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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 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: 0-17695.
HEALTHCARE PROPERTIES, L.P.
(Exact name of Registrant as specified in its charter)
DELAWARE 62-1317327
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75254
- ---------------------------------------------- -----
(Address of principal executive officers) (Zip Code)
The Registrant's telephone number, including area code: (972) 770-5600
------------------------
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
-----------------------------
(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 the 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The Registrant's outstanding securities consist of units of limited partnership
interests which have no readily ascertainable market value since there is no
public trading market for these securities on which to base a calculation of
aggregate market value.
Documents incorporated by reference: None
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Page 1 of 19
Exhibit Index Page 19
HEALTHCARE PROPERTIES, L.P.
2002 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business 3
Item 2 Properties 4
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for the Registrant's Common Equity
and Related Security Holder Matters 5
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7A Quantitative and Qualitative Disclosures About Market Risk 12
Item 8 Financial Statements and Supplementary Data 12
Item 9 Changes in and Disagreements with Accountants on Accounting 12
and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 12
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners and Management 14
Item 13 Certain Relationships and Related Transactions 14
Item 14 Controls and Procedures 16
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16
2
PART I
ITEM 1. BUSINESS
HealthCare Properties, L.P. (Registrant or the Partnership), is a Delaware
limited partnership formed in March 1987 for the purpose of acquiring, leasing
and operating existing or newly constructed health care properties. The General
Partner of the Registrant is Capital Realty Group Senior Housing, Inc.
(Capital).
The offering of the Registrant's limited partnership interests (the Units)
terminated on August 31, 1989, although some Units were sold to existing
investors pursuant to the Registrant's distribution reinvestment plan (the Plan)
until July of 1991 when the Plan was suspended. The Registrant received gross
proceeds from the offering of $43,373,269 and net proceeds of $38,748,791.
All of the net proceeds of the offering were originally invested in 12
properties (the Properties) or used for working capital reserves. The Registrant
partially financed the acquisition of eight of its original properties with
non-recourse debt. Four properties were initially unleveraged. As of December
31, 2002, eleven of the original 12 properties had either been sold or deeded
back to the lender, leaving the Registrant with one unleveraged property. See
Item 2, Properties, and Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, for a description of the
Registrant's properties and their history.
As of December 31, 2002, the Registrant has one non-operational property held
for sale. It is the current intention of the General Partner to wind-up the
affairs of the Partnership and cause its existence to be terminated. The
winding-up process will entail disposing of the Partnership's remaining asset
(or transferring it to a liquidating trust), paying the Partnership's debts and
liabilities and, as required by the Partnership Agreement and applicable law,
setting up any reserves which the General Partner may deem reasonably necessary
for any contingent, conditional or unforeseen liabilities or obligations of the
Partnership. To the extent that the Partnership has funds in excess of amounts
necessary to satisfy its obligations and establish such reserves, such funds
will be distributed to unitholders. To the extent that reserves are not
exhausted by future claims, the funds remaining in such reserves will be
distributed to unitholders after a period of time necessary to assure that all
currently contingent, conditional or unforeseen liabilities or obligations of
the Partnership have matured and been paid.
For the year ended December 31, 2002, the Registrant's Properties owned during
2002 accounted for 100 percent of the Registrant's gross revenues.
During 2002, the Registrant sold the Hearthstone property on January 1, 2002 and
the Trinity Hills property on February 28, 2002. Following the sale of the
Trinity Hills property on February 28, 2002, the Registrant is continuing to
seek opportunities to sell its remaining asset on favorable terms.
Capital Senior Living Properties, Inc., a wholly owned subsidiary of Capital
Senior Living Corporation, an SEC registrant, and until June 10, 1998, an
affiliate of Capital, owns 56.7 percent of the outstanding Units of the
Registrant as of March 1, 2003.
3
Employees
Capital Senior Living, Inc. (CSL), a subsidiary of Capital Senior Living
Corporation, manages the Registrant. Until June 10, 1998, CSL was an affiliate
of Capital. There were no employees of the Registrant at December 31, 2002.
Competition
The real estate business is highly competitive. The Registrant's remaining
property, Crenshaw Creek, is subject to competition from properties for sale
within their service area. Such competition could effect the Registrant's
ability to sell this property.
Regulatory Matters
Federal, state and local government regulations govern fitness and adequacy,
equipment, personnel and standards of medical care at a health care facility, as
well as health and fire codes. Changes in the applicable regulations could
adversely affect the Registrant's ability to market its remaining property to
healthcare providers, which also could affect the financial results of the
Registrant.
ITEM 2. PROPERTIES
The Registrant owned one property at December 31, 2002. This property has
previously been operated as a rehabilitation center, but the property has been
closed since May 2000 and is held for sale. See Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The following table summarizes key information about the Registrant's property
at December 31, 2002.
CRENSHAW CREEK
Location Lancaster, SC
Type Rehab
Date Purchased 6/88
Purchase Price $3,900,000
Original Mortgage Amount $0
12/31/02 Mortgage Balance $0
Mortgage Maturity N/A
During 2000, 2001 and 2002, the Partnership disposed of several of its
Properties. On July 12, 2000, one of the two small Cedarbrook facilities was
sold for $390,546, resulting in a gain on sale of $115,717 and net cash proceeds
of approximately $360,380 after payment of settlement costs. The remaining
facility on the Cedarbrook campus was sold on September 25, 2001 for $325,000,
resulting in a gain on sale of $1,418 and net cash proceeds of $286,046 after
payment of settlement costs.
On January 11, 2000, the Cane Creek facility was sold to its lessee for
$2,350,000, resulting in a $302,787 gain on sale and $2,143,400 in net cash
proceeds after payment of closing costs and the mortgage related to this
facility.
On August 4, 2000, the Sandybrook facility was sold for $2,025,000 resulting in
a loss on sale of approximately $766,400, and net cash proceeds of approximately
$1,829,130 after payment of settlement costs.
4
On August 15, 2001, the Cambridge facility was sold for $3,600,000 resulting in
a gain on sale of $2,443,030 and net cash proceeds of $3,457,205 after payment
of settlement costs.
The lessee of the McCurdy facility defaulted on its minimum lease payments as of
January 2001. The Registrant attempted to work with the lessee to stabilize its
census, but the lessee was unable to do so. The Registrant discontinued mortgage
payments to the lender after the lessee defaulted on payment of its lease
obligations. The facility was foreclosed by the lender on September 11, 2001,
resulting in an extraordinary loss of $434,199.
On January 1, 2002, the Hearthstone facility was sold for $4,000,000, resulting
in a gain on sale of $1,777,113 and net cash proceeds of $2,702,125 after
payment of settlement costs.
On February 28, 2002, the Trinity Hills facility was sold for $1,800,000,
resulting in a gain of approximately $506,000 and net cash proceeds of
$1,693,323 after payment of settlement costs.
At December 31, 2002 and 2001, the Crenshaw facility was classified as an asset
held for sale on the Registrant's consolidated financial statements as the
General Partner of the Registrant had approved and established a plan to sell
this facility.
ITEM 3. LEGAL PROCEEDINGS
The Registrant has pending claims incurred in the normal course of business
that, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements of the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
At March 1, 2003, there were 1,651 unitholders of record in the Registrant
owning an aggregate of 4,148,325 Units. There is no public market for these
Units and there is no plan to list the Units on a national exchange or automated
quotation system. The Registrant formerly had a liquidity reserve feature that,
under certain circumstances, permitted unitholders to sell their Units at a
predetermined formula. In March 1991, due to inadequate liquidity of the
Registrant and the adverse impact on Unit values caused by prior-year defaults
of certain of the Registrant's lessees, the prior General Partners suspended all
redemptions pursuant to the liquidity reserve.
Pursuant to the terms of the Partnership Agreement, there are restrictions on
the ability of the unitholders to transfer their Units. In all cases, the
General Partner must consent in writing to any substitution of a unitholder. The
Internal Revenue Code contains provisions that have an adverse impact on
investors in publicly traded partnerships. Accordingly, the General Partner has
5
established a policy of imposing restrictions on the transferability of the
Units in private transactions. This policy is intended to prevent a public
trading market from developing and may impact the ability of a unitholder to
liquidate his investment quickly.
In 2002, the Registrant distributed $4,913,993 to its unitholders, of which
$4,214,326 resulted from net cash proceeds from the Hearthstone and Trinity
sales, adjusted for mortgage, security deposit and tax payments, and $699,667
resulted from excess operating cash.
In 2001, the Registrant collectively distributed $17,596,912 to its unitholders,
of which $3,450,000 resulted from net cash proceeds from the Cambridge sale,
$1,801,358 resulted from the Cedarbrook house and prior years sales, and
$12,345,554 resulted from excess operating cash. (See Item 6, Selected Financial
Data).
6
ITEM 6. SELECTED FINANCIAL DATA
HEALTHCARE PROPERTIES, L.P.
(Unaudited - Not Covered By Independent Auditors' Reports)
Year Ended December 31
----------------- ------------------ ----------------- ----------------- ------------------
2002 2001 2000 1999 1998
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Total Assets $ 1,658,431 $ 6,919,587 $ 25,294,360 $ 32,055,252 $ 32,758,958
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Mortgage Debt $ - $ 1,123,389 $ 4,772,795 $ 5,173,281 $ 6,128,656
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Total Revenue From
Operations $ 59,884 $ 6,638,177 $ 9,746,951 $ 9,499,819 $ 8,787,575
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Income Before
Extraordinary Item $ 989,705 $ 3,738,913 $ 2,651,881 $ 3,131,398 $ 874,425
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Extraordinary Loss $ - $ (434,199) $ - $ - $ -
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Net Income $ 989,705 $ 3,304,714 $ 2,651,881 $ 3,131,398 $ 874,425
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Net Income (Loss) Per Unit:
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Income Before
Extraordinary Item $ 0.24 $ 0.86 $ 0.63 $ 0.74 $ 0.21
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Extraordinary Loss $ - $ (0.10) $ - $ - $ -
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Net Income $ 0.24 $ 0.76 $ 0.63 $ 0.74 $ 0.21
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Weighted Average Number of
Units 4,148,325 4,148,325 4,148,325 4,148,325 4,153,835
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Taxable Net Income (Loss)
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Taxable Net Income (Loss) $ 894,597 $ (613,181) $ 1,707,451 $ 3,315,817 $ 1,822,007
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Per Unit $ 0.21 $ (0.15) $ 0.41 $ 0.80 $ 0.44
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Cash Distributions $ 4,913,993 $ 17,596,912 $ 9,132,500 $ 2,763,569 $ -
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Per Limited Partnership Unit $ 1.18 $ 4.18 $ 2.18 $ 0.67 $ -
- ---------------------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
The above selected financial data should be read in conjunction with the
consolidated financial statements and the related notes appearing elsewhere in
this annual report. See Footnote 3, Property and Improvements, to the
Consolidated Financial Statements, for discussion of property dispositions.
Differences between net income and taxable net income are mainly attributable to
basis differences between book and tax on property dispositions, write-downs of
asset basis, differences from pass-through entities, and depreciation methods
used.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
This item should be read in conjunction with the consolidated financial
statements and other items contained elsewhere in this report.
During 2002, the Registrant sold the Hearthstone property on January 1, 2002 and
the Trinity Hills property on February 28, 2002. Following the sale of the
Trinity Hills property on February 28, 2002, the Registrant is continuing to
seek opportunities to sell its remaining asset, the Crenshaw Creek property, on
favorable terms. It is the current intention of the General Partner to wind-up
the affairs of the Partnership and cause its existence to be terminated. The
winding-up process will entail disposing of the Partnership's remaining asset
(or transferring it to a liquidating trust), paying the Partnership's debts and
liabilities and, as required by the Partnership Agreement and applicable law,
setting up any reserves which the General Partner may deem reasonably necessary
for any contingent, conditional or unforeseen liabilities or obligations of the
Partnership. To the extent that the Partnership has funds in excess of amounts
necessary to satisfy its obligations and establish such reserves, such funds
will be distributed to unitholders. To the extent that reserves are not
exhausted by future claims, the funds remaining in such reserves will be
distributed to unitholders after a period of time necessary to assure that all
currently contingent, conditional or unforeseen liabilities or obligations of
the Partnership have matured and been paid. The Registrant anticipates
sufficient cash flow to satisfy all operational expenses.
The Registrant ended 2002 with cash and cash equivalents of $643,493, compared
to $1,694,546 at December 31, 2001. Cash and cash equivalents decreased in 2002
due to distributions of net cash proceeds from sales of property and net cash
used in operating activities.
Accounts receivable, net at December 31, 2002 decreased to $0, compared to
approximately $89,000 at December 31, 2001 primarily due to collections from the
Crenshaw Creek and Trinity Hills lessees. The allowance for doubtful accounts
decreased to approximately $649,000 at December 31, 2002 from approximately
$652,212 at December 31, 2001. This decrease was the result of account
receivable recoveries at the Cambridge facility. Accounts receivable are fully
reserved at December 31, 2002.
Assets held for sale were $1,000,000 at December 31, 2002, compared to
approximately $1,864,000 at December 31, 2001. This decrease resulted from
write-downs of estimated realizable value on the Crenshaw Creek facility in
2002. At December 31, 2001, the Crenshaw Creek facility was reclassified as an
asset held for sale.
Property and improvements, net, were approximately $600 at December 31, 2002,
compared to $3,272,000 at December 31, 2001. This decrease resulted from the
sale of the Hearthstone and Trinity Hills facilities.
Accounts payable and accrued expenses were approximately $66,000 at December 31,
2002, compared to $175,000 at December 31, 2001. This decrease resulted from
payment of accrued real estate taxes by the Registrant on the Hearthstone
facility.
Operating facility accounts payable were $0 at December 31, 2002, and
approximately $3,000 at December 31, 2001. The decrease is due to the sale of
the Cambridge facility.
8
Decreases in security deposits and mortgage loans payable from December 31, 2001
to 2002 resulted from the sale of the Hearthstone.
Results of Operations
Rental and lease revenues were approximately $37,000 in 2002 compared to
approximately $3,619,000 in 2001 and approximately $4,084,000 in 2000. The
decrease in rental and lease revenue form 2001 to 2002 was due to the sale of
the Hearthstone and Trinity Hills facilities. The decrease in rental revenue
from 2000 to 2001 resulted from the November 30, 2001 lease termination on the
properties leased to HealthSouth Corporation and due to the termination of the
lease upon foreclosure of the McCurdy facility.
Resident and healthcare revenues of approximately $23,000 for the year ended
December 31, 2002, approximately $3,019,000 for the year ended December 31, 2001
and approximately $5,663,000 for the year ended December 31, 2000, related to
the operations at the Cambridge facility. The decrease in resident and
healthcare revenues from 2000 to 2001 and 2001 to 2002 is due to the sale of the
Cambridge facility in 2001.
Facility operating expenses were $0 in 2002 compared to approximately $3,461,000
in 2001 and approximately $4,862,000 in 2000. The decrease in facility operating
expenses is due to the sale of the Cambridge facility in 2001.
Depreciation was approximately $14,000 for 2002, $443,000 for 2001, and $533,000
for 2000. Depreciation decreased in 2002 and 2001 from 2000 due to the sale of
the Cambridge, Hearthstone, Trinity Hills and small Cedarbrook facilities.
Fees to related parties were approximately $99,000, $419,000, and $838,000 for
the years ended 2002, 2001, and 2000, respectively. The decrease in fees from
2000 to 2001 and 2001 to 2002 resulted from decreased asset management fees,
property management fees, administrative expenses, and general partner
management fees.
Bad debt expense (net of recoveries) was approximately $(3,500), $798,000, and
$0, for the years ended 2002, 2001, and 2000, respectively. Bad debt recoveries
in 2002 was due to recoveries from the Cambridge facility. The bad debt expense
provision increase in 2001 was due to non-payment of rent on the McCurdy lease
and additional allowance reserves at the Cambridge facility. There was no bad
debt expense provision in 2000.
The Registrant recorded approximately $864,000 write-downs of estimated
realizable value on the Crenshaw property held for sale in 2002 and a $232,000
write-down on an asset held for sale in 2000 for its remaining small Cedarbrook
facility.
Administrative and other expenses were approximately $463,000, $207,000, and
$446,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
Administrative and other expenses decreased from 2000 to 2001 due to decreased
overhead costs on properties held for sale or released. Administrative and other
expenses increased from 2001 to 2002 due to increased real estate taxes,
insurance, partnership overhead costs and overhead costs on the properties held
for sale.
9
Interest income was approximately $31,000, $248,000, and $768,000 for the years
ended December 31, 2002, 2001, and 2000, respectively. Interest income decreased
in 2002 from 2000 and 2001 due to less available cash for investment resulting
from increased distributions in 2001 and 2002.
Interest expense was approximately $11,000, $364,000, and $499,000 for the years
ended December 31, 2002, 2001, and 2000, respectively. Interest expense
decreased in 2002 and 2001 from 2000 due to continuing pay-down of loan
principal and the repayment of mortgages upon the sale or foreclosure of
facilities.
Amortization was approximately $0, $56,000, and $107,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Amortization decreased in 2002
and 2001 from 2000 due to fully amortized lease costs.
During 2002, the net gain on sale of properties of approximately $2,283,000
resulted from a $1,777,000 gain on the Hearthstone facility and a $506,000 gain
on the Trinity Hills facility. During 2001, the net gain on sale of properties
of approximately $2,444,000 resulted from a $2,443,000 gain on the Cambridge
facility and a $1,000 gain on the Cedarbrook facility. During 2000, the net loss
on sale of properties of approximately $348,000 resulted from a $303,000 gain on
the sale of the Cane Creek facility, a $115,000 gain on the sale of a small
Cedarbrook facility, and a $766,000 loss on the sale of the Sandybrook facility.
During 2002, other income of approximately $63,000 resulted from collection of
an administrative claim from the former lessee of the Cambridge facility. During
2001, other income of approximately $156,000 was due to the write off of prior
management lessee obligations on the Trinity Hills facility.
During 2001, an extraordinary loss of approximately $434,000 resulted upon
foreclosure of the McCurdy facility.
Operations of certain of the Registrant's Properties
Cedarbrook, Cane Creek, Crenshaw Creek and Sandybrook Facilities
Rebound, Inc., a subsidiary of HealthSouth Corporation (HealthSouth), formerly
leased the Cedarbrook, Cane Creek, Crenshaw Creek and Sandybrook properties
pursuant to a master lease with the Registrant through the end of the lease
term, November 30, 2001.
Due to low occupancy, HealthSouth closed the Sandybrook facility in 1994, the
Cedarbrook facility in 1997, and the Crenshaw Creek facility in May 2000.
HealthSouth continued to make full lease payments under the terms of the master
lease on a timely basis through the end of the lease term.
Effective August 5, 1999, HealthSouth agreed to transfer control of the
Cedarbrook and Sandybrook facilities to the Registrant and to continue making
its full lease payments under the terms of the master lease to the Registrant.
On July 12, 2000, one of the two small Cedarbrook facilities was sold for
$390,546, resulting in a gain on sale of $115,717 and net cash proceeds of
approximately $360,380 after payment of settlement costs. On September 25, 2001,
the remaining Cedarbrook facility was sold for $325,000, resulting in a gain on
sale of $1,418 and net cash proceeds of $286,046 after payment of settlement
costs. On January 11, 2000, the Cane Creek facility was sold to a subsidiary of
HealthSouth for $2,350,000, resulting in a $302,787 gain on the sale and
$2,143,400 in net cash proceeds after payment of settlement costs and mortgage
payable. On August 4, 2000, the Sandybrook facility was sold for $2,025,000
resulting in a loss of approximately $766,400, and net cash proceeds of
10
approximately $1,829,130 after payment of settlement costs. HealthSouth
transferred the Crenshaw Creek facility to the Registrant by the end of its
lease term. The Crenshaw Creek facility was closed in May 2000 and held for sale
at December 31, 2002 and 2001.
Cambridge Facility
The lessee of the Cambridge facility, Nursing Centers of America-Cambridge
(NCAC), filed a voluntary petition under Chapter 11 of the Federal Bankruptcy
Code in February of 1992. The Registrant commenced litigation against NCAC
seeking full payment of future rentals under the lease of NCAC.
On August 1, 1996, the United States Bankruptcy Court approved the transfer of
the operations of NCA Cambridge Nursing Home to Cambridge LLC, a subsidiary of
the Registrant, thereby releasing the operations of the Cambridge facility from
the jurisdiction of the United States Bankruptcy Court. The Registrant's
subsidiary operated this property through August 2001. On August 15, 2001, the
Cambridge facility was sold for $3,600,000 resulting in a gain on sale of
$2,443,030 and net cash proceeds of $3,457,205 after payment of settlement
costs. Additionally, the Registrant has engaged an independent third party
consultant to explore the possibility of selling the license of the Cambridge
facility to prospective nursing home purchasers. There can be no assurances such
sale will occur.
The Registrant had filed an administrative claim with the trustee of the United
States Bankruptcy Court for unpaid lease payments. At December 31, 1999, the
Registrant recorded a receivable for $700,000 related to this administrative
claim, which was approved by the United States Bankruptcy Court. The $700,000
account receivable was subsequently collected on March 1, 2000. In January 2002,
an additional $63,498 was received related to the administrative claim. It is
unlikely that material future disbursements will be made to the Registrant from
NCAC's bankruptcy.
Hearthstone, Trinity Hills and McCurdy Facilities
The Hearthstone lease expired on November 7, 2000. The lessee and the Registrant
attempted to negotiate an extension of the lease, but were unsuccessful in doing
so. On January 18, 2000, the parent company of the lessee filed for Chapter 11
bankruptcy in the United States Bankruptcy Court for the District of Delaware.
The Hearthstone lessee did not pay its April 2001 rent to the Registrant. The
Registrant negotiated with an unaffiliated operator to take over the lease,
effective May 1, 2001 for a five-year term through April 30, 2006. The
Hearthstone facility was subsequently sold on January 1, 2002 for $4,000,000,
resulting in a gain on sale of $1,777,113 and net cash proceeds of $2,702,125
after payment of settlement costs. Registrant received notice from the original
lessee (who had filed for Chapter 11 bankruptcy) of a potential claim against
Registrant regarding ownership of the furniture, fixtures and equipment at the
Hearthstone facility. The Registrant has subsequently been released from this
claim.
The Trinity Hills lease expired on June 30, 2000, however, the lessee continued
to lease the facility on a month-to-month basis. On February 2, 2000, the parent
company of the lessee filed for Chapter 11 bankruptcy in the United States
Bankruptcy Court for the District of Delaware. The lessee was current on its
rent and lease participation payments through December 31, 2001. The Registrant
negotiated with an unaffiliated operator to take over the lease effective
January 1, 2002 for a five-year term through December 2006, with an option to
purchase. The Trinity Hills facility was subsequently sold to the lessee on
February 28, 2002 for $1,800,000, resulting in a gain of approximately $506,000
11
and net cash of $1,693,323 after payment of settlement costs. The lessee of the
McCurdy facility defaulted on its minimum lease payments as of January 2001. The
Registrant attempted to work with the current lessee to stabilize its census,
but was unable to do so. The Registrant discontinued mortgage payments to the
lender after the lessee's default on payment of lease obligations. The facility
was foreclosed by the lender on September 11, 2001, resulting in an
extraordinary loss of $434,199 in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant's primary market risk exposure is from fluctuations in interest
rates and the effects of those fluctuations on the market values of its cash
equivalent short-term investments. The cash equivalent short-term investments
consist primarily of overnight investments that are not significantly exposed to
interest rate risk, except to the extent that changes in interest rates will
ultimately affect the amount of interest income earned on these investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the attached Consolidated Financial Statements with Independent Auditors'
Reports thereon.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant is a Limited Partnership and has no directors, officers, or
employees.
The General Partner of the Registrant is Capital, which was formed under the
laws of the State of Texas in 1988. Capital was a wholly owned subsidiary of
Capital Realty Group Corporation, a Texas corporation (CRG). CRG is owned by
James A. Stroud (50 percent through a trust) and by Jeffrey L. Beck (50
percent).
On June 10, 1998, the sole owner of stock of the General Partner, CRG, sold all
of its shares of Capital common stock to Retirement Associates, Inc.
(Associates) for $855,000. The source of the financing was a Promissory Note for
$855,000 with a five-year term and bearing an interest rate of 8 percent per
annum as of December 1, 1999. Prior to December 1, 1999, the Promissory Note had
an interest rate of 10 percent per annum; the interest rate was decreased to
adjust to a market rate and in consideration of an early, unscheduled payment of
interest due. As of December 31, 2002, the interest on this note has been paid
and the unpaid balance on this note is $717,938. Associates was the maker of the
Note and CRG was the payee. Mr. Robert Lankford is the President of Associates
and has had prior business relationships with Messrs. Beck and Stroud, the
former principals of Capital. From 1988 to 1997, Mr. Lankford was an independent
12
broker with Capital Realty Group Brokerage, Inc., an affiliate of CRG. From 1997
to the present, however, Mr. Lankford has been a principal with Kamco Property
Company Commercial Real Estate Brokerage. In this capacity, Mr. Lankford
provides independent commercial real estate brokerage services for various
clients including Capital Senior Living Corporation (CSLC), which accounts for
less than 20 percent of his compensation. The address of the principal executive
offices of Capital is 3516 Merrell Road, Dallas, Texas 75229.
CSL, a subsidiary of CSLC, manages the Registrant.
As of December 31, 2002 the officers and directors of Capital, the General
Partner, were:
Name Position
---- --------
Robert L. Lankford President, Retirement Associates,
Inc., sole stockholder of Capital,
the General Partner
Wayne R. Miller, Esq. Secretary, Retirement Associates,
Inc.
Robert L. Lankford
Robert L. Lankford, age 48, has served as President of Retirement Associates,
Inc. since June 1997. From 1988 to 1997, Mr. Lankford was an independent broker
with Capital Realty Group Brokerage, Inc., an affiliate of CRG. From 1997 to the
present, Mr. Lankford has been a principal with Kamco Property Company
Commercial Real Estate Brokerage. In this capacity, Mr. Lankford provides
independent commercial real estate brokerage services for various clients
including CSLC, which currently accounts for less than 20 percent of his
compensation.
Wayne R. Miller
Wayne R. Miller, age 53, has served as Secretary of Retirement Associates, Inc.
since June 1997. From 1980 to 1994, Mr. Miller was an officer, director and
shareholder of the law firm of Miller, Hiersche, Martens and Hayward, Inc. From
1994 to the present, Mr. Miller has been President, Sole Director and Sole
Shareholder of the law firm of Wayne R. Miller P.C.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Registrant pursuant to Rule 16a-3(e) of the SEC rules, the
Registrant is not aware of any failure of any officer or director of CSL or
beneficial owner of more than 10 percent of the Units to timely file with the
SEC any Form 3, 4 or 5 relating to the Registrant for 2002.
13
ITEM 11. EXECUTIVE COMPENSATION
The Registrant has no officers or directors. The officers and directors of the
General Partner receive no direct current remuneration from the Registrant nor
is it proposed that they receive remuneration in such capacities. The Registrant
is required to pay certain fees to the General Partner or its affiliates, make
distributions, and allocate a share of the profits and losses of the Registrant
to the General Partner. The relationship of the General Partner (and its
directors and officer) to its affiliates is set forth above in Item 10.
Reference is also made to Note 6 of the Notes to the Consolidated Financial
Statements included herein, for a description of such distributions, allocations
and the compensation and reimbursements paid to the General Partner and former
affiliates. Also see Item 13, Certain Relationships and Related Transactions,
for additional information.
There are no compensatory plans or arrangements resulting from resignation or
retirement of the partners, directors or executive officers of the General
Partner that require payments to be received from the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Capital Senior Living Properties, Inc., owned by CSLC, an SEC registrant and an
affiliate of CSL, and until June 10, 1998, an affiliate of Capital, owns 56.7
percent of outstanding Units of the Registrant as of March 1, 2003. Otherwise,
no other person or group owns more than 5 percent of the Registrant as of March
1, 2003.
No partners, officers or directors of the General Partner directly own any Units
at March 1, 2003. However, Messrs. Beck and Stroud and their affiliates own a
substantial interest (approximately 50 percent) in CSLC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of the Partnership Agreement, the Registrant is entitled to
engage in various transactions involving affiliates of the General Partner.
Pursuant to the Partnership Agreement, the General Partner receives a share of
the Registrant's profits, losses and distributions of available cash flow.
The General Partner and its affiliates are entitled to receive an Acquisition
Fee, as defined in the Registrant's Partnership Agreement, for their services
rendered to the Registrant in connection with the selection and purchase of any
property by the Registrant whether designated as real estate commissions or
other fees, however designated and however treated for tax or accounting
purposes. Aggregate Acquisition Fees (as defined in the Registrant's Partnership
Agreement) payable to all persons in connection with the purchase of the
Registrant's properties may not exceed the lesser of: (a) 2 percent of the gross
proceeds of the Registrant's offering; or (b) such compensation as is
customarily charged in similar arm's-length transactions. If there are
insufficient proceeds to pay such fee to the General Partner and their
affiliates, such amount will not be deferred. No amounts were earned in 2002,
2001 and 2000 in connection with such services. In connection with any
reinvestment of sale or refinancing proceeds as provided in the Partnership
Agreement, the Registrant will pay a reinvestment acquisition fee of 2 percent
of the price of additional properties payable from Net Sale or Refinancing
Proceeds (each as defined in the Registrant's Partnership agreement) utilized
solely for the acquisition. No such fees were paid in 2002, 2001, or 2000.
14
The Registrant may pay the General Partner or its affiliates a Regulatory
Approval Fee, as defined in the Partnership Agreement, of up to 6 percent of the
costs of any newly constructed property that is acquired by the Registrant. The
services rendered in connection with such fee will include: obtaining the
appropriate certificates of need, licenses, Medicare and Medicaid clearances,
regulatory approvals of transfer as is necessary, and such other federal, state,
local and other regulatory agency approvals as are necessary, and completion of
various other items which pertain to the commencement of the operation of a
newly constructed health care facility. Said services are expected to continue
over the term for which such the Registrant properties are subject to compliance
with regulatory agencies, so as to ensure that the newly constructed property
can be placed into service on a timely basis and remain operational. This fee
will not exceed $1,150,000. The General Partner or its affiliates did not earn
any compensation in 2002, 2001 or 2000 in connection with such services.
The Registrant may pay to the General Partner or its affiliates, for services
rendered in connection with the refinancing, financing or lease restructuring of
the Registrant's property, a service fee equal to the lesser of: (a) 2 percent
of the refinancing proceeds of the Registrant property; or (b) fees which are
competitive for similar services in the geographical area where the Registrant
property is located. In 2001, the General Partner received a $39,856 fee for the
lease restructure of the Hearthstone facility. No such fees were paid in 2002 or
2000.
The Registrant may pay to the General Partner or its affiliates, for services
rendered in connection with the sale of a the Registrant property, and shall be
entitled to receive the lesser of: (a) 3 percent of the sale price of the
Registrant's property, or (b) an amount not to exceed 50 percent of the standard
real estate commission. Amounts earned by the General Partner in 2002 for its
efforts in the sale of The Hearthstone and Trinity Hills facilities were
$174,000. Amounts earned by the General Partner in 2001 for its efforts in the
sale of the Cambridge facility were $108,000. Amounts earned by the General
Partner in 2000 for its efforts in the sale of Cane Creek, Sandybrook and the
small Cedarbrook facility were $142,967.
Since most of the Registrant's properties have long-term, triple-net leases and
others have independent fee management engagements for most services, the
General Partner or its former affiliates received 1 percent of the monthly gross
rental or operating revenues, totaling approximately $370, $60,000, and $97,000
in 2002, 2001, and 2000, respectively. Property management fees paid to the
General Partner or to its managing agent, CSL, were approximately $0, $209,000,
and $396,000 in 2002, 2001,and 2000, respectively. Asset management fees paid to
the General Partner or to its managing agent, CSL, were approximately $0, $0,
and $80,000 in 2002, 2001, and 2000, respectively.
The General Partner may be reimbursed for its direct expenses relating to
administration of the Registrant. The General Partner, its affiliates or its
managing agent, CSL, received approximately $99,000, $111,000, and $265,000 of
reimbursements for such out-of-pocket expenses in 2002, 2001, and 2000,
respectively. In addition, the General Partner, its affiliates or its managing
agent, CSL, received approximately $3,000, $2,487,000, and $3,130,000 for salary
and benefit reimbursements during 2002, 2001 and 2000 respectively.
In addition, a significant stockholder of Capital Senior Living Corporation is
chairman of the board and principal stockholder of a bank, United Texas Bank of
Dallas, where the Registrant holds the majority of its operating cash accounts.
15
ITEM 14. CONTROLS AND PROCEDURES
The General Partner's chief executive officer/chief financial officer, after
evaluating the effectiveness of the Registrant's disclosure controls and
procedures (as defined in Rules 13-a-14(c) and 15-d-14(c) under the Securities
Exchange Act of 1934) as of a date (the "Evaluation Date"), which was within 90
days of this annual report on Form 10-K, has concluded in his judgment that, as
of the Evaluation Date, the Registrant's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Registrant and its subsidiaries would be made known to them.
There were no significant changes in the Registrant's internal controls or, to
the knowledge of the chief executive officer/chief financial officer, in other
factors that could significantly affect the Registrant's disclosure controls and
procedures subsequent to the Evaluation Date.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Financial Statements
The following documents were filed as part of this report:
o Report of Independent Auditors of Ernst & Young LLP
o Consolidated Balance Sheets -December 31, 2002 and 2001;
o Consolidated Statements of Income - Three years ended December 31, 2002;
o Consolidated Statements of Partnership Equity - Three years ended December
31, 2002;
o Consolidated Statements of Cash Flows - Three years ended December 31,
2002; and
o Notes to Consolidated Financial Statements.
Financial Statement Schedules
All schedules have been omitted because they are inapplicable, not required, or
the information is included in the consolidated financial statements or notes
thereto.
Exhibits
The list of exhibits is incorporated herein by reference to the exhibit index on
page 18 of this report.
Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 2002.
16
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 by the
Registrant and on its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE PROPERTIES, L.P.
By: Capital Realty Group Senior Housing, Inc.,
General Partner
By: /s/ Robert L. Lankford
----------------------------
Robert L. Lankford, President/Chief Financial Officer
March 28, 2003
17
EXHIBIT INDEX
Exhibit Number
3 Restated Limited Partnership Agreement is incorporated
by reference to Exhibit A to the Prospectus of the Registrant
dated August 31, 1987, as filed with the Commission
pursuant to Rule 424(b).
10 Restructuring Agreement dated November 30, 1992,
between the Registrant and Rebound, Inc. with exhibits.
28 Partnership Management Agreement, dated July 29, 1992,
with Capital Realty Group Properties, Inc. as filed with
the Commission in the Third Quarter 10-Q,
dated September 30, 1992.
99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002
18
CERTIFICATION
I, Robert Lankford, chief executive officer and chief financial officer of the
General Partner of Healthcare Properties L.P., certify that:
1. I have reviewed this annual report on Form 10-K of Healthcare Properties L.P.
("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to me by
others within the Registrant, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date.
5. I have disclosed, based on my most recent evaluation, to the Registrant's
auditors and the General Partner's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Robert L. Lankford
---------------------------------
Robert L.Lankford
Chief executive officer and chief
financial officer of the
General Partner
March 28,2003
19
CONSOLIDATED FINANCIAL STATEMENTS
HealthCare Properties, L.P. and Subsidiaries
Years ended December 31, 2002, 2001, and 2000
HealthCare Properties, L.P. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2002, 2001, and 2000
Contents
Report of Ernst & Young LLP, Independent Auditors...........................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Income...........................................F-3
Consolidated Statements of Partnership Equity (Deficit).....................F-4
Consolidated Statements of Cash Flows.......................................F-5
Notes to Consolidated Financial Statements..................................F-6
Report of Independent Auditors
The Partners
HealthCare Properties, L.P.
We have audited the accompanying consolidated balance sheets of HealthCare
Properties, L.P. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, partnership equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2002.
These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of HealthCare
Properties, L.P. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
February 14, 2003
except for Note 1, as to which the date is
March 26, 2003
F-1
HealthCare Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
December 31
2002 2001
---------------------------------------
Assets
Cash and cash equivalents $ 643,493 $ 1,694,546
Accounts receivable, less allowance for doubtful
accounts of $648,697 in 2002 and $652,212 in 2001 - 89,185
Prepaid expenses 14,375 -
Assets held for sale (Note 2) 1,000,000 1,863,652
Property and improvements, net (Notes 3, 4, and 5) 563 3,272,204
---------------------------------------
Total assets $ 1,658,431 $ 6,919,587
=======================================
Liabilities and Partnership Equity
Accounts payable and accrued expenses $ 66,114 $ 175,001
Operating facility accounts payable - 3,345
Security deposits - 101,247
Mortgage loan payable (Note 4) - 1,123,389
---------------------------------------
Total liabilities 66,114 1,402,982
Partnership equity (deficit):
Limited partners (4,148,325 units at December 31,
2002 and 2001) 1,631,431 5,550,910
General partner (39,114) (34,305)
---------------------------------------
Total partnership equity 1,592,317 5,516,605
---------------------------------------
Total liabilities and partnership equity $ 1,658,431 $ 6,919,587
=======================================
See accompanying notes.
F-2
HealthCare Properties, L.P. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
2002 2001 2000
-------------------------------------------------------
Revenues:
Resident and health care revenue $ 22,813 $ 3,019,174 $ 5,663,026
Rental and lease income (Note 5) 37,071 3,619,003 4,083,925
-------------------------------------------------------
59,884 6,638,177 9,746,951
-------------------------------------------------------
Expenses:
Facility operating expenses - 3,461,459 4,862,317
Depreciation 13,693 442,619 532,949
Fees to related parties (Note 6) 99,430 419,203 837,912
Bad debt expense, net of recoveries of $3,514
in 2002, $0 in 2001, and $0 in 2000 (3,514) 797,619 -
Write-down of assets held for sale to estimated
net realizable value (Note 2) 863,652 - 232,490
Administrative and other 463,174 207,116 446,463
-------------------------------------------------------
1,436,435 5,328,016 6,912,131
-------------------------------------------------------
(Loss) income from operations (1,376,551) 1,310,161 2,834,820
Other income (expense):
Interest income 30,799 248,413 767,806
Interest expense (11,234) (363,614) (498,416)
Amortization - (56,291) (107,041)
Gain (loss) on sale of properties, net (Note 3) 2,283,193 2,444,448 (347,896)
Other 63,498 155,796 2,608
-------------------------------------------------------
2,366,256 2,428,752 (182,939)
-------------------------------------------------------
Income before extraordinary loss 989,705 3,738,913 2,651,881
Extraordinary loss (Note 2) - (434,199) -
-------------------------------------------------------
Net income $ 989,705 $ 3,304,714 $ 2,651,881
=======================================================
Allocation of net income:
Limited partners 980,521 $ 3,152,135 $ 2,595,512
General partner 9,184 152,579 56,369
-------------------------------------------------------
$ 989,705 $ 3,304,714 $ 2,651,881
=======================================================
Basic per limited partnership unit calculations:
Net income before extraordinary loss $ .24 $ .86 $ .63
Extraordinary loss - (.10) -
-------------------------------------------------------
Net income $ .24 $ .76 $ .63
=======================================================
Distributions $ (1.18) $ (4.18) $ (2.18)
=======================================================
Weighted average number of units $ 4,148,325 $ 4,148,325 $ 4,148,325
=======================================================
See accompanying notes.
F-3
HealthCare Properties, L.P. and Subsidiaries
Consolidated Statements of Partnership Equity (Deficit)
Limited General
Partners Partner Total
-------------------------------------------------------------
Equity at January 1, 2000 $ 26,189,763 $ 99,659 $ 26,289,422
Net income 2,595,512 56,369 2,651,881
Distributions (9,036,500) (96,000) (9,132,500)
-------------------------------------------------------------
Equity at December 31, 2000 19,748,775 60,028 19,808,803
Net income 3,152,135 152,579 3,304,714
Distributions (17,350,000) (246,912) (17,596,912)
-------------------------------------------------------------
Equity (Deficit) at December 31, 2001 5,550,910 (34,305) 5,516,605
Net income 980,521 9,184 989,705
Distributions (4,900,000) (13,993) (4,913,993)
-------------------------------------------------------------
Equity (Deficit) at December 31, 2002 $ 1,631,431 $ (39,114) $ 1,592,317
=============================================================
See accompanying notes.
F-4
HealthCare Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2002 2001 2000
--------------------------------------------------------
Operating Activities
Net income $ 989,705 $ 3,304,714 $ 2,651,881
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Write-down of assets held for sale to estimated net
realizable value 863,652 - 232,490
Depreciation and amortization 13,693 498,910 639,990
Bad debt expense, net of recoveries (3,514) 797,619 -
(Gain) loss on sale of properties (2,283,193) (2,444,448) 347,896
Extraordinary loss - 434,199 -
Changes in operating assets and liabilities:
Accounts receivable 92,699 (132,990) 867,129
Prepaid expenses (14,375) 15,200 (14,895)
Accounts payable and accrued expenses (89,928) (341,185) 120,213
Security deposits (101,247) 101,247 -
--------------------------------------------------------
Net cash (used in) provided by operating
activities (532,508) 2,233,266 4,844,704
Investing Activities
Purchase of property and improvements - (20,500) (27,572)
Proceeds from sales of properties 4,395,448 3,644,457 4,506,173
--------------------------------------------------------
Net cash provided by investing activities 4,395,448 3,623,957 4,478,601
Financing Activities
Payments on mortgage loans payable - (80,020) (400,486)
Distributions to partners (4,913,993) (17,596,912) (9,132,500)
--------------------------------------------------------
Net cash used in financing activities (4,913,993) (17,676,932) (9,532,986)
--------------------------------------------------------
Net decrease in cash and cash equivalents (1,051,053) (11,819,709) (209,681)
Cash and cash equivalents at beginning of year 1,694,546 13,514,255 13,723,936
--------------------------------------------------------
Cash and cash equivalents at end of year $ 643,493 $ 1,694,546 $ 13,514,255
========================================================
Supplemental Disclosures
Cash paid for interest $ 22,304 $ 365,022 $ 495,876
========================================================
See accompanying notes.
F-5
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
1. General
HealthCare Properties, L.P. (HCP or the Partnership) is a Delaware limited
partnership established for the purpose of acquiring, leasing, and operating
existing or newly constructed long-term health care properties. These properties
are operated by the Partnership or are leased to qualified operators who provide
specialized health care services. Capital Realty Group Senior Housing, Inc.
(CRG) is the sole general partner of the Partnership. Capital Senior Living,
Inc. (CSL), a wholly owned subsidiary of Capital Senior Living Corporation
(CSLC), and an affiliate of CRG until June 1998, is the managing agent for the
Partnership.
Capital Senior Living Properties, Inc. (CSLP), a wholly owned subsidiary of
CSLC, owned approximately 57% of the Partnership's limited partner units at
December 31, 2002, 2001, and 2000. As a result, HCP is consolidated into the
financial statements of CSLC. CSLC is subject to the reporting obligations of
the Securities and Exchange Commission.
The consolidated financial statements for the years ended December 31, 2001 and
2000, include the accounts of the Partnership's wholly owned subsidiary,
Cambridge Nursing Home Limited Liability Company (Cambridge LLC), which operated
the Partnership's Cambridge Nursing Home, located in Cambridge, Massachusetts,
until it was sold on August 15, 2001. All significant intercompany accounts and
transactions have been eliminated in consolidation.
At December 31, 2002, the Partnership has one remaining property which is
classified as an asset held for sale. At December 31, 2001, the Partnership
leased two of its three properties to unaffiliated operators on a triple net
basis. At December 31, 2000, the Partnership leased four of its five properties
to unaffiliated operators on a triple net basis.
On March 26, 2003, the general partner began plans to wind-up the affairs of the
Partnership and cause its existence to be terminated. Management believes there
are no adjustments to the December 31, 2002, balances that would be needed if a
liquidation basis of accounting had been adopted as of December 31, 2002.
F-6
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
The Partnership classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.
The Partnership records accounts receivable for contingent rentals and past due
rents only when circumstances indicate a substantial probability of collection.
Existing receivables are reserved to the extent collection is deemed doubtful by
the Partnership's management.
Property and improvements are stated at cost. Depreciation is calculated over
the estimated useful service lives of the assets using declining-balance and
straight-line methods. The estimated useful lives are as follows: buildings and
improvements, 25 to 31 years; and furniture, fixtures and equipment, 5 to 10
years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The fair value is
based on either the expected future cash flows discounted at a rate which varies
based on associated risk or an independent third-party appraisal. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
During 2002, the Partnership sold its two remaining operating properties,
Hearthstone and Trinity Hills. During 2002, the Partnership also recorded an
adjustment of $863,652 to the carrying amount of its remaining property,
Crenshaw Creek, which is classified as an asset held for sale, due to reduction
in estimated net realizable value. The Partnership estimates the one remaining
property at December 31, 2002, classified as held for sale has an aggregate fair
value, net of costs of disposal, of $1,000,000. The amount the Partnership will
ultimately realize could differ materially from this estimate.
During 2001, the Partnership reclassified the Crenshaw Creek property to assets
held for sale, and sold the Cambridge facility. In addition, during 2001, a
lender foreclosed on a property that had been classified as assets held for
sale, resulting in a 2001 extraordinary loss of $434,199.
F-7
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred charges primarily represent initial fees and other costs incurred in
negotiating leases and mortgage loans payable. These costs were amortized using
the straight-line method over the lives of the related leases or mortgage loans.
The consolidated financial statements and federal income tax returns are
prepared on the accrual method of accounting and include only those assets and
liabilities and results of operations which relate to the business of the
Partnership and its wholly owned subsidiaries. No provision has been made for
federal and state income taxes since such taxes are the responsibility of the
individual partners. Although the Partnership's subsidiaries file federal
corporate income tax returns, none of the subsidiaries had significant net
income for financial reporting or income tax purposes in 2002, 2001, or 2000.
Accordingly, no provision has been made for federal and state income taxes for
these subsidiaries in 2002, 2001, or 2000.
Resident and health care revenue is reported at the estimated net realizable
amounts due from residents, third-party payors (including the Medicare and
Medicaid programs), and others in the period for which services are provided.
Revenue under third-party payor agreements is subject to audit and, in certain
cases, retroactive adjustment. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered.
Differences between the estimated amounts accrued and interim and final
settlements are reported in operations in the year of settlement. Final
settlement has been made by the Medicare fiscal intermediary with respect to the
Cambridge property for all years through December 31, 2001. Laws and regulations
governing the Medicare and Medicaid programs are complex and subject to
interpretation. The Partnership believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action, including fines, penalties, and exclusion from
the Medicare and Medicaid programs.
Net income (loss) of the Partnership and taxable income (loss) are generally
allocated 98% to the limited partners and 2% to the general partner. The net
income of the Partnership from the disposition of a property is allocated (i) to
F-8
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
partners with deficit capital accounts on a pro rata basis, (ii) to limited
partners until they have been paid an amount equal to the amount of their
Adjusted Investment, as defined, (iii) to the limited partners until they have
been allocated income equal to their 12% Liquidation Preference, and (iv)
thereafter, 80% to the limited partners and 20% to the general partner. The net
loss of the Partnership from the disposition of a property is allocated (i) to
partners with positive capital accounts on a pro rata basis and (ii) thereafter,
98% to the limited partners and 2% to the general partner. Distributions of
available cash flow are generally distributed 98% to the limited partners and 2%
to the general partner, until the limited partners have received an annual
preferential distribution, as defined. Thereafter, available cash flow is
distributed 90% to the limited partners and 10% to the general partner.
For the year ended December 31, 2002, the gain on the sale of Hearthstone and
Trinity Hills was allocated first to the general partner's deficit and the
remaining amount was allocated to the limited partners. The operating losses
throughout the year were allocated 98% to the limited partners and 2% to the
general partner. The partnership made distributions of $4,900,000 and $13,993 to
the limited partners and general partner, respectively, in 2002.
For the year ended December 31, 2001, the gain on the sale of Cambridge (Note 3)
was allocated first to the deficit of the general partner's account and the
remaining amount was allocated to the limited partners. The loss on the
Cedarbrook sale was allocated to the balance on the partners capital accounts on
the date of the event, resulting in 99.99% of the loss being allocated to the
limited partners and 0.01% to the general partner. The extraordinary loss on the
McCurdy foreclosure was allocated to the balance on the partners capital
accounts on the date of the event, resulting in 99.99% of the loss being
allocated to the limited partners and 0.01% to the general partner. The
remaining net income was allocated 98% to the limited partners, and 2% to the
general partner. The Partnership made distributions of $17,350,000 and $246,912
to the limited partners and general partner, respectively, in 2001.
For the year ended December 31, 2000, the gain on sale of the Cane Creek
property and the Cedarbrook house (see Note 3) was allocated 100% to the limited
partners. The loss on the sale of the Sandybrook property was allocated
according to the balance on the partners' capital accounts at the date of sale,
F-9
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
resulting in 99.5% of the loss being allocated to the limited partners and 0.5%
to the general partner. The remaining 2000 net income was allocated 98% to the
limited partners and 2% to the general partner. The Partnership made
distributions of $9,036,500 and $96,000 to the limited partners and general
partner, respectively, in 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements and related footnotes. Management bases its estimates and assumptions
on historical experience, observance of industry trends and various other
sources of information and factors, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from these
estimates. Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions. The
Company believes revenue recognition and assets held for sale are its most
critical accounting policies and require management's most difficult, subjective
and complex judgments.
The Partnership evaluates the performance and allocates resources of its
properties based on current operations and market assessments on a
property-by-property basis. The Partnership does not have a concentration of
operations geographically or by product or service as its management functions
are integrated at the property level.
F-10
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Improvements
Property and improvements consist of:
December 31
2002 2001
-------------------- --------------------
Land $ - $ 1,056,039
Buildings and improvements - 4,932,962
Furniture, fixtures, and equipment 8,908 487,423
-------------------- --------------------
8,908 6,476,424
Less accumulated depreciation 8,345 3,204,220
-------------------- --------------------
$ 563 $ 3,272,204
==================== ====================
On January 1, 2002, the Hearthstone property was sold for net $4,000,000, which
resulted in a gain of $1,777,113, and net cash proceeds of $2,702,125.
On February 28, 2002, the Trinity Hills facility was sold for $1,800,000,
resulting in a gain of approximately $506,000 and net cash proceeds of
$1,693,323 after payment of settlement costs.
During 2001, the Partnership sold its Cambridge facility and final Cedarbrook
house for net proceeds of $3,644,457 and the gain on the sale was $2,444,448.
Also during 2001, the Crenshaw Creek property was reclassed to assets held for
sale at a net book value of $1,863,652, which is the lower of net book value or
fair value. The lessee of the McCurdy facility defaulted on its minimum lease
payment. The Partnership attempted to work with the current lessee to stabilize
it census, but was unable to do so. The facility was foreclosed by the lender on
September 11, 2001, resulting in an extraordinary loss of $434,199.
During 2000, the Partnership sold the Cane Creek, Sandybrook, and one of the
Cedarbrook houses for total proceeds of $4,506,173, net of sales commissions,
which resulted in a net loss on sales of $347,896. These facilities had been
classified as assets held for sale. Rental revenue associated with these
properties was $1,794,000 in 2000.
The following information is a summary of Partnership additions to and
deductions from property and improvements and accumulated depreciation for the
years ended December 31, 2002 and 2001. The information presented includes
furniture, fixtures, and equipment, which are immaterial to the Partnership.
F-11
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Property and Improvements 2002 2001
-------------------- ---------------------
Balance at beginning of year $ 6,476,424 $ 3,704,485
Additions during the year - 20,500
-------------------- ---------------------
6,476,424 13,724,985
Deductions during year:
Cost of property sold 6,467,516 3,245,829
Reclass to assets held for sale - 4,002,732
-------------------- ---------------------
Balance at end of year $ 8,908 $ 6,476,424
==================== =====================
Accumulated depreciation:
Balance at beginning of year $ 3,204,220 $ 7,253,247
Additions 13,693 442,619
Deductions during year:
Property sold 3,209,568 2,352,566
Reclass to assets held for sale - 2,139,080
-------------------- ---------------------
Balance at end of year $ 8,345 $ 3,204,220
==================== =====================
F-12
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Improvements (continued)
The following is a summary of information for the individual Partnership
properties owned at December 31, 2002 from inception of the Partnership through
December 31, 2002. The information presented includes furniture, fixtures, and
equipment, which are immaterial to the Partnership.
Costs
Capitalized
Subsequent to
Initial Cost to Partnership Acquisition
------------------------------------------------------
Buildings
and
Description Land Improvements Improvements Land
- --------------------------------------------------------------------------------
Partnership assets
Dallas, TX $ - $ - $ 8,908 $ -
------------------------------------------------------
Total properties and $ - $ - $ 8,908 $ -
improvements
======================================================
Crenshaw Creek rehab 123,801 3,776,199 102,732 123,801
facility Lancaster, SC
------------------------------------------------------
Total assets held for
sale $ 123,801 $ 3,776,199 $102,732 $123,801
======================================================
Table Continued:
Balances at December 31, 2002
---------------------------------------------------------------------------------------------------------
Buildings
and Valuation Accumulated Date of Date Useful
Description Improvements Allowance Total Encumbrances Depreciation Construction Acquired Life
- -----------------------------------------------------------------------------------------------------------------------------------
Partnership assets 5-10
Dallas, TX $ 8,908 $ - $ 8,908 $ - $ 8,345 n/a 1991-199 years
--------------------------------------------------------------------
Total properties and $ 8,908 $ - $ 8,908 $ - $ 8,345
improvements
====================================================================
Crenshaw Creek rehab 3,878,931 863,652 3,139,080 - 2,139,080 1988 1988 25-31
facility Lancaster, SC years
--------------------------------------------------------------------
Total assets held for
sale $ 3,878,931 $ 863,652 $3,139,080 $ - $ 2,139,080
====================================================================
F-13
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Mortgage Loan Payable
Mortgage loan payable consisted of the following at December 31, 2002 and 2001:
2002 2001
-------------------- ------------------
Hearthstone property - note payable to
life insurance company $ - $ 1,123,389
==================== ==================
The mortgage loan payable bore interest of 10.75% at December 31, 2001. All debt
was paid in conjunction with the sale of the Hearthstone property on January 1,
2002.
5. Leases
The Partnership leased its property and equipment to tenants under noncancelable
operating leases. The leases generally provided for contingent rentals based on
the performance of the property. Contingent rentals aggregated $0, $151,089, and
$112,597 in 2002, 2001, and 2000, respectively.
The Hearthstone lease expired on November 7, 2000. The parent company of the
lessee filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for
the District of Delaware. The lessee and the Partnership attempted to negotiate
an extension of the lease, but were unsuccessful in doing so. The Hearthstone
lessee did not pay its April rent to the Partnership. The Partnership negotiated
a new lease with an unaffiliated operator, effective May 1, 2001. The
Hearthstone property was sold on January 1, 2002, to the operator.
The Trinity Hills lease expired on June 30, 2000, however, the lessee continued
to lease the facility on a month-to-month basis. On February 2, 2000, the parent
company of the lessee of the Trinity Hills facility filed for Chapter 11
bankruptcy in the United States Bankruptcy Court for the District of Delaware.
The lessee was current on its rent and lease payments through December 31, 2001.
The Partnership renegotiated with an unaffiliated operator to take over the
lease effective January 1, 2002. On February 28, 2002, the operator purchased
The Trinity Hills facility.
F-14
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Related Party Transactions
Personnel working at the property sites and certain home office personnel who
perform services on behalf of HCP are employees of CSL. HCP reimburses CSL for
the salaries, related benefits, and overhead reimbursements of such personnel.
In addition, HCP pays fees to the general partner and to CSL. The approximate
costs of these arrangements are reflected below:
Year ended December 31
2002 2001 2000
------------------- ------------------ -------------------
Salary and benefit
reimbursements $ 2,535 $ 2,487,415 $ 3,130,000
=================== ================== ===================
Asset management fees $ - $ - $ 80,000
Property management fees - 208,708 396,000
Administrative and other expenses 99,059 111,089 265,000
General partner management fees 371 59,550 97,000
GP release fee - 39,856 -
------------------- ------------------ -------------------
$ 99,430 $ 419,203 $ 838,000
=================== ================== ===================
In connection with the sale of the properties during 2002 and 2001, the general
partner was paid fees of $174,000 and $108,000, respectively.
A former officer and significant shareholder of CSLC is chairman of the board of
a bank where the Partnership holds the majority of its operating cash accounts.
F-15
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The reconciliation of financial statement basis partnership equity to federal
income tax basis partnership equity is as follows:
Year ended December 31
2002 2001 2000
--------------------------------------------------------
Total partnership equity - financial statement
basis $ 1,592,317 $ 5,516,605 $ 19,808,803
Current year tax basis net (losses) earnings over
financial statement basis (105,615) (4,797,732) (1,155,714)
Cumulative tax basis net (losses) earnings over
financial statement basis
(22,157) 4,775,575 5,931,289
-------------------- ----------------- ------------------
Total partnership equity - federal
income tax basis $ 1,464,545 $ 5,494,448 $ 24,584,378
==================== ================= ==================
Differences between financial statement basis and tax basis amounts primarily
relate to different methods for depreciation and bad debt expense.
Because many types of transactions are susceptible to varying interpretations
under federal and state income tax laws and regulations, the amounts reported
above may be subject to change at a later date upon final determination by the
taxing authorities.
The federal income tax basis of the Partnership's property and improvements at
December 31, 2002 and 2001, is $2,231,057 and $8,340,076, respectively.
8. Business and Credit Concentrations
The Partnership also derived revenue from the Medicaid program funded by the
State of Massachusetts until the sale of the Cambridge property in 2001. The
Partnership derived 0% of its revenues in 2002, 36% of its revenues in 2001, and
40% of its revenues in 2000 from the state program in Massachusetts. The
Partnership also derived 0%, 3%, and 6% of its revenues from the Medicare
program in 2002, 2001 and 2000, respectively.
(Payables to) receivables from the Massachusetts state Medicaid program
aggregated $(63,534) and $258,221 at December 31, 2002 and 2001, respectively.
F-16
HealthCare Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Partnership does not require collateral or other security to support
financial instruments subject to credit risk.
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments presented below:
Cash and Cash Equivalents, Receivables, Payables and Mortgage Loans Payable -
The carrying amount approximates fair value because of the short maturity of
these instruments.
10. Condensed Operating Results for Subsidiary
Operating results for the Partnership's subsidiary, Cambridge LLC, follow:
2002 2001 2000
----------------- ------------------ -----------------
Net patient service revenue $ - $ 3,019,174 $ 5,663,026
Facility operating expenses - 3,309,389 4,862,317
Depreciation - 13,253 19,546
Fees to affiliates - 270,903 453,014
Bad debt expense, net of recoveries
of $0 in 2001 and $0 in 2000 - 152,077 -
----------------- ------------------ -----------------
- 3,745,622 5,334,877
----------------- ------------------ -----------------
(Loss) income from operations $ - $ (726,448) $ 328,149
================= ================== =================
F-17
11. Selected Quarterly Financial Data (Unaudited)
Fiscal 2002 Quarters
---------------------------------------------------------------------
First Second Third (a) Fourth (a)
---------------------------------------------------------------------
Revenues $ 37,070 $ - $ 15,255 $ 7,559
=====================================================================
Net income (loss) $ 2,217,259 $ (135,346) $ (610,393) $ (481,815)
=====================================================================
Earnings (losses) per
limited partnership unit:
Net income (loss) $ .53 $ (.03) $ (.14) $ (.12)
=====================================================================
Fiscal 2001 Quarters
---------------------------------------------------------------------
First Second Third Fourth
---------------------------------------------------------------------
Revenues $ 2,484,141 $ 2,501,468 $ 1,062,987 $ 589,581
=====================================================================
Net income before extraordinary loss $ 536,726 $ 435,067 $ 2,479,154 $ 287,966
Extraordinary loss (b) - - (434,199) -
---------------------------------------------------------------------
Net income $ 536,726 $ 435,067 $ 2,044,955 $ 287,966
=====================================================================
Earnings (loss) per
limited partnership unit:
Net income before
extraordinary loss $ .13 $ .10 $ .56 $ .07
Extraordinary loss - - (.10) -
---------------------------------------------------------------------
Net income $ .13 $ .10 $ .46 $ .07
=====================================================================
(a) During the third quarter and fourth quarter of 2002, the Partnership
recorded write-downs on an asset held for sale of $500,000 and $363,652,
respectively, due to a reduction in estimated net realizable value.
(b) During 2001, the lessee of the McCurdy facility defaulted on its minimum
lease payment. The Partnership attempted to work with the current lessee
to stabilize its census, but was unable to do so. The facility was
foreclosed by the lender on September 11, 2001. In connection with the
foreclosure, net fixed assets of $4,196,816, mortgage loans of $3,569,386
and accrued interest of $193,231 were written off resulting in an
extraordinary loss of $434,199.
Quarterly operating results are not necessarily representative of operations for
a full year.
F-18