10-Q 1 a77247e10-q.txt FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 ================================================================================ 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, 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 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 November 10, 2001 was 35,020. ================================================================================ 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) ASSETS

LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 41,731 $ 41,226 Accounts payable 144 341 Accrued expenses 1,981 1,492 Amounts payable to affiliate 115 128 Distributions payable to Partners 33 25 -------- -------- Total liabilities 44,004 43,212 -------- -------- Partners' capital (deficit): General partners' capital 1 1 Special limited partners 117 111 Limited partners' capital, 35,020 units outstanding (3,138) (3,768) -------- -------- Total partners' capital (3,020) (3,656) -------- -------- Commitments and contingencies $ 40,984 $ 39,556 ======== ========

See accompanying notes to the unaudited condensed consolidated financial statements. 2 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 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 American Retirement Villas Properties II, L.P. (a California limited partnership) Notes to Condensed Consolidated Financial Statements (Unaudited) September 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. ("the Partnership") 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 fiscal year ended December 31, 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. USE OF ESTIMATES In the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America, 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. 5 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 $1,000 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 September 30, 2001 and September 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. RECLASSIFICATION We have reclassified certain prior period amounts to conform to the September 30, 2001 presentation. ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Partnership is required to adopt SFAS 143 on January 1, 2002. Management believes the adoption of SFAS 143 will not have a material effect on the Partnership's financial position, results of operations, or cash flows. On October 3, 2001 the FASB issued SFAS 144 "Accounting for the Impairment and Disposal of Long Lived Assets". SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of". However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Partnership is required to adopt SFAS 144 on January 1, 2002. Management has not determined the impact SFAS 144 will have on the Partnership's financial position, results of operations, or cash flows. (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 $870,000 and $792,000 for the nine-month periods and $297,000 and $274,000 for the three-month periods ended September 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 $180,000 and $200,000 for the nine-month periods and $58,000 and $91,000 for the three-month periods ended September 30, 2001 and 2000 respectively. (3) NOTES PAYABLE Notes payable consist of the following at September 30, 2001 and December 31, 2000 (in thousands): 6

The future annual principal payments of the notes payable at September 30, 2001 are as follows (in thousands): Twelve month period ending September 30, 2002 ...... $ 2,089 Twelve month period ending September 30, 2003 ...... 250 Twelve month period ending September 30, 2004 ...... 270 Twelve month period ending September 30, 2005 ...... 293 Twelve month period ending September 30, 2006 ...... 317 Thereafter ......................................... 38,512 ------- $41,731 =======

The $1.9 million mortgage loan that is due January 2002 is in the process of refinancing to a thirty-five years loan. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Operating Results Before Extraordinary Item For the Nine Months Ended September 30, 2001 and 2000 (Unaudited) (In millions)

Assisted living community revenue increased $1.51 million, or 9.64%, from $15.67 million for the nine-month period ended September 30, 2000 to $17.18 million for the nine-month period ended September 30, 2001 primarily due to the following: o an increase in average rental rate per occupied unit to $1,852 for the nine-month period ended September 30, 2001 as compared with $1,731 for the nine-month period ended September 30, 2000; o an increase in average assisted living rate per assisted living resident to $677 for the nine-month period ended September 30, 2001 as compared with $675 for the nine-month period ended September 30, 2000; and o an increase in average occupancy to 89.7% for the nine-month period ended September 30, 2001 compared with 88% for the nine-month period ended September 30, 2000. Interest and other revenue increased $0.04 million, or 11.76%, from $0.34 million for the nine-month period ended September 30, 2000 to $0.38 million for the nine-month period ended September 30, 2001 primarily due to the following: o processing fees collected as a result of the increased occupancy; and 7 o higher interest income earned from the higher unrestricted cash balance. Assisted living operating expenses increased $0.77 million, or 7.41%, from $10.39 million for the nine-month period ended September 30, 2000 to $11.16 million for the nine-month period ended September 30, 2001 primarily due to the following: o increase wages of staff; o increase in California's minimum wage; o incentive programs; o increase worker's compensation premiums; and o higher utility costs; partially offset by o lower cost of purchased services and variable expenses due to changes in staffing. General and administrative expenses increased $0.08 million, or 16.67%, from $0.48 million for the nine-month period ended September 30, 2000 to $0.56 million for the nine-month period ended September 30, 2001 primarily due to higher insurance expenses and other professional services. Depreciation and amortization expense decreased $0.59 million, or (33.91)%, from $1.74 million for the nine-month period ended September 30, 2000 to $1.15 million for the nine-month period ended September 30, 2001 primarily due to the reduced amortization of loan fees as a result of the refinancing of certain loans. Property tax expense increased $0.10 million, or 20.41%, from $0.49 million for the nine-month period ended September 30, 2000 to $0.59 million for the nine-month period ended September 30, 2001 primarily due to the increased assessed values of the property. Interest expense increased $0.22 million, or 8.87%, from $2.48 million for the nine-month period ended September 30, 2000 to $2.70 million for the nine-month period ended September 30, 2001 primarily due to the higher balances of mortgages as a result of refinancings, partially offset by lower interest rates. Operating Results Before Extraordinary Item For the Three Months Ended September 30, 2001 and 2000 (Unaudited) (In millions)

Assisted living community revenue increased $0.46 million, or 8.5%, from $5.41 million for the quarter ended September 30, 2000 to $5.87 million for the quarter ended September 30, 2001 primarily due to the following: o an increase in the average rental rate per occupied unit to $1,904 for the three-month period ended September 30, 2001 as compared with $1,766 for the three-month period ended September 30, 2000; o an increase in the average assisted living rate per assisted living resident to $695 for the three-month period ended September 30, 2001 as compared with $674 for the three-month period ended September 30, 2000; and o occupancy levels remained constant at 89%. 8 Interest and other revenue decreased $0.02 million, or (15.38)%, from $0.13 million for the quarter ended September 30, 2000 to $0.11 million for the quarter ended September 30, 2001. Assisted living operating expenses increased $0.34 million, or 9.71%, from $3.5 million for the quarter ended September 30, 2000 to $3.84 million for the quarter ended September 30, 2001 primarily due to the following: o increase wages of staff; o increase in California's minimum wage; o incentive programs; o increase worker's compensation premiums; and o higher utility costs; partially offset by o lower cost of purchased services and variable expenses due to changes in staffing. General and administrative expenses decreased $0.02 million, or (9.09)%, from $0.22 million for the quarter ended September 30, 2000 to $0.20 million for the quarter ended September 30, 2001 primarily due to the following: o decrease in bad debt expense; and o decrease in partnership administration fees paid to our affiliates; offset by o higher property insurance premiums. Depreciation and amortization expense decreased $0.23 million, or (39.66)%, from $0.58 million for the quarter ended September 30, 2000 to $0.35 million for the quarter ended September 30, 2001 primarily due to the reduced amortization of loan fees as a result of the refinancing of certain loans. Property tax expense increased $0.01 million, or 5.56%, from $0.18 million for the quarter ended September 30, 2000 to $0.19 million for the quarter ended September 30, 2001 primarily due to the increased assessed values of the property. Advertising expenses decreased $0.04 million, or (40.00)%, from $0.10 million for the quarter ended September 30, 2000 to $0.06 million for the quarter ended September 30, 2001 primarily due to the matching of the yellow page advertisement to the period the ads cover. Interest expense increased $0.01 million, or 1.11%, from $0.90 million for the quarter ended September 30, 2000 to $0.91 million for the quarter ended September 30, 2001 primarily due to the higher balances of mortgages as the result of refinancings, offset by lower interest rates. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash balances were $3.9 million and $2.2 million at September 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 nine-months ended September 30, 2001 cash provided by operating activities was $2.8 million compared to $1.1 million during the nine-months ended September 30, 2000. The cash provided by operating activities during the nine-months ended September 30, 2001 was a result of net income of $0.9 million, adjusted for: - $1.2 million non cash charge for depreciation and amortization expense; - $0.4 million net decrease in other assets; - $0.2 million net increase in payables and accrued expenses; and - $0.1 million from extraordinary loss from write off of loan fees. During the nine-months ended September 30, 2001 cash used in investing activities was $0.9 million compared to cash used in investing activities of $0.6 million during the nine-months ended September 30, 2000. The cash used by investing activities nine-months ended September 30, 2001 was primarily the result of capital improvements at our assisted living communities. During the nine-months ended September 30, 2001 cash provided by financing activities was $0.2 million as compared to cash used in financing activities of $0.4 million for the nine-months ended September 30, 2000. 9 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; - $0.3 million of distribution payments; and - $0.2 million of loan fees. As of September 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 September 30, 2001 we had made approximately $869,000 in capital expenditures. Funds for these improvements are expected to be available from operations or from the respective impound accounts held by HUD. The $1.9 million mortgage loan that is due January 2002 is in the process of refinancing to a thirty-five years loan. 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 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. 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 10 None. (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ending September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, we have 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 THE FOLLOWING PERSONS ON OUR BEHALF. Date: November 14, 2001 ARV ASSISTED LIVING, INC., its managing General Partner By: /s/ DOUGLAS M. PASQUALE ------------------------------------- Douglas M. Pasquale Chief Executive Officer By: /s/ ABDO H. KHOURY ------------------------------------- Abdo H. Khoury President and Chief Financial Officer 11

AMERICAN RETIREMENT VILLAS PROPERTIES II 10-Q