10-Q 1 june2002-10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities exchange Act of 1934 For the Quarterly Period Ended June 30, 2002 Commission File Number 0-16815 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP (A Delaware Limited Partnership) (Exact name of registrant as specified in its charter) DELAWARE 52-1453513 (State of other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 14160 DALLAS PARKWAY, SUITE 300 DALLAS, TX 75254 (Address of principal executive offices) (Zip Code) (972) 770-5600 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 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 ---- ---- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statements of Net Assets (Liabilities) in Liquidation (LIQUIDATION BASIS)

See notes to financial statements 2 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statements of Changes in Net Assets (Liabilities) in Liquidation (LIQUIDATION BASIS) For the Six Months Ended June 30, 2002 (Unaudited) Net liabilities in liquidation at January 1, 2002 $ (17,755,723) Net Income 18,307,651 -------------- Net assets in liquidation at June 30, 2002 $ 551,928 ============== See notes to financial statements 3 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statement of Operations (Unaudited)

See notes to financial statements 4 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statement of Operations (Unaudited)

See notes to financial statements 5 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statement of Partners' Equity (Deficit) (Unaudited)

See notes to financial statements 6 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statements of Cash Flows (Unaudited)

See notes to financial statements 7 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statements of Cash Flows (Unaudited) (Continued)

See notes to financial statements 8 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Notes to Financial Statements June 30, 2002 A. ACCOUNTING POLICIES Nature of Business 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 were invested in residential rental properties for retirement age occupants. 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 Note holders and Interest holders of its intent to dissolve the Partnership effective May 21, 2001 and liquidate its remaining asset. 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. Payment on one of the promissory notes is subject to the purchaser obtaining certain levels of financing proceeds, and payment on the other promissory note is subject to the property achieving certain levels of operating income. With respect to the promissory note conditioned on financing proceeds, the Partnership will not receive any proceeds under that promissory note. With respect to the promissory note conditioned on operating income levels of the Amberleigh, the determination as to whether any amounts will be owed under that note will depend on annual operating income as of December 28, 2002. There can be no assurance that any amounts will be owed under the second promissory note. 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 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 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 Notes and deferred interest, the unpaid debt has been treated as forgiven and resulted in $18,991,176 of extraordinary income for book purposes for the quarter ended March 31, 2002. 9 Basis of Presentation The accompanying balance sheet as of December 31, 2001 has been derived from audited financial statements of the Partnership for the year ended December 31, 2001 and the accompanying unaudited financial statements, as of June 30, 2002 and 2001, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. For further information, refer to the financial statements and notes thereto for the year ended December 31, 2001 included in the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the Partnership's net assets (liabilities) in liquidation as of June 30, 2002 and December 31, 2001, statement of changes in net assets (liabilities) in liquidation for the six month period ended June 30, 2002, results of operations, changes in Partner's equity (deficit) and cash flows for six month periods ended June 30, 2002 and 2001. The results of operations for the six-month period ended June 30, 2002 are not necessarily indicative of the results for the year ending December 31, 2002. B. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER Effective January 23, 1995, Capital Realty Group Senior Housing, Inc. (CRGSH) became the sole general partner of the Partnership. 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") for $855,000. The source of the funds is a Promissory Note for $855,000 with a five-year term and bears a current interest rate of 8 percent per annum. The interest will accrue on the Promissory Note and be payable at the maturity of the Promissory Note. 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 brokered and continues to broker real estate as an independent contractor with Capital Realty Group Corporation and its affiliates. Personnel working at the Property sites and certain home office personnel who perform services for the Partnership are employees of Capital Senior Living, Inc. (CSL), an affiliate of CRGSH until June 30, 1998. The Partnership reimburses CSL for the salaries, related benefits, and overhead reimbursements of such personnel as reflected in the accompanying financial statements. Salary, related benefits and overhead reimbursements reimbursed and expensed by the Partnership to CSL for the second fiscal quarter ended June 30, 2002 and 2001, were $0 and $283,864, respectively. Management fees, dietary fees and other services reimbursed and expensed by the Partnership to CSL for the second fiscal quarter ended June 30, 2002 and 2001, were $0 and $162,149, respectively. Distributions of $0 and $74,359 were made to the General Partner during the six months ended June 30, 2002 and 2001, respectively. 10 C. 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. Payment on one of the promissory notes is subject to the purchaser obtaining certain levels of financing proceeds, and payment on the other promissory note is subject to the property achieving certain levels of operating income. With respect to the promissory note conditioned on financing proceeds, the Partnership will not receive any proceeds under that promissory note. With respect to the promissory note conditioned on operating income levels of the Amberleigh, the determination as to whether any amounts will be owed under that note will depend on annual operating income as of December 28, 2002. There can be no assurance that any amounts will be owed under the second promissory note. 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 December 2001. D. LEGAL PROCEEDINGS On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of Interests in the Partnership in the Delaware Court of Chancery, Civil Action No. 16725 (the "Delaware Action"), against the Partnership, the General Partner, Capital Senior Living Corporation and Capital Senior Living Properties 2-NHPCT, Inc. (collectively, the "Defendants"). Mr. Lewis purchased 90 Interests in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by the Partnership to Capital Senior Living Properties 2-NHPCT, Inc. in September 1998 (the "1998 Transaction"). The complaint seeks, among other relief, rescission of the 1998 Transaction and unspecified money damages. On July 9, 1999, the Defendants filed a motion to dismiss the case. Subsequently, the plaintiff amended his complaint adding allegations challenging the terms of the sale in December 2001 of the Amberleigh. On January 31, 2002, the parties to the Delaware Action entered a Memorandum of Understanding providing for the settlement of the Delaware Action subject to certain terms and conditions, including receipt of the approval of the Court of Chancery. The proposed settlement contemplates the creation of a settlement fund in the amount of $840,000, of which the Partnership has contributed $250,000, the amount of the deductible of the Partnership's directors and officers' liability insurance policy at the time the Delaware Action was filed (the "D&O Policy"). Virtually all of the balance of the settlement fund will be contributed by various insurance brokers and agents, and their insurers, in connection with the resolution of certain claims for coverage under the D&O Policy. If approved by the Court of Chancery, the settlement fund, less any award of attorney's fees for plaintiff's counsel approved by the Court, will be distributed to a class of holders of the Interests. The parties have engaged in discussions subsequent to entering into the Memorandum of Understanding and the Partnership expects the parties to enter into additional settlement agreements in the near future; however, the Partnership cannot make any assurances that the parties will enter into any further settlement agreements or any assurances regarding the terms of any other settlement agreement. 11 On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the Delaware Action on behalf of a putative class of holders of Notes in the event the Court of Chancery determines that the claims asserted in the Delaware Action are derivative in nature. The Complaint in Intervention filed by Mr. Kalmenson names as defendants the Defendants in the Delaware Action, as well as Retirement Associates, Inc., the sole stockholder of the General Partner, and various current and former directors of the General Partner. The Complaint in Intervention essentially alleges, among other things, a variety of claims challenging the 1998 Transaction and a claim for breach of contract relating to the failure of the Partnership to pay the full amount of principal and interest owed on the Notes on their maturity date. The Partnership believes that the allegations asserted by Mr. Kalmenson are without merit and that his motion to intervene is moot in view of the proposed settlement of the Delaware Action. The Partnership is unable to estimate any liability related to this claim, if any. E. 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 was subject to deferral thereafter. Deferred interest does not bear interest. Interest not deferred was 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 that was scheduled to be due upon dissolution of the Partnership. 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 assets. 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. For the six months ended June 30, 2001, an additional $3,000,000 was paid to Note Holders 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 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 Notes and deferred interest, the unpaid debt has been treated as forgiven and resulted in $18,991,176 of extraordinary income for book purposes for the quarter ended March 31, 2002. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Rent collections for the six-month period ended June 30 decreased to $27,159 in 2002 from $2,616,395 in 2001. Decreased rent collections were due to the sale of the Amberleigh in 2001. Salaries, management fees and other operating expenses paid likewise decreased for this period, from $1,742,360 in 2001 to $887,550 in 2002. Decreased operating expenses paid was due to the sale of the Amberleigh and partially offset by an increase in other operating expenses paid resulting from payment of December 31, 2001 accruals paid in the first quarter ended March 31, 2002. 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 Notes and deferred interest, the unpaid debt has been treated as forgiven and resulted in $18,991,176 of extraordinary income for book purposes for the quarter ended March 31, 2002. During the six months ended June 30, 2001, an additional $3,000,000 was paid for deferred interest not scheduled to become due until December 31, 2001. Net cash used in operations after the payment of interest expense during the six months ended June 30, 2002 and 2001 was $8,321,431 and $2,744,604, respectively. Interest on the Notes bears stated simple interest at 13 percent rate per annum, and is paid on a 7 percent rate per annum, however it was accrued under the effective interest method at a rate of approximately 9 percent per annum compounded quarterly through May 2001. As of June 2001, the Partnership began recording accrued interest on the principal at the stated interest rate which represents the amount that was scheduled to be due upon dissolution of the Partnership. Interest expense totaled $423,590 and $1,666,883 for the six months ended June 30, 2002 and 2001, respectively. Capital expenditures decreased from $79,720 for the six month period ended June 30, 2001 to $0 for the six month period ended June 30, 2002 due to the sale of the Amberleigh. Cash and cash equivalents at June 30, 2002 and December 31, 2001 amounted to $258,163 and $18,117,660, respectively. 13 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 Note holders and Interest holders of its intent to dissolve the Partnership effective May 21, 2001 and liquidate its remaining asset. 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. Payment on one of the promissory notes is subject to the purchaser obtaining certain levels of financing proceeds, and payment on the other promissory note is subject to the property achieving certain levels of operating income. With respect to the promissory note conditioned on financing proceeds, the Partnership will not receive any proceeds under that promissory note. With respect to the promissory note conditioned on operating income levels of the Amberleigh, the determination as to whether any amounts will be owed under that note will depend on annual operating income as of December 28, 2002. There can be no assurance that any amounts will be owed under the second promissory note. 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 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 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 Notes and deferred interest, the unpaid debt has been treated as forgiven and resulted in $18,991,176 of extraordinary income for book purposes for the quarter ended March 31, 2002. Results of Operations The Partnership's net income for the six months ended June 30, 2002 includes rental operations from the Partnership's property. The net income also includes amortization of Pension Notes issuance costs, and accrued Pension Note interest expense, which are non-cash in nature. The Partnership net income (loss) increased from ($1,187,271) to $18,307,651 for the six-month periods ending June 30, 2001 and 2002, respectively. Net income (loss) per assignee interest increased from ($28) to $428 for the six-month periods ending June 30, 2001 and 2002, respectively. The increase in the Partnership's net income was principally due to $18,991,176 of extraordinary income recognized from the dissolution of the Partnership and debt forgiveness of outstanding notes and deferred interest. Total revenues for the six-month periods ended June 30 decreased from $2,686,456 in 2001 to $2,092 in 2002. The decrease in total revenues was due to the sale of the Amberleigh. Total operating costs and expenses decreased from $1,996,665 in 2001 to $76,041 in 2002. The decrease in operating expenses primarily was due to the sale of the Amberleigh. Note interest expense decreased from $1,666,883 to $423,590 for the 14 six-month periods ending June 30, 2001 and 2002, respectively. The decrease in Note interest expense is due to the cessation of interest expense on the Note release date of February 28, 2002. Amortization of Notes issuance costs decreased from $59,502 to $0 for the six-month periods ending June 30, 2001 and 2002, respectively due to Notes issuance costs being fully amortized at December 31, 2001. Other expenses relating to Partnership administration increased from $150,677 to $185,986 for the six-month periods ending June 30, 2001 and 2002, respectively, due to increased printing costs. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. The Partnership invests its cash in money market accounts. As a result, the Partnership believes any impact of market risk to the Partnership's investments is immaterial. 15 PART II Item 1. Legal Proceedings On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of Interests in the Partnership in the Delaware Court of Chancery, Civil Action No. 16725 (the "Delaware Action"), against the Partnership, the General Partner, Capital Senior Living Corporation and Capital Senior Living Properties 2-NHPCT, Inc. (collectively, the "Defendants"). Mr. Lewis purchased 90 Interests in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by the Partnership to Capital Senior Living Properties 2-NHPCT, Inc. in September 1998 (the "1998 Transaction"). The complaint seeks, among other relief, rescission of the 1998 Transaction and unspecified money damages. On July 9, 1999, the Defendants filed a motion to dismiss the case. Subsequently, the plaintiff amended his complaint adding allegations challenging the terms of the sale in December 2001 of the Amberleigh. On January 31, 2002, the parties to the Delaware Action entered a Memorandum of Understanding providing for the settlement of the Delaware Action subject to certain terms and conditions, including receipt of the approval of the Court of Chancery. The proposed settlement contemplates the creation of a settlement fund in the amount of $840,000, of which the Partnership has contributed $250,000, the amount of the deductible of the Partnership's directors and officers' liability insurance policy at the time the Delaware Action was filed (the "D&O Policy"). Virtually all of the balance of the settlement fund will be contributed by various insurance brokers and agents, and their insurers, in connection with the resolution of certain claims for coverage under the D&O Policy. If approved by the Court of Chancery, the settlement fund, less any award of attorney's fees for plaintiff's counsel approved by the Court, will be distributed to a class of holders of the Interests. The parties have engaged in discussions subsequent to entering into the Memorandum of Understanding and the Partnership expects the parties to enter into additional settlement agreements in the near future; however, the Partnership cannot make any assurances that the parties will enter into any further settlement agreements or any assurances regarding the terms of any other settlement agreement. On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the Delaware Action on behalf of a putative class of holders of Notes in the event the Court of Chancery determines that the claims asserted in the Delaware Action are derivative in nature. The Complaint in Intervention filed by Mr. Kalmenson names as defendants the Defendants in the Delaware Action, as well as Retirement Associates, Inc., the sole stockholder of the General Partner, and various current and former directors of the General Partner. The Complaint in Intervention essentially alleges, among other things, a variety of claims challenging the 1998 Transaction and a claim for breach of contract relating to the failure of the Partnership to pay the full amount of principal and interest owed on the Notes on their maturity date. The Partnership believes that the allegations asserted by Mr. Kalmenson are without merit and that his motion to intervene is moot in view of the proposed settlement of the Delaware Action. The Partnership is unable to estimate any liability related to this claim, if any. 16 Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (A) 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. NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP By: Capital Realty Group Senior Housing, Inc. General Partner By: /s/ Robert Lankford ------------------------------------- Robert Lankford President Date: August 8, 2002 17

NHP RETIREMENT HOUSING PARTNERS I LTD PARTNERSHIP 10-Q