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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, 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
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(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
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Properties, at cost:
Land $ 11,453 $ 11,453
Buildings and improvements, less accumulated depreciation of
$7,901 and $7,248 at September 30, 2000 and December 31, 1999,
respectively 20,292 20,662
Leasehold property and improvements, less accumulated depreciation
of $1,266 and $1,244 at September 30, 2000 and December 31, 1999,
respectively 225 209
Furniture, fixtures and equipment, less accumulated depreciation
of $1,404 and $1,145 at September 30, 2000 and December 31, 1999,
respectively 1,243 1,373
-------- --------
Net properties 33,213 33,697
Cash 2,039 2,002
Other assets 2,851 2,844
-------- --------
$ 38,103 $ 38,543
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 39,196 $ 39,545
Accounts payable 101 155
Accrued expenses 1,669 1,426
Amounts payable to affiliate 216 304
Distributions payable to Partners 22 8
-------- --------
Total liabilities 41,204 41,438
-------- --------
Commitments and contingencies
Partners' capital (deficit)
General partners' capital 117 119
Limited partners' capital, 35,020 units outstanding (3,218) (3,014)
-------- --------
Total partners' capital (deficit) (3,101) (2,895)
-------- --------
$ 38,103 $ 38,543
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
------- ------ -------- -------
<S> <C> <C> <C> <C>
REVENUE:
Rent $ 4,483 $4,178 $ 12,869 $12,259
Assisted living 924 1,025 2,801 3,032
Interest and other 99 121 306 363
------- ------ -------- -------
Total revenue 5,506 5,324 15,976 15,654
------- ------ -------- -------
COSTS AND EXPENSES:
Rental property operations 2,844 2,800 8,409 8,098
Assisted living 659 507 1,981 1,387
General and administrative 222 200 475 784
Communities rent 87 86 262 472
Depreciation and amortization 584 535 1,740 1,292
Property taxes 177 155 494 480
Advertising 104 66 296 151
Interest 899 901 2,475 1,560
Other (income) (31) -- (31) --
------- ------ -------- -------
Total costs and expenses 5,545 5,250 16,101 14,224
------- ------ -------- -------
Income (loss) before income tax expense (39) 74 (125) 1,430
Income tax expense 2 -- 7 --
------- ------ -------- -------
Net income (loss) $ (41) $ 74 $ (132) $ 1,430
======= ====== ======== =======
Net income (loss) per limited partner unit $ (1.17) $ 2.09 $ (3.73) $ 40.44
======= ====== ======== =======
</TABLE>
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)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (132) $ 1,430
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,740 1,292
Change in assets and liabilities:
Increase in other assets (635) (1,665)
Increase in accounts payable & accrued expenses .. 189 439
Increase (decrease) in amounts payable to affiliate (88) 179
------- --------
Net cash provided by operating activities 1,074 1,675
------- --------
Cash flows used in investing activities:
Capital expenditures (624) (1,258)
Purchase of previously leased communities -- (14,692)
(Increase) decrease in deposits (4) 199
------- --------
Net cash used in investing activities (628) (15,751)
------- --------
Cash flows from financing activities:
Principal repayments on notes payable (348) (20,889)
Proceeds from notes payable -- 54,380
Distributions paid (61) (18,027)
------- --------
Net cash provided by (used in) financing
activities (409) 15,464
------- --------
Net increase in cash 37 1,388
Cash at beginning of period 2,002 953
------- --------
Cash at end of period $ 2,039 $ 2,341
======= ========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 2,703 $ 1,301
======= ========
</TABLE>
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 Consolidated Condensed Financial Statements
(Unaudited)
September 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 to 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 $792,000 and $778,000 for the nine-month periods and
$274,000 and $264,000 for the three-month periods ended September 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 $200,000 and $301,000 for the nine-month periods
and $89,000 and $49,000 for the three-month periods ended September 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 $39.2
million of mortgage loans are due June 2001 and are in the process of being
refinanced with 35-year loans. We have received the approvals on two communities
and are waiting on the approvals necessary to ensure the loans will be available
on six other communities.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
This 10-Q report contains forward-looking statements, including statements
regarding, among other items:
o our business strategy;
o our liquidity requirements and ability to obtain financing;
o the level of future capital expenditures;
o the impact of inflation and changing prices; and
These forward-looking statements are based on our expectations and are subject
to a number of risks and uncertainties, some of which are beyond our control.
These risks and uncertainties include, but are not limited to:
o access to capital necessary for acquisitions and development;
o our ability to manage growth;
o governmental regulations;
o competition; and
o other risks associated with the assisted living industry.
Although we believe we have the resources required to achieve our objectives,
actual results could differ materially from those anticipated by these
forward-looking statements. There can be no assurances that events anticipated
by these forward-looking statements will in fact transpire as expected.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30,
------------------- Increase/
2000 1999 (decrease)
------ ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Assisted living community revenue $15.67 $15.29 2.5%
Interest and other revenue 0.31 0.36 (15.2)%
------ ------ ------
Total revenue 15.98 15.65 2.1%
------ ------ ------
Costs and expenses:
Assisted living operating expenses 10.39 9.49 9.6%
General and administrative 0.47 0.78 (39.4)%
Communities rent 0.26 0.47 (44.5)%
Depreciation and amortization 1.73 1.29 34.7%
Property taxes 0.49 0.48 3.0%
Advertising 0.29 0.15 95.8%
Interest 2.47 1.56 58.6%
------ ------ ------
Total costs and expenses 16.10 14.22 13.2%
------ ------ ------
Net income (loss) $(0.12) $ 1.43 (108.7)%
====== ====== ======
</TABLE>
The increase in assisted living community revenue is attributable to:
o an increase in average rental rate per occupied unit to $1,748 for the
nine-month period ended September 30, 2000 as compared with $1,658 for
the nine-month period ended September 30, 1999; offset by
o a decrease in average occupancy to 88% for the nine-month period
ended September 30, 2000 compared with 89% for the nine-month period
ended September 30, 1999; and
o a decrease in assisted living penetration to 54% for the nine-month
period ended September 30, 2000 compared with 57% for the nine-month
period ended September 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.
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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 competition in the
Assisted Living market.
The increase in interest expense attributable to:
o the refinancing in June 1999 of the eight owned properties; partially
offset by
o a recovery of $228,000 of the interest rate lock and commitment fees
incurred in connection with the failed refinancing of certain notes
payable in 1998.
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30,
------------------- Increase/
2000 1999 (decrease)
------ ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Assisted living community revenue $ 5.41 $5.20 3.9%
Interest and other revenue 0.10 0.12 (18.2)%
------ ----- ------
Total revenue 5.51 5.32 3.4%
------ ----- ------
Costs and expenses:
Assisted living operating expenses 3.50 3.31 5.9%
General and administrative 0.22 0.20 11.2%
Communities rent 0.09 0.09 1.1%
Depreciation and amortization 0.58 0.53 9.1%
Property taxes 0.17 0.15 14.8%
Advertising 0.10 0.07 58.0%
Interest 0.89 0.90 (0.3)%
------ ----- ------
Total costs and expenses 5.55 5.25 5.6%
------ ----- ------
Net income $(0.04) $0.07 (156.9)%
====== ===== ======
</TABLE>
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 September 30, 2000 as compared with $1,649
for the three-month period ended September 30, 1999; offset
o by a decrease in assisted living penetration to 53% for the
three-month period ended September 30, 2000 compared with 58% for the
three-month period ended September 30, 1999.
o occupancy levels remained constant at 89%
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 increase in general and administrative expenses are attributable to:
o increased legal fees as the successful collection efforts of loan fees
due the company, and
o an increase of administration fees paid to our managing general
partner as a result of increased cash flow; offset by
o a reduction of expenses, that were previously allocated to G&A due to
cost-cutting efforts.
Community rent expense remained relatively constant between the three-month
periods ending September 30, 2000 and September 30, 1999.
The increase in depreciation and amortization is due to an increase in property
improvements.
The increase in advertising expenses is due to increased competition in the
Assisted Living market.
Interest expense remained relatively constant between the three-month periods
ending September 30 2000 and September 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
and our ability to refinance certain ALCs 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 nine-month period ended September 30, 2000, cash provided by
operating activities decreased to $1.1 million compared to $1.7 million for the
corresponding period in 1999. The primary components of cash used by operating
activities for the quarter ended September 30, 2000 were operating losses or
$0.1 million offset by depreciation and amortization of $1.7 million, an
increase in other assets of $0.6 million and an increase in accounts payable and
accrued expenses of $0.2 million.
During the nine-month period ended September 30, 2000, our net cash used in
investing activities decreased to $0.6 million compared to $15.7 million for the
corresponding period in 1999. The decrease was a result of a purchase of 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 nine-month period ended September 30, 2000, our net cash used in
financing activities was $0.4 million compared to cash provided by financing
activities of $15.5 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 $0.3 million and distributions paid of
$0.1 million.
The mortgage loans are due June 2001 and are in the process of being refinanced
with 35-year loans. The $39.2 million of mortgage loans are due June 2001 and
are in the process of being refinanced with 35-year loans. We have received the
approvals on two communities and are waiting on the approvals necessary to
ensure the loans will be available on six other communities.
Our debt agreements contain restrictive covenants requiring us to maintain a
certain level of debt service coverage. At September 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 September 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 $850,000 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. QUANTITATIVE 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
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. 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: /s/ Douglas M. Pasquale
-------------------------------
Douglas M. Pasquale
Chairman of the Board of ARVAL,
Managing General Partner
Date: November 14, 2000
By: /s/ Abdo H. Khoury
--------------------------------
Abdo H. Khoury
Senior Vice President, and Chief
Financial Officer of ARVAL,
Managing General Partner
Date: November 14, 2000
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