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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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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, 2002
|- |  | ------------------------------------------------------------------------------------------------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
 TO
|- |  | ---------------------------------------------------------------------------------------------------------------------------




Commission file number 0-26468





AMERICAN RETIREMENT VILLAS


PROPERTIES II


(Exact name of registrant as specified in its charter)





California (State or other
jurisdiction of incorporation or organization)

33-0278155 (I.R.S.
Employer Identification Number)





245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626


(Address of principal executive office) (zip code)





(714) 751-7400


(Registrants telephone number, including area code)








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x     No  ̈





The aggregate market value of the voting units held by non-affiliates of the issuer, 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 July 14, 2002 was 35,020.


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PART IFINANCIAL INFORMATION


ITEM 1FINANCIAL STATEMENTS





American Retirement Villas Properties II


(a California limited partnership)


Condensed Consolidated Balance Sheets


(Unaudited)


(In thousands)





ASSETS


JUNE 30, 2002


DECEMBER 31, 2001Properties, at cost:Land

$
11,453


$
11,453Buildings and improvements, less accumulated depreciation of $9,459 and $9,009 at June 30, 2002 and December 31, 2001,
respectively


19,760



20,018Leasehold property and improvements, less accumulated depreciation of $1,341 and $1,311 at June 30, 2002 and December
31, 2001, respectively


326



352Furniture, fixtures and equipment, less accumulated depreciation of $1,432 and $1,384 at June 30, 2002 and December 31,
2001, respectively


1,164



1,260Net properties


32,703



33,083Cash and cash equivalents


1,848



4,416Loan fees, less accumulated amortization of $38 and $24 at June 30, 2002 and December 31, 2001,
respectively


942



948Other assets, including impound accounts of $2,748 and $2,628 at June 30, 2002 and December 31, 2001,
respectively


3,302



3,121$
38,795


$
41,568LIABILITIES AND PARTNERS CAPITALNotes payable

$
41,903


$
42,024Accounts payable


155



208Accrued expenses


1,829



2,233Amounts payable to affiliates


381



236Distributions payable






38Total liabilities


44,268



44,739Partners capital (deficit):General partners


1



1Special limited partners


92



115Limited partners, 35,020 units outstanding


(5,566
)


(3,287
)Total partners capital (deficit)


(5,473
)


(3,171
)$
38,795


$
41,568





See accompanying notes to the unaudited condensed consolidated financial
statements.




2




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American Retirement Villas Properties II


(a California limited partnership)


Condensed Consolidated Statements of Operations


(Unaudited)


(In thousands, except unit data)





THREE MONTHS ENDED JUNE 30,


SIX MONTHS ENDED JUNE 30,2002


2001


2002


2001Revenues:Rent

$
4,750


$
4,735


$
9,555


$
9,405Assisted living


1,034



974



2,045



1,901Interest and other


119



153



241



273Total revenues


5,903



5,862



11,841



11,579Costs and expenses:Rental property operations


3,007



2,917



6,139



5,929Assisted living


671



709



1,352



1,393General and administrative


314



191



488



357Communities rent


94



95



189



187Depreciation and amortization


366



360



734



800Property taxes


164



194



326



397Advertising


81



53



157



110Interest


885



898



1,754



1,789Total costs and expenses


5,582



5,417



11,139



10,962Income before franchise tax expense and extraordinary loss


321



445



702



617Franchise tax expense


(4
)


(5
)


(4
)


(5
)Income before extraordinary loss


317



440



698



612Extraordinary loss from write-off of loan fees due to refinancing














(56
)Net income

$
317


$
440


$
698


$
556Income per limited partner unitIncome before extraordinary loss

$
8.96


$
12.43


$
19.73


$
17.31Extraordinary loss














(1.58
)Net income

$
8.96


$
12.43


$
19.73


$
15.73





See accompanying notes to the unaudited condensed consolidated financial
statements.




3




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American Retirement Villas Properties II


(a California limited partnership)


Condensed Consolidated Statements of Cash Flows


(Unaudited)


(In thousands)





FOR THE SIX MONTHS ENDED JUNE
30,2002


2001Cash flows from operating activities:Net income

$
698


$
556Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


734



800Extraordinary loss from write-off of loan fees due to refinancing






56Change in assets and liabilities:(Increase) decrease in other assets


(300
)


496(Decrease) increase in accounts payable and accrued expenses


(457
)


67Increase in amounts payable to affiliates


145



19Net cash provided by operating activities


820



1,994Cash flows used in investing activities:Capital expenditures


(221
)


(676
)Refund of purchase deposit, net


1



Net cash used in investing activities


(220
)


(676
)Cash flows provided by (used in) financing activities:Principal repayments on notes payable


(121
)


(9,661
)Proceeds from notes payable






10,227Mortgage insurance






(200
)Loan fees


(9
)


(197
)Distributions paid


(3,038
)


(21
)Net cash provided by (used in) financing activities


(3,168
)


148Net increase (decrease) in cash and cash equivalents


(2,568
)


1,466Cash and cash equivalents at beginning of period


4,416



2,177Cash and cash equivalents at end of period

$
1,848


$
3,643Supplemental disclosure of cash flow information - cash paid during the period for interest

$
1,663


$
1,497





See accompanying notes to the unaudited condensed consolidated financial
statements.




4




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American Retirement Villas Properties II


(a California limited partnership)


Notes to Condensed Consolidated Financial Statements


(Unaudited)





June 30, 2002





(1)  SIGNIFICANT ACCOUNTING POLICIES





BASIS OF PRESENTATION





Basis of Presentation





The condensed consolidated financial statements of American Retirement Villas Properties II (the Partnership or ARVPII) 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 condensed consolidated financial statements include
all normal and recurring adjustments that the management considers necessary for the fair presentation of the partnerships financial position and operating results. To obtain a more detailed understanding of the partnerships results, one
should also read the consolidated financial statements and notes in our Form 10-K for fiscal year ended December 31, 2001, 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 are not necessarily an indication of the results
for the full year.





Basis of Accounting





American Retirement Villas Properties II maintains records on the accrual method of accounting for financial reporting and Federal and state tax purposes.





Principles of Consolidation





The condensed consolidated financial statements include the accounts of the Partnership and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which we have controlling interests,
have been consolidated into the financial statements. Management believes 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 significant inter-company
balances and transactions have been eliminated in consolidation.





Capital Expenditures





The Partnership capitalizes all assets obtained by purchase, trade or capital lease that have a useful life of more than one year and
costs exceeding $500, or a group of similar assets purchased together where the total purchase price exceeds $1,000 and the cost of each asset exceeds $50. Improvements or additions to existing assets are also capital expenditures when they extend
the useful life of the assets beyond their original life. Repair expenditures are expensed as incurred.





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 yearsLeasehold property and improvements

Lease termFurniture, fixtures and equipment

3 to 7 years




5




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The Partnership reviews the partnerships 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 cash flows expected to result from using the assets and eventually
disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the assets fair value.





Use of Estimates





In the preparation of our 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.





Impound Accounts





Our lenders hold certain of our 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.





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.





Loan Fees





The Partnership amortizes loan fees using the effective interest method over the
term of the respective notes payable, with the expense records in amortization expense.





General Insurance Liability





The Partnership utilizes 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.





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 month earned for rent and
assisted living services.





Advertising Costs





American Retirement Villas Properties II expenses all advertising costs as they are incurred.





Net Income Per Limited Partner Unit





Net income per limited
partner unit was based on the weighted-average number of limited partner units outstanding of 35,020 for the three months and six months ended June 30, 2002 and 2001.





Reclassifications




6




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American Retirement Villas Properties II has reclassified certain prior period
amounts to conform to the June 30, 2002 presentation.





New Accounting Pronouncements





The Partnership adopted SFAS No. 141 Business Combinations, SFAS No. 142 Goodwill and Other Intangible Assets,
SFAS No. 143 Accounting for Asset Retirement Obligations, and SFAS No. 144 Accounting for the Impairment and Disposal of Long Lived Assets on January 1, 2002. The adoption of SFAS Nos. 141, 142, 143, and 144 did not have a
material effect on the partnerships financial position, results of operations, or cash flows.





In April
2002, the Financial Accounting Standards Board issued 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 non-substantive technical corrections to existing pronouncements. SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The only impact we expect of adopting SFAS No. 145 is the reclassification of prior year extraordinary losses to interest expense and
income taxes.





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. As the provisions of SFAS No. 146 is required to be applied prospectively after the adoption date, management cannot determine the potential effects that
adoption of SFAS No. 146 will have on the partnerships consolidated financial statements.





(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. These payments amounted to $590,000 and $573,000 for the six-month periods and $294,000 and $290,000 for the three-month periods ended June 30, 2002 and
2001, respectively. Additionally, the Partnership pays ARV a partnership administrative fee of 10 percent of cash flow before distributions, as provided for in the Partnership Agreement. These payments amounted to $130,000 and $122,000 for the
six-month periods and $62,000 and $38,000 for the three-month periods ended June 30, 2002 and 2001, respectively.





(3)  NOTES PAYABLE





Notes payable consist of the following at June 30, 2002 and
December 31, 2001 (in thousands):





2002

2001HUD 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

$
41,903

$
42,024





The future annual principal payments of the notes payable at June
30, 2002 are as follows (in thousands):





Twelve month period ending June 30, 2003

$
259Twelve month period ending June 30, 2004


280Twelve month period ending June 30, 2005


304Twelve month period ending June 30, 2006


328Twelve month period ending June 30, 2007


356Thereafter


40,376$
41,903




7




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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, 2002 and the six months ended June 30, 2001. 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 Extraordinary
Loss


For the Six Months Ended June 30, 2002 and 2001


(Unaudited)


(In millions)





(DOLLARS IN MILLIONS)

For the Six Months Ended June
30,

Increase/ (decrease)2002

2001Revenue:Assisted living community revenue

$
11.60

$
11.31

2.60
%Interest and other revenue


0.24


0.27

(11.72
)%Total revenue


11.84


11.58

2.26
%Costs and expenses:Assisted living operating expenses


7.49


7.33

2.31
%General and administrative


0.49


0.36

36.69
%Communities rent


0.19


0.19

1.07
%Depreciation and amortization


0.73


0.80

(8.25
)%Property taxes


0.33


0.40

(17.88
)%Advertising


0.16


0.11

42.73
%Interest


1.75


1.79

(1.96
)%Total costs and expenses


11.14


10.98

1.61
%Income before taxes and extraordinary loss

$
0.70

$
0.60

13.78
%





Assisted living community revenue increased $0.29 million, or
2.60%, from $11.31 million for the six-month period ended June 30, 2001 to $11.60 million for the six-month period ended June 30, 2002 primarily due to the following:





| |  |  | an increase in average rate per occupied unit to $2,493 for the six-month period ended June 30, 2002 as compared with $2,252 for the six-month period ended June
30, 2001; offset by
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a decrease in average occupancy to 84% for the six-month period ended June 30, 2002 as compared with 91% for the six-month period ended June 30, 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




Interest and other revenue decreased $0.03 million, or (11.72%), from $0.27 million for the
six-month period ended June 30, 2001 to $0.24 million for the six-month period ended June 30, 2002 primarily due to the following:





| |  |  | a decrease in cash and cash equivalents; and
| | - |  | --------------------------------------------

| |  |  | lower interest rates.
| | - |  | ---------------------




Assisted living operating expenses increased $0.16 million, or 2.31%, from $7.33 million for the six-month period ended June 30, 2001 to $7.49 million for the six-month period ended June 30, 2002 primarily due to the following:





| |  |  | increased wages of staff and fringe benefits;
| | - |  | ---------------------------------------------

| |  |  | higher workers compensation costs;
| | - |  | -----------------------------------

| |  |  | higher utility costs; partially offset by
| | - |  | -----------------------------------------

| |  |  | lower cost of purchased services; and
| | - |  | -------------------------------------

| |  |  | lower variable expenses related to occupancy decrease.
| | - |  | ------------------------------------------------------




General and administrative expenses increased $0.13 million, or 36.69%, from $0.36 million for the six-month period ended June 30, 2001 to $0.49 million for the six-month
period ended June 30, 2002 primarily due to higher property and general liability insurance premiums, and legal expenses.




8




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Depreciation and amortization expense decreased $0.07 million, or (8.25%), from
$0.80 million for the six-month period ended June 30, 2001 to $0.73 million for the six-month period ended June 30, 2002 primarily due to the following:





| |  |  | the reduced amortization of loan fees as a result of the refinancing of certain loans; and
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | capital assets that have become fully depreciated.
| | - |  | --------------------------------------------------




Property tax expense decreased $0.07 million, or (17.88%), from $0.40 million for the six-month period ended June 30, 2001 compared to $0.33 million for the six-month period ended June 30, 2002 due to
supplemental tax expense incurred in 2001.





Advertising expenses increased $0.05 million, or 42.73%, from $0.11
million for the six-month period ended June 30, 2001 compared to $0.16 million for the six-month period ended June 30, 2002 due to aggressive marketing efforts to increase occupancy.





Interest expense decreased $0.04 million, or (1.96%), from $1.79 million for the six-month period ended June 30, 2001 to $1.75 million for the six-month period ended June
30, 2002 primarily due to principal repayments of loans and lower interest rates.





The following table sets forth
a comparison of the three months ended June 30, 2002 (the 2002 Quarter) and the three months ended June 30, 2001 (the 2001 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 Extraordinary Loss


For the Three Months Ended June 30, 2002 and 2001


(Unaudited)


(In millions)





(DOLLARS IN MILLIONS)

For the Three Months Ended June 30,

Increase/ (decrease)2002


2001Revenues:Assisted living community revenue

$
5.78

$
5.71

1.31
%Interest and other revenue


0.12


0.15

(22.22
)%Total revenues


5.90


5.86

0.70
%Costs and expenses:Assisted living operating expenses


3.68


3.63

1.43
%General and administrative


0.32


0.19

64.40
%Communities rent


0.09


0.10

(1.05
)%Depreciation and amortization


0.36


0.36

1.67
%Property taxes


0.17


0.19

(15.46
)%Advertising


0.08


0.05

52.83
%Interest


0.88


0.90

(1.45
)%Total costs and expenses


5.58


5.42

3.05
%Income before taxes and extraordinary loss

$
0.32

$
0.44

(27.87
)%





Assisted living community revenue increased $0.07 million, or
1.31%, from $5.71 million for the quarter ended June 30, 2001 to $5.78 million for the quarter ended June 30, 2002 primarily due to the following:





| |  |  | an increase in the average rate per occupied unit to $2,500 for the three-month period ended June 30, 2002 as compared with $2,274 for the three-month period
ended June 30, 2001; offset in part by
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a decrease in average occupancy for our assisted living communities to 83.5% for the three-month period ended June 30, 2002 as compared with 90.6% for the
three-month period ended June 30, 2001.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Interest and other revenue decreased $0.03 million, or
(22.22%), from $0.15 million for the quarter ended June 30, 2001 to $0.12 million for the quarter ended June 30, 2002 primarily due to the following:





| |  |  | a decrease in cash and cash equivalents; and
| | - |  | --------------------------------------------

| |  |  | lower interest rates.
| | - |  | ---------------------




Assisted living operating expenses increased $0.05 million, or 1.43%, from $3.63 million for the quarter ended June 30, 2001 to $3.68 million for the quarter ended June 30, 2002 primarily due to the following:





| |  |  | an increase in workers compensation premiums; and
| | - |  | -------------------------------------------------



9




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| |  |  | an increase in other staff payroll costs.
| | - |  | -----------------------------------------




General and administrative expense increased $0.13 million, or 64.40% from $0.19 million for the quarter ended June 30, 2001 to $0.32 million for the quarter ended June 30, 2002 primarily due to higher
property and general liability insurance premiums, and legal expenses.





Community rent expenses decreased $0.01
million, or (1.05%), from $0.10 million for the quarter ended June 30, 2001 to $0.09 million for the quarter ended June 30, 2002. The decrease was primarily due to the decrease in additional rent, which is based on rental revenue of one of our ALCs.





Depreciation and amortization expense remained relatively constant at $0.36 million for the quarters ended June
30, 2002 and 2001.





Property tax expense decreased $0.02 million, or (15.46%), from $0.19 million for the three
months ended June 30, 2001 to $0.17 million for the three months ended June 30, 2002 due to supplemental tax expense incurred in 2001.





Advertising expenses increased $0.03 million, or 52.83%, from $0.05 million for the three-month period ended June 30, 2001 compared to $0.08 million for the three-month period ended June 30, 2002 due to aggressive marketing
efforts to increase occupancy.





Interest expense decreased $0.02 million, or (1.45%), from $0.90 million for the
three-month period ended June 30, 2001 to $0.88 million for the three-month period ended June 30, 2002 primarily due to principal repayments of loans and lower interest rates.





LIQUIDITY AND CAPITAL RESOURCES





Our unrestricted cash
balances were $1.8 million and $4.4 million at June 30, 2002 and December 31, 2001, 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 13 to 25 years with an average age of 21.5 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 flow and existing reserve funds. 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 Partners expect 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.





During the six months ended June 30, 2002 cash provided by operating activities was $0.8 million compared to $2.0 million during the six months ended June 30, 2001.





The cash provided by operating activities during the six months ended June 30, 2002 was primarily a result of :





| |  |  | net income of $0.7 million, adjusted for non-cash charges of:
| | - |  | -------------------------------------------------------------

| |  |  | $0.7 million of depreciation and amortization expense; offset by
| | - |  | ----------------------------------------------------------------

| |  |  | $0.3 million decrease in net liabilities; and
| | - |  | ---------------------------------------------

| |  |  | $0.3 million increase in other assets.
| | - |  | --------------------------------------







During the six months ended June 30, 2002 cash used in investing activities was $0.2 million compared to $0.7 million during the six months ended June 30, 2001. The cash
used in investing activities during the six months ended June 30, 2002 was primarily the result of $0.2 million for purchase of furniture and equipment.





During the six months ended June 30, 2002 cash used in financing activities was $3.2 million as compared to cash provided by financing activities of $0.1 million for the six months ended June 30, 2001.





The cash used in financing activities during the six months ended June 30, 2002 was a result of:





| |  |  | $3.0 million of distributions paid; and
| | - |  | ---------------------------------------

| |  |  | $0.1 million of repayments of notes payable.
| | - |  | --------------------------------------------






10




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As of June 30, 2002, 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 $942,000 for capital expenditures during 2002 for physical improvements at our communities. As of June 30, 2002 we have made approximately $221,000 in capital expenditures. Funds for these improvements are expected to be
available from operations and existing reserve funds.





In order to protect itself 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 the results 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, 2001 and the three months
ended March 31, 2002. For the three months ended June 30, 2002, our general liability deductible per occurrence has again been materially increased. Losses up to these deductible levels are accrued based upon our estimates of the aggregate liability
for claims incurred based on our experience. As the result of these continuing increases 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.





IMPACT OF INFLATION 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.





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; 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.    QUANTITATIVE 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, are not subject to interest rate risk associated with variable interest rate debt. Currently, the Partnership does not utilize interest rate swaps.




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None of the partnerships total assets and total contract revenues as of and
for the periods ended June 30, 2002 and 2001 were denominated in currencies other than the U.S. Dollar; accordingly, management believes that the Partnership has no material exposure to foreign currency exchange risk. This materiality
assessment is based on the assumption that the foreign currency exchange rates could change unfavorably by 10%. The Partnership has no foreign currency exchange contracts.





PART IIOTHER INFORMATION





ITEM 1.     LEGAL
PROCEEDINGS





During 2001, four employees of an ALC owned by ARVP II filed EEOC claims against the Partnership.
The four claims have been submitted to binding arbitration.





The Partnership is from time to time subject to
ordinary routine legal proceedings that arise in the normal course of business. While the Partnership cannot predict the results with certainty, the Partnership does not believe that any liability from any such lawsuits or other matters will have a
material effect on our financial position, results of operations, or liquidity.





ITEM 2.    CHANGES IN SECURITIES





None.





ITEM 3.    DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4.    SUBMISSION OF MATTER TO A VOTE OF SECURITY-HOLDERS





None.





ITEM 5.     OTHER INFORMATION





None.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





No reports on 8-K were
filed for the quarter ended June 30, 2002.




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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 9, 2002



ARV ASSISTED LIVING, INC., its managing General PartnerBy:

/s/    DOUGLAS M. PASQUALEDouglas M. Pasquale Chief Executive
OfficerBy:

/s/    ABDO H. KHOURYAbdo H. Khoury President and Chief
Financial Officer







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