10-Q 1 a75026e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30,2001 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, 2001 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 OR ORGANIZATION) (I.R.S. EMPLOYER 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 [ ] The aggregate market value of the voting units held by non-affiliates of registrant, computed by reference to the price at which units were sold, was $16,696,569 (for purposes of calculating the preceding amount only, all directors, executive officers and unitholders holding 5% or greater of the registrant's units are assumed to be affiliates). The number of Units outstanding as of August 10, 2001 was 35,020. ================================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS American Retirement Villas Properties II, L.P. (a California limited partnership) Condensed Consolidated Balance Sheets (Unaudited) (In thousands)

See accompanying notes to the unaudited condensed consolidated financial statements. 2 3 American Retirement Villas Properties II, L.P. (a California limited partnership) Consolidated Statements of Operations (Unaudited) (In thousands, except unit data)

See accompanying notes to the unaudited condensed consolidated financial statements. 3 4 American Retirement Villas Properties II, L.P. (a California limited partnership) Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)

See accompanying notes to the unaudited condensed consolidated financial statements. 4 5 American Retirement Villas Properties II, L.P. (a California limited partnership) Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 (1) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION BASIS OF PRESENTATION We prepared the accompanying condensed consolidated 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 accounting principles generally accepted in the United States of America 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. To obtain a more detailed understanding of our results, one should also read the financial statements and notes in our Form 10-K for 2000, 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. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Partnership and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which we have controlling interests, have been consolidated into the financial statements. Management believes we have a controlling interest consistent with the requirements of SOP 78-9 when we own more than 50% of an entity. All significant intercompany balances and transactions have been eliminated in consolidation. BASIS OF ACCOUNTING American Retirement Villas Properties II, L.P. maintains records on the accrual method of accounting for financial reporting and Federal and state tax purposes. CARRYING VALUE OF REAL ESTATE Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements............. 27.5 to 35 years Leasehold property and improvements.... Lease term Furniture, fixtures and equipment...... 3 to 7 years We review our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, we estimate the future cash flows expected to result from using the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset's fair value. 5 6 USE OF ESTIMATES In the preparation of our financial statements in conformity with accounting principles generally accepted in the United State of America, we have made estimates and assumptions that affect the following: - reported amounts of assets and liabilities at the date of the financial statements; - disclosure of contingent assets and liabilities at the date of the financial statements; and - reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IMPOUND ACCOUNTS The U.S. Department of Housing and Urban Development ("HUD") finances certain of our properties. HUD holds our funds in impound accounts for payment of property taxes, insurance and future property improvements (replacement reserves) on these properties. We include these impound accounts in other assets. LOAN FEES We amortize loan fees using the effective interest method over the term of the respective notes payable and include them in other assets. CAPITAL EXPENDITURES We capitalize all assets, obtained by purchase, trade or capital lease that have a useful life of more than one year, and costs exceeding $500, or a group of similar assets purchased together where the total purchase price exceeds $1000 and the cost of each asset exceeds $50. Improvements or additions to existing assets are also capital expenditures when they extend the useful life of the assets beyond their original life. Refurbishment expenditures are expensed as incurred. NET INCOME (LOSS) PER LIMITED PARTNER UNIT Net income (loss) per limited partner unit was based on the weighted average number of limited partner units outstanding of 35,020 during the periods ended June 30, 2001 and June 30, 2000. REVENUE RECOGNITION Rent agreements with tenants are on a month-to-month basis. We apply advance deposits to the first month's rent. Revenue is recognized in the month earned for rent and assisted living services. (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. These payments amounted to $573,000 and $518,000 for the six-month periods and $290,000 and $261,000 for the three-month periods ended June 30, 2001 and 2000 respectively. Additionally, we pay ARV a partnership management fee of 10 percent of cash flow before distributions, as defined in the Partnership Agreement. These payments amounted to $122,000 and $109,000 for the six-month periods and $38,000 and $66,000 for the three-month periods ended June 30, 2001 and 2000 respectively. 6 7 (3) NOTES PAYABLE Notes payable consist of the following at June 30, 2001 and December 31, 2000 (in thousands):

The future annual principal payments of the notes payable at June 30, 2001 are as follows (in thousands): Twelve month period ending June 30, 2002........................... $ 2,091 Twelve month period ending June 30, 2003........................... 245 Twelve month period ending June 30, 2004........................... 265 Twelve month period ending June 30, 2005........................... 287 Twelve month period ending June 30, 2006........................... 310 Thereafter......................................................... 38,594 -------- $ 41,792 ========

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Operating Results Before Extraordinary Item For the Six Months Ended June 30, 2001 and 2000 (Unaudited) (In millions)

The increase in assisted living community revenue is attributable to: - an increase in average rental rate per occupied unit to $1,874 for the six-month period ended June 30, 2001 as compared with $1,723 for the six-month period ended June 30, 2000; and - an increase in average occupancy to 91% for the six-month period ended June 30, 2001 compared with 88% for the six-month period ended June 30, 2000. Interest and other revenue increased primarily due to processing fees collected as a result of the increased occupancy. Assisted living operating expenses increased $0.4 million, or 6.30%, from $6.9 million for the six-month period ended June 30, 2000 to $7.3 million for the six-month period ended June 30, 2001 primarily due to the following: - increased wages of staff, - incentive programs; - increased worker's compensation premiums; and - higher utility costs; partially offset by 7 8 - lower cost of purchased services and variable expenses due to changes in staffing. General and administrative expenses increased $0.11 million, or 41.67%, from $0.25 million for the six-month period ended June 30, 2000 to $0.36 million for the six-month period ended June 30, 2001 primarily due to higher insurance and bad debt expenses. Depreciation and amortization expense decreased $0.4 million, or 30.80%, from $1.2 million for the six-month period ended June 30, 2000 to $0.8 million for the six-month period ended June 30, 2001 primarily due to the reduced amortization of loan fees as a result of the refinancing of certain loans. Property tax expense increased 25.63% due to increased property values for the six-month period ended June 30, 2001 compared to the six-month period ended June 30, 2000. Advertising expenses decreased 42.71% due to decreased advertising in the six-month period ended June 30, 2001 compared to the six-month period ended June 30, 2000. Interest expense increased $0.2 million, or 13.44%, from $1.6 million for the six-month period ended June 30, 2000 to $1.8 million for the six-month period ended June 30, 2001 primarily due to the higher balances of mortgages due to refinancing partially offset by lower interest rates. Operating Results Before Extraordinary Item For the Three Months Ended June 30, 2001 and 2000 (Unaudited) (In millions)

Assisted living community revenue increased $0.5 million, or 9.89%, from $5.2 million for the quarter ended June 30, 2000 to $5.7 million for the quarter ended June 30, 2001 primarily due to the following: - an increase in the average rate per occupied unit to $1,887 for the three-month period ended June 30, 2001 as compared with $1,723 for the three-month period ended June 30, 2000; and - an increase in average occupancy for our assisted living communities to 90.6% for the three-month period ended June 30, 2001 as compared with 88.4% for the three-month period ended June 30, 2000. Interest and other revenue increased primarily due to processing fees collected as a result of the increased occupancy. Assisted living operating expenses increased $0.2 million, or 6.71%, from $3.4 million for the quarter ended June 30, 2000 to $3.6 million for the quarter ended June 30, 2001 primarily due to the following: - increased wages of staff; - incentive programs; - increased worker's compensation premiums; and - higher utility costs; partially offset by - lower cost of purchased services and variable expenses due to changes in staffing. 8 9 General and administrative expenses increased $0.06 million, or 44.70%, from $0.13 million for the quarter ended June 30, 2000 to $0.19 million for the quarter ended June 30, 2001 primarily due to the following: - increased bad debt expense; and - higher property insurance premiums Depreciation and amortization expense decreased $0.2 million, or 30.72%, from $0.6 million for the quarter ended June 30, 2000 to $0.4 million for the quarter ended June 30, 2001 primarily due to the reduced amortization of loan fees as a result of the refinancing of certain loans. Property tax expense increased 27.63% due to increased property values for the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. Advertising expenses decreased 48.04% due to decreased advertising quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. Interest expense increased $0.2 million, or 33.43%, from $0.7 million for the quarter ended June 30, 2000 to $0.9 million for the quarter ended June 30, 2001 primarily due to the higher balances of mortgages due to refinancing partially, offset by lower interest rates. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash balances were $3.6 million and $2.2 million at June 30, 2001 and December 31, 2000, respectively. We expect cash generated from operations from our properties and our ability to refinance certain assisted living communities ("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 six-months ended June 30, 2001 cash provided by operating activities was $2.1 million compared $0.9 million during the six-months ended June 30, 2000. The cash provided by operating activities during the six-months ended June 30, 2001 was a result of net income of $0.5 million, adjusted for: - 0.8 million non cash charge for depreciation and amortization expense; - $0.6 million net decrease in other assets; and - $0.1 million from extraordinary loss from write off of loan fees. During the six-months ended June 30, 2001 cash used in investing activities was $0.8 million compared to cash used in investing activities of $0.5 million during the six-months ended June 30, 2000. The cash used by investing activities six-months ended June 30, 2001 was primarily the result of $0.8 million for purchase of furniture and equipment. During the six-months ended June 30, 2001 cash provided by financing activities was $0.1 million as compared to cash used in financing activities of $0.3 million for the six-months ended June 30, 2000. The cash provided by financing activities during 2001 was a result of $10.2 million of borrowing under notes payable; offset by: - $9.7 million of repayments of notes payable; - $0.2 million of mortgage insurance; and - $0.2 million of loan fees. As of June 30, 2001, of our 10 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 $1,000,000 for capital expenditures during 2001 for physical improvements at our communities. As of June 30, 2001 we have made approximately $798,000 in capital expenditures. Funds for these improvements are expected to be available from operations or from the respective reserve accounts. 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 9 10 if the inflation rate increases we will be able to pass through the subsequent increase in operating expenses to 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 or permanent decline in occupancy and/or a delay in increasing occupancy. If this occurs, revenues may remain constant or decline. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in the interest rates on our fixed rate notes payable. With respect to our fixed rate notes payable, changes in the interest rates affect the fair market value of the notes payable, but not our earnings or 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 the earlier of maturity and any required refinancing of such debt. We do not currently have any variable interest rate debt and, therefore, are not subject to interest rate risk associated with variable interest rate debt. Currently, we do not utilize interest rate swaps. Less than 1% of our total assets and total contract revenues as of and for the periods ended June 30, 2001 and 2000 were denominated in currencies other than the U.S. Dollar; accordingly, we believe that we have no material exposure to foreign currency exchange risk. This materiality assessment is based on the assumption that the foreign currency exchange rates could change unfavorably by 10%. We have no foreign currency exchange contracts. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY-HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ending June 30, 2001. 10 11 Date: August 13, 2001 AMERICAN RETIREMENT VILLAS PROPERTIES II, A CALIFORNIA LIMITED PARTNERSHIP. By: ARV ASSISTED LIVING, INC., MANAGING GENERAL PARTNER /s/ DOUGLAS M. PASQUALE --------------------------------------- Douglas M. Pasquale Chief Executive Officer Pursuant to the requirements of Section 13 or 15(d) 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. Date: August 13, 2001 SIGNATURE ---------- /s/ DOUGLAS M. PASQUALE --------------------------------------- Douglas M. Pasquale Chief Executive Officer (Principal Executive Officer) /s/ ANITA RYAN --------------------------------------- Anita Ryan Vice President and Controller (Principal Accounting Officer) 11

AMERICAN RETIREMENT VILLAS PROPERTIES II 10-Q