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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, 2000
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,
2000 1999
-------- ------------
Properties, at cost:
Land $ 11,453 $ 11,453
Buildings and improvements, less accumulated
depreciation of $7,682 and $7,248 at June 30, 2000
and December 31, 1999, respectively 20,405 20,662
Leasehold property and improvements, less accumulated
depreciation of $1,258 and $1,244 at June 30, 2000 and
December 31, 1999, respectively 269 209
Furniture, fixtures and equipment, less accumulated depreciation
of $1,298 and $1,145 at June 30, 2000 and December 31, 1999,
respectively 1,306 1,373
-------- --------
Net properties 33,433 33,697
Cash 2,112 2,002
Other assets 2,642 2,844
-------- --------
$ 38,187 $ 38,543
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 39,312 $ 39,545
Accounts payable 170 155
Accrued expenses 1,500 1,426
Amounts payable to affiliate 234 304
Distributions payable to Partners 31 8
-------- --------
Total liabilities 41,247 41,438
-------- --------
Commitments and contingencies
Partners' capital (deficit)
General partners' capital 117 119
Limited partners' capital, 35,020 units outstanding (3,177) (3,014)
-------- --------
Total partners' capital (deficit) (3,060) (2,895)
-------- --------
$ 38,187 $ 38,543
======== ========
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties II
(a California limited partnership)
Statements of Operations
(Unaudited)
(In thousands, except unit data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
2000 1999 2000 1999
------ ------ -------- -------
REVENUE:
Rent $4,230 $4,093 $ 8,387 $ 8,080
Assisted living 965 1,014 1,877 2,007
Interest and other 101 113 207 243
------ ------ -------- -------
Total revenue 5,296 5,220 10,471 10,330
------ ------ -------- -------
COSTS AND EXPENSES:
Rental property operations 2,775 2,666 5,565 5,263
Assisted living 623 456 1,323 880
General and administrative 132 283 252 584
Communities rent 87 86 175 386
Depreciation and amortization 578 419 1,156 756
Property taxes 152 177 316 325
Advertising 102 66 192 120
Interest 673 443 1,577 660
------ ------ -------- -------
Total costs and expenses 5,122 4,596 10,556 8,974
------ ------ -------- -------
Income (loss) before income tax expense 174 624 (85) 1,356
Income tax expense 2 -- 5 --
------ ------ -------- -------
Net income (loss) $ 172 $ 624 $ (90) $ 1,356
====== ====== ======== =======
Net income (loss) per limited partner unit $ 4.86 $16.26 $ (2.56) $ 36.96
====== ====== ======== =======
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,
------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $ (90) $ 1,356
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,156 756
Change in assets and liabilities:
Increase in other assets (218) (1,599)
Increase (decrease) in accounts payable & accrued
expenses 88 (423)
Increase in amounts payable to affiliate (70) (21)
------- --------
Net cash provided by operating activities 866 69
------- --------
Cash flows used in investing activities:
Capital expenditures (470) (913)
Purchase of previously leased communities -- (14,636)
(Increase) decrease in deposits (1) 200
------- --------
Net cash used in investing activities (471) (15,349)
------- --------
Cash flows from financing activities:
Principal repayments on notes payable (233) (20,791)
Proceeds from notes payable -- 54,380
Distributions paid (52) (9,755)
------- --------
Net cash provided by (used in) financing
activities (285) 23,834
------- --------
Net increase in cash 110 8,554
Cash at beginning of period 2,002 953
------- --------
Cash at end of period $ 2,112 $ 9,507
======= ========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,805 $ 443
======= ========
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, 2000
(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 1999, 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 $518,000 and $514,000 for the six-month periods and
$261,000 and $259,000 for the three-month periods ended June 30, 2000 and 1999
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 $109,000 and $252,000 for the six-month periods and
$67,000 and $128,000 for the three-month periods ended June 30, 2000 and 1999
respectively.
(3) NOTES PAYABLE
On June 28, 1999, we obtained financing on eight owned communities. As part of
the loan requirements, we created a wholly owned subsidiary Retirement Inns II,
LLC. The loan is for 24 months and is secured by the various properties; in
addition, ARV Assisted Living, our managing general partner, is a guarantor on
the loan for fraud, material misrepresentation and certain covenants. The $39.3
million of mortgage loans are due June 2001 and are in the process of being
refinanced with 30-year loans. However, we have not received the approvals
necessary to ensure the loans will be available.
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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/
2000 1999 (decrease)
--------- ---------- ----------
Revenue:
Assisted living community revenue $10.3 $10.1 1.8%
Interest and other revenue 0.2 0.2 (14.8)%
----- ----- -----
Total revenue 10.5 10.3 1.3%
----- ----- -----
Costs and expenses:
Assisted living operating expenses 6.9 6.1 12.1%
General and administrative 0.2 0.6 (56.8)%
Communities rent 0.2 0.4 (54.8)%
Depreciation and amortization 1.2 0.8 52.8%
Property taxes 0.3 0.3 (2.6)%
Advertising 0.2 0.1 59.5%
Interest 1.6 0.6 139.2%
----- ----- -----
Total costs and expenses 10.6 8.9 17.6%
----- ----- -----
Net income (loss) $(0.1) $ 1.4 (106.7)%
===== ===== =====
The increase in assisted living community revenue is attributable to:
o an increase in average rental rate per occupied unit to $1,723 for the
six-month period ended June 30, 2000 as compared with $1,643 for the
six-month period ended June 30, 1999; offset
o by a decrease in average occupancy to 88% for the six-month period
ended June 30, 2000 compared with 89% for the six-month period ended
June 30, 1999; and
o a decrease in assisted living penetration to 55% for the six-month
period ended June 30, 2000 compared with 56% for the six-month period
ended June 30, 1999.
Interest and other revenue remained relatively constant.
The increase in assisted living operating expenses is attributable to increased
payroll costs including:
o increased wages of staff;
o incentive programs; and
o increased worker's compensation premiums.
The decrease in general and administrative expenses are attributable to:
o a reduction of administration fees paid to our managing general
partner; and
o a reduction of expenses, that were previously allocated to G&A due to
cost-cutting efforts.
The decrease in community rent is a result of the purchase of four previously
leased communities, in March of 1999.
The increase in depreciation and amortization is due to the amortization of loan
fees related to the refinancing in June 1999 of the eight owned properties and
the purchase of four previously leased communities, in March of 1999.
The increase in advertising expenses is due to increased use of professionals to
prepare collateral used in advertising in 2000.
The increase in interest expense is related to the refinancing in June 1999 of
the eight owned properties.
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(DOLLARS IN MILLIONS) For the Three Months Ended
June 30,
--------------------------
Increase/
2000 1999 (decrease)
------------ ------------ ----------
Revenue:
Assisted living community revenue $5.2 $5.1 1.7%
Interest and other revenue 0.1 0.1 (10.6)%
---- ---- ----
Total revenue 5.3 5.2 1.5%
---- ---- ----
Costs and expenses:
Assisted living operating expenses 3.4 3.1 8.8%
General and administrative 0.1 0.3 (53.3)%
Communities rent 0.1 0.1 0.4%
Depreciation and amortization 0.6 0.4 37.8%
Property taxes 0.1 0.2 (14.2)%
Advertising 0.1 0.1 54.5%
Interest 0.7 0.4 52.0%
---- ---- ----
Total costs and expenses 5.1 4.6 11.4%
---- ---- ----
Net income $0.2 $0.6 (72.4)%
==== ==== ====
The increase in assisted living community revenue is attributable to:
o an increase in average rental rate per occupied unit to $1,723 for the
three-month period ended June 30, 2000 as compared with $1,649 for the
three-month period ended June 30, 1999; offset
o by a decrease in average occupancy to 88% for the three-month period
ended June 30, 2000 compared with 90% for the three-month period ended
June 30, 1999; and
o a decrease in assisted living penetration to 54% for the three-month
period ended June 30, 2000 compared with 58% for the three-month
period ended June 30, 1999.
Interest and other revenue remained relatively constant.
The increase in assisted living operating expenses is attributable to increased
payroll costs including:
o increased wages of staff;
o incentive programs; and
o increased worker's compensation premiums.
The decrease in general and administrative expenses are attributable to:
o a reduction of administration fees paid to our managing general
partner; and
o a reduction of expenses, that were previously allocated to G&A due to
cost-cutting efforts.
The increase in depreciation and amortization is due to the ongoing amortization
of loan fees related to the refinancing in June 1999 of the eight owned
properties.
The increase in advertising expenses is due to increased use of professionals to
prepare collateral used in advertising in 2000.
The increase in interest expense is related to the refinancing in June 1999 of
the eight owned properties.
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,
and meet required principal reductions of debt. 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, 2000, cash provided by operating
activities increased to $0.9 million compared to $0.1 million for the
corresponding period in 1999. The primary components of cash used by operating
activities for the quarter ended June 30, 2000 were operating losses offset by
depreciation of $1.1 million and a decrease in other assets of $0.2 million.
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During the six-month period ended June 30, 2000, our net cash used in investing
activities decreased to $0.5 million compared to $15.3 million for the
corresponding period in 1999. The decrease was a result of a purchase our
landlords' interests in four previously leased assisted living communities in
March 1999 and capital expenditures required to qualify for the refinancing in
June 1999. The 2000 cash used in investing activities was primarily a result of
capital expenditures.
During the six-month period ended June 30, 2000, our net cash used in financing
activities was $0.3 million compared to cash provided by financing activities of
$23.8 million for the corresponding period in 1999. The 1999 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 and the
refinancing of the eight 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. The 2000
cash used in financing activities was a result of principal repayments on notes
payable of $0.2 million and distributions paid of $0.1 million.
The mortgage loans are due June 2001 and, are in the process of being refinanced
with 30-year loans. However, the company has not received the approvals
necessary to ensure the loans will be available.
Our debt agreements contain restrictive covenants requiring us to maintain a
certain level of debt service coverage. At June 30, 2000, we were not in
compliance with the debt service coverage ratio. We have obtained waivers for
those covenants with which we were not in compliance. Had we not obtained
waivers we would have been in default on certain debt agreements.
At June 30, 2000, 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 contemplate spending approximately $725,000 for capital expenditures during
2000 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.
ITEM 3. QUANATITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our
fixed rate notes payable. Currently, we do not utilize interest rate swaps. 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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: /s/ Douglas M. Pasquale
-----------------------------------------
Douglas M. Pasquale
Chairman of the Board of ARVAL,
Managing General Partner
Date: August 11, 2000
By: /s/ Abdo H. Khoury
-----------------------------------------
Abdo H. Khoury
Senior Vice President, and
Chief Financial Officer of ARVAL,
Managing General Partner
Date: August 11, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule