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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 0-16815
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1453513
- -------- ----------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 770-5600
--------------
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Assignee 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 twelve 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 (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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 assignee interests in 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 33
Exhibit Index: Page 32
1
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
2002 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Pension Notes and Limited
Partnership Assignee Interests and Related Partnership Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7A. Qualitative and Quantitative Disclosure About Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
PART III
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 31
Item 14. Controls and Procedures 31
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
2
PART I
ITEM 1. BUSINESS
NHP Retirement Housing Partners I Limited Partnership (the Partnership), a
Delaware limited partnership, was formed under the Delaware Revised Uniform
Limited Partnership Act as of March 10, 1986. On September 23, 1986, the
Partnership commenced offering 25,000 Assignee Interests and 50,000 Pension
Notes, both at a price of $1,000 per unit (the Offering). The Partnership
subsequently exercised its right to increase the offering to 75,000 Assignee
Interests and 100,000 Pension Notes. The offering was managed by NHP Real Estate
Securities, Inc. and was terminated on September 22, 1987, with subscriptions
for 42,711 Assignee Interests and 42,697 Pension Notes.
The Assignee Interests were sold to taxable individuals or entities and
represent assignments of limited partnership interests in the Partnership issued
to NHP RHP-I Assignor Corporation (Assignor Corporation), a Delaware
corporation, the assignor and sole limited partner. Pension Notes were sold to
qualified profit-sharing, pension and other retirement trusts, bank commingled
trust funds for such trusts, Keogh Plans and IRAs, government pension and
retirement trusts, and other entities intended to be exempt from Federal
taxation. The Pension Notes are obligations of the Partnership issued under a
Trust Indenture between the Partnership and The National Bank of Washington
(NBW), Washington, D.C., as Trustee, and have a preference over the Assignee
Interests with respect to payment. In August 1990, Riggs National Bank,
Washington, D.C., which became the successor trustee, purchased the assets of
NBW. In November 1996, Riggs National Bank transferred its trust operations to
the Bank of New York, New York City, which claims to be the successor trustee.
The original General Partner of the Partnership was NHP/RHGP-I Limited
Partnership (NHP/RHGP-I), a Delaware limited partnership, and NHP/RHGP-I held a
2 percent interest as General Partner in the Partnership. On December 19, 1991,
NHP/RHGP-I executed an amended and restated purchase agreement with Capital
Realty Group Properties, Inc. (CRG), a Texas corporation, for the transfer of
its General Partner interests in the Partnership. CRG assigned its rights under
this purchase agreement to an affiliate, Capital Realty Group Senior Housing,
Inc. (CRGSH), a Texas corporation. Effective January 1, 1992, CRGSH was selected
by NHP/RHGP-I to manage the five properties of the Partnership. Effective June
1, 1993, the Partnership entered into a Partnership Management Agreement with
CRGSH to provide administrative services on behalf of the Partnership. This
Partnership management agreement was terminated effective upon CRGSH becoming
the substitute General Partner.
The substitution of CRGSH as sole General Partner of the Partnership required
the consent of 50 percent or more of the outstanding Assignee Interests, which
had been issued by the Partnership and assigned by Assignor Corporation to the
Assignee Holders. Under the Partnership Agreement, holders of the Pension Notes
were not entitled to vote. Pursuant to a Consent Solicitation dated October 25,
1994, Assignee Holders holding more than 64 percent of the equity interests in
the Partnership approved the election of CRGSH as the replacement General
Partner of the Partnership. Effective January 23, 1995, CRGSH became the new
sole General Partner of the Partnership. CRGSH was a wholly owned subsidiary of
3
Capital Realty Group Corporation, a Texas corporation (Capital). Capital is
owned by James A. Stroud (50 percent through a trust) and Jeffrey L. Beck (50
percent). CRGSH assigned its contract rights to manage the Partnership
properties to Capital Senior Living, Inc. (CSL), a subsidiary of Capital Senior
Living Corporation (CSLC), effective February 1, 1996.
On June 10, 1998, Capital sold all of its shares of CRGSH common stock to
Retirement Associates, Inc. (Associates) for $855,000. The source of the funds
is a Promissory Note for $855,000 with a five-year term and bearing an interest
rate of 8 percent per annum since 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 is the maker of the Note and Capital is 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 CRGSH. From 1988 to 1997,
Mr. Lankford was an independent broker with Capital Realty Group Brokerage,
Inc., an affiliate of Capital. 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 CSLC, which accounts for
less than 20 percent of his compensation. The address of the principal executive
offices of CRGSH is 3516 Merrell Road, Dallas, Texas 75229.
Until 2001, the Partnership's business was to operate residential rental
properties for retirement age occupants (the Properties). During 2001, the
Partnership owned a 99.99 percent partnership interest in one property. The
property was sold on December 31, 2001. See Item 2, Properties, for a
description of this property. The Partnership is in the process of liquidating
its other assets and receivables, pending continuing litigation. See Item 3,
Legal Proceedings.
The Partnership did not have any employees as of December 31, 2002.
Dissolution of Partnership
On February 12, 2001, due to the pending maturity of the Pension Notes at
December 31, 2001 and to obtain maximum value through an organized disposition
of Partnership assets, the General Partner notified the Pension Note holders and
Assignee Interest holders of its intent to dissolve the Partnership effective
May 21, 2001 and liquidate its remaining property, the Amberleigh.
On December 31, 2001, the Partnership sold the Amberleigh to an unaffiliated
entity for $20,000,000. The Partnership received two $1,000,000 promissory
notes, each payable within 12 months from the date of sale, one Note subject to
the purchaser obtaining certain levels of financing proceeds and the other note
subject to the property achieving certain levels of operating income. The
Partnership did not satisfy the requirements for payment under these promissory
notes, and therefore the Partnership will not receive any proceeds from these
notes. The balance of the sale proceeds net of settlement costs and other direct
costs associated with the sale was paid in cash, resulting in net sale proceeds
of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale in
2001. On December 31, 2001, the principal on the Pension Notes and deferred
interest of approximately $35,504,000 matured.
4
Relating to the sale of the Amberleigh on December 31, 2001, the Partnership
paid $9,538,066 for a partial redemption of Notes, and paid $7,461,934 for a
partial payment of deferred interest, effective February 28, 2002. Cash funds
were not sufficient at February 28, 2002 to fully repay the outstanding
principal balance of $18,991,176 in Notes and deferred interest. Since available
cash after payment of Partnership expenses and potential collection of the
Amberleigh promissory notes was insufficient to repay the outstanding Pension
Notes and deferred interest, the unpaid debt related to the Pension Notes has
been treated as forgiven for book purposes and resulted in $18,991,176 of
extraordinary income for the year ended 2002. For tax purposes, any
extraordinary income relating to the forgiveness of unpaid debt and deferred
interest will be recognized in the year the Pension Notes are deemed cancelled,
which has not yet occurred. Upon final liquidation of the Partnership's cash
reserves, to the extent any funds are in excess of liabilities, those funds will
be distributed to the Pension Note holders.
ITEM 2. PROPERTIES
On December 31, 2001, the Partnership sold its remaining property, the
Amberleigh, to an unaffiliated entity for $20,000,000. The Partnership received
two $1,000,000 promissory notes, payable within 12 months from the date of sale,
subject to the purchaser obtaining certain levels of financing proceeds and the
property achieving certain levels of operating income. The Partnership did not
satisfy the requirements for payment under these notes, and therefore the
Partnership will not receive any proceeds from these notes. The balance of the
sale proceeds was paid in cash, resulting in net sale proceeds of $16,014,830.
The Partnership recognized a $1,491,679 loss on the sale.
5
ITEM 3. LEGAL PROCEEDINGS
On September 17, 2002, William Bren filed a putative class action complaint on
behalf of certain holders of Pension Notes of the Partnership in the Delaware
Court of Chancery, C.A. No. 19902 (the "Bren Action"), against the Partnership
and the General Partner. The complaint in the Bren Action, which was amended on
December 3, 2002, alleges that the General Partner breached its fiduciary duty
by failing to initiate a lawsuit against, among others, the former General
Partner and its principals in connection with the sale of four properties by the
Partnership in September 1998; failed to disclose material information and
promised to make certain distributions when it solicited consents from the
Pension Note holders in 2001 to facilitate the sale of the Partnership's fifth
property, the Amberleigh, which sale occurred in December 2001; and failed to
disclose material information in connection with obtaining releases from the
Pension Note holders in 2002. The Bren Action also seeks a judgment against the
Partnership for failing to pay the full amount of the principal and interest
owed on the Pension Notes on December 21, 2001, the maturity date of the Pension
Notes.
On February 10, 2003, the defendants moved to dismiss the amended complaint in
the Bren Action or, alternatively, for summary judgment. Briefing has been
completed on this motion and the matter is expected to be submitted to the Court
shortly for decision. Previously, on October 15, 2002, plaintiff filed a motion
for class certification, which plaintiff is pursuing at the present time. The
Partnership believes the allegations asserted in the Bren Action are without
merit and intends to defend against these claims. The Partnership is unable at
the time to estimate liability, if any, related to this claim.
The Partnership has made previous disclosures concerning an action filed by
Robert Lewis on October 23, 1998, in the Delaware Court of Chancery, Civil
Action No. 16725 (the "Lewis Action"), on behalf of a putative class of holders
of Assignee Interest against the Partnership, the General Partner, Capital
Senior Living Corporation and Capital Senior Living Properties 2 NHPCT, Inc. The
Lewis Action has been settled. On October 18, 2002, the Delaware Court of
Chancery entered a Final Order and Judgment approving a settlement of the Lewis
Action which included the creation of a settlement fund in the amount of
$840,000. The Partnership contributed $250,000 to this settlement fund, the
amount of the deductible under its director and officers' liability policy, and
virtually all of the balance of the settlement fund was contributed by various
insurance brokers and agents, and their insurers. In accordance with the
settlement, approximately $590,000 (the amount of the settlement fund minus an
award of attorney's fees and expenses approved by the Court) has been
distributed to the members of the class certified by the Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PENSION NOTES AND LIMITED PARTNERSHIP
ASSIGNEE INTERESTS AND RELATED PARTNERSHIP MATTERS
a. Assignee Interests and Pension Notes were sold through a public
offering managed by NHP Real Estate Securities, Inc. There is not
currently, and it is not anticipated that there will be, any
established public trading market for resale of Assignee Interests or
Pension Notes. Accordingly, an investor may be unable to sell or
otherwise dispose of his interest in the Partnership.
As of March 1, 2003, there were 2,266 registered holders of Assignee
Interests and 3,104 registered holders of Pension Notes.
As of March 1, 2003, Capital Senior Living Properties, Inc., a wholly
owned subsidiary of Capital Senior Living Corporation, owned
approximately 14,131 Pension Notes, or approximately 33 percent of the
Partnership's outstanding Pension Notes.
Each Pension Note bears stated interest in an amount equal to 13
percent per annum, 9 percent of which was subject to deferral through
December 31, 1988 and 6 percent of which is subject to deferral
thereafter. Interest is payable quarterly. Quarterly distributions of
Cash Available for Distribution (as defined in the Partnership
Agreement) are payable to Assignee Interest holders within 60 days
after the end of each three-month period, subject to the General
Partner's right to restrict or suspend such distributions, if the
General Partner, in its absolute discretion, determines that such
restriction or suspension is in the best interests of the Partnership.
For each of the years ended December 31, 2001 and 2000, interest paid
to the Pension Note holders as a group totaled $4,411,805 and
$1,416,337, respectively, per year. During 2001, an additional
$3,000,000 was paid for deferred interest not scheduled to become due
until December 31, 2001. Relating to the sale of The Amberleigh on
December 31, 2001, the Partnership paid $9,538,066 for a partial
redemption of Pension Notes, and paid $7,461,934 for a partial
redemption of deferred interest, effective February 28, 2002.
No cash distributions were paid to the Assignee Interest holders during
2002, 2001 or 2000. As presented in the Statement of Cash Flows (as
stated below), cash and cash equivalents (decreased) increased
$(18,056,716), $12,625,072, and $(60,769) for the years ended December
31, 2002, 2001 and 2000, respectively. Future cash requirements have
caused the General Partner to determine that it is not financially
appropriate to make distributions to Assignee Interest holders.
b. Not applicable.
7
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenue $ 13,223 $ 5,406,768 $ 5,274,800 $ 5,322,600 $ 13,746,088
============= ============= ============= ============= ============
Net Income (Loss) $ 17,888,053 $ (3,988,526) $ (2,473,796) $ (2,474,347) $ 3,409,569
============= ============= ============= ============= ============
Net Income (Loss) per
Assignee Interest $ 419 $ (94) $ (58) $ (57) $ 61
============= ============= ============= ============= ============
Total assets $ 396,807 $ 18,464,086 $ 23,753,479 $ 24,333,572 $ 25,262,800
============= ============= ============= ============= ============
Long-term obligations,
Pension Notes, and
related interest payable $ - $ 35,504,347 $ 36,938,253 $ 35,036,889 $ 33,300,689
============= ============= ============= ============= ============
Cash distributions per
Assignee Interest $ 0 $ 0 $ 0 $ 0 $ 0
============= ============= ============= ============= ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
(Loss) income from rental operations decreased to $(73,155) from $1,295,341 and
$1,350,158 for the years ended December 31, 2002, 2001, and 2000, respectively.
Rental revenues decreased in 2002 to $13,223 from $5,406,768 in 2001 due to the
sale of the Amberleigh on December 31, 2001. Rental expenses decreased to
$86,378 in 2002 from $4,111,427 in 2001 due to the sale of the Amberleigh on
December 31, 2001. Interest expense decreased to $423,591 in 2002 from
$2,977,899 in 2001 due to the forgiveness of debt recognized for book purposes
at February 28, 2002. Amortization of Pension Note issuance costs was $0 for
2002 having been fully amortized in 2001. Other expenses decreased to $606,377
in 2002 from $695,280 in 2001 due to a decrease in professional fees. Due to the
forgiveness of debt recognized for book purposes at February 28, 2002, the
Partnership recognized $18,991,176 in extraordinary income in 2002.
Rental revenue increased in 2001 to $5,406,768 from $5,274,800 in 2000 due to
increased occupancies at the Property. Rental expenses increased to $4,111,427
in 2001 from $3,924,642 in 2000 due to increased salary and related benefit
costs and costs attributable to inflation. Due to the sale of the property on
December 31, 2001, the Partnership recognized a loss on sale of $1,491,679.
Interest expense decreased to $2,977,899 in 2001 from $3,317,701 in 2000 due to
a change of interest calculation from the effective interest rate to the stated
interest rate. Other expense increased to $695,280 in 2001 from $387,249 in 2000
primarily due to a $250,000 accrual for a lawsuit settlement provision.
The Partnership's net income (loss) was $17,888,053, $(3,988,526), and
$(2,473,796) for the years ended December 31, 2002, 2001 and 2000, respectively.
8
Liquidity and Capital Resources
Net cash used by operating activities during 2002 was $8,518,650, representing a
increase over 2001 net cash used by operating activities of $3,169,181. This
increase was primarily due to $7,461,934 of interest paid to Pension Note
holders on February 28, 2002. Rent collections decreased to $21,646 in 2002 from
$5,222,146 in 2001, due to the sale of the Amberleigh on December 31, 2001.
Operating expenses paid decreased to $1,090,387 in 2002 from $4,103,892 in 2001
due to the sale of the Amberleigh on December 31, 2001.
Net cash used by operating activities during 2001 was $3,169,181, representing a
decrease over 2000 net cash provided by operating activities of $126,945. This
decrease was primarily due to an additional $3,000,000 payment for deferred
interest not scheduled to become due until December 31, 2001. Rent collections
increased to $5,222,146 in 2001 from $4,985,113 in 2000, primarily due to
increased occupancies at the Property. Operating expenses paid increased to
$4,103,892 in 2001 from $3,721,034 in 2000 primarily due to increased costs paid
for salary and related benefits and other costs attributable to inflation.
Interest paid was $7,461,934 in 2002, $4,411,805 in 2001, and $1,416,337 in
2000.
For the year ended 2000, cash generated from rental operations was sufficient to
pay the base interest amount on the outstanding Pension Notes of $1,416,337.
However, cash generated from rental operations during 2002 and 2001 was
insufficient to pay the interest amount of $7,461,934 and $4,411,805,
respectively. During 2001, an additional $3,000,000 was paid for deferred
interest not scheduled to become due until December 31, 2001. Interest payments
on the Pension Notes were accrued at a 13 percent rate, but were paid based on a
7 percent pay rate in 2001 and 2000. The remaining 6 percent unpaid portion for
these years as well as amounts deferred in prior years in accordance with the
terms of the Pension Notes were accrued and became due at maturity, December 31,
2001.
Relating to the sale of The Amberleigh on December 31, 2001, the Partnership
paid $9,538,066 for a partial redemption of Pension Notes, and paid $7,461,934
for a partial redemption of deferred interest, effective February 28, 2002. Cash
funds were not sufficient at February 28, 2002 to fully repay the outstanding
balance of $18,927,938 in Pension Notes and deferred interest. Since available
cash after payment of Partnership expenses and potential collection of the
Amberleigh promissory notes was insufficient to repay the outstanding Pension
Notes and deferred interest, the unpaid debt related to the Pension Notes has
been treated for book purposes as forgiven and resulted in $18,991,176 of
extraordinary income for the year ended 2002. For tax purposes any extraordinary
income relating to the forgiveness of unpaid debt and deferred interest will be
recognized in the year the Pension Notes are deemed cancelled, which has not yet
occurred. Upon final liquidation of the Partnership's cash reserves, to the
extent any funds are in excess of liabilities, those funds will be distributed
to Pension Note holders.
Cash and cash equivalents at December 31, 2002 amounted to $60,944 as compared
to $18,117,660 at December 31, 2001.
9
Dissolution of Partnership
On February 12, 2001, due to the pending maturity of the Notes at December 31,
2001 and to obtain maximum value through an organized disposition of Partnership
assets, the General Partner notified the Pension Note holders and Assignee
Interest holders of its intent to dissolve the Partnership effective May 21,
2001 and liquidate its remaining property, the Amberleigh.
On December 31, 2001, the Partnership sold the Amberleigh to an unaffiliated
entity for $20,000,000. The Partnership received two $1,000,000 promissory
notes, each payable within 12 months from the date of sale, one note subject to
the purchaser obtaining certain levels of financing proceeds and the other note
subject to property achieving certain levels of operating income. The
Partnership did not satisfy the requirements for payment under these promissory
notes, and therefore the Partnership will not receive any proceeds from these
notes. The balance of the sale proceeds net of settlement costs and other direct
costs associated with the sale was paid in cash, resulting in net sale proceeds
of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale. On
December 31, 2001, the principal on the Pension Notes and deferred interest of
approximately $35,504,000 matured.
Relating to the sale of the Amberleigh on December 31, 2001, the Partnership
paid $9,538,066 for a partial redemption of Pension Notes, and paid $7,461,934
for a partial payment of deferred interest, effective February 28, 2002. Cash
funds were not sufficient at February 28, 2002 to fully repay the outstanding
principal balance of $18,991,176 in Pension Notes and deferred interest. Since
available cash after payment of Partnership expenses and potential collection of
the Amberleigh promissory notes was insufficient to repay the outstanding
Pension Notes and deferred interest, the unpaid debt related to the Pension
Notes has been treated for book purposes as forgiven and resulted in $18,991,176
of extraordinary income for the year ended 2002. For tax purposes, any
extraordinary income relating to the forgiveness of unpaid debt and deferred
interest will be recognized in the year the Pension Notes are deemed cancelled,
which has not yet occurred. Upon final liquidation of the Partnership's cash
reserves, to the extent any funds are in excess of liabilities, those funds will
be distributed to the Pension Note holders.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership'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
The financial statements and supplementary data of the Partnership are included
on pages 11 through 28 of this report.
10
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Partners
NHP Retirement Housing Partners I Limited Partnership
We have audited the accompanying statement of net assets (liabilities) in
liquidation of NHP Retirement Housing Partners I Limited Partnership as of
December 31, 2002 and 2001 and the related statement of changes in net assets
(liabilities) in liquidation for the year ended December 31, 2002, and the
related statements of operations, partners' equity (deficit), and cash flows for
the year ended December 31, 2002 (liquidation basis) and the related statements
of operations, partner's capital, and cash flows for each of the two years in
the period ended December 31, 2001 (going concern basis). These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these 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 misstatements. 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.
As described in Note 1 to the financial statements, the partners of NHP
Retirement Housing Partners I Limited Partnership approved a plan of liquidation
on May 21, 2001, and the Partnership commenced liquidation shortly after the
sale of its remaining property on December 31, 2001. As a result, the
Partnership has changed its basis of accounting on December 31, 2001, and for
periods subsequent thereto from the going-concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets (liabilities) in liquidation of NHP
Retirement Housing Partners I Limited Partnership as of December 31, 2002 and
2001, the changes in net assets (liabilities) in liquidation for the year ended
December 31, 2002, and the results of its operations and its cash flows for year
ended December 31, 2002 (liquidation basis) and the related statements of
operations, partner's capital, and cash flows for each of the two years in the
period ended December 31, 2001 (going concern basis) in conformity with
accounting principles generally accepted in the United States applied on the
basis described in the preceding paragraph.
Ernst & Young LLP
Dallas, Texas
February 14, 2003
11
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARNERSHIP
STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION
(LIQUIDATION BASIS)
December 31,
2002 2001
---- ----
ASSETS (Notes 1 and 6)
Cash and cash equivalents (Note 2) $ 60,944 $ 18,117,660
Receivables 75,978 96,426
Prepaid Expenses 7,187 -
Other assets 252,698 250,000
---------------- -----------------
Total assets 396,807 18,464,086
LIABILITIES
Accounts payable - 185,374
Interest payable (Notes 1 and 6) - 15,346,521
Pension notes (Notes 1 and 6) - 20,157,826
Other liabilities 264,477 530,088
---------------- -----------------
Total liabilities 264,477 36,219,809
---------------- -----------------
Contingencies (Note 12)
Net assets (liabilities) in liquidation $ 132,330 $ (17,755,723)
================ =================
See notes to financial statements
12
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
Statement of Changes in Net Assets (Liabilities) in Liquidation
(LIQUIDATION BASIS)
For the Year Ended December 31, 2002
Net liabilities in liquidation at January 1, 2002 $ (17,755,723)
Net Income 17,888,053
Net assets in liquidation at December 31, 2002 $ 132,330
See Notes to Financial Statements
13
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(Liquidation (Going Concern (Going Concern
Basis) Basis) Basis)
REVENUES
Rental income $ 1,198 $ 5,282,398 $ 4,995,597
Interest income 4,705 90,783 216,442
Other income 7,320 33,587 62,761
-------------- -------------- --------------
13,223 5,406,768 5,274,800
-------------- -------------- --------------
COSTS AND EXPENSES
Salaries, related benefits and overhead reimbursements (Note 3) - 1,173,466 1,080,206
Management fees, dietary fees and other services (Note 3) - 483,078 460,444
Administrative and marketing 73,879 242,272 235,967
Utilities - 297,709 286,361
Maintenance - 173,400 181,526
Resident services, other than salaries - 38,860 38,661
Food services, other than salaries - 564,067 533,939
Depreciation - 593,240 582,861
Taxes and insurance 12,499 545,335 524,677
-------------- -------------- --------------
86,378 4,111,427 3,924,642
-------------- -------------- --------------
(LOSS) INCOME FROM RENTAL OPERATIONS (73,155) 1,295,341 1,350,158
-------------- -------------- --------------
OTHER EXPENSES
Loss on sale (Note 4) - 1,491,679 -
Interest expense - Pension Notes (Note 6) 423,591 2,977,899 3,317,701
Amortization of Pension Notes issuance costs - 119,009 119,004
Other expenses 606,377 695,280 387,249
-------------- -------------- --------------
1,029,968 5,283,867 3,823,954
-------------- -------------- --------------
NET LOSS BEFORE EXTRAORDINARY INCOME $ (1,103,123) (3,988,526) (2,473,796)
Extraordinary income-debt forgiveness 18,991,176 - -
-------------- -------------- --------------
NET INCOME (LOSS) $ 17,888,053 $ (3,988,526) $ (2,473,796)
-------------- -------------- --------------
ALLOCATION OF NET INCOME (LOSS)
General Partner $ 357,761 $ (64,854) $ (49,476)
Assignor Limited Partner 17,530,292 (3,923,672) (2,424,320)
-------------- -------------- --------------
$ 17,888,053 $ (3,988,526) $ (2,473,796)
-------------- -------------- --------------
NET INCOME (LOSS) PER ASSIGNEE INTEREST:
Net loss before extraordinary income $ (26) $ (94) $ (58)
Extraordinary income 445 - 445
-------------- -------------- --------------
Net income (loss) $ 419 $ (94) $ (58)
============== ============== ==============
Weighted average number of outstanding Assignee Interests 41,888 41,888 42,120
============== ============== ==============
See Notes to Financial Statements
14
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Assignee
General Limited
Partner Partners Total
------- -------- -----
Partners' deficit at January 1, 2000 $ (928,115) $ (10,246,734) $ (11,174,849)
Distributions (28,875) - (28,875)
Repurchase of 571 assignee units
subsequently cancelled - (571) (571)
Net Loss (49,476) (2,424,320) (2,473,796)
-------------- -------------- --------------
Partner's deficit at December 31, 2000 (1,006,466) (12,671,625) (13,678,091)
Distributions (88,797) - (88,797)
Repurchase of 309 assignee units - (309) (309)
subsequently cancelled
Net Loss (64,854) (3,923,672) (3,988,526)
-------------- -------------- --------------
Partner's deficit at December 31, 2001
and net liabilities in liquidation (1,160,117) (16,595,606) (17,755,723)
Net Income 357,761 17,530,292 17,888,053
-------------- -------------- --------------
Partner's (deficit) equity at December 31, 2002
and net assets in liquidation $ (802,356) $ 934,686 $ 132,330
============== ============== ==============
See Notes to Financial Statements
15
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
(Liquidation (Going Concern (Going Concern
Basis) Basis) Basis)
CASH FLOWS FROM OPERATING ACTIVITIES
Rent collections $ 21,646 $ 5,222,146 $ 4,985,113
Interest received 4,705 90,783 216,442
Other income 7,320 33,587 62,761
Management fees, dietary fees and other services (41,650) (480,900) (422,871)
Salary, related benefits and overhead reimbursements (46,900) (1,170,100) (1,080,869)
Other operating expenses paid (1,001,837) (2,452,892) (2,217,294)
Interest paid (7,461,934) (4,411,805) (1,416,337)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities (8,518,650) (3,169,181) 126,945
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of properties - 16,014,830 -
Capital expenditures - (131,471) (158,268)
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities - 15,883,359 (158,268)
CASH FLOWS FROM FINANCING ACTIVITIES
Pension note payments (9,538,066) - -
Repurchase of assignee units - (309) (571)
Distributions - (88,797) (28,875)
---------------- ---------------- ----------------
Net cash used in financing activities (9,358,066) (89,106) (29,446)
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents (18,056,716) 12,625,072 (60,769)
Cash and cash equivalents at beginning of year 18,117,660 5,492,588 5,553,357
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 60,944 $ 18,117,660 $ 5,492,588
================ ================ ================
See Notes to Financial Statements
16
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
(Liquidation (Going Concern (Going Concern
Basis) Basis) Basis)
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Net income (loss) $ 17,888,053 $ (3,988,526) $ (2,473,796)
--------------- ---------------- ----------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Extraordinary income - debt forgiveness (18,991,176) - -
Loss sale of properties - 1,491,679 -
Depreciation - 593,240 582,861
Amortization of Pension Notes issuance costs - 119,009 119,004
Interest (paid) deferred (7,038,344) (1,433,906) 1,901,364
CHANGES IN OPERATING ASSETS AND LIABILITIES
Other assets and receivables 17,750 (305,812) (10,381)
Prepaid expenses (7,187) 132,989 (13,892)
Accounts payable (122,135) (17,999) 27,878
Other liabilities (265,611) 240,145 (6,093)
--------------- ---------------- ----------------
Net cash (used in) provided by operating activities $ (8,518,650) $ (3,169,181) $ 126,945
=============== ================ ================
See Notes to Financial Statements
17
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
NHP Retirement Housing Partners I Limited Partnership (the Partnership) is a
limited partnership organized under the laws of the State of Delaware on March
10, 1986. The Partnership was formed for the purpose of raising capital by
issuing both Pension Notes (Notes) to tax-exempt investors and selling
additional Partnership interests in the form of Assignee Interests (Interests)
to taxable individuals. Interests represent assignments of the limited
partnership interests of the Partnership issued to the Assignor Limited Partner,
NHP RHP-I Assignor Corporation. The proceeds from the sale of the Notes and
Interests have been invested in residential rental properties for retirement age
occupants.
On December 31, 2001, the principal of the Notes and deferred interest of
approximately $35,504,000 matured. The Partnership does not have sufficient
funds to fully repay this amount. Due to the pending maturity of the Notes and
to obtain maximum value through an organized disposition of Partnership assets,
the General Partner on February 12, 2001 notified the holders of Notes (Note
Holders) and holders of Interests (Assignee Holders) of its intent to dissolve
the Partnership effective May 21, 2001 (see Note 9). The last remaining property
in the Partnership, The Amberleigh, was sold on December 31, 2001 (see Note 4).
The Partnership is in the process of liquidating its other assets and
receivables, pending continuing litigation (see Note 10).
Significant Accounting Policies
As of December 31, 2001, the Partnership changed its basis of accounting from
going-concern basis to liquidation basis. Under this basis of accounting, assets
and liabilities are stated at their net realizable value and estimated costs
through the liquidation date are provided to the extent reasonably determinable.
Interest expense on Notes is calculated using the effective interest method
through May 2001. Effective June 2001, the Partnership began recording accrued
interest at the stated interest rate, which represents the amount which will be
paid upon dissolution of the Partnership (see Note 6).
18
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
Buildings and improvements were depreciated using the straight-line method,
assuming a 30-year life and a 30 percent salvage value. Furniture and equipment
were depreciated using the straight-line method over 5 years.
Rental income was recognized when earned based on residents' signed rental
agreements. Rental payments received in advance were deferred and recognized
when earned.
In April 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44
and 62, Amendment of FASB No. 13, and Technical Corrections", which is required
to be applied in fiscal years beginning after May 15, 2002. This statement will
require gains and losses on the extinguishments of debt to be classified as
income or loss from continuing operations rather than as extraordinary items as
previously required under Statement No. 4. The Partnership does not expect the
adoption of this statement to have a material effect on the Partnership's
earnings or financial position.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. CASH AND CASH EQUIVALENTS
As of December 31, 2002 and 2001, cash and cash equivalents consisted of demand
deposits and repurchase agreements. All repurchase agreements have an original
maturity of three months or less and, therefore, are considered to be cash
equivalents.
19
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
NOTE 3. TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES
Through January 22, 1995, the sole General Partner of the Partnership was
NHP/RHGP-I Limited Partnership (NHP/RHGP-I) and the sole limited partner of the
Partnership was NHP RHP-I Assignor Corporation, a Delaware corporation.
Effective January 23, 1995, Capital Realty Group Senior Housing, Inc. (CRGSH)
became the sole General Partner of the Partnership. Effective February 1, 1995,
CRGSH assigned its contract rights to manage the Partnership's properties to
Capital Senior Living, Inc. (CSL), which, in 1997, became a subsidiary of
Capital Senior Living Corporation (CSLC). CSL received $41,650, $480,900, and
$422,871, in 2002, 2001, and 2000, respectively, for management fees, dietary
services fees and other operating expense reimbursements related to services
provided to the Partnership.
Personnel working at the property sites and certain home office personnel who
perform services for the Partnership were employees of CSL, an affiliate of
CRGSH until June 30, 1998. The Partnership reimbursed CSL for the salaries and
related benefits of such personnel as reflected in the accompanying financial
statements. During 2002, 2001, and 2000, such reimbursements for salaries,
related benefits and overhead reimbursements amounted to $46,900, $1,170,100 and
$1,080,869 respectively.
At December 31, 2002, Capital Senior Living Properties, Inc., a wholly owned
subsidiary of CSLC, held 14,131 Notes. CSLC is subject to the periodic reporting
obligations of the Securities and Exchange Commission.
20
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 CONTINUED
On June 10, 1998, Capital Realty Group Corporation sold all of its shares of
CRGSH common stock to Retirement Associates, Inc. (Associates) for $855,000. The
source of the funds is 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 is the maker of the Note and Capital Realty Group
Corporation is 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 CRGSH. From 1988 to 1997, Mr. Lankford was an independent broker
with Capital Realty Group Brokerage, Inc., an affiliate of Capital Realty Group
Corporation. 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, which
accounts for less than 20 percent of his compensation. The address of the
principal executive offices of CRGSH is 3516 Merrell Road, Dallas, Texas 75229.
In connection with the sale of The Amberleigh (see Note 4), the General Partner
became entitled to a fee of $255,000. In January 2002, the Partnership paid the
General Partner one-half of this amount, or $127,500. The General Partner
remains entitled to receive the balance of this fee in the amount of $127,500,
which has been accrued for payment at December 31, 2002.
NOTE 4. DISPOSITION OF PROPERTY
On December 31, 2001, the Partnership sold its last remaining property, The
Amberleigh, to an unaffiliated entity for $20,000,000. The Partnership received
two $1,000,000 promissory notes, payable within 12 months from the date of sale,
subject to the purchaser obtaining certain levels of financing proceeds and the
property achieving certain levels of operating income. The Partnership did not
satisfy the requirements for payment under the promissory notes, and therefore
the Partnership will not receive any proceeds from these notes. The balance of
the sale proceeds was paid in cash, resulting in net sale proceeds of
$16,014,830. The Partnership recognized a $1,491,679 loss on the sale.
22
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
NOTE 5. CASH DISTRIBUTION POLICIES
The Partnership Agreement allows for quarterly payments of substantially all
Cash Available For Distribution (as defined in the Partnership Agreement),
subject to the following: (a) distributions to Assignee Holders may be
restricted or suspended for limited periods when the General Partner determines
in its absolute discretion that it is in the best interests of the Partnership;
and (b) all Assignee Holder distributions are subject to the payment of
Partnership expenses, payments to Note Holders and maintenance of working
capital reserves.
Distributions of cash available for distribution are made in the following order
of priority, to the extent available:
1. To the General Partner in an amount equal to 2 percent of cash
available for distribution before interest payments for each quarterly
cash distribution period;
2. To the Assignee Holders until the Assignee Holders have received an
amount equal to an aggregate annual non-compounded return of 10 percent
on their adjusted capital contributions for each quarterly cash
distribution period;
3. To the General Partner, a Partnership Management Incentive Fee in an
amount equal to 8 percent of Cash Available For Distribution Before
Interest Payments for the fiscal year; and
4. To the Assignee Holders, the balance.
22
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
No distributions were paid to the Assignee Holders during 2002, 2001 or 2000.
Future cash requirements have caused the General Partner to determine it is not
financially appropriate to make distributions to Assignee Holders.
Cash received from sales or re-financings of any Partnership Property, after
retirement of applicable mortgage debt and the payment of all expenses related
to the transaction and any payments of debt service on the Notes including
interest at a non-compounded rate of 13 percent per annum less any prior
payments (see Note 6) and establishment of reserves, is to be distributed in the
following order of priority:
1. To the Assignee Holders until their adjusted capital accounts are
reduced to zero;
2. To the Assignee Holders until cumulative cash distributions received
equal a 13 percent non-compounded return on their adjusted capital
accounts, reduced by prior distributions;
3. To the General Partner in the amount of a disposition fee of not more
than 3 percent of sales price; and
4. To the Assignee Holders, 85 percent, and to the General Partner, 15
percent.
Taxable net income or loss from operations is allocated to the Assignee Holders
as a class and to the General Partner in proportion to available cash
distributed during the fiscal year. If no cash is distributed during the year,
net income or loss is allocated 90 percent to the Assignee Holders as a class
and 10 percent to the General Partner. Other provisions exist if there is net
income or loss other than from operations. As discussed in Note 7, 2 percent for
2001 and 2000 of the Cash Available For Distribution Before Interest Payments
was paid to the General Partner. For 2002, the General Partner was not paid a 2%
distribution. Accordingly, net income and loss for each of the three years in
the period ended December 31, 2002, was allocated in the same manner.
The deficit balance in the Assignee Limited Partner account reflects their
percentage interest in the Partnership's cumulative net losses, although there
are no restoration requirements for the Assignee Limited Partner interest upon
termination of the Partnership.
23
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
NOTE 6. PENSION NOTES
The Notes bear stated simple interest at a rate equal to 13 percent per annum.
Payment of up to 9 percent of stated interest was subject to deferral through
December 31, 1988 and payment of up to 6 percent of stated interest is subject
to deferral thereafter. Deferred interest does not bear interest. Interest not
deferred is payable quarterly. Using the effective interest method, interest on
principal and accrued interest of the Notes has been accrued at the rate of
approximately 9 percent per annum compounded quarterly through May 2001. The
approximate 9 percent effective interest rate was calculated using estimates of
the amounts of interest that will be deferred and the time period in which such
deferred amounts will be paid. As of June 2001, the Partnership began recording
accrued interest on the principal at the stated interest rate which represents
the amount which will be paid upon dissolution of the Partnership. The
Partnership made minimum interest payments of $1,411,805 and $1,416,337 in 2001
and 2000, respectively, to Note Holders. During 2001, an additional $3,000,000
was paid for deferred interest not scheduled to become due until December 31,
2001. Relating to the sale of the Amberleigh on December 31, 2001, the
Partnership paid $9,538,066 for a partial redemption of Notes, and paid
$7,461,934 for a partial redemption of deferred interest, effective February 28,
2002. Cash funds were not sufficient at February 28, 2002 to fully repay the
outstanding principal and deferred interest balance of $18,991,176. Since
available cash after payment of Partnership expenses and potential collection of
the Amberleigh promissory notes was insufficient to repay the outstanding Notes
and deferred interest, the unpaid debt related to the Notes has been treated for
book purposes as forgiven and resulted in $18,991,176 of extraordinary income
for the year ended 2002. For tax purposes any extraordinary income relating to
the forgiveness of unpaid debt and deferred interest will be recognized in the
year the Notes are deemed cancelled, which has not yet occurred. Upon final
liquidation of the Partnership's cash reserves, to the extent any funds are in
excess of liabilities, those funds will be distributed to Note Holders.
The Partnership's obligation to repay the principal amount of the Notes, which
matured on December 31, 2001, and stated interest thereon, is secured by a lien
on the Partnership's properties. The liability of the Partnership under the
Notes is limited to the assets of the Partnership. The Notes are subject to
redemption in whole or in part upon not less than 30 or more than 60 days prior
notice, at the election of the Partnership.
NOTE 7. DISTRIBUTIONS TO PARTNERS
During 2001 and 2000, the General Partner received distributions, representing 2
percent of the Cash Available For Distribution Before Interest Payments to the
Note Holders. The General Partner received no distributions in 2002. The
Partnership did not make a distribution to the Assignee Holders during 2002,
2001 or 2000.
24
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
NOTE 8. INCOME TAXES
The Partnership is not taxed on its income. The partners are taxed in their
individual capacities upon their distributive share of the Partnership's taxable
income and are allowed the benefits to be derived from possibly offsetting their
distributive share of the tax loss against taxable income from other sources
subject to application of passive loss rules and subject to At Risk basis
limitation. The taxable income or loss differs from amounts included in the
statement of operations primarily because of different methods used in computing
depreciation and interest on the Notes and determining start-up and marketing
expenses for financial reporting and federal income tax purposes.
Cash funds were not sufficient at February 28, 2002 to fully repay the
outstanding principal and deferred interest balance of $18,991,176. For tax
purposes, any unpaid debt and deferred interest related to the Notes will be
treated as forgiven and will result in recognition of income in the year the
Notes are deemed cancelled, which has not yet occurred.
For federal income tax purposes, the Partnership computes depreciation of
buildings and improvements using the Modified Accelerated Cost Recovery System
(MACRS) and the Accelerated Cost Recovery System (ACRS), while for financial
statement purposes, depreciation is computed using the straight-line method.
Interest on Notes is computed in accordance with Internal Revenue Service
regulations for original issue discount for federal income tax purposes, while
for financial statement purposes, interest on Notes is computed using the
effective interest method. Start-up and marketing costs incurred prior to
initial occupancy were capitalized and amortized over sixty months for federal
income tax purposes, only those start-up and marketing costs that are expected
to benefit future operations have been capitalized and amortized over sixty
months for financial statement purposes.
25
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
Reconciliation between financial statement net income (loss) and net income
(loss) for tax purposes follows:
Years Ended December 31,
2002 2001 2000
---- ---- ----
Net income (loss) per financial statements $ 17,888,053 $(3,988,526) $(2,473,796)
Temporary differences in determining income
(losses) for federal income tax purposes:
Debt forgiveness income (18,991,176) - -
Excess tax basis over book in assets (8,848,636) - -
Loss from pass-through entity (1,751,450) - -
Gain on sale of properties - 5,812,954 -
Depreciation - (138,774) (218,987)
Amortization of start-up and marketing
costs - (2,136) (2,141)
Interest expense - Notes (8,969,529) (1,405,364) 1,933,772
Miscellaneous (42,832) (29,596) (5,540)
----------------- ------------ ------------
Net (loss) income per tax return $ (20,715,570) $ 248,585 $ (766,692)
================= ============ ============
For federal income tax purposes, the basis of building and improvements, net of
accumulated depreciation, was $15,153,644 at December 31, 2000.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at December 31,
2002 and 2001 are as follows:
2002 2001
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and cash equivalents $ 60,944 $ 60,944 $ 18,117,660 $ 18,117,660
Pension Notes and accrued interest - - 35,504,347 17,748,624
Following are methods and assumptions used by the General Partner in estimating
its fair value disclosures for financial instruments.
26
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 CONTINUED
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate fair value.
Pension Notes and Accrued Interest
The fair values of Notes are based on available cash for note payment at
December 31, 2001.
NOTE 10. CONTINGENCIES
On September 17, 2002, William Bren filed a putative class action complaint on
behalf of certain holders of Pension Notes of the Partnership in the Delaware
Court of Chancery, C.A. No. 19902 (the "Bren Action"), against the Partnership
and the General Partner. The complaint in the Bren Action, which was amended on
December 3, 2002, alleges that the General Partner breached its fiduciary duty
by failing to initiate a lawsuit against, among others, the former General
Partner and its principals in connection with the sale of four properties by the
Partnership in September 1998; failed to disclose material information and
promised to make certain distributions when it solicited consents from the
Pension Note holders in 2001 to facilitate the sale of the Partnership's fifth
property, the Amberleigh, which sale occurred in December 2001; and failed to
disclose material information in connection with obtaining releases from the
Pension Note holders in 2002. The Bren Action also seeks a judgment against the
Partnership for failing to pay the full amount of the principal and interest
owed on the Pension Notes on December 21, 2001, the maturity date of the Pension
Notes.
On February 10, 2003, the defendants moved to dismiss the amended complaint in
the Bren Action or, alternatively, for summary judgment. Briefing has been
completed on this motion and the matter is expected to be submitted to the Court
shortly for decision. Previously, on October 15, 2002, plaintiff filed a motion
for class certification, which plaintiff is pursuing at the present time. The
Partnership believes the allegations asserted in the Bren Action are without
merit and intends to defend against these claims. The Partnership is unable at
the time to estimate liability, if any, related to this claim.
The Partnership has made previous disclosures concerning an action filed by
Robert Lewis on October 23, 1998, in the Delaware Court of Chancery, Civil
Action No. 16725 (the "Lewis Action"), on behalf of a putative class of holders
of Assignee Interest against the Partnership, the General Partner, Capital
Senior Living Corporation and Capital Senior Living Properties 2 NHPCT, Inc. The
Lewis Action has been settled. On October 18, 2002, the Delaware Court of
Chancery entered a Final Order and Judgment approving a settlement of the Lewis
Action which included the creation of a settlement fund in the amount of
$840,000. The Partnership contributed $250,000 to this settlement fund, the
amount of the deductible under its director and officers' liability policy, and
27
virtually all of the balance of the settlement fund was contributed by various
insurance brokers and agents, and their insurers. In accordance with the
settlement, approximately $590,000 (the amount of the settlement fund minus an
award of attorney's fees and expenses approved by the Court) has been
distributed to the members of the class certified by the Court.
NOTE 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2002 Quarters
----------------------------------------------------------------------------
First (a) Second Third Fourth
----------------------------------------------------------------------------
Revenues $ 1,571 $ 521 $ 1,255 $ 9,876
Net income (loss) 18,476,698 (169,047) (246,003) (173,595)
Basic income (loss) per assignee
interest 432 (4) (6) (3)
Fiscal 2001 Quarters
----------------------------------------------------------------------------
First Second Third Fourth (b)
----------------------------------------------------------------------------
Revenues 1,345,513 1,340,943 1,364,792 355,520
Net loss (611,579) (575,692) (427,676) (2,373,579)
Basic loss per assignee interest (14) (13) (10) (57)
(a) During the first quarter 2002, the Partnership recorded extraordinary
income of debt forgiveness of $18,991,176.
(b) During the fourth quarter 2001, the Partnership recorded a loss on sale
of $1,491,679.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants that are
required to be reported herein.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors, executive officers or significant employees of
its own.
On January 23, 1995, CRGSH became the sole General Partner of the Partnership.
CRGSH is a privately owned corporation initially organized on December 1, 1988.
Its principal business activity has been the ownership and management of real
property for its own account and for the account of various limited partnerships
of which it is the General Partner. Prior to June 10, 1998, CRGSH was a wholly
owned subsidiary of Capital Realty Group Corporation, a Texas corporation
(Capital), with its corporate headquarters in Dallas, Texas. Capital is owned by
James A. Stroud (50 percent through a trust) and by Jeffrey L. Beck (50
percent).
On June 10, 1998, Capital sold all of its shares of CRGSH common stock to
Retirement Associates, Inc. (Associates) for $855,000. The source of the funds
is a Promissory Note for $855,000 with a five-year term and bearing an interest
rate of 8 percent per annum since 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 is the maker of the Note and Capital is 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 CRGSH. From 1988 to 1997,
Mr. Lankford was an independent broker with Capital Realty Group Brokerage,
Inc., an affiliate of Capital. 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, which accounts for less than 20 percent of his compensation. The
address of the principal executive offices of CRGSH is 3516 Merrell Road,
Dallas, Texas 75229.
The Partnership properties during 1994 and through February 1, 1995, were
managed by CRGSH. On February 1, 1995, CRGSH assigned its contract rights to
manage the Partnership's properties to Capital Senior Living (CSL), a subsidiary
of Capital Senior Living Corporation.
Following are directors and executive officers of CRGSH, the General Partner of
the Partnership.
Name Position
---- --------
Robert L. Lankford President, Retirement Associates,
Inc., sole stockholder of CRGSH,
the General Partner
Wayne R. Miller Secretary, Retirement Associates,
Inc.
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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 Capital. 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, which 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 Miller, Hiersche, Martens and Hayward, Inc. From 1994 to the
present, Mr. Miller has been President, Sole Director and Sole Shareholder 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 Partnership pursuant to Rule 16a-3(c) of the Securities and
Exchange Commission (SEC) rules, the Partnership is not aware of any failure of
any officer or director of CRGSH or beneficial owner of more than ten percent of
the Assignee Interests to file timely with the SEC any Forms 3, 4 or 5 relating
to the Partnership for 2002.
ITEM 11. EXECUTIVE COMPENSATION
NHP Retirement Housing Partners I Limited Partnership has no officers or
directors. However, various fees and reimbursements are paid to the General
Partner or its affiliates. Such fees paid or accrued during the year ended
December 31, 2002 included $255,000 in brokerage fees for the sale of The
Amberleigh property. See Item 8, Financial Statements and Supplementary Data.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person is known by the Partnership to own more than 5 percent of Assignee
Interests.
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As of March 1, 2003, Capital Senior Living Properties, Inc., a former affiliate
of the General Partner, owns approximately 14,131 Pension Notes, or
approximately 33 percent of the Partnership's outstanding Pension Notes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except as described in Items 8 (Note 3 in the Financial Statements), 10, 11 and
12, the Partnership had no other transactions or business relationships with
CRGSH or its affiliates.
ITEM 14. CONTROLS AND PROCEDURES
The Partnership's management, including its Chief Executive Officer/Chief
Financial Officer, after evaluating the effectiveness of the Partnership's
disclosure controls and procedure (as defined in Rules 113a-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 Partnership's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Partnership would be made known to him.
There were no significant changes in the Partnership internal controls or, to
its knowledge, in other factors that could significantly affect its 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
Following are the financial statements, notes and reports listed included in
this report.
Page
Report of Ernst & Young LLP, Independent Auditors 11
Statement of Net Assets (Liabilities) in Liquidation
December 31, 2002 and 2001 12
Statement of Changes in Net Assets (Liabilities) in
Liquidation 13
Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000 14
Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 2002, 2001
and 2000 15
Statements of Cash Flows for the
Years Ended December 31, 2002, 2001 and 2000 16
Notes to Financial Statements 18
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Financial Statement Schedules
All schedules have been omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.
Exhibits
99.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 2002.
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 on its behalf by the undersigned, thereunto duly authorized.
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
By: CAPITAL REALTY GROUP SENIOR HOUSING, INC.
General Partner
By: /s/ Robert L. Lankford
---------------------------------
ROBERT L. LANKFORD, President (Chief executive
officer and chief financial officer)
March 28, 2003
32
CERTIFICATION
I, Robert Lankford, chief executive officer and chief financial officer of the
General Partner of NHP Retirement Housing Partners I Limited Partnership,
certify that:
1. I have reviewed this annual report on Form 10-K of NHP Retirement Housing
Partners I Limited Partnership ("Partnership");
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
Partnership 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
Partnership and I have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Partnership, is made known to me by others
within the Partnership, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Partnership'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 Partnership'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 Partnership 's ability to record,
process, summarize and report financial data and have identified for the
Partnership'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 Partnership'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
33