<PAGE> 1
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, 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
(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 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
----- -----
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DEC. 31, 1996
------- ------
(UNAUDITED) (AUDITED)
(In thousands except unit data)
<S> <C> <C>
Properties, at cost:
Land $ 2,903 2,903
Buildings and improvements, less accumulated depreciation of
$5,537 in 1997 and $5,250 in 1996 14,497 14,723
Leasehold property and improvements, less accumulated depreciation
of $4,217 in 1997 and $5,545 in 1996 375 349
Furniture, fixtures and equipment, less accumulated depreciation
of $925 in 1997 and $888 in 1996 978 940
------- ------
Net properties 18,753 18,915
Cash 1,211 370
Other assets 1,578 1,516
------- ------
$21,542 20,801
======= ======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,478 6,562
Accounts payable and accrued expenses 882 1,063
Amounts payable to affiliate 479 189
Distributions payable to Partners 1,013 742
------- ------
Total liabilities 8,852 8,556
------- ------
Partners' capital
General partners' capital 275 270
Limited partners' capital, 35,020 units outstanding 12,415 11,975
------- ------
Total partners' capital 12,690 12,245
$21,542 20,801
======= ======
</TABLE>
<PAGE> 3
American Retirement Villas Properties II
(a California limited partnership)
Statements of Income
(unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Rent .................................. 3,908 3,733 7,767 7,429
Assisted living ....................... 751 617 1,496 1,172
Interest .............................. 4 3 7 7
Other ................................. 81 52 246 101
------ ----- ------ ------
Total revenue ................ 4,744 4,405 9,516 8,709
------ ----- ------ ------
COSTS AND EXPENSES:
Rental property operations ............ 2,458 2,372 4,885 4,769
Assisted living ....................... 306 240 600 480
General and administrative ............ 318 635 637 886
Facilities rent ....................... 291 294 584 587
Depreciation and amortization ......... 253 412 602 891
Property taxes ........................ 123 139 253 238
Advertising ........................... 33 15 66 46
Interest .............................. 155 145 287 293
------ ----- ------ ------
Total costs and expenses ..... 3,937 4,252 7,914 8,190
------ ----- ------ ------
Net income ................... 807 153 1,602 519
====== ===== ====== ======
Net income per limited partner unit ... $22.81 $4.33 $45.29 $14.67
====== ===== ====== ======
</TABLE>
<PAGE> 4
American Retirement Villas Properties II
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 3O,
---------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... 1,602 $ 519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 602 891
Change in assets and liabilities:
Increase in other assets ................................. (61) (10)
Increase (decrease) in accounts payable & accrued expenses (181) 76
Increase (decrease) in amounts payable to affiliates ..... 290 (11)
------- -------
Net cash provided by operating activities ........... 2,252 1,465
------- -------
Cash flows used in investing activities
Capital expenditures ............................................ (440) (198)
------- -------
Net cash used in investing activities ................ (440) (198)
------- -------
Cash flows from financing activities:
Borrowings on line of credit .................................... -- 660
Principal repayments on line of credit .......................... -- (900)
Principal repayments on notes payable ........................... (84) (79)
Distributions paid .............................................. (887) (1,141)
------- -------
Net cash used by financing activities ............... (971) (1,460)
------- -------
Net increase (decrease) in cash ................................... 841 (193)
Cash at beginning of period ....................................... 370 489
------- -------
Cash at end of period ............................................. $ 1,211 $ 296
======= =======
</TABLE>
<PAGE> 5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
American Retirement Villas Properties II, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited) (Continued)
June 30, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference. The financial statements
reflect all adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation. All such adjustments are of a normal
recurring nature.
CARRYING VALUE OF REAL ESTATE
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
LOAN FEES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
RENTAL INCOME
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
INCOME TAXES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
NET INCOME PER LIMITED PARTNER UNIT
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
CASH
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
RECLASSIFICATIONS
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
<PAGE> 6
(2) ORGANIZATION AND PARTNERSHIP AGREEMENT
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
(3) TRANSACTIONS WITH AFFILIATES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference, and is supplemented as
follows. For the three months ended June 30, 1997, property management fees and
partnership administration fees of $237,000 and $112,000 respectively, were paid
or accrued to the Managing General Partner.
(4) PROPERTIES
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
(5) NOTES PAYABLE
Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.
<PAGE> 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1996.
Revenue for the three month periods ended June 30, 1997 and 1996 includes rental
income, assisted living income, interest earned on cash balances and other
revenue. Total revenue for the three months ended June 30, 1997 was $4.7 million
representing an increase of approximately 8% over revenue of $4.4 million for
the three months ended June 30, 1996.
The largest component of revenue, rental income, increased approximately 5% to
$3.9 million for the three months ended June 30, 1997 from $3.7 million for the
three months ended June 30, 1996. The increase in rental income is attributable
to both higher rent rates as well as increased occupancy. Meanwhile, assisted
living revenue increased approximately 22% to $751,000 for the three months
ended June 30, 1997 from $617,000 for the three months ended June 30, 1996. The
increase in assisted living revenue was primarily the result of an aggressive
marketing campaign for assisted living services and more residents using the
services.
Interest income increased slightly to $4,000 for the three months ended June 30,
1997 from $3,000 for the same period in the prior year.
Other revenue increased approximately 56% from $52,000 for the three months
ended June 30, 1996 to $81,000 for the three months ended June 30, 1997,
primarily due to increased processing fees.
Sources of revenue for the three months ended June 30, 1997 and June 30, 1996
are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
(In thousands)
1997 1996
---- ----
<S> <C> <C>
Rent $3,908 $3,733
Assisted Living 751 617
Interest 4 3
Other 81 52
------ ------
Total Revenue $4,744 $4,405
====== ======
</TABLE>
Total costs and expenses for the three months ended June 30, 1997 were $3.9
million, a 7% decrease compared to costs and expenses of $4.3 million for the
three months ended June 30, 1996.
The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operations expenses
increased approximately 4% to $2.5 million for the three months ended June 30,
1997 from $2.4 million for the three months ended June 30, 1996. This increase
is due mainly to increases in payroll, maintenance and repair expenses and other
miscellaneous supplies.
Assisted living expenses consist primarily of the related payroll expense. This
expense increased approximately 28% to $306,000 for the three months ended March
31, 1997 from $240,000 for the three months ended June 30, 1996. The increase
corresponds directly to the increase in assisted living services revenue in the
current year and the staffing required to provide these services.
General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt, data processing, investor
relations, insurance and professional services. General and administrative
expenses decreased almost 50% to $318,000 for the three months ended June 30,
1997 from $635,000 for the three months ended June 30, 1996. The decrease in
general and administrative expenses was primarily due to the one time charge in
1996 of $389,000 for costs related to preparing to
<PAGE> 8
solicit the consent of the Partnership's Unitholders with respect to an
anticipated sale of four fee properties owned by the Partnership to a healthcare
real investment trust.
Depreciation and amortization expense decreased by 39% from $412,000 for the
three months ended June 30, 1996 to $253,000 for the three months ended June 30,
1997. The primary reason for this decrease is the full amortization of assets
associated with the expiration of the initial lease term of two of the facility
operating leases.
Interest expense increased approximately 7% to $155,000 for the three months
ended June 30, 1997 compared with $145,000 for the three months ended June 30,
1996 due to adjustments made on amortization schedules of four notes payable
related to facility vehicles.
Selected costs and expenses for the three months ended June 30, 1997 and June
30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(In thousands)
<S> <C> <C>
Rental Property Operations $2,458 $2,372
Assisted Living 306 240
General and Administrative 318 635
Depreciation and amortization 253 412
Property Taxes 123 139
Interest 155 145
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996.
Revenue for the six months ended June 30, 1997 and 1996 includes rental income,
assisted living revenue from all ten facilities, interest income and other
revenue. Total revenue for the six months ended June 30, 1997 was $9.5 million ,
an increase of 9% over revenue of $8.7 million for the six months ended June 30,
1996.
The largest component of revenue, rent, increased approximately 5% to $7.8
million for the six months ended June 30, 1997 from $7.4 million for the six
months ended June 30, 1996 due to both increased occupancy and higher rental
rates.
Revenue from assisted living increased over 27% to $1.5 million for the six
months ended June 30, 1997 from $1.2 million for the six month period ended June
30, 1996. The increase in assisted living revenue was due to an aggressive
marketing campaign of the assisted living services and the resulting increase in
the number of residents using the services.
Interest income remained flat at $7,000 for both periods while other income
increased to $246,000 for the six months ended June 30, 1997 from $101,000 for
the six month period ended June 30, 1996. Interest income results from interest
earned on cash deposits. The increase in other income is primarily the result of
higher processing fees and forfeited security deposits recognized as income.
Sources of revenue for the six months ended June 30, 1997 and June 30, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Rent $7,767 $7,429
Assisted Living 1,496 1,172
Interest and Other Income 253 108
------ ------
TOTAL REVENUE $9,516 $8,709
====== ======
</TABLE>
<PAGE> 9
Total costs and expenses for the six months ended June 30, 1997 were $7.9
million, a decrease of 3% over costs and expenses of $8.2 million for the six
months ended June 30, 1996.
The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operations expense
increased slightly by 2% to $4.9 million for the six months ended June 30, 1997
from $4.8 million for the six months ended June 30, 1996. The increase in rental
property operating expenses is due to higher payroll and property management
expenses as a result of increased revenue.
Assisted living expenses consist mainly of the related payroll expense. Assisted
living expenses increased approximately 25% to $600,000 for the six months ended
June 30, 1997 from $480,000 for the six months ended June 30, 1996. The increase
corresponds directly to the increase in assisted living services revenue in the
current year and the staffing required to provide these services.
General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt, data processing, investor
relations, insurance, and professional services. General and administrative
expenses decreased approximately 28% to $637,000 for the six months ended June
30, 1997 from $886,000 for the six months ended June 30, 1996. The decrease was
due primarily to a one time charge in 1996 of $389,000 for costs related to
preparing to solicit the consent of the Partnership's Unitholders with respect
to an anticipated sale of the Partnership's four fee properties to a health care
real estate investment trust.
Depreciation and amortization expense decreased over 32% to $602,000 for the six
months ended June 30, 1997 from $891,000 for the six months ended June 30, 1996.
Depreciation and amortization expense decreased due to a reduction in
amortization expense for those assets associated with the Campbell and Sunnyvale
leases whose terms have expired and the assets have been fully amortized.
Interest expense decreased by 2% to $287,000 for the six months ended June 30,
1997 from $293,000 for the six months ended June 30, 1996, as a result of
reduced outstanding principal on loans.
Selected costs and expenses for the six months ended June 30, 1997 and June 30,
1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Rental Property Operations $4,885 $4,769
Assisted Living 600 480
General & Administrative 637 886
Depreciation & Amortization 602 891
Property Taxes 253 238
Interest 287 293
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Partnership has approximately $315,000 of debt maturing within
the next six 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. Currently, the extension is being
documented. To the extent such an extension is received, the General Partners
expect that the cash to be 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 three months ended June 30,
1997, cash provided by operating activities was $2.3 million compared to cash
provided by operating activities of $1.5 million for the three months ended June
30, 1996.
<PAGE> 10
During three months ended June 30, 1997, the Partnership used net cash in
investing activities of $440,000 compared to $198,000 for the three months ended
June 30, 1996. The Partnership's investing activities consisted of capital
improvements made to its ten facilities.
During the three months ended June 30, 1997, the Partnership used net cash in
financing activities of $971,000 compared to $1.5 million for the three months
ended June 30, 1996. 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 June 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 will reduce future
distributions to Unitholders. 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 beginning 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 long term debt of $6.5 million as of June 30, 1997. Of this
amount, $315,000 is due September 10, 1997 and a further extension for a period
five years, 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 $450,000 has been
expended as of June 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.
<PAGE> 11
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 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
<PAGE> 13
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/ GARY L. DAVIDSON
-----------------------------------
Gary L. Davidson
Chairman of the Board
Date: August 11, 1997
By: /s/ GRAHAM P. ESPLEY-JONES
-----------------------------------
Graham P. Espley-Jones
Chief Financial Officer
Date: August 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,211
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,211
<PP&E> 26,529
<DEPRECIATION> (10,479)
<TOTAL-ASSETS> 21,542
<CURRENT-LIABILITIES> 2,887
<BONDS> 6,478
0
0
<COMMON> 0
<OTHER-SE> 12,680
<TOTAL-LIABILITY-AND-EQUITY> 21,542
<SALES> 0
<TOTAL-REVENUES> 4,744
<CGS> 0
<TOTAL-COSTS> 3,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
