-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTh1xIgb22Tq8M6R7V+9TIPMiQw0urYhZnlXgmP4mdCG9i+eHaUmBKFtE/edcX0J o4p/ZbmSiCi8i0pShtavPw== 0000892569-97-000881.txt : 19970401 0000892569-97-000881.hdr.sgml : 19970401 ACCESSION NUMBER: 0000892569-97-000881 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES II CENTRAL INDEX KEY: 0000830156 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330278155 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-20413 FILM NUMBER: 97569823 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-K 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-26468 AMERICAN RETIREMENT VILLAS PROPERTIES II A CALIFORNIA LIMITED PARTNERSHIP (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, SUITE D-1, COSTA MESA, CALIFORNIA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: UNITS OF LIMITED PARTNERSHIP (TITLE OF CLASS) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of voting Units (all voting) held by non-affiliates of Registrant, computed by reference to the price at which such units were sold, was $34,995,000 as of March 1, 1997, a date within sixty (60) days of the filing of this Form 10-K. On that date there were 35,020 Units outstanding. 2 TABLE OF CONTENTS AMERICAN RETIREMENT VILLAS PROPERTIES II, A CALIFORNIA LIMITED PARTNERSHIP PART I ITEM 1. BUSINESS Overview. Industry Background. Services. Operational History. Competition. Government Regulation. Employees. ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 2 3 PART I ITEM 1. BUSINESS OVERVIEW American Retirement Villas Properties II ("ARVP II" or the "Partnership") operates ten assisted living facilities in the state of California, five of which it owns and five of which it leases. These facilities house and provide personal care and support services to its senior residents. The ten facilities contain an aggregate of 941 units. For the twelve months ended December 31, 1996, ARVP II's facilities had a total average occupancy of approximately 93% as compared to 94% for the twelve months ended December 31, 1995. ARVP II was founded in February 1988 as a California limited partnership to develop, finance, acquire, and operate senior housing, inclusive of assisted living facilities. The general partners of ARVP II are ARV Assisted Living, Inc., ("ARVAL"), which serves as Managing General Partner, Gary L. Davidson, John A. Booty, John S. Jason, and Tony Rota (collectively known as the "General Partners"). On May 16, 1996, ARVAL tendered for the limited partnership units in ARVP II, at a net cash price per unit of $720. At the close of the tender offer on June 21, 1996, holders of approximately 15,519 units tendered their shares representing approximately 44% of all outstanding units. On July 26, 1996, ARVAL initiated a second tender offer to purchase up to 3,715 additional limited partnership units at a net cash price of $720 per unit less second quarter distributions. At the close of the second tender offer on August 23, 1996, holders of approximately 2,148 units tendered their shares representing approximately 6.2% of all units. When added to the previously acquired and owned units, ARVAL owns 17,776 units or approximately 50.8% of the limited partnership units. As such, ARVAL has a controlling interest in the Partnership. INDUSTRY BACKGROUND Assisted living represents a combination of housing, personalized support services, and health care designed to respond to the individual needs of the senior elderly who need help in activities of daily living, but do not need the higher acuity medical care provided in a skilled nursing facility. The assisted living market can be viewed as falling near the middle of the elder care continuum, between home-based care at one end and long-term skilled nursing facilities and acute care hospitals at the other. The Registrant believes the assisted living industry will benefit from several significant trends affecting the long-term care industry. These are as follows: Demographic trends: While increasing numbers of Americans are living longer and healthier lives, many gradually require increasing assistance with activities of daily living, and are not able to continue to age in place at home. The typical resident at an assisted living facility is over the age of 65 with the largest percentage of residents around 84 years of age. This group represents one of the fastest growing segments of the population. According to the U.S. Bureau of the Census data, the number of people in the U.S. age 65 and older is expected to increase over 16% from 3 4 1996 to 2010. Moreover, the segment of the population 85 years of age or older is projected to increase more than 51% between the years of 1996 to 2010. Another trend benefiting the assisted living industry is the increased affluence of the elderly population with incomes sufficient to afford assisted living. According to the National Planning Data Corporation Senior Life Report, in 1990, 1.9 million people over the age of 80 were estimated to have incomes over $15,000. By 1998, this number is projected to reach approximately 3.3 million people, which is an increase of 74%. Historically, seniors were taken care of by their children, however, the increased number of two wage earner families has reduced the supply of in-home care givers who are able to care for their elderly relatives at home. At the same time, the number of elderly people living alone has increased dramatically which can be attributed to rising divorce rates, lifestyle choices and longevity patterns. Assisted living facilities have, and will continue to, fill this void as the number of seniors without a family support system at home who need assistance in their daily activities increases. Health care cost containment: In response to rapidly rising health care costs in this country, both the federal government and private pay sources have adopted cost containment measures that have encouraged reduced length of stay in hospitals and skilled nursing facilities. According to the U.S. Department of Health and Human Resources, approximately 25% to 40% of all nursing home residents could be cared for in a less institutional and more cost effective environment. Assisted living offers a cost effective alternative for those individuals who do not require the level of medical services provided by hospitals and skilled nursing facilities. Limited number of nursing home beds: The majority of states in the U.S. have enacted "Certificates of Need" or similar legislation, which generally limits the construction of skilled nursing facilities and the addition of beds or services in existing skilled nursing facilities. This legislation, coupled with higher construction costs, limitations on government reimbursement for the full cost of construction and start-up expenses also acts to constrain growth in the supply of such facilities. Such restrictive legislation benefits the assisted living industry by limiting the supply of skilled nursing beds for the senior elderly. Moreover, cost factors are placing pressure on skilled nursing facilities to shift their focus toward higher acuity care thus creating a shortage of lower acuity care availability, and thereby increasing the pool of potential assisted living residents. SERVICES The Registrant provides services and care which are designed to meet the individual needs of its residents. The services provided are designed to enhance both the physical and mental well-being of the senior resident in each of the Registrant's facilities by promoting their independence and dignity in a homelike setting. The assisted living program at the Registrant's facilities include: Personalized Care Plan - A primary element of the Registrant's strategy is the concept of "personalized" care to meet each resident's specific needs. This concept of customizing services to meet the needs of the residents begins with the resident admissions process, where the facility's management staff, the resident, the resident's family, and the resident's physician, discuss the resident's needs and develop a plan for the resident's care. If recommended by 4 5 the resident's physician, additional health care or medical services may be provided at the facility by a third party home health care agency or other medical provider. Basic Service and Care Package - The basic service and care package at the Registrant's assisted living facilities generally includes the following: meals in a communal, "home-like" setting, housekeeping, linen and laundry service, social and recreational programs, security, utilities, and transportation. Other care services can be provided under the basic package based upon the individual's personalized health care plan. Additional Services - The Registrant has designed additional assisted living services in a three-tier program available to residents on a personalized basis. These services are described as follows: o Level One: Assistance to residents in the self-administration of medication. Where necessary, the assisted living staff will consult with the family, the physician or the insurance company of a resident to designate a home health care agency to administer the appropriate medication. o Level Two: In addition to the services provided under Level One, assistance with bathing, dressing and grooming, escorting to and from meals and activities, reading mail, writing letters, shopping and other specialized activities. These services are provided on an as-needed basis and at the convenience of the resident within the overall operation of the facility. o Level Three: All of the services provided by Level One and Two, and, in addition, provision of those services on a 24-hour basis. Further, this level provides appropriate services for individuals who require assistance with incontinence. COMPETITION Assisted living providers compete principally on the basis of the quality of care, breadth of services offered, location and facility appearance, price and reputation. Due to the changing demographics in the United States and the favorable attention that the assisted living industry has recently received, ARVP II expects increasing competitive pressure in the future. Currently, ARVP II competes not only with other assisted living providers but also with a number of healthcare service providers from home healthcare companies, retirement communities and facilities, and, to a lesser extent, convalescent center and nursing homes. Many of these competitors are national and regional companies with greater financial resources than those of ARVP II. However, management believes that most of the competitive pressure will come from local and regional long-term care providers within same geographical area as its prospective residents who tend to move to facilities near their home. GOVERNMENT REGULATION Assisted living facilities are subject to certain state regulations and licensing requirements. In order to qualify as a state licensed facility, assisted living facilities must comply with regulations which address, among other things, building codes and other ordinances, including fire safety codes, staffing requirements, required services and care standards and resident characteristics. The state of California requires an inspection at least once per year and as 5 6 often as necessary to ensure that the health, safety and personal rights of the residents are protected. Currently, all ten facilities are licensed and in substantial compliance with state regulations. No significant changes in the state regulations are expected in the near future that would materially impact the business. EMPLOYEES Personnel at each of the Registrant's ten facilities are employees of ARVAL. As of December 31, 1996, approximately 350 people were employed at the ten facilities. While none of ARVAL's employees are currently unionized, any unionization of workers in the assisted living industry or at the Registrant's facilities could increase labor costs. No assurances can be given that the facilities labor costs will not increase, or if they do increase, that they can be matched by corresponding increases in rental or management revenue. In addition, a shortage of qualified personnel may require ARVAL to enhance its wage and benefits package in order to compete with other providers of assisted living and senior housing to attract and retain qualified individuals. ITEM 2. PROPERTIES The following table sets forth, as of December 31, 1996, the location, the date on which operations commenced, number of units, number of beds, and the Company's interest in the property.
ARVPII OPERATIONS FACILITY LOCATION COMMENCED UNITS BEDS INTEREST Retirement Inn of Burlingame Burlingame, CA 1989 68 90 Leased Retirement Inn of Campbell Campbell, CA 1989 72 90 Leased Covina Villa Covina, CA 1988 64 90 Fee-Owned subject to ground lease Retirement Inn of Daly City Daly City, CA 1989 95 120 Fee-Owned Retirement Inn of Fremont Fremont, CA 1989 70 99 Leased Retirement Inn of Fullerton Fullerton, CA 1989 68 99 Fee-Owned Montego Heights Lodge Walnut Creek, CA 1989 171 200 Fee-Owned Retirement Inn of Sunnyvale Sunnyvale, CA 1989 124 160 Leased Valley View Lodge of Rossmoor Walnut Creek, CA 1989 125 153 Fee-Owned Inn at Willow Glen San Jose, CA 1989 84 120 Leased
6 7 OPERATIONAL HISTORY The following tables summarize the average occupancy rates and average monthly rental rates per occupied unit at each of the ten facilities over the past five years.
OCCUPANCY FACILITY 1996 1995 1994 1993 1992 -------- ---- ---- ---- ---- ---- Retirement Inn of Burlingame 96% 98% 91% 91% 90% Retirement Inn of Campbell 100% 97% 94% 95% 83% Covina Villa 95% 83% 71% 86% 90% Retirement Inn of Daly City 92% 92% 87% 77% 76% Retirement Inn of Fremont 84% 92% 91% 80% 80% Retirement Inn of Fullerton 90% 95% 90% 91% 86% Montego Heights Lodge 90% 90% 84% 86% 85% Retirement Inn of Sunnyvale 93% 93% 96% 93% 89% Valley View Lodge of Rossmoor 95% 97% 97% 95% 94% Inn at Willow Glen 96% 98% 97% 94% 97%
7 8
AVERAGE MONTHLY RENTAL RATE FACILITY 1996 1995 1994 1993 1992 -------- ---- ---- ---- ---- ---- Retirement Inn of Burlingame $1,539 $1,477 $1,451 $1,428 $1,430 Retirement Inn of Campbell $1,434 $1,338 $1,331 $1,329 $1,302 Covina Villa $1,335 $1,306 $1,258 $1,288 $1,279 Retirement Inn of Daly City $1,208 $1,172 $1,187 $1,156 $1,102 Retirement Inn of Fremont $1,370 $1,357 $1,312 $1,261 $1,203 Retirement Inn of Fullerton $1,366 $1,326 $1,275 $1,274 $1,266 Montego Heights Lodge $1,461 $1,428 $1,417 $1,382 $1,355 Retirement Inn of Sunnyvale $1,445 $1,369 $1,354 $1,312 $1,277 Valley View Lodge of Rossmoor $1,763 $1,714 $1,687 $1,646 $1,588 Inn at Willow Glen $1,445 $1,395 $1,353 $1,284 $1,239
ITEM 3. LEGAL PROCEEDINGS On September 27, 1996, the Partnership filed actions seeking declaratory judgements 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 facilities could increase significantly, which will reduce distributions to Unitholders in the future. These rent increases would be retroactive to the commencement of the lease renewal periods. 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 facilities. It is not known whether the landlords of those facilities will dispute the amount of rent due during the renewal periods which began January 1997 for Fremont and beginning August 1997 for Burlingame. If so, the Partnership may be required to file litigation to determine the rights under those leases as 8 9 well. As of March 25, 1997, no threat of litigation has been made by the landlords of the Retirement Inn of Fremont or the Retirement Inn at Burlingame. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to Unitholders during the fiscal year. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Registrant's securities. The Registrant repurchased and retired 5 Partnership Units in June 1990. As noted in Item 1, ARVAL, the Managing General Partner of ARVP II, tendered for the limited partnership units in ARVP II in May 1996 and July 1996. Following the close of the second tender offer in August 1996, ARVAL owned 17,776 limited partnership units or approximately 50.8% of all outstanding units. As of December 31, 1996, there were approximately 1,828 Unitholders of record owning 35,019.88 Units. For the years ended December 31, 1996, 1995 and 1994, the Registrant made limited partner distributions of $60.77 per Unit, $64.28 per Unit and $55.45 per Unit, respectively. The return of capital to the Unitholders for the years ended December 31, 1996, 1995 and 1994 was $16.22, $39.57 and $55.45, respectively. There were distributions of earnings for the years ending December 31, 1996, 1995 and 1994 of $44.55, $24.71 and $-0-, respectively. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for each of the Registrant's last five fiscal years. Certain of this financial data has been derived from the Registrant's audited financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" at Item 7. This table is not covered by the Independent Auditors' Report.
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands except unit data) Revenue $17,834 $16,982 $16,003 $15,085 $14,106 Net Income (Loss) 1,576 873 (107) (672) (773) Net Income (Loss) (per weighted average Limited partner Units outstanding) 44.55 24.71 (3.04) (19.00) (21.87) Total Assets 20,801 21,524 22,765 24,628 26,957 Partners' Capital 12,245 12,819 13,765 15,832 18,184 Notes Payable 6,562 7,212 7,189 7,306 7,417 Distributions of Earnings $ 44.55 $ 24.71 -0- -0- -0- Distributions Return of Capital 16.22 39.57 $ 55.45 $ 47.53 $ 55.43 Total Distributions (per weighted average Limited Partner units outstanding) 60.77 64.28 55.45 47.53 55.43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY. On a long-term basis, the Registrant's liquidity is sustained primarily from cash flow provided by operating activities. During 1996, net cash provided by operating activities was approximately $3.3 million compared to $3.0 million and $2.6 million for 1995 and 1994, respectively. 10 11 As of December 31, 1996, the Partnership's note payable with a principal balance of approximately $323,000 secured by a first deed of trust encumbering the Retirement Inn of Fullerton had matured. The maturity date of the loan was initially extended to March 10, 1997. Subsequently, the maturity date of the loan was again extended to May 10, 1997. It is the Managing General Partner's intention to seek a longer term extension of the maturity date of this loan or find suitable replacement financing. In addition to the Partnership's maturing debts, the Managing General Partner has commenced a refurbishment program in order to repair and maintain the physical plant of the Partnership's facilities. Given the age of the facilities (ages range from 11 to 23 years with an average age of 19.5 years), the Managing General Partner has determined the necessity of certain repairs and improvements currently budgeted to cost $1.4 million. Approximately $207,000 of these repairs will be reimbursed to the Partnership from replacement reserves which the Partnership has established with the lender on Valley View Lodge, and Montego Heights Lodge. The remaining $1.2 million will be funded from cash flow of the Partnership. As a result of the planned repairs, and due to the uncertainty of a future extension of the maturity date or refinancing of the Partnership's maturing debt, the Managing General Partner believes that distributions of cash flow from operations will either be reduced or eliminated to the Partners over the near term. To the extent an extension of the maturity date is obtained, or the loan is refinanced, the General Partners expect that the cash to be generated from operations of the Partnership's properties will be adequate to pay operating expenses, make necessary capital improvements and make required principal reductions of loans. During 1996, the Registrant used net cash in investing activities of approximately $748,000 compared to $891,000 and $389,000 for 1995 and 1994, respectively. The primary investing activities consist of the purchase of carpeting, heating/air conditioning and elevator repairs. These three items represent approximately $265,000 of the cash used in investing activities in 1996. During 1996, the Registrant used net cash in financing activities of approximately $2.6 million compared to $2.2 million and $1.9 million for 1995 and 1994, respectively. The increase in cash used in financing activities is the result of principal reductions of debt made by the Partnership. The General Partners 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 revenues or income from the operations or sale of properties. The General Partners believe that if the inflation rate increases they will be able to pass the subsequent increases in operating expenses onto the residents at the properties by way of higher rental and assisted living rates. The Registrant has long term debt of approximately $6.6 million, as of December 31, 1996 of which $323,000 is due on March 10, 1997 (which amount was subsequently extended to May 10, 1997). CAPITAL RESOURCES. Registrant contemplates spending approximately $1.4 million for capital expenditures during 1997 for physical improvements at its ten facilities. The Registrant expects that the funds for these improvements should be available from operations or Registrant's replacement reserves. 11 12 Other than as disclosed above, there are no known material trends, favorable or unfavorable, in the Registrant's capital resources, and there is no expected change in the mix of such resources. RESULTS OF OPERATIONS. Revenue for the years ended December 31, 1996, 1995 and 1994, includes rental income and assisted living revenue from ten facilities, interest earned on cash balances and other revenue. In 1996 and 1995 the Registrant's rental revenue increased over prior years due to higher aggregate occupancy levels and rental rates and increased utilization of assisted living services. Total revenue for the year ended December 31, 1996, were $17.8 million compared to $17.0 million and $16.0 million for the years ended December 31, 1995 and December 31, 1994, respectively. The largest component of revenue, rent, increased by approximately 2% from 1995 to 1996 and by approximately 5% from 1994 to 1995. During 1996, the increase in rent was primarily due to an increase in rental rates offset by a slight decline in occupancy. During 1995, the increase was due to an increase of 4% in occupancy and an increase in rental rates of 3% from 1994 to 1995. Revenue from assisted living increased by 24% from 1995 to 1996 and 17% from 1994 to 1995. The increase in assisted living was due to aggressive marketing of the assisted living services and the resulting increase in the number of residents using the program. Interest and other revenue increased by 12% from 1995 to 1996 after having decreased by 11% from 1994 to 1995. Interest income results from interest earned on cash deposits. Other revenue generally includes processing fees and beauty shop revenue. Sources of revenue for the years ended December 31, 1996, 1995 and 1994 are summarized as follows:
1996 1995 1994 --------- --------- --------- (In thousands) Rent $ 15,108 $ 14,769 $ 14,056 Assisted Living 2,509 2,019 1,729 Interest 15 20 15 Other 202 174 203 --------- --------- --------- Total Revenue $ 17,834 $ 16,982 $ 16,003 ========= ========= =========
Total costs and expenses for the years ended 1996, 1995 and 1994 were $16.3 million, $16.1 million and $16.1 million respectively. The largest component of expenses, rental property operations, consists primarily of property management costs, payroll related expenses, utilities, food expenses, maintenance and supplies. Rental property operations expense varied by less than 1% for each of the three years ended December 31, 1996, 1995 and 1994. 12 13 Assisted living expenses consist primarily of the related payroll expense. Assisted living expenses increased by 15% from 1995 to 1996 following a 15% increase from 1994 to 1995. Assisted living expenses increased as a result of the increase in the related staff providing assisted living services. The staff size was increased due to the increase in the number of residents using the assisted living services. This increase corresponds with the increase in assisted living revenue. General and administrative expenses are comprised of, but not limited to, costs for accounting, partnership administration, bad debt, data processing, investor relations, insurance and professional services. General and administrative expense increased to $1.3 million in 1996 from $800,000 in 1995. The primary reason for this increase was a one time charge of $389,000 for costs related to preparing to solicit the consent of the Partnership's unitholders with respect to an anticipated sale of the Partnership's four fee properties to a health care real estate investment trust. A preliminary consent solicitation statement had been filed with the Securities and Exchange Commission (the "SEC"). The normal course of review of the consent solicitation by the SEC was not completed before the time in which the solicitation statement was required to be updated with audited year-end financial statements for the partnership. While the year-end financial statements were being prepared and audited, the Managing General Partner requested the appraisal firm which had previously prepared appraisals of the four fee properties to update those appraisals. Upon receiving and reviewing the updated appraisals, which indicated an increase in market value for each of the fee properties, the Managing General partner contacted the potential buyer of the properties to determine if it was willing to increase its purchase price accordingly. As the purchase price was not increased, the Partnership's General Partners decided not to proceed with the consent solicitation of the Partners for the sale of the fee properties. Although the sale of the fee properties did not occur, the Managing General Partner provided those Unitholders seeking liquidity an opportunity to sell their interests in the Partnership at an amount which reflected the values contained in the updated appraisals when it made an offer to purchase limited partnership units. General and administrative expenses increased to $800,000 for the year ended December 31, 1995 from $696,000 for the year ended December 31, 1994. This increase was primarily due to an increase in Partnership administration fees paid as a result of higher net operating income generated by the facilities. Depreciation and amortization expense for the year ended December 31, 1996 decreased to $1.7 million from $2.1 million for the year ended December 31, 1995. There are three primary reasons for this decrease. The first is the full amortization of assets associated with the expiration of the initial lease term of two of the facility operating leases. The second is the managing General Partner's intention to extend the operating leases for the Partnership's other two leased facilities thus increasing the lives of the associated leasehold improvements. The third is the result of the Managing General Partner's change in asset lives following capital improvements to these facilities and evaluation of the physical plant. The change had the effect of reducing depreciation expense and increasing net income by approximately $51,000 ($1.44 per limited partner unit). Depreciation and amortization expense decreased to $2.1 million for the year ended December 31, 1995 from $2.4 million for the year ended December 31, 1994. The decrease was a result of a portion of the Partnership's property having become fully depreciated during 1994. 13 14 Property taxes decreased by 5% from 1995 to 1996 and increased 12% from 1994 to 1995. Interest expense decreased by approximately 4% from 1995 to 1996 and decreased 2% from 1994 to 1995. Interest expense is lower due to a decrease in the principal balance outstanding on the line of credit. 14 15 Selected costs and expenses for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- (In thousands) Rental Property Operations 10,051 $9,994 $10,001 Assisted Living 989 859 748 General and Administrative 1,271 800 696 Depreciation and Amortization 1,678 2,077 2,360 Property Taxes 465 488 434 Interest 550 572 583
FUTURE CASH DISTRIBUTIONS. The General Partners believe that the Registrant's ability to make cash distributions to limited partners depends on factors such as: (i) The Registrant's ability to rent the available units and maintain high occupancies. (ii) The Registrant's ability to control both operating and administrative expenses. (iii) The Registrant's ability to maintain adequate working capital. (iv) The absence of any losses from uninsured property damage (e.g., earthquakes) or future litigation. (v) The Registrant's ability to generate proceeds from the sales of its properties. (vi) The Registrant's ability to renew existing leases under favorable terms. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included in Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-K" below and incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT INDIVIDUAL GENERAL PARTNERS OF THE REGISTRANT GARY L. DAVIDSON. Mr. Davidson, age 62, an attorney, received his Bachelor's Degree in 1958 and his Juris Doctor Degree in 1961 from the University of California at Los Angeles. Mr. Davidson has practiced law in Orange County since 1962. During his professional career, he has been active in numerous business and professional sports ventures. In 1979, with Mr. Booty and others, he founded the predecessor to ARVAL. Mr. Davidson serves as a Director and Chairman of the Board of ARVAL. JOHN A. BOOTY. Mr. Booty, age 58, is a graduate of the University of California at Berkeley, from which he also holds a Master's Degree in Business Administration. Mr. Booty was with Ford Motor Company Aeronutronics, Development Research Associates and Booz Allen and Hamilton, of which Mr. Booty was a Vice President. In 1979, with Mr. Davidson and others, he founded California Retirement Villas Corporation which merged into ARVAL. In 1996, Mr. Booty retired as President of ARVAL. Mr. Booty continues to serve as a Director of ARVAL. DAVID P. COLLINS. Mr. Collins, age 59, received his Bachelor's Degree from St. Anselm College, Manchester, New Hampshire in 1960. His first association with ARVAL occurred in 1982. Mr. Collins is a registered principal with the National Association of Securities Dealers, Inc., and from its formation in December 1985, has been President of ARV Capital Corporation. Mr. Collins is a member and former Chairman of the Board of the Orange County Chapter of the International Association for Financial Planners. For many years, Mr. Collins was active in the field of international finance, mostly in the Middle East, and in 1971, was a founder of the World Trade Center Association of Orange County. Mr. Collins is a Director and Senior Executive Vice President of ARVAL. JOHN S. JASON, 61, graduated from the University of Indiana with a degree in Business Administration. He was associated with KPMG Peat Marwick LLP for 6 years. In 1979, with Messrs. Booty, Davidson and Rota, he founded the predecessor to ARVAL. In February 1993, Mr. Jason retired from active service with ARVAL and retired from his positions as a Director and as Executive Vice President of ARVAL. Mr. Jason is currently retired and not gainfully employed. TONY ROTA, 68, is a licensed real estate broker, and has been active in real estate investments since 1958. In 1979, with Messrs. Booty, Davidson and Jason, he founded the predecessor to ARVAL. In November 1992, Mr. Rota retired from active service with ARVAL and retired from his positions as a Director and as Vice President of ARVAL. Mr. Rota is currently retired and not gainfully employed. 16 17 EXECUTIVE OFFICERS OF ARV ASSISTED LIVING, INC. ("ARVAL") For a description of Messieurs. Davidson, Booty and Collins, please see above. GRAHAM P. ESPLEY-JONES. Mr. Espley-Jones, age 37, graduated from Pepperdine University with an MBA and from San Diego State University with a degree in Business Administration. Mr. Espley-Jones is a Registered Representative and Financial Principal with the National Association of Securities Dealers ("NASD"). From 1985 to 1988 he served as the Controller for the real estate division of First California Savings Bank. Mr. Espley-Jones joined ARVAL in 1988 and serves as Chief Financial Officer and Assistant Secretary. DIRECTORS OF ARVAL For a description of Messieurs. Davidson, Booty and Collins, please see above. R. BRUCE ANDREWS. Mr. Andrews, age 56, has served as President and Chief Executive Officer of Nationwide Health Properties, Inc. (a New York Stock Exchange listed REIT) since September 1989 and a director of that company since October 1989. Mr. Andrews had previously served as a director of American Medical International, Inc., a hospital management company, and served as its Chief Financial Officer from 1970 to 1985 and its Chief Operating Officer in 1985 and 1986. Mr. Andrews is also a director of Alexander Haagen Properties, Inc.. MAURICE J. DEWALD. Mr. DeWald, age 57, is Chairman and Chief Executive Officer of Verity Financial Group based in Irvine, California. Mr. DeWald founded Verity Financial in 1992 to develop and implement investment opportunities in the U.S. and internationally. Previously, Mr. DeWald had a 30 year career at KPMG Peat Marwick, where he was a Managing Partner and served on its Board of Directors. Mr. DeWald is currently a director of several other firms, including: Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California, and Monarch Funds. He is also a trustee of St. John's Hospital and Health Care Foundation and Loyola Marymount University, and serves on the advisory Council of the University of Notre Dame School of Business. Mr. DeWald is a Certified Public Accountant. JAMES M. PETERS. Mr. Peters, age 61, is the founder of the J. M. Peters Company (an American Stock Exchange listed company), a California-based home building firm operating in 14 western states. Mr. Peters served as President and Chief Executive Officer of the J. M. Peters Company from its inception in 1975 until his retirement in 1992. During his career, Mr. Peters has been responsible for building and marketing more than 12,000 housing units. Mr. Peters serves as a member of the Board of Trustees of the UCLA Foundation. JOHN J. RYDZEWSKI. Mr. Rydzewski, age 43, is an investment banker specializing in health care finance. He has been a member of the firm Benedetto, Gartland & Greene, Inc. since 1993. Mr. Rydzewski served as Executive Vice President and Chief Financial Officer in 1992 for Four Winds, Inc., a provider of behavioral health care services. He also served as a Vice President in the health care finance group of Kidder, Peabody & Co. Incorporated from 1986 to 1992. He has served as a director of United Medical Corporation, a diversified health services provider, and Maxim Healthcare Corporation, a behavioral health services provider. Mr. Rydzewski 17 18 received a Master of Business Administration and a Bachelor of Science Degree from the Wharton School of the University of Pennsylvania and is a Certified Public Accountant. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation earned by the General Partners. Property Management Fees (ARV Assisted Living, Inc.) A property management fee of 5% of gross revenue is paid for managerial services including general supervision, hiring of onsite management personnel employed by the Registrant, renting of units, installation and provision of food service, maintenance, and other operations. At December 31, 1996, 1995 and 1994, the property management fee amounted to $892,000, $849,000 and $800,000, respectively. Partnership Management Fees (ARV Assisted Living, Inc.) A fixed partnership management fee of 10% of cash flow before distributions is paid for implementing the Partnership business plan, supervising and managing the Registrant's affairs including general administration and coordination of legal, audit, tax, and insurance matters. At December 31, 1996, 1995 and 1994, the partnership management fee amounted to $399,000, $330,000 and $252,000, respectively. Sale of Partnership Projects (General Partners) The Limited Partnership Agreement permits payment in the form of real estate commissions to the General Partners or its Affiliates. Any such compensation shall not exceed 3% of the gross sales price or 50% of the standard real estate brokerage commission, whichever is less. For the year ended December 31, 1996, 1995 and 1994 no real estate commissions were received. Subordinated Incentive Compensation (ARVAssisted Living, Inc.) ARVAL is entitled to receive 15% of Proceeds of Sale or Refinancing subordinated to a return of Initial Capital Contributions plus an 8%-10% (depending on the timing of the limited partners' investment) per annum cumulative, but not compounded, return thereon from all sources. For the years ended December 31, 1996, 1995 and 1994, no incentive compensation was earned. 18 19 Partnership Interest (General Partners) 1% of all items of capital, profit or loss, and liquidating Distributions, subject to a capital account adjustment is paid to the General Partners. Reimbursed Expenses (General Partners) All Partnership expenses are billed directly to and paid by the Registrant. The General Partners may be reimbursed for the actual cost of goods and materials obtained from unaffiliated entities and used for or by the Registrant. The Managing Partner is reimbursed for administrative services necessary to the prudent operation of Registrant, provided that such reimbursement is at the lower of its actual cost or the amount which the Registrant would be required to pay to independent parties for comparable administrative services in the same geographic location. Total reimbursements to ARVAL amounted to $6.0 million, $5.6 million and $5.6 million, at December 31, 1996, 1995 and 1994, respectively. SEE FOOTNOTE 3 OF NOTES TO FINANCIAL STATEMENTS (TRANSACTIONS WITH AFFILIATES). 19 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Name and Address Amount and Nature of Title of Class of Beneficial Owner Beneficial Ownership Percent of Class -------------- ------------------- -------------------- ---------------- Limited Partnership Units ARV Assisted Living, Inc. 17,822.31 units 50.8% 245 Fischer Ave., D-1 Direct ownership Costa Mesa, CA 92626
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than the compensation earned by the General Partners, as set out under ITEM 11 above, no General Partner or Affiliate receives any direct or indirect compensation from the Registrant. For example, the Managing Partner receives a management fee of 5% of Gross Revenues. Because these fees are payable without regard to whether particular facilities are generating Cash Flow or otherwise benefiting the Registrant, a conflict of interest could arise in that it might be to the advantage of the General Partners that a facility be retained or re-financed rather than sold. On the other hand, an Affiliate of the General Partners may earn a real estate commission on sale of a property, creating incentive to sell what might be a profitable property. The General Partners have authority to invest the Registrant's funds in properties or entities in which they, or any Affiliate have an interest, provided the Registrant acquires a controlling interest. In any such investment, duplicate property management or other fees will not be permitted. The General Partners or Affiliates may, however, purchase property in their own names and temporarily hold title to facilitate acquisition for the Registrant, provided that such property is purchased by the Registrant at cost (including acquisition, closing and carrying costs). The General Partners will not commingle Registrant's funds with those of any other person or entity. Conflicts of interest will exist to the extent that facilities owned or operated compete, or are in a position to compete for residents, general managers or key employees with assisted living facilities owned or operated by the General Partners and Affiliates in the same geographic area. The General Partners will seek to reduce any such conflicts by offering such persons their choice of residence or employment on comparable terms in any facility. The personnel working at each facility are employed by the Registrant's managing partner ARVAL. ARVAL pays payroll and retirement benefit expenses on the Registrant's behalf and is subsequently reimbursed by the Registrant. The retirement benefit expense consists of contributions made to an employee stock ownership plan ("ESOP"). Effective April 1, 1991, ARVAL approved an ESOP to enable all eligible employees of ARVAL and its affiliates to own common stock in ARVAL. The General Partners are currently considering whether or not to continue making contributions to the ESOP. Further conflicts may exist if and to the extent that other affiliated owners of assisted living facilities seek to refinance or sell at the same time as the Registrant. The General Partners will seek to reduce any such conflicts by making prospective purchasers aware of all facilities available for sale. 20 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (i) Independent Auditors' Report. (ii) Balance Sheets - December 31, 1996 and 1995. (iii) Statements of Operations - Years Ended December 31, 1996, 1995 and 1994. (iv) Statements of Partners' Capital - Years Ended December 31, 1996, 1995 and 1994. (v) Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994. (vi) Notes to Financial Statements. (viii) Financial Statement Schedule - Schedule III - Real Estate and Related Accumulated Depreciation and Amortization - December 31, 1996. (b) The Registrant's current report on Form 8-K filed with the Securities and Exchange Commission on September 16, 1996 reported under Item 1, concerning the tender offer by ARVAL is incorporated herein by reference. (c) Exhibit 27 - Financial Data Schedule. 21 22 SIGNATURES 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. AMERICAN RETIREMENT VILLAS PROPERTIES II, A CALIFORNIA LIMITED PARTNERSHIP, BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT. /s/ GARY L. DAVIDSON By: Gary L. Davidson, Chairman of the Board and Director of ARVAL, Managing General Partner /s/ GRAHAM P. ESPLEY-JONES By: Graham P. Espley-Jones, Chief Financial Officer and Assistant Secretary of ARVAL, Managing General Partner /s/ JOHN A. BOOTY By: John A. Booty, Director of ARVAL, Managing General Partner Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GARY L. DAVIDSON Chairman of the Board March 31, 1997 Gary L. Davidson and Director of ARVAL, Managing General Partner /s/ GRAHAM P. ESPLEY-JONES Chief Financial Officer March 31, 1997 Graham P. Espley-Jones and Assistant Secretary of ARVAL, Managing General Partner /s/ JOHN A. BOOTY Director of ARVAL, March 31, 1997 John A. Booty Managing General Partner
22 23 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Annual Report - Form 10-K Financial Statements and Schedule Items 8 and 14(a) December 31, 1996, 1995 and 1994 (With Independent Auditors' Report Thereon) 24 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Annual Report - Form 10-K Items 8 and 14(a) Index to Financial Statements and Schedule
Page ---- Independent Auditors' Report F-2 Balance Sheets - December 31, 1996 and 1995 F-3 Statements of Operations - Years ended December 31, 1996, 1995 and 1994 F-4 Statements of Partners' Capital - Years ended December 31, 1996, 1995 and 1994 F-5 Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 F-6 Notes to Financial Statements F-7 Schedule - -------- Real Estate and Related Accumulated Depreciation and Amortization - December 31, 1996 Schedule III
All other schedules are omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes. F-1 25 INDEPENDENT AUDITORS' REPORT ARV Assisted Living, Inc. as the Managing General Partner of American Retirement Villas Properties II: We have audited the financial statements of American Retirement Villas Properties II, a California limited partnership, as listed in the accompanying index. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Retirement Villas Properties II as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK LLP ------------------------- Orange County, California March 21, 1997 F-2 26 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Balance Sheets December 31, 1996 and 1995 (In thousands)
ASSETS 1996 1995 ------ ------- Properties, at cost (notes 4 and 5): Land $ 2,903 2,903 Buildings and improvements, less accumulated depreciation of $5,250 in 1996 and $4,579 in 1995 14,723 15,179 Leasehold property and improvements, less accumulated depreciation of $5,545 in 1996 and $6,591 in 1995 349 825 Furniture, fixtures and equipment, less accumulated depreciation of $888 in 1996 and $864 in 1995 940 938 ------- ------- Net properties 18,915 19,845 Cash 370 489 Other assets, including impound accounts of $672 in 1996 and $626 in 1995 1,516 1,190 ------- ------- $20,801 21,524 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Notes payable (note 5) $ 6,562 7,212 Accounts payable and accrued expenses 1,063 758 Amounts payable to affiliate (note 3) 189 155 Distributions payable to Partners 742 580 ------- ------- Total liabilities 8,556 8,705 ------- ------- Partners' capital (note 2): General partners' capital 270 276 Limited partners' capital, 35,020 limited partnership units authorized, issued and outstanding 11,975 12,543 ------- ------- Total partners' capital 12,245 12,819 ------- ------- Commitments and contingencies (note 4) $20,801 21,524 ======= =======
See accompanying notes to financial statements. F-3 27 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Statements of Operations Years ended December 31, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 -------- ------- ------- Revenues: Rent $15,108 14,769 14,056 Assisted living 2,509 2,019 1,729 Interest 15 20 15 Other 202 174 203 -------- ------- ------- Total revenues 17,834 16,982 16,003 -------- ------- ------- Costs and expenses: Rental property operations (including $5,820, $5,514 and $5,277 related to affiliates in 1996, 1995 and 1994, respectively) (note 3) 10,051 9,994 10,001 Assisted living (all related to affiliates) (note 3) 989 859 748 General and administrative (including $522, $453 and $638 related to affiliates in 1996, 1995 and 1994, respectively) (note 3) 1,271 800 696 Facilities rent (note 4) 1,172 1,178 1,176 Depreciation and amortization 1,678 2,077 2,360 Property taxes 465 488 434 Advertising 82 141 112 Interest (note 5) 550 572 583 ------- ------- ------- Total costs and expenses 16,258 16,109 16,110 ------- ------- ------- Net income (loss) $ 1,576 873 (107) ======= ======= ======= Net income (loss) per limited partner unit $ 44.55 24.71 (3.04) ======= ======= =======
See accompanying notes to financial statements. F-4 28 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Statements of Partners' Capital Years ended December 31, 1996, 1995 and 1994 (In thousands)
TOTAL GENERAL LIMITED PARTNERS' PARTNERS PARTNERS CAPITAL -------- -------- -------- Balance (deficit) at December 31, 1993 $(142) 15,974 15,832 Distribution to partners ($55.45 per limited partner unit) (20) (1,940) (1,960) Net loss (1) (106) (107) ----- ------- ------- Balance (deficit) at December 31, 1994 (163) 13,928 13,765 Distribution to partners ($64.28 per limited partner unit) (23) (2,249) (2,272) Capital contribution - cancelation of indebtedness (note 7) 453 -- 453 Net income 9 864 873 ----- ------- ------- Balance at December 31, 1995 276 12,543 12,819 Distribution to partners ($60.77 per limited partner unit) (22) (2,128) (2,150) Net income 16 1,560 1,576 ----- ------- ------- Balance at December 31, 1996 $ 270 11,975 12,245 ===== ======= =======
See accompanying notes to financial statements. F-5 29 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 ------- ------- ------- Cash flows from operating activities: Net income (loss) $ 1,576 873 (107) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,678 2,077 2,360 Change in assets and liabilities: (Increase) decrease in other assets (326) (61) 107 Increase (decrease) in accounts payable and accrued expenses 305 (14) 127 Increase in amounts payable to affiliate 34 114 63 ------- ------- ------- Net cash provided by operating activities 3,267 2,989 2,550 ------- ------- ------- Cash flows used in investing activities - capital expenditures (748) (891) (389) ------- ------- ------- Cash flows from financing activities: Principal repayments on notes payable (150) (132) (117) Increase in long-term debt -- 154 -- Borrowings on line of credit -- 1,225 1,735 Repayments on line of credit (500) (1,225) (1,735) Distributions paid (1,988) (2,236) (1,829) ------- ------- ------- Net cash used in financing activities (2,638) (2,214) (1,946) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (119) (116) 215 Cash at beginning of year 489 605 390 ------- ------- ------- Cash at end of year $ 370 489 605 ======= ======= ======= Supplemental disclosure of cash flow information - cash paid during the year for interest $ 550 572 583 ======= ======= ======= Supplemental disclosure of noncash financing activities: Distributions accrued to partners $ 162 36 544 Cancelation of indebtedness -- 453 -- ======= ======= =======
See accompanying notes to financial statements. F-6 30 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING American Retirement Villas Properties II (the Partnership) maintains its records on the accrual method of accounting for financial reporting and Federal and state tax purposes. CARRYING VALUE OF REAL ESTATE Properties are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of buildings and improvements, furniture, fixtures and equipment, ranging from 3 to 35 years. In 1996, the Partnership extended the estimated useful lives of buildings and improvements to better reflect the estimated periods during which such assets will remain in service. The change had the effect of reducing depreciation expense and increasing net income by approximately $51,000 ($1.44 per limited partner unit). Leasehold property and improvements are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the assets. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires the Partnership to adopt the provisions of the new statement no later than fiscal 1996. SFAS 121 requires an impairment loss to be recorded as a reduction to operating income if the sum of the expected undiscounted cash flows derived from an asset is less than the asset's carrying value. The Partnership adopted SFAS 121 in fiscal year 1994 without an impact to the financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IMPOUND ACCOUNTS Other assets includes funds held in impound accounts with the U.S. Department of Housing and Urban Development (HUD) for payment of property taxes, insurance and future property improvements (replacement reserves) on certain properties with HUD financing. LOAN FEES Loan fees are amortized using the interest method over the term of the notes payable and are included in other assets. RENTAL INCOME Rent agreements with tenants are on a month-to-month basis. Advance deposits are applied to the first month's rent. F-7 31 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued INCOME TAXES Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership. The Partnership has not requested a ruling from the Internal Revenue Service to the effect that it will be treated as a partnership and not an association taxable as a corporation for Federal income tax purposes. The Partnership has received an opinion of counsel as to its tax status prior to its effectiveness for the offering of limited partnership units, but such opinion is not binding upon the Internal Revenue Service. Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles (GAAP) and for Federal income tax reporting purposes at December 31:
1996 1995 ---------------------------------- -------------------------------- GAAP BASIS TAX BASIS (1) GAAP BASIS TAX BASIS (1) ---------- --------------- ------------ ------------- (in thousands) Total assets $20,801 26,419 21,524 26,666 ======= ====== ====== ====== Total liabilities $ 8,556 8,705 8,705 8,667 ======= ====== ====== ======
Following are the differences between the financial statement and tax return income (loss):
1996 1995 1994 -------- ---- ---- (in thousands) Net income (loss) per financial statements $1,576 873 (107) Cancelation of indebtedness income (note 8) -- 453 -- Depreciation differences on property (1) (47) (637) (324) Amortization differences on intangible assets (1) 363 885 753 Other (1) 42 (15) 12 ------ ----- ---- Taxable income per Federal tax return (1) $1,934 1,559 334 ====== ===== ====
(1) Unaudited 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 in 1996, 1995 and 1994. F-8 32 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. (2) ORGANIZATION AND PARTNERSHIP AGREEMENT The Partnership was formed on February 9, 1988 for the purpose of acquiring, developing and operating residential retirement facilities. The term of the Partnership is 59 years and may be dissolved earlier under certain circumstances. Limited Partner units (minimum of 2 units per investor for Individual Retirement Accounts, KEOGHs and pension plans and 5 units for all other investors) were offered for sale to the general public. A maximum number of 35,000 units were offered at $1,000 per unit and an additional 25 units were issued in lieu of commissions. The Partnership was initially capitalized by a $1,000 contribution from a Limited Partner and a $500 contribution from the General Partners. The Partnership reached its maximum capitalization in October 1989, representing a total capital investment of $35,000,000. In June 1990, the Partnership repurchased and effectively retired 5 units for $4,600 (the balance of unreturned initial contributions) from a Limited Partner. No additional capital contributions will be required from any Limited Partner. Under the Partnership Agreement, the maximum liability of the Limited Partners is the amount of their capital contributions. The Managing General Partner is ARV Assisted Living, Inc. (ARVAL), a California corporation, and the individual General Partners are John A. Booty, John S. Jason, Gary L. Davidson and Tony Rota. The individual General Partners are shareholders of the Managing General Partner. The General Partners are not required to make capital contributions to the Partnership. Profits and losses for financial and income tax reporting purposes shall generally be allocated, other than cost recovery deductions (as defined in the Partnership Agreement), 1% to the General Partners and 99% to the Limited Partners. Cost recovery deductions for each year are allocated 1% to the General Partners and 99% to the Limited Partners who are taxable investors. Cash available for distribution from operations is to be distributed 1% to the General Partners and 99% to the Limited Partners. Upon any sale, refinancing or other disposition of the Partnership's real properties, distributions will be made 1% to the General Partners and 99% to the Limited Partners until the Limited Partners have received an amount equal to 100% of their capital contributions plus an amount ranging from 8% to 10% (depending upon the timing of the Limited Partner's investment) of their capital contributions per annum, cumulative but not compounded, from the date of each Partner's investment. The cumulative return will be reduced, but not below zero, by the aggregate amount of prior distributions from all sources. Thereafter, distributions are to be 15% to the General Partners and 85% to the Limited Partners, except that after the sale of the properties, the proceeds of sale of any last remaining assets owned by the Partnership shall be distributed in accordance with positive capital account balances. F-9 33 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued (3) TRANSACTIONS WITH AFFILIATES The Partnership has an agreement with ARVAL providing for a property management fee of 5% of gross revenues and a Partnership management fee of 10% of cash flow before distribution, as defined in the Partnership Agreement, amounting to $892,000 $849,000, $800,000 and $399,000, $330,000, $252,000, respectively, at December 31, 1996, 1995 and 1994, respectively. Payment of the Partnership management fee out of cash flow is subordinated to a quarterly noncumulating distribution from each property to the Limited Partners of an amount equal to an annualized return, per quarter, of 7.5% of Capital Contributions allocated to each property. ARVAL pays certain expenses such as repairs and maintenance, supplies, payroll and retirement benefit expenses on behalf of the Partnership and is subsequently reimbursed by the Partnership. The retirement benefit expense of $0, $28,000 and $134,000 for the years ended December 31, 1996, 1995 and 1994, respectively, consists of contributions made to an employee stock ownership plan (ESOP). The total reimbursements to ARVAL, including the retirement benefit expense, are included in rental property operations and general and administrative expenses in the accompanying statements of operations and amounted to $6,040,000, $5,648,000 and $5,612,000 for the years ended December 31, 1996, 1995 and 1994, respectively. In consideration for services rendered with respect to property acquisitions, the Managing General Partner was paid an investment advisory fee of a maximum of 2% of the gross offering proceeds. In addition, the Managing General Partner was entitled to a development and processing fee of a maximum of 5.5% of gross offering proceeds allocated to a particular project. Investment advisory and development and processing fees were capitalized to properties to the extent that gross offering proceeds were allocated to the respective properties acquired. Amounts payable to affiliate at December 31, 1996 and 1995 includes expense reimbursements and accrued property management and partnership management fees. (4) COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS COVINA VILLA In October 1988, the Partnership purchased Covina Villa, an existing assisted living facility in Covina, California. In conjunction with the acquisition, the Partnership assumed a ground lease, expiring in 2037, covering the land on which the facility is built. Pledged as collateral for the ground lease is a security interest in the facility property and in all furniture, fixtures and equipment which the Partnership places in the facility. Rent expense under the ground lease for 1996, 1995 and 1994 was $103,000, $103,000 and $115,000, respectively. F-10 34 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued RETIREMENT INNS OF AMERICA In April 1989, the Partnership acquired the operations of eight existing assisted living facilities located throughout California from Retirement Inns of America, Inc. As part of the purchase agreement, the Partnership acquired certain assets and assumed certain liabilities relating to the operations of the facilities. The Partnership purchased three of the facilities and assumed a tenant's position under long-term operating leases for the other five facilities. Rent expense under the operating leases for 1996, 1995 and 1994 was $1,069,000, $1,071,000 and $1,061,000, respectively. The expiration dates for the leases range from August 1995 to November 1997 and have options to extend for two additional ten-year terms. MONTEGO HEIGHTS In November 1989, the Partnership purchased Montego Heights, an existing assisted living facility and related assets in Walnut Creek, California. Future minimum lease payments under all ground and facility leases which are treated as operating leases are as follows:
Year ending December 31: (In thousands) 1997 $ 1,409 1998 1,409 1999 1,409 2000 1,409 2001 1,409 Thereafter 10,074 ------- $17,119 =======
TENDER OFFER FOR LIMITED PARTNERSHIP UNITS Pursuant to the Partnership agreement, the minimum holding period (five to seven years) has expired. The Managing General Partner is beginning to explore potential disposition strategies for the Partnership's assets. In order to provide liquidity and a disposition strategy for certain of the limited partners, the Managing General Partner made a tender offer to purchase limited partnership units at a cash price of $720 per unit. Pursuant to this tender offer, the Managing General Partner acquired 50.8% of the outstanding limited partnership units and has thus attained majority control of the Partnership. LITIGATION On September 27, 1996, the Partnership filed actions seeking declaratory judgements 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 facilities could increase significantly, which will reduce distributions to Unitholders 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 facilities. It is not known whether the landlords of those facilities will dispute the amount of rent due during the renewal periods which began January 1997 for Fremont and beginning August 1997 for Burlingame. If so, the Partnership may be required to file litigation to determine the rights under those leases as well. As of March 25, 1997, no threat of litigation has been made by the landlords of the Retirement Inn of Fremont or the Retirement Inn at Burlingame. F-11 35 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued (5) NOTES PAYABLE At December 31, 1996 and 1995, notes payable included the following:
1996 1995 --------- ----- (in thousands) HUD financed note payable, bearing interest at 7.5%; monthly principal and interest payments of $26,171; due August 1, 2018; secured by deed of trust on the Montego Heights property $ 3,359 3,418 HUD financed note payable, bearing interest at 8.25%; monthly principal and interest payments of $23,468; due November 1, 2016; secured by deed of trust on the Valley View Lodge property 2,750 2,802 Note payable to bank, secured by deed of trust on the Fullerton property, bearing interest at 1% in excess of the bank's prime rate (8.25% at December 31, 1996). The note matured on December 1, 1996. The maturity date has been extended through May 10, 1997 323 337 Revolving line of credit (maximum $500,000), guaranteed by the General Partners, bearing interest at 1.25% in excess of the bank's prime rate (8.25% at December 31, 1996). The revolving line of credit was repaid in January 1996 -- 500 Various notes payable, bearing interest at rates from 8.67% to 10.39%, payable in monthly principal and interest installments and all unpaid principal and interest due on or before November 1, 2000; secured by equipment 130 155 ------- ----- $ 6,562 7,212 ======= =====
F-12 36 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued The annual principal payments of the notes payable are as follows
Year ending December 31: (in thousands) 1997 $ 477 1998 169 1999 184 2000 170 2001 166 Thereafter 5,396 ------ $6,562 ======
(6) ESOP AND 401(K) SAVINGS PLAN Prior to 1996, ARVAL offered an Employee Stock Ownership Plan (ESOP) to all eligible employees which includes the employees of the Partnership. The amount of stock contributed annually to the ESOP is at the discretion of ARVAL. During 1994, ARVAL's Board of Directors declared a contribution that approximated 3% of each employee's payroll expense. During 1995, ARVAL's Board of Directors declared a contribution in only the first quarter of the year and that contribution approximated 3% of each employee's payroll expense. No further contributions have been declared. The Partnership's expense was $0, $28,000 and $134,000 for the ESOP (as a reimbursement to ARVAL) in 1996, 1995 and 1994, respectively. Effective January 1, 1997, ARVAL added a 401(k) savings plan. F-13 37 AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Notes to Financial Statements, Continued (7) FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosure about Fair value of Financial Instruments." The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. Fair value information related to financial instruments is as follows:
DECEMBER 31, 1996 ------------------------------- FINANCIAL INSTRUMENT BOOK VALUE FAIR VALUE -------------------- ----------- ------------ (in thousands) Cash $ 370 370 Notes Payable 6,562 5,941 ====== =====
CASH The carrying amount for cash approximates fair value because these instruments are demand deposits and do not present unanticipated interest rate or credit concerns. NOTES PAYABLE For notes payable with variable interest rates, fair value is the amount reported a payable in the financial statements. For notes payable with fixed rates on interest, fair value is estimated using the rates currently offered for bank borrowings with similar terms. (8) CANCELATION OF INDEBTEDNESS On March 31, 1995, ARVAL, the Managing General Partner of the Partnership, decided to cancel indebtedness owed to it by the Partnership in the amount of $453,000. This indebtedness related to accrued Partnership management fees accumulated in prior years. As discussed at note 3, the Partnership agreement provides that the payment of a Partnership management fee is subordinate to a quarterly noncumulating distribution from each property to the Limited Partners of an amount equal to an annualized return, per quarter, of 7.5% of capital contributions allocated to each property. ARVAL canceled the indebtedness as collection appeared unlikely. Such cancelation of indebtedness was treated as a capital contribution by the Managing General Partner for financial reporting purposes. F-14 38 Schedule III AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership) Real Estate and Related Accumulated Depreciation and Amortization December 31, 1996 (In thousands)
Initial cost Gross amount -------------------------------- Costs ------------------------------------------- Buildings Leasehold capitalized Buildings Leasehold and property and subsequent to and property and Description Encumbrances Land Improvements Improvements acquisition Land Improvements Improvements Total(1) - --------------- ------------ ---- ------------ ------------ ------------- ---- ------------ ------------ -------- Covina Villa $ -- -- 1,850 -- 502 -- 2,352 -- 2,352 Retirement Inns: Burlingame -- -- -- 938 517 -- -- 1,290 1,290 Campbell -- -- -- 814 415 -- -- 258 258 Daly City -- 500 1,178 -- 525 500 1,705 -- 2,205 Fremont -- -- -- 567 407 -- -- 852 852 Fullerton 323 500 982 -- 623 500 1,604 -- 2,104 Willow Glen -- -- -- 1,011 449 -- -- 1,297 1,297 Sunnyvale -- -- -- 1,431 1,024 -- -- 2,197 2,197 Valley View 2,750 1,000 4,018 -- 1,068 1,000 5,086 -- 6,086 Montego Heights 3,359 900 7,800 -- 1,429 903 9,226 -- 10,129 ------ ----- ------ ----- ----- ----- ------ ----- ------ $6,432 2,900 15,828 4,761 6,959 2,903 19,973 5,894 28,770 ====== ===== ====== ===== ===== ===== ====== ===== ======
Depreciable Accumulated Date of lives Description depreciation acquisition (years) - -------------------- ------------ ----------- ----------- Covina Villa 692 10/88 35 Retirement Inns: Burlingame 1,183 4/89 8.5(2) Campbell 243 4/89 6.3(2) Daly City 523 4/89 35 Fremont 840 4/89 7.8(2) Fullerton 436 4/89 35 Willow Glen 1,153 4/89 8.7(2) Sunnyvale 2,127 4/89 7.0(2) Valley View 1,343 4/89 35 Montego Heights 2,255 11/89 35 ------ 10,795 ======
Following is a summary of investment in properties for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 -------- ------ ------ Balance at beginning of year $ 30,077 29,798 29,661 Improvements 371 279 137 Disposals (1,678) -- -- --------- ------ ------ Balance at end of year $ 28,770 30,077 29,798 ========= ====== ======
Following is a summary of accumulated depreciation and amortization of investment in properties for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 -------- ------ ------ Balance at beginning of year $ 11,170 9,461 7,724 Additions charged to expense (375) 1,709 1,737 --------- ------ ------ Balance at end of year $ 10,795 11,170 9,461 ========= ====== ======
(1) Aggregate cost for Federal income tax purposes is $30.1 million December 31, 1996. (2) Leasehold property and improvements are amortized over remaining terms of ground leases, which are shorter than the estimated useful lives. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 370 0 0 0 0 1,886 30,598 (11,683) 20,801 8,556 0 0 0 0 12,245 20,801 0 17,834 0 16,258 0 0 550 1,576 0 0 0 0 0 1,576 0 0
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