Form 10-Q for ARV Properties II

10-Q 1 d10q.htm FORM 10-Q FOR ARV PROPERTIES II Form 10-Q for ARV Properties II

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER: 0-26468

AMERICAN RETIREMENT VILLAS
PROPERTIES II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA		33-0278155
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

245 FISCHER AVENUE, D-1 COSTA MESA, CA		92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)		(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

(714) 751-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

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 June 30, 2003 was 35,020.

Indicate by check mark whether the registrant is accelerated filer (as defined in Rule 12b-2 of the Act).

Yes o

No x

The aggregate market value of the voting and non-voting units held by non-affiliates computed by reference to the price at which the units were last sold was $16,696,569, as of June 30, 2003.

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)

	JUNE 30, 2003			DECEMBER 31, 2002

ASSETS
Properties, at cost:
Land	$	11,453		$	11,453
Buildings and improvements, less accumulated depreciation of $10,366 and $9,911 at June 30, 2003 and December 31, 2002, respectively		19,126			19,454
Leasehold property and improvements, less accumulated depreciation of $1,413 and $1,373 at June 30, 2003 and December 31, 2002, respectively		347			312
Furniture, fixtures and equipment, less accumulated depreciation of $1,590 and $1,422 at June 30, 2003 and December 31, 2002, respectively		1,519			1,394
Construction in Progress		51			101

Net properties		32,496			32,714
Cash and cash equivalents		2,767			2,366
Loan fees, less accumulated amortization of $66 and $52 at June 30, 2003 and December 31, 2002, respectively		914			928
Other assets, including impound accounts of $2,574 and $2,696 at June 30, 2003 and December 31, 2002, respectively		3,108			3,328

	$	39,285		$	39,336

LIABILITIES AND PARTNERS’ CAPITAL (DEFICIENCY)
Notes payable	$	41,644		$	41,776
Accounts payable		75			192
Accrued expenses		2,020			1,788
Amounts payable to affiliate		310			340
Tenant prepaid rent and assisted living services		168			198
Distributions payable		31			18

Total liabilities		44,248			44,312

Commitments and contingencies
Partners’ capital (deficit):
General partners’ capital		1			1
Special limited partners		97			97
Limited partners’ capital, 35,020 units outstanding		(5,061	)		(5,074	)

Total partners’ capital (deficiency)		(4,963	)		(4,976	)

	$	39,285		$	39,336

See accompanying notes to the unaudited condensed consolidated financial statements.

American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except unit data)

	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,

	2003			2002			2003			2002

Revenues:
Rent	$	4,713		$	4,750		$	9,477		$	9,555
Assisted living		1,053			1,034			2,054			2,045
Interest and other		92			119			225			241

Total revenues		5,858			5,903			11,756			11,841

Costs and expenses:
Rental property operations		3,256			2,979			6,285			6,090
Assisted living		699			671			1,341			1,352
General and administrative		485			314			881			488
Communities rent		92			94			185			189
Depreciation and amortization		399			366			788			734
Property taxes		160			164			286			326
Advertising		112			109			214			206
Interest		876			885			1,758			1,754

Total costs and expenses		6,079			5,582			11,738			11,139

(Loss) income before franchise tax		(221	)		321			18			702
Franchise tax expenses		(5	)		(4	)		(5	)		(4	)

Net (loss) income	$	(226	)	$	317		$	13		$	698

Per limited partner unit:
Net (loss) income	$	(6.39	)	$	8.96		$	0.37		$	19.73

See accompanying notes to the unaudited condensed consolidated financial statements.

American Retirement Villas Properties II
(a California limited partnership)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

	FOR THE SIX MONTHS ENDED JUNE 30

	2003			2002

Cash flows from operating activities:
Net income	$	13		$	698
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		788			734
Change in assets and liabilities:
Other assets		220			(300	)
Accounts payable and accrued expenses		128			(410	)
Tenant prepaid rent and assisted living services		(30	)		(47	)
Amounts payable to affiliates		(30	)		145

Net cash provided by operating activities		1,089			820

Cash flows used in investing activities:
Capital expenditures		(556	)		(221	)
Refund of purchase deposit, net		—			1

Net cash used in investing activities		(555	)		(220	)

Cash flows used in financing activities:
Principal repayments on notes payable		(132	)		(121	)
Loan fees		—			(9	)
Distributions paid		—			(3,038	)

Net cash used in financing activities		(132	)		(3,168	)

Net increase (decrease) in cash and cash equivalents		401			(2,658	)
Cash and cash equivalents at beginning of period		2,366			4,416

Cash and cash equivalents at end of period	$	2,767		$	1,848

Supplemental disclosure of cash flow information -cash paid during the period for interest	$	1,653		$	1,663

See accompanying notes to the unaudited condensed consolidated financial statements.

American Retirement Villas Properties II
(a California limited partnership)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

June 30, 2003

(1) CRITICAL ACCOUNTING POLICIES

BASIS OF PRESENTATION

Basis of Presentation

The accompanying condensed consolidated financial statements of American Retirement Villas Properties II (“the Partnership” or “ARVP II”) are presented pursuant to the rules and regulations 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 consolidated financial statements include all normal and recurring adjustments that the Partnership considers necessary for the fair presentation of our financial position and operating results. For further information, refer to the consolidated financial statements and notes in the Partnership’s Form 10-K for fiscal year ended December 31, 2002, 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 consolidated financial statements may not be the same as those for the full year.

Basis of Accounting

American Retirement Villas Properties II financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

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 the Partnership has controlling interests, have been consolidated into the financial statements. Management believes the Partnership has a controlling interest consistent with the requirements of SOP 78-9 when the Partnership owns more than 50% of an entity. All intercompany balances and transactions have been eliminated in consolidation.

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	Shorter of lease term or life of lease
Furniture, fixtures and equipment	3 to 7 years

The Partnership reviews its 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, the Partnership estimates the future undiscounted 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 the Partnership’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management has made estimates and assumptions that affect the following:

	•	reported amounts of assets and liabilities at the date of the financial statements;
	•	disclosure of contingent assets and liabilities at the date of the financial statements; and

•

reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash balances, the Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Impound Accounts

The lenders hold certain Partnership’s funds in impound accounts for payment of property taxes, insurance premiums and future property improvements (replacement reserves) on these properties. The Partnership includes these impound accounts in other assets. As of June 30,2003 and December 31, 2002 the impound balances were $2,574,000 and $2,696,000, respectively.

Loan Fees

The Partnership amortizes loan fees using the effective interest method over the term of the respective notes payable, and includes them in other assets.

Revenue Recognition

Residency agreements with residents are on a month-to-month basis. The Partnership applies advance deposits to the first month’s rent. Revenue is recognized in the period in which services are provided. Revenue received in advance of the period the services are performed is recorded in tenant prepaid rents and services.

General Liability Insurance

For the year 2002 through March 31, 2003, the Partnership utilized third-party insurance for losses and liabilities associated with general and professional liability claims subject to established deductible levels on a per occurrence basis. Losses up to these deductible levels are accrued based upon the Partnership’s estimates of the aggregate liability for claims incurred based on the Partnership’s experience and appropriate actuarial principles. As of April 1, 2003, the Partnership was able to secure general and professional liability insurance with a $1,000 deductible per occurrence.

Net Income Per Limited Partner Unit

The Partnership based net income per limited partner unit on the weighted-average number of limited partner units outstanding of 35,020 in the periods ended June 30, 2003 and 2002. Special Limited Partners and General Partner share of earnings, 1% for both, is deducted from earnings before computing earnings per limited partner unit.

Reclassifications

The Partnership has reclassified certain prior period amounts to conform to the June 30, 2003 presentation.

New Accounting Pronouncement

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. Adoption of this statement did not have a material effect on the Partnership’s consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Adoption of this statement did not have a material effect on the Partnership’s consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosure

requirements for the annual and interim financial statements of the guarantor. It also requires that a guarantor recognize a liability at the inception of the guarantee for the fair value of the obligation undertaken. The Partnership adopted the recognition and measurement provision of FIN No. 45 beginning January 1, 2003, while the disclosure provisions became effective at December 31, 2002. Adoption of this interpretation did not have a material effect on the Partnership’s consolidated financial statements.

In January 2003, FIN No. 46 “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, was issued. FIN No. 46 requires that a company consolidate variable interest entities if that company is subject to a majority of the risk of loss from the entity’s activities or the company receives a majority of the entity’s residual returns. FIN No. 46 also requires certain disclosures about variable interest entities in which a company has a significant interest, regardless of whether consolidation is required. The Partnership adopted the consolidation provisions of FIN No. 46 beginning January 1, 2003, while certain disclosures required became effective for all financial statements issued after January 31, 2003, regardless of when the variable interest entities were established. The Partnership currently has no variable interest entities, therefore, the adoption of this interpretation had no effect on the Partnership’s condensed consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 will not have a material effect on the Partnership’s consolidated financial position or results of operations.

Managing General Partner

On April 23, 2003, the managing general partner became a wholly-owned subsidiary of Prometheus Assisted Living LLC (“Prometheus”) pursuant to an Agreement and Plan of Merger entered into on January 3, 2003 by and among the managing general partner, Prometheus and a subsidiary of Prometheus.

(2) TRANSACTIONS WITH AFFILIATES

The Partnership has an agreement with ARV Assisted Living, Inc. (“ARV”), our Managing General Partner, providing for a property management fee of five percent of gross revenues amounting to $587,000 and $590,000 for the six-month periods and $292,000 and $294,000 for the three-month periods ended June 30, 2003 and 2002, respectively, and is included in rental property operations expenses. Additionally, the Partnership incurred a partnership management fee of ten percent of cash flow before distributions, as defined in the Partnership Agreement, which amounted to $99,180 and $130,000 for the six-month periods and $37,000 and $62,000 for the three-month periods ended June 30, 2003 and 2002, respectively and is included in general and administrative expenses. The Partnership has significant transactions with affiliates, had the Partnership been operated as an unaffiliated entity the accompanying financial statements could have been materially different.

(3) NOTES PAYABLE

Notes payable consist of the following at June 30, 2003 and December 31, 2002 (in thousands):

	2003		2002

HUD insured notes payable, bearing interest ranging from 7.25% to 8.06%. Monthly principal and interest payments of $297; due through January 2037; collateralized by various properties	$	41,644	$	41,776

The annual principal payments of the notes payable at June 30, 2003 are as follows (in thousands):

2004	$	281
2005		304
2006		328
2007		355
2008		385
Thereafter		39,991

	$	41,644

(4) COMMITMENT AND CONTINGENCIES

During 2001, two lawsuits were brought by employees of an ALC owned by ARVP II. In addition, four other employees of the same ALC filed EEOC claims arising out of the same facts. In 2002, the two lawsuits were submitted to mediation and settled. Two of the claimants subsequently dismissed their claims. The two remaining claims will be submitted to binding arbitration in the third quarter of 2003.

Except as described above, and other than the ordinary routine litigation that is incidental to, and arises in the normal course of, the business of the Partnership, there are no material legal proceedings pending against the Partnership. While the Partnership cannot predict the results with certainty, it does not believe that any liability from any such lawsuits or other matters will have a material effect on its financial position, results of operations, or liquidity.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth a comparison of the six months ended June 30, 2003 and the six months ended June 30, 2002. The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.

Operating Results before Franchise Tax Expenses
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
(In millions)

	June 30,

(DOLLARS IN MILLIONS)		2003		2002	Increase/ (decrease)

Revenue:
Assisted living community revenue	$	11.53	$	11.60	(0.59	)%
Interest and other revenue		0.23		0.24	(6.64	)%

Total revenue		11.76		11.84	(0.72	)%
Costs and expenses:
Assisted living operating expenses		7.62		7.44	2.47	%
General and administrative		0.88		0.49	80.53	%
Communities rent		0.19		0.19	(2.12	)%
Depreciation and amortization		0.79		0.73	7.36	%
Property taxes		0.29		0.33	(12.27	)%
Advertising		0.21		0.21	3.88	%
Interest		1.76		1.75	3.88	%

Total costs and expenses		11.74		11.14	5.38	%

Income before franchise tax expenses	$	0.02	$	0.70	(97.44	)%

Assisted living community revenue decreased $0.07 million, or (0.59)%, from $11.60 million for the six-month period ended June 30, 2002 to $11.53 million for the six-month period ended June 30, 2003 primarily due to the following:

	•	a decrease in average occupancy to 80% for the six-month period ended June 30, 2003 as compared with 84% for the six- month period ended June 30, 2002; offset by

	•	an increase in rent and assisted living average rate per occupied unit to $2,590 for the six-month period ended June 30, 2003 as compared with $2,493 for the six-month period ended June 30, 2002

	•	the increase in assisted living penetration to 59.3% for the six months ended June 30, 2003 as compared with 56.7% for the six months ended June 30, 2002

Interest and other revenue decreased $0.01 million, or (6.64%), from $0.24 million for the six-month period ended June 30, 2002 to $0.23 million for the six-month period ended June 30, 2003 primarily due to the following:

	•	a decrease in cash and cash equivalents; and
	•	lower interest rates.

Assisted living operating expenses increased $0.18 million, or 2.47%, from $7.44 million for the six-month period ended June 30, 2002 to $7.62 million for the six-month period ended June 30, 2003 primarily due to the following:

	•	increase wages of staff and fringe benefits;
	•	higher workers’ compensation costs;
	•	higher cost of purchased services;
	•	higher cost of utilities; and
	•	increase in repair and maintenance, rental and leases; partially offset by
	•	decrease in miscellaneous expenses.

General and administrative expenses increased $0.39 million, or 80.53%, from $0.49 million for the six-month period ended June 30, 2002 to $0.88 million for the six-month period ended June 30, 2003 primarily due to increases in general liability insurance cost.

Depreciation and amortization expense increased $0.06 million, or 7.36%, from $0.73 million for the six-month period ended June 30, 2002 to $0.79 million for the six-month period ended June 30, 2003 primarily due to additional capital expenditures.

Property tax expense decreased $0.04 million, or (12.27%), from $0.33 million for the six-month period ended June 30, 2002 compared to $0.29 million for the six-month period ended June 30, 2003 due to the following:

	•	a reversal of $36,000 supplemental tax expense accrued in a previous period, and
	•	a reduction in properties assessed value that resulted in a refund of taxes for current and prior years.

Interest expense increased $0.01million, or 0.23%, from $1.75 million for the six-month period ended June 30, 2002 to $1.76 million for the six-month period ended June 30, 2003 primarily due to the additional mortgage insurance on one of the ALC.

The following table sets forth a comparison of the three months ended June 30, 2003 (the “2003 Quarter”) and the three months ended June 30, 2002 (the “2002 Quarter”). The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.

Operating Results before Franchise Tax Expenses
For the Three Months Ended June 30, 2003 and 2002
(Unaudited)

	June 30,

(Dollars in millions)		2003			2002	Increase/ (decrease)

Revenues:
Rent and assisted living	$	5.76		$	5.78	(0.31	)%
Interest and others		0.10			0.12	(22.69	)%

Total revenues		5.86			5.90	(0.76	)%

Costs and expenses:
Rental property operations and assisted living		3.96			3.65	8.36	%
General and administrative		0.48			0.32	54.46	%
Communities rent		0.09			0.09	(2.13	)%
Depreciation and amortization		0.40			0.36	8.72	%
Property taxes		0.16			0.17	(2.44	)%
Advertising		0.11			0.11	3.70	%
Interest		0.88			0.88	(1.02	)%

Total costs and expenses		6.08			5.58	8.90	%

(Loss) Income before franchise tax expenses	$	(0.22	)	$	0.32	(168.85	)%

Rent and assisted living revenues decreased $0.02 million, or (0.31)%, from $5.78 million for the quarter ended June 30, 2002 to $5.76 million for the quarter ended June 30, 2003 primarily due to the following:

	•	the decrease in average occupancy to 81.8% for the three months ended June 30, 2003 from 83.5% for the three months ended June 30, 2002; offset by
	•	the increase in rent and assisted living average rate per occupied unit to $2,512 for the three months ended June 30, 2003 as compared with $2,500 for the three months ended June 30, 2002; and
	•	the increase in assisted living penetration to 59.8% for the three months ended June 30, 2003 as compared with 56.9% for the three months ended June 30, 2002.

Interest and other revenues decreased $0.02 million, or (22.69%), from $0.12 million for the quarter ended June 30, 2002 to $0.10 million for the quarter ended June 30, 2003 primarily due to the following:

	•	decrease in interest income relating to a lower replenishment reserve impound balance and lower interest rates, partially offset by
	•	increase in processing fees related to a higher number of move-ins.

Rental property operations and assisted living expenses increased $0.31 million, or 8.36%, from $3.65 million for the quarter ended June 30, 2002 to $3.96 million for the quarter ended June 30, 2003 primarily due to the following:

	•	increase in staff payroll costs;
	•	increase in worker compensation expense;
	•	higher cost of purchase services;
	•	higher cost of utilities; and
	•	increase in rental and leases; partially offset by
	•	decrease in variable expenses and miscellaneous expenses.

General and administrative expenses increased $0.16 million, or 54.46%, from $0.32 million for the quarter ended June 30, 2002 to $0.48 million for the quarter ended June 30, 2003 primarily due to increases in general liability insurance cost.

Community rent expense was relatively constant for both periods ended June 30, 2003 and 2002.

Depreciation and amortization expense increased $0.04 million, or 8.72%, from $0.36 million for the quarter ended June 30, 2002 to $0.40 million for the quarter ended June 30, 2003 primarily due to capital improvement additions.

Interest expense is relatively constant for both periods ended June 30, 2003 and 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $2.8 million and $2.4 million at June 30, 2003 and December 31, 2002, respectively. On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities.

Given the age of the ALCs (ages range from 14 to 26 years with an average age of 22.5 years), our Managing General Partner has continued our refurbishment program put in place to repair, maintain and physically improve our ALCs. We expect to fund repairs and improvements primarily from our operating cash flows. As a result of the planned renovations, our Managing General Partner believes that distributions of cash flow from operations to the Partners will either be reduced or eliminated in the near term. Our General Partner expects that the cash to be generated from operations of our communities will be adequate to pay operating expenses, make necessary capital improvements and make required principal reductions of loans.

We expect that cash generated from the operations of our properties will be adequate to pay operating expenses and current capital requirements for the next 12 months. On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities. During the six-month period ended June 30, 2003, cash provided by operating activities was $1.1 million compared $0.8 million during the six-month period ended June 30, 2002.

The cash provided by operating activities during the six-month period ended June 30, 2003 was primarily a result of: net income of $0.01million, adjusted for non-cash charges of:

	•	$0.79 million of depreciation and amortization expense;
	•	$0.22 million decrease in other assets, and
	•	$0.07 million increase in net liabilities.

During the six-month period ended June 30, 2003, cash used in investing activities was $0.6 million compared to of $0.2 million during the six-month period ended June 30, 2002. The cash used in investing activities during the 2003 six-month period was for the purchase of furniture, fixtures and equipment, and building improvement.

During the six-month period ended June 30, 2003, cash used in financing activities was $0.1 million as compared to cash used by financing activities of $3.2 million for the six-month period ended June 30, 2002. The cash used in financing activities during 2003 six-month period was a result of principal repayment on loans. The cash used in financing activities during the six months ended June 30, 2002 was a result of principal repayment on loans and distribution paid.

As of June 30, 2003, 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 $1,077,000 for capital expenditures during 2003 for physical improvements at our communities. As of June 30, 2003 we have made approximately $556,000 in capital expenditures. Funds for these improvements are expected to be available from operations.

In order to protect ourself against lawsuits and claims relating to general and professional liability, we currently maintain third party insurance policies in amounts and covering risks that are consistent with industry practice. Under the terms of such insurance policies, our coverage is provided subject to varying deductible levels and liability amounts. As a result of poor industry loss experience, a number of insurance carriers have stopped providing insurance coverage to the assisted living industry and those remaining have drastically increased premiums and deductible amounts. Consistent with this trend, our general liability coverage is subject to significant deductible levels on a per occurrence basis. For the nine months ended December 31, 2002 and the three months ended March 31, 2003, our general liability deductible per occurrence was materially increased. As of April 1, 2003, our general liability deductible was reduced to $1,000 per occurrence. Losses up to these deductible levels are accrued based upon our estimates of the aggregate liability for claims incurred based on our experience and appropriate actuarial principles. As the result of these continuing uncertainties in both deductible amounts and premiums, there can be no assurance that we will be able to obtain all desired insurance coverage in the future on commercially reasonable terms or at all.

Our General Partner is 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 our operations or sale of properties. Our General Partner believes that if the inflation rate increases, they will be able to recover subsequent increases in operating expenses from higher rental and assisted living rates.

IMPACT OF INFLATION, DEFLATION AND CHANGING PRICES

To date, inflation has not had a significant impact on the Partnership. Inflation could, however, affect our future revenues and operating income due to our dependence on the senior resident population, most of who rely on relatively fixed incomes to pay for our services. The monthly charges for the resident’s unit and assisted living services are influenced by the location of the community and local competition. Our ability to increase revenues in proportion to increased operating expenses may be limited. We typically do not rely to a significant extent on governmental reimbursement programs. In pricing our services, we attempt to anticipate inflation levels, but there can be no assurance that we will be able to respond to inflationary pressures in the future. The Partnership could be effected by deflation since, as noted above, we rely on seniors with relatively fixed incomes.

FORWARD-LOOKING STATEMENTS

A number of matters and subject areas discussed in this report, that are not historical or contain current facts, deal with potential future circumstances, operations and prospects. The discussion of these matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from our actual future experience as a result of

such factors as: the effects of competition and economic conditions on the occupancy levels in our communities; our ability under current market conditions to maintain and increase our resident charge without adversely affecting the occupancy level; our ability to control community operation expenses without adversely affecting the occupancy level and the level of resident charges; the ability of our operations to generate cash flow sufficient to service our debt, capital expenditures and other fixed payment requirements; and our ability to find sources of financing and capital on satisfactory terms to meet our cash requirements to the extent that they are not met by operations. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future results to differ from our current expectations regarding the matters or subject areas discussed in this report. These and other risks and uncertainties are detailed in our reports filed with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.

ITEM 3. QUANATITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership is exposed to market risks related to fluctuations in the interest rates on our fixed rate notes payable. With respect to the Partnership’s fixed rate notes payable, changes in the interest rates affect the fair value of the notes payable, but not the Partnership’s earnings or cash flows. The Partnership does not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair value should not have a significant impact on the fixed rate debt until the earlier of maturity and any required refinancing of such debt. The Partnership does not currently have any variable interest rate debt and, therefore, is not subject to interest rate risk associated with variable interest rate debt. Currently, the Partnership does not utilize interest rate swaps.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the quarter ended June 30, 2003, the Partnership’s Management, including the Chief Executive Officer and Chief Financial Officer of the managing general partner, ARV, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, ARV’s Chief Executive Officer and Chief Financial Officer concluded that the Partnership’s disclosure controls and procedures were effective as of June 30, 2003 to ensure that information required to be disclosed by the Partnership in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Security and Exchange Commission rules and forms. There was no change in the Partnership’s internal controls over financial reporting during the Partnership’s quarter ended June 30, 2003 that materially effected, or is reasonably likely to materially effect, the Partnership’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as described above, and other than the ordinary routine litigation that is incidental to, and arises in the normal course of, the business of the Partnership, there are no material legal proceeding pending against the Partnership. While the Partnership cannot predict the results with certainty, it does not believe that any liability from any such lawsuits or other matters will have a material effect on its financial position, results of operations, or liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	The following documents are filed as part of this Report:

		31.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated August 14, 2003.

		31.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated August 14, 2003.

		32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 14, 2003.

		32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 14, 2003.

(b)	Reports on Form 8-K.

	The Partnership filed an 8-K report regarding the change in independent accountants on May 9, 2003.

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: August 14 2003
		ARV ASSISTED LIVING, INC.,
		it’s 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*