<PAGE> 1
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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 SEPTEMBER 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, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0278155
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
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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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties II
(a California limited partnership)
Condensed Balance Sheets
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Properties, at cost:
Land $ 2,903 $ 2,903
Buildings and improvements, less accumulated
depreciation of $6,283 and $5,827 at
September 30, 1998 and December 31, 1997,
respectively 14,340 14,521
Leasehold property and improvements, less
accumulated depreciation of $5,733 and
$5,686 at September 30, 1998 and December
31, 1997, respectively 586 468
Furniture, fixtures and equipment, less
accumulated depreciation of $1,110 and $976
at September 30, 1998 and December 31,
1997, respectively 1,109 1,098
------- -------
Net properties 18,938 18,990
Cash 1,794 1,857
Other assets 2,355 1,082
------- -------
$23,087 $21,929
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,230 $ 6,403
Accounts payable 528 832
Accrued expenses 687 414
Amounts payable to affiliate 977 277
Distributions payable to Partners 35 480
------- -------
Total liabilities 8,457 8,406
------- -------
Commitments and contingencies
Partners' capital
General partners' capital 294 283
Limited partners' capital, 35,020 units outstanding 14,336 13,240
------- -------
Total partners' capital 14,630 13,523
------- -------
$23,087 $21,929
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
2
<PAGE> 3
American Retirement Villas Properties II
(a California limited partnership)
Condensed Statements of Income
(Unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Rent $ 3,848 $ 3,904 $11,477 $11,671
Assisted living 938 775 3,065 2,271
Interest and other 161 62 80 315
------- ------- ------- -------
Total revenue 4,947 4,741 14,622 14,257
------- ------- ------- -------
COSTS AND EXPENSES:
Rental property operations 2,775 2,488 7,835 7,373
Assisted living 358 308 1,023 908
General and administrative 294 367 924 1,027
Communities rent 314 296 890 880
Depreciation and
amortization 275 256 809 858
Property taxes 139 108 406 361
Advertising 38 37 142 103
Interest 128 131 381 395
------- ------- ------- -------
Total costs and
expenses 4,321 3,991 12,410 11,905
------- ------- ------- -------
Net income $ 626 $ 750 $ 2,212 $ 2,352
======= ======= ======= =======
Net income per limited
partner unit $ 17.69 $ 21.19 $ 62.54 $ 66.49
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
3
<PAGE> 4
American Retirement Villas Properties II
(a California limited partnership)
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,212 $ 2,352
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 809 858
Change in assets and liabilities:
Increase in other assets (215) (162)
Decrease in accounts payable & accrued
expenses (31) (213)
Increase in amounts payable to affiliates 700 365
------- -------
Net cash provided by operating
activities 3,475 3,200
------- -------
Cash flows used in investing activities:
Capital expenditures (757) (680)
------- -------
Net cash used in investing activities (757) (680)
------- -------
Cash flows from financing activities:
Principal repayments on notes payable (173) (127)
Interest rate lock fees paid in connection
with refinancing (1,058) --
Distributions paid (1,550) (1,862)
------- -------
Net cash used by financing activities (2,781) (1,989)
------- -------
Net (decrease) increase in cash (63) 531
Cash at beginning of period 1,857 370
------- -------
Cash at end of period $ 1,794 $ 901
======= =======
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 381 $ 424
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
4
<PAGE> 5
American Retirement Villas Properties II, L.P.
(a California limited partnership)
Notes to Condensed Financial Statements
(Unaudited)
SEPTEMBER 30, 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. We have reclassified certain prior year data to conform to
the 1998 presentation.
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 1997, 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., our Managing General
Partner, providing for a property management fee of five percent of gross
revenues amounting to $245,000 and $727,000, for the three-month and the
nine-month periods ended September 30, 1998, respectively. Additionally, a
partnership management fee of 10 percent of cash flow before distributions, as
defined in the Partnership Agreement, amounted to $100,000 and $336,000 for the
three-month and the nine-month periods ended September 30, 1998, respectively.
(3) COMMITMENTS AND CONTINGENCIES
LITIGATION
On September 27, 1996, we 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"). We lease 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. We seek a determination that we
are 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 us, rent for the Campbell and
Sunnyvale communities could increase significantly, which would 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.
5
<PAGE> 6
Two other communities leased by us, 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, we may be required to file litigation to
determine the rights under those leases.
We have negotiated the terms of a proposed purchase agreement involving the sale
of the landlord's fee interest in the four communities to us and settlement of
all claims. Further, we mutually have agreed to forebear from prosecuting the
litigation during the pendency of the escrow. We expect to finance the entire
purchase price and that the purchase of the properties will be completed in
December 1998 however, there can be no assurance that this purchase will occur.
In the event the purchase is completed, may result in a reduction in
distributions to the partners because we will have debt payments, increases in
property taxes and depreciation that will be higher than the current lease
expenses. We are of the opinion, based in part upon opinions of legal counsel,
that an adverse outcome is unlikely.
(4) SUBSEQUENT EVENTS
Included in other assets are approximately $1.1 million of fees incurred during
the quarter ended September 30, 1998 as part of a proposed discretionary
refinancing of eight ALCs. These fees consist of $0.8 million of interest rate
lock fees and $0.3 million of loan commitment fees. Subsequent to September 30,
1998, PRN Mortgage Capital LLC ("PRN"), the lender that was providing the
financing, informed us that the commitment to provide a fixed rate financing was
being revoked due to adverse market conditions.
ContiFinancial Services Corporation ("Conti"), an approximate 30% owner of PRN
who provides credit enhancement to PRN, terminated the underlying contract for
the interest rate lock. Representatives of Conti cited adverse conditions in the
commercial mortgage backed securities markets as its reason for terminating the
contract. In conjunction with the termination, Conti advised us that they would
return approximately $0.3 million of the rate lock fees. It is our belief that
we are entitled to a full and complete return of the rate lock fees we have
paid. We intend to vigorously pursue a return of all fees, and will seek legal
recourse if necessary.
Currently, we are working with PRN to obtain an alternative financing on terms
and conditions acceptable to all parties. While there can be no assurances that
such financing will be available on terms and conditions acceptable to us it is
our belief that such alternative financing will be obtained.
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 $206,000 and $365,000 for the
three-month and nine-month periods ended September 30, 1998, respectively,
compared with the same periods in 1997. The increase is due to:
o an increase in assisted living penetration; offset by
o a decrease in average occupancy during 1998.
COSTS AND EXPENSES
Total costs and expenses include rental property operations (made up of, but not
limited to, property management costs, payroll related expenses, utilities,
food, and maintenance expenses), assisted living expenses, general and
administrative (made up 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 $330,000 and $505,000 for the three-month and nine-month periods ended
September 30, 1998, respectively, compared with the same periods in 1997. The
increases were due to:
o an increase in rental property operations and assisted living
expenses as a result of additional payroll expenses; offset by
o a decrease in general and administrative expenses as a result of
legal expenses incurred in 1997 in connection with the dispute
with our landlord on two assisted living communities which were
not incurred in 1998; and
o a decrease in depreciation and amortization expenses during the
nine-month period due to certain leasehold improvements becoming
fully amortized when the initial lease term of two communities
expired in 1997. advertising expenses increased as a result of
new marketing programs designed to increase occupancy.
6
<PAGE> 7
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.
During the nine-month period ended September 30, 1998, cash provided by
operating activities increased to $3.5 million compared to $3.2 million for the
corresponding period in 1997. The increase was primarily due to timing of
payments for accounts payable, accrued liabilities and amounts due to
affiliates.
During the nine-month period ended September 30, 1998, our net cash used in
investing activities increased to $0.8 million compared to $0.7 million for the
corresponding period in 1997. Our investing activities consist of the following:
o improvements to existing buildings and leasehold property; and
o purchase of furniture, fixtures and equipment.
During the nine-month period ended September 30, 1998, our net cash used in
financing activities increased to $2.8 million compared to $2.0 million for the
corresponding period in 1997. Our financing activities consisted of the
following:
o principal reduction on our notes payable;
o payment of interest rate lock fees in connection with our
proposed refinance; and
o distributions paid to our partners.
In July 1998, the Board of Directors of our Managing General Partner approved
the refinancing of eight of our communities. The purpose of the refinancing was
to take advantage of lower fixed interest rates available at the time through
the commercial mortgage backed security market and provide a return of equity to
the partners by borrowing against the increased value of these properties.
Additionally, four of the eight communities are currently operated pursuant to
long term operating leases. The financing would allow the majority owned
entities to purchase the communities from their owners. As a result of this
refinancing, our consolidated long-term debt on these communities would increase
to approximately $40.4 million (including $14.8 million incurred for the
purchase of the four communities) from $6.2 million.
In conjunction with this financing, we paid approximately $1.1 million of fees
for an interest rate lock and loan commitment fees. These fees consist of $0.8
million of interest rate lock fees and $0.3 million of loan commitment fees.
Subsequent to the quarter ended September 30, 1998, PRN Mortgage Capital LLC
("PRN"), the lender that was providing the financing, informed us that the
commitment to provide a fixed rate financing was being revoked due to adverse
market conditions in the commercial mortgage backed security market.
Currently, we are working with PRN to obtain an alternative financing on terms
and conditions acceptable to all parties. We are also working to obtain a refund
of all fees paid for the rate lock and financing commitment. Although there can
be no assurance that such financing will be available on terms and conditions
acceptable to us, it is our belief that such alternative financing will be
obtained. Furthermore, while there can be no assurances that all of the rate
lock and commitment fees will be returned, we will vigorously pursue a return of
all fees, and will seek legal recourse if necessary.
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 they 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.
Of our ten assisted living communities, five are operated under long-term
operating leases, four are owned directly, and one is owned which is subject to
a ground lease.
We contemplate spending approximately $2.1 million for capital expenditures
during 1998 for physical improvements at our communities. As of September 30,
1998, we have contracted for approximately $1.1 million of this amount. Funds
for these improvements are expected to be available from operations. A portion
of the funds for these improvements is expected to come from the refinancing
referred to above.
There are no known material trends, favorable or unfavorable, in our capital
resources, other than as described above, and there is no expected change in the
mix of such resources.
7
<PAGE> 8
YEAR 2000 ISSUE
Certain computer programs utilized by us 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.
Unrelated to the Year 2000 Issue, the Managing General Partner, which provides
accounting services, intends to replace substantially all of its accounting
information systems software during 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.
We are assessing our remaining software and operating equipment to determine
whether any existing programs will have to be modified or replaced so that these
systems will function properly with respect to dates in the year 2000 and
thereafter. We anticipate completing this during the second quarter of 1999.
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 have 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 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 us.
We expect to successfully implement the changes necessary to address these Year
2000 Issues, and do not believe that the cost of such actions will have a
material effect on us. 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 reasonably likely
worst case Year 2000 scenarios), and to create those contingency plans by the
end of the first quarter of 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, we 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"). We lease 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. We seek a determination that we
are 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 us, rent for the Campbell and
Sunnyvale communities could increase significantly, which would 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 us, 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, we may be required to file litigation to
determine the rights under those leases.
We have negotiated the terms of a proposed purchase agreement involving the sale
of the landlord's fee interest in the four communities to us and settlement of
all claims. Further, we mutually have agreed to forebear from prosecuting the
litigation during
8
<PAGE> 9
the pendency of the escrow. We expect to finance the entire purchase price and
that the purchase of the properties will be completed in December 1998 however,
there can be no assurance that this purchase will occur. In the event the
purchase is completed, may result in a reduction in distributions to the
partners because we will have debt payments, increases in property taxes and
depreciation that will be higher than the current lease expenses. We are 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
9
<PAGE> 10
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/ Howard G. Phanstiel
------------------------------------
Howard G. Phanstiel
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 13, 1998
By: /s/Paul Kuliev
------------------------------------
Paul Kuliev
Vice President, Controller
Date: November 13, 1998
10
<PAGE> 11
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,794
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 32,064
<DEPRECIATION> 13,126
<TOTAL-ASSETS> 23,087
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,630
<TOTAL-LIABILITY-AND-EQUITY> 23,087
<SALES> 0
<TOTAL-REVENUES> 4,947
<CGS> 0
<TOTAL-COSTS> 4,193
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 626
<INCOME-TAX> 0
<INCOME-CONTINUING> 626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 626
<EPS-PRIMARY> 17.69
<EPS-DILUTED> 0
</TABLE>
