 5.1 $ 4.7 7.4%
Interest and other revenue .......... 0.1 0.2 (29.6)%
------ ------ -----
Total revenue ............... 5.2 4.9 6.3%
------ ------ -----
Costs and expenses:
Assisted living operating expenses .. 3.1 2.9 6.7%
General and administrative .......... 0.3 0.3 6.2%
Communities rent .................... 0.1 0.3 (69.9)%
Depreciation and amortization ....... 0.4 0.3 57.4%
Property taxes ...................... 0.2 0.1 26.2%
Advertising ......................... 0.1 0.1 0.7%
Interest ............................ 0.4 0.1 255.0%
------ ------ -----
Total costs and expenses .... 4.6 4.1 12.8%
------ ------ -----
Net income .................. $ 0.6 $ 0.8 (27.6)%
====== ====== =====
The increase in assisted living community revenue is attributable to:
o an increase in assisted living penetration to 55% for the three month
period ended June 30, 1999 compared with 52% for the three month
period ended June 30, 1998;
o an increase in average rental rate per occupied unit to $1,746 for
the three month period ended June 30, 1999 as compared with $1,471
the three month period ended June 30, 1998; and
o an increase in average rate for our assisted living communities to
$511 for the three month period ended June 30, 1999 as compared with
$495 for the three month period ended June 30, 1998.
The increase in assisted living operating expenses is attributable to:
o staffing requirements related to increased assisted living services
provided; and
o increased salaries of staff.
General and administrative 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 is due to the four previously
leased communities that now are owned and incurring depreciation and
amortization expense. In addition, the increase in interest expense is also
related to the loans for the purchase, in March 1999, of four previously leased
communities.
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,
meet 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.
During the six-month period ended June 30, 1999, cash provided by operating
activities decreased $2.0 million to $69 thousand compared to $2.0 million for
the corresponding period in 1998. Distributions payable to the partners and
unrestricted cash were high at quarter end. The distribution to partners was
paid out in July.
During the six-month period ended June 30, 1999, our net cash used in investing
activities increased to $15.3 million compared to $0.4 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,
capital expenditures required to qualify for the refinancing and fumigation
costs of $0.3 million. Capital expenditures exceeded budget as we were required
to do numerous capital expenditures to qualify for the refinancing.
During the six-month period ended June 30, 1999, our net cash provided by
financing activities was $23.8 million compared to cash used in financing
activities of $1.2 million for the corresponding period in 1998. The cash
provided by financing activities was the
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result of a $14.7 million bridge loan which enabled us to purchase four
previously leased communities from our landlords and the refinancing of the 8
owned properties. As part of the $39.2 million Banc One refinancing we were able
to pay down the bridge loan of $14.7 million.
At June 30, 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 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;
o testing items assessed as material;
o replacing or repairing material non-compliant items; and
o designing and implementing business continuation plans.
We have initiated communications with the third-party providers of certain 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
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We have successfully converted our accounting system over to a Year 2000
compliant system. We expect to successfully implement the other 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.
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. EXHIBITS
Exhibit 10.1 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC
Exhibit 10.4 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.5 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.6 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.7 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.8 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.9 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.10 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.11 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC(1)
Exhibit 10.12 Letter Agreement as to the Loans in the aggregate amount of $39,703,100 from Banc One
Capital Funding Corporation to Retirements Inns II
Exhibit 10.15 Note and Agreement as to Retirement Inns II, LLC
Exhibit 27 Financial Data Schedule
- -------------
(1) Pursuant to instruction number 2 of Item 601 of Regulation S-K, this
document has not been filed as an exhibit. See Schedule I filed with
Exhibit 10.1 which sets forth the material details in which this document
differs from the document filed as Exhibit 10.1.
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B. Reports on Form 8-K
None.
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
(Managing General Partner)
By: /s/ Douglas M. Pasquale
------------------------------------------
Douglas M. Pasquale
President, Chief Executive Officer and
Director of ARV Assisted Living, Inc.
Date: August 12, 1999
By: /s/ Abdo H. Khoury
------------------------------------------
Abdo H. Khoury
Senior Vice President, and Chief Financial
Officer of ARV Assisted Living, Inc.
Date: August 12, 1999
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