<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Properties, at cost:
Land $ 2,903 $ 2,903
Buildings and improvements, less accumulated depreciation
of $5,974 and $5,827 at March 31, 1998 and December 31, 1997,
respectively 14,476 14,521
Leasehold property and improvements, less accumulated depreciation of
$5,700 and $5,686 at March 31, 1998 and December 31, 1997, respectively 483 468
Furniture, fixtures and equipment, less accumulated depreciation of $1,033
and $976 at March 31, 1998 and December 31, 1997, respectively 1,075 1,098
------- -------
Net properties 18,937 18,990
Cash 3,749 1,857
Other assets 1,093 1,082
------- -------
$23,779 $21,929
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 6,349 $ 6,403
Accounts payable 405 832
Accrued expenses 692 414
Amounts payable to affiliate 1,975 277
Distributions payable to Partners 703 480
------- -------
Total liabilities 10,124 8,406
------- -------
Commitments and contingencies
Partners' capital
General partners' capital 284 283
Limited partners' capital, 35,020 units outstanding 13,371 13,240
------- -------
Total partners' capital 13,655 13,523
------- -------
$23,779 $21,929
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE> 3
American Retirement Villas Properties II
(a California limited partnership)
Statements of Income
(unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1997
------ ------
<S> <C> <C>
Revenues:
Rent $3,813 $3,928
Assisted living 871 745
Interest and other 78 98
------ ------
Total revenues 4,762 4,771
------ ------
Costs and expenses:
Rental property operations 2,474 2,427
Assisted living 316 294
General and administrative 313 319
Communities rent 290 294
Depreciation and amortization 268 349
Property taxes 129 129
Advertising 48 33
Interest 129 131
------ ------
Total costs and expenses 3,967 3,976
------ ------
Net income $ 795 $ 795
====== ======
Net income per limited partner unit $22.48 $22.47
====== ======
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE> 4
American Retirement Villas Properties II
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 795 $ 795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 268 349
Change in assets and liabilities:
Increase in other assets (11) (20)
Increase (decrease) in accounts payable & accrued expenses (149) 39
Increase in amounts payable to affiliates 1,698 185
-------- --------
Net cash provided by operating activities 2,601 1,348
-------- --------
Cash flows used in investing activities:
Capital expenditures (215) (281)
-------- --------
Net cash used in investing activities (215) (281)
-------- --------
Cash flows from financing activities:
Principal repayments on notes payable (54) (41)
Distributions paid (440) (705)
-------- --------
Net cash used by financing activities (494) (746)
-------- --------
Net increase in cash 1,892 321
Cash at beginning of period 1,857 370
-------- --------
Cash at end of period $ 3,749 $ 691
======== ========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 129 $ 131
======== ========
</TABLE>
<PAGE> 5
American Retirement Villas Properties II, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
MARCH 31, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
All adjustments, consisting only of normal recurring accruals, have been made
that are necessary to present fairly the financial position and results of
operations for the periods covered by this report. The results of operations for
the three months ended March 31, 1998, are not necessarily indicative of the
operating results for the full year.
Pursuant to Regulation S-X Rule 10-1(5), American Retirement Villas Properties
II, L.P.'s ( the "Partnership") significant accounting policies are described in
the Partnership's December 31, 1997 Form 10-K filed with the Securities and
Exchange Commission. The Partnership follows the same accounting policies for
interim reporting purposes. This quarterly report should be read in conjunction
with such financial statements.
Certain prior period amounts have been reclassified to conform to the current
period financial statement presentation.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARV Assisted Living, the Partnership's
Managing General Partner, providing for a property management fee of 5 percent
of gross revenues and a partnership management fee of 10 percent of cash flow
before distribution, as defined in the Partnership Agreement. Property
management fees and partnership administration fees were $238,000 and $116,000
for the three months ended March 31, 1998, respectively.
(3) COMMITMENTS AND CONTINGENCIES
LITIGATION
On September 27, 1996, the Partnership 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). 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 communities 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
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, the Partnership may be
required to file litigation to determine the rights under those leases.
<PAGE> 6
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 decreased $9,000 for the three-month period
ended March 31, 1998, respectively, compared with the corresponding period of
1997. The decrease resulted primarily from lower occupancy rates partially
offset by additional residents using assisted living services during 1998.
COSTS AND EXPENSES
Total costs and expenses include rental property operations (consisting of, but
not limited to, property management costs, payroll related expenses, utilities,
food, and maintenance expenses), assisted living expenses, general and
administrative (comprised 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
decreased $9,000 for the three-month period ended March 31, 1998, compared with
the corresponding period of 1997.
For the three-month period ended March 31, 1998, rental property operations and
assisted living expenses increased due to additional payroll expenses.
Depreciation and amortization expenses decreased as a result of the full
amortization of the leasehold assets associated with the expiration of the
initial lease term of four communities' operating leases. Advertising expenses
have increased as a result of new marketing programs aided at increasing
occupancy.
LIQUIDITY AND CAPITAL RESOURCES
The General Partners expect that the cash 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.
The Partnership's liquidity is sustained primarily from cash flow provided by
operating activities. During the three-month period ended March 31, 1998, cash
provided by operating activities increased to $2.6 million compared to $1.3
million for the corresponding period in 1998. The primary increase in cash
provided by operating activities was a $1.5 million increase in amounts payable
to affiliates due to timing of payments.
During the three-month period ended March 31, 1998, the Partnership's net cash
used in investing activities decreased to $215,000 compared to $281,000 for the
corresponding period in 1997. The Partnership's investing activities consisted
of capital improvements made to its ten communities.
During the three-month period ended March 31, 1998, the Partnership's net cash
used in financing activities was $494,000 compared to $746,000 for the
corresponding period in 1997. The Partnership's financing activities consisted
of repayments on notes payable and distributions paid to the Partners.
Distributions paid in the three-month period ended March 31, 1998 decreased by
approximately $265,000 compared to the same period in the prior year.
The Managing General Partner is not aware of any trends, other than national
economic conditions, which
<PAGE> 7
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 communities, five are operated pursuant to long-term
operating leases, four communities are owned directly, and one community is
owned by the Partnership subject to a ground lease.
Increases in rent for the communities 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 debt of $6.3 million at March 31, 1998. 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 $2.2 million
for physical improvements and normal recurring preventative maintenance at its
ten communities during 1998. Of this amount, approximately $800,000 has been
contracted as of March 31, 1998. Funds for these improvements are expected to 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> 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, the Partnership filed actions in the Superior Court of
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of Campbell and Sunnyvale. The Partnership leases 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. 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 communities may 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 communities leased by the Partnership, Fremont and 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, the
Partnership may be required to file litigation to determine the rights under
those leases.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
<PAGE> 9
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
(General Partner)
By: /s/ Howard G. Phanstiel
-----------------------------------
Howard G. Phanstiel
Chief Executive Officer and
Chairman of the Board of Directors
Date: May 15, 1998
By: /s/ Graham P. Espley-Jones
----------------------------------
Graham P. Espley-Jones
Chief Financial Officer
Date: May 15, 1998
<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> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,749
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 31,644
<DEPRECIATION> 12,707
<TOTAL-ASSETS> 23,779
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 13,655
<TOTAL-LIABILITY-AND-EQUITY> 23,779
<SALES> 0
<TOTAL-REVENUES> 4,762
<CGS> 0
<TOTAL-COSTS> 3,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> 795
<INCOME-TAX> 0
<INCOME-CONTINUING> 795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 795
<EPS-PRIMARY> 22.48
<EPS-DILUTED> 22.48
</TABLE>
