10-Q 1 june2002-10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Number) 14160 Dallas Parkway, Suite 300, Dallas, Texas 75254 (Address of principal executive office) (972) 770-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES x NO ---- ---- See notes to financial statements 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED BALANCE SHEETS

See notes to financial statements 1 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See notes to financial statements 2 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See notes to financial statements 3 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF PARTNERSHIP EQUITY (DEFICIT) (Unaudited)

See notes to financial statements 4 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to financial statements 5 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 and 2001 (Unaudited) A. ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary have been included. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto included in Registrant's annual report on Form 10-K for the year ended December 31, 2001. Net income (loss) of Registrant and taxable income (loss) are generally allocated 98 percent to the limited partners and 2 percent to the general partner. The net income of Registrant from the disposition of a property is allocated (i) to 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 percent Liquidation Preference, and (iv) thereafter, 80 percent to the limited partners and 20 percent to the general partner. The net loss of Registrant from the disposition of a property is allocated (i) to partners with positive capital accounts on a pro rata basis and (ii) thereafter, 98 percent to the limited partners and 2 percent to the general partner. Distributions of available cash flow are generally distributed 98 percent to the limited partners and 2 percent to the general partner, until the limited partners have received an annual preferential distribution, as defined. Thereafter, available cash flow is distributed 90 percent to the limited partners and 10 percent to the general partner. B. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER Personnel working at the Cambridge facility and certain home office personnel who perform services for the Registrant are employees of Capital Senior Living, Inc. ("CSL"), the managing agent of Registrant. Registrant reimburses CSL for the salaries, related benefits, and overhead reimbursements of such personnel as reflected in the accompanying condensed consolidated financial statements. Reimbursements and fees paid to Capital Realty Group Senior Housing, Inc. ("CRGSH" or the "General Partner") and CSL are as follows:

In connection with the sale of the Hearthstone and Trinity Hills facilities in the first quarter of 2002, the General Partner was paid fees of $174,000 or 3% of the sales proceeds as allowed in the Partnership Agreement. Currently, Capital Senior Living Properties, Inc., formerly an affiliate of CRGSH, holds approximately 57 percent of the outstanding units of Registrant. Registrant is included in the consolidated financial statements of Capital Senior Living Properties, Inc. and its parent company, Capital Senior Living Corporation, a public company that files with the Securities and Exchange Commission. 6 On June 10, 1998, the sole owner of the General Partner, Capital Realty Group Corporation, sold all of its shares of CRGSH common stock to Retirement Associates, Inc. ("Associates"). Mr. Robert Lankford is the President of Associates and has brokered and continues to broker real estate as an independent contractor with Capital Realty Group Corporation and its affiliates. C. DISPOSITION OF PROPERTIES The Hearthstone facility was sold on January 1, 2002 for $4,000,000, resulting in a gain on sale of $1,777,113 and net cash proceeds of $2,641,003 after payment of settlement costs. The Trinity Hills facility was sold on February 28, 2002 for $1,800,000, resulting in a gain of $506,079 and net cash proceeds of $1,747,323 after payment of settlement costs. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Registrant commenced an offering to the public on August 31, 1987, of depository units representing beneficial assignments of limited partnership interests ("Units"). On October 14, 1987, Registrant commenced operations, having previously accepted subscriptions for more than the specified minimum of 120,000 Units. As of August 30, 1989, the offering was closed except for Units for sale to existing investors under the terms of a distribution reinvestment plan. As of September 30, 1995, Registrant had sold Units aggregating approximately $43.4 million. Due to the suspension of the distribution reinvestment plan, Registrant does not anticipate any additional inflow of investment. All of the net proceeds of the offering were originally invested in 12 properties or used for working capital reserves. Registrant partially financed the acquisition of eight of its original properties with non-recourse debt. Four properties were initially unleveraged. As of June 30, 2002, eleven of the original twelve properties had either been sold or deeded back to the lender, leaving Registrant one unleveraged property, the Crenshaw facility. As of June 30, 2002, the Crenshaw facility is classified as an asset held for sale. Potential sources of liquidity for Registrant include current holdings of cash and cash equivalents, collection of outstanding receivables on previously owned facilities which are fully reserved as of June 30, 2002, collection on defaulted rent and/or damage settlements related to leases in default, and a potential sale of Registrant's remaining asset. As of June 30, 2002, Registrant had cash and cash equivalents aggregating $2,641,821. The cash and cash equivalents will be used for working capital, emergency reserves, and future potential cash distributions. Registrant's general policy is to maintain sufficient cash and cash equivalents to address disruptions of its lease revenues and to have adequate additional funds for investment in its existing asset for improvements and sale. Future cash distributions will be dependent on the sale of its remaining asset. Cash and sale distributions of $3,111,816 and $5,000,000 were made for the six months ended June 30, 2002 and 2001 respectively. The Units are not publicly traded and as a result the liquidity of each Limited Partner's individual investment is limited. 7 Results of Operations Discussion of Six Months Ended June 30, 2002 Rental revenues for the six months ended June 30 2002 decreased $2,099,682 from the comparable six months ended June 30, 2001, due to the sale of the Hearthstone and Trinity Hills facilities during the six months ended June 30, 2002. Net patient services revenue for the six months ended June 30, 2002 decreased $2,848,856 from the six months ended June 30, 2002 primarily due to the sale of the Cambridge facility in August 2001. Interest income for the six months ended June 30, 2002 decreased $174,634 from the six months ended June 30, 2001 primarily due to decreasing cash available for investment. Other income of $63,498 was received during the first quarter ended March 31, 2002 due to payment of an administrative claim on the Cambridge facility. A gain of $2,283,193 was recognized during the first quarter ended March 31, 2002 due to the sale of the Hearthstone and Trinity Hills facilities. Facility operating expenses for the six months ended June 30, 2002 decreased by $2,639,979 from the comparable 2001 period primarily due to the sale of the Cambridge facility. Depreciation for the six months ended June 30, 2002, decreased $254,467 from the comparable 2001 period due to the sale of the Hearthstone and Trinity Hills facilities. Administrative expenses decreased $211,478 for the six months ended June 30, 2002 in comparison to 2001 due to decreased management fees. Bad debt expense decreased $520,973 for the six months ended June 30, 2002 in comparison to the 2001 period due to the foreclosure of the McCurdy property in 2001. Interest expense for the six months ended June 30, 2002 decreased by $225,611 from the comparable 2001 period, due to the sale of the Hearthstone facility and foreclosure of the McCurdy facility, and retirement of the related mortgages. Amortization expense for the six months ended June 30, 2002 decreased $34,093 from the comparable 2001 period, due to fully amortized deferred charges in 2001. For the three months ended June 30, 2002 as compared with the three months ended June 30, 2001, Registrant's revenue was impacted by the same shifts of revenue as discussed above. Similarly, a comparison of second quarter 2002 operating expenses versus second quarter 2001 reflects the same variances as discussed above. Cash and cash equivalents as of June 30, 2002 increased by $947,275 from the balance at December 31, 2001. Cash flows increased by $4,724,904 for the six months ended June 30, 2002 in comparison to the six months ending June 30, 2001 primarily due to cash proceeds from the sale of the Hearthstone and Trinity Hills facilities and decreased cash distributions. Net accounts receivable of $0 at June 30, 2002 reflected a decrease of $89,185 from the balance at December 31, 2001 due to collections of account receivable balances. Accounts payable, accrued expenses, and operating facility accounts payable balances decreased $158,847 at June 30, 2002, from the balance at December 31, 2001 primarily due to paid real estate taxes and interest on the Hearthstone facility. Following is a brief discussion of the status of Registrant's properties: Cedarbrook, Cane Creek, Crenshaw Creek and Sandybrook Facilities Rebound, Inc. a subsidiary of HealthSouth Corporation, formerly leased the Cedarbrook, Crenshaw Creek, Cane Creek and Sandybrook facilities pursuant to a master lease with Registrant through the end of the lease term, November 30, 2001. The Cedarbrook, Cane Creek and Sandybrook facilities have been previously sold. Due to low occupancy, HealthSouth closed 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. HealthSouth transferred the Crenshaw Creek facility to the Registrant by the end of its lease term and the facility is held for sale as of June 30, 2002. 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. Registrant commenced litigation against NCAC seeking full payment of future rentals under the lease of NCAC. 8 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 Registrant, thereby releasing the operations of the Cambridge facility from the jurisdiction of the United States Bankruptcy Court. 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, 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. Registrant had filed an administrative claim with the trustee of the United States Bankruptcy Court for unpaid lease payments. At December 31, 1999, 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 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 Registrant from NCAC's bankruptcy. Hearthstone, Trinity Hills and McCurdy Facilities The Hearthstone lease expired on November 7, 2000. The lessee and 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 Registrant. 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 and the lease terminated on January 1, 2002 for $4,000,000, resulting in a gain on sale of $1,777,113 and net cash proceeds of $2,641,003 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 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. 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 held by the lessee The Trinity Hills facility was subsequently sold to the lessee on February 28, 2002 for $1,800,000, resulting in a gain of $506,079 and net cash proceeds of $1,747,323 after payment of settlement costs. The lessee of the McCurdy facility defaulted on its minimum lease payments as of January 2001. Registrant attempted to work with the current lessee to stabilize its census, but was unable to do so. 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, which was recorded in the quarter ended September 30, 2001. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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. PART II. OTHER INFORMATION Item 1. 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 of the financial statements of the Registrant. Item 2. Changes in Securities None 9 Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (A) Exhibit: 99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (B) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTHCARE PROPERTIES, L.P. By: CAPITAL REALTY GROUP SENIOR HOUSING, INC. General Partner By: /s/ Robert Lankford ---------------------------------- Robert Lankford President Date: August 8, 2002 10

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