10-Q 1 june302003-10q.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, 2003 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 ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X ---- ---- 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 OPERATIONS (Unaudited)

See notes to financial statements 2 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF OPERATIONS (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, 2003 and 2002 (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 notes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, all of which were normal recurring accruals, necessary to present fairly the Registrant's consolidated balance sheets as of June 30, 2003 and December 31, 2002, and results of operations, changes in Registrant's equity (deficit) and cash flows for six-month periods ended June 30, 2003 and 2002. The results of operations for the three and six-month period ended June 30, 2003 are not necessarily indicative of the results for the year ending December 31, 2003. The December 31, 2002 consolidated balance sheet has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Registrant's annual report on Form 10-K for the year ended December 31, 2002. Net income (loss) of the 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 the 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 the 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. As of June 30, 2003, the Registrant has one non-operational property held for sale. The Registrant entered into an Agreement to Sell and Purchase Real Estate ("Agreement") relating to the sale of its Crenshaw Creek facility for $1.1 million. The Registrant expects this transaction to close during the third quarter of fiscal 2003. It is the current intention of the General Partner to wind-up the affairs of the Registrant and cause its existence to be terminated. The winding-up process will entail disposing of the Registrant's remaining asset, paying the Registrant's debts and liabilities and, as required by the Partnership Agreement and applicable law, setting up any reserves which the General Partner may deem reasonably necessary for any contingent, conditional or unforeseen liabilities or obligations of the Registrant. To the extent that the Registrant has funds in excess of amounts necessary to satisfy its obligations and establish such reserves, such funds will be distributed to the partners. To the extent that reserves are not exhausted by future claims, the funds remaining in such reserves will be distributed to the partners after a period of time necessary to assure that all currently contingent, conditional or unforeseen liabilities or obligations of the Registrant have matured and been paid. Management believes there are no adjustments to the June 30, 2003, balances that would be needed if a liquidation basis of accounting had been adopted as of June 30, 2003. B. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER 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 6 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") and CSL are as follows: Six months ended June 30, 2003 June 30, 2002 ------------- ------------- Administrative reimbursements $ 44,974 $ 56,753 General partner fees - 371 -------------- -------------- $ 44,974 $ 57,124 ============== ============== 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 Registrant Agreement. Currently, Capital Senior Living Properties, Inc., formerly an affiliate of CRGSH, holds approximately 57 percent of the outstanding units of the 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. 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. VALUATION OF RENTAL PROPERTY Generally accepted accounting principles require that Registrant evaluate whether an event or circumstance has occurred that would indicate that the estimated undiscounted future cash flows of its properties, taken individually, will be less than the respective net book value of the properties. If such a shortfall exists, then a write-down to fair value is recorded. Registrant performs such evaluations on an on-going basis. During the six months ended June 30, 2003, based on Registrant's evaluation of its sole remaining property, Registrant did not record any impairment. D. 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 $506,080 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 Registrant 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, 2003, eleven of the 7 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, 2003, 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, 2003, collection on defaulted rent and/or damage settlements related to leases in default, and a potential sale of the Registrant's remaining asset. As of June 30, 2003, Registrant had cash and cash equivalents aggregating $93,500. 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 continuing maintenance expenditures on its remaining asset. Future cash distributions will be dependent on the sale of its remaining asset. Cash and sale distributions of $306,123 and $3,111,816 were made for the six months ended June 30, 2003 and 2002 respectively. The Units are not publicly traded and as a result the liquidity of each Limited Partner's individual investment is limited. Results of Operations Discussion of Three Months and Six Months Ended June 30, 2003 Rental revenues for the six months ended June 30, 2003 decreased $37,071 from the comparable six months ended June 30, 2002, due to the sale of the Hearthstone and Trinity Hills facilities during the six months ended June 30, 2002. Interest income for the six months ended June 30, 2003 decreased $20,462 from the six months ended June 30, 2002 primarily due to decreasing cash available for investment. Other income of $63,498 was received during the six months ended June 30, 2002 due to payment of an administrative claim on the Cambridge facility. A gain of $2,283,193 was recognized for the six months ended June 30, 2002 due to the sale of the Hearthstone and Trinity Hills facilities. Depreciation for the six months ended June 30, 2003, decreased $13,431 from the comparable 2002 period due to the sale of the Hearthstone and Trinity Hills facilities. Administrative expenses decreased $46,392 for the six months ended June 30, 2003 in comparison to 2002 primarily due to decreased taxes. Bad debt recoveries of $3,514 for the six months ended June 30, 2002 is related to account receivable collections from the Cambridge property. Interest expense for the six months ended June 30, 2003 decreased to $0 from the comparable 2002 period, due to the sale of the Hearthstone facility and retirement of its related mortgage. For the three months ended June 30, 2003 as compared with the three months ended June 30, 2002, Registrant's revenue was impacted by the same shifts of revenue as discussed above. Similarly, a comparison of second quarter 2003 operating expenses versus second quarter 2002 reflects the same variances as discussed above. Cash and cash equivalents as of June 30, 2003 decreased by $549,993 from the balance at December 31, 2002. Cash flows decreased by $1,497,268 for the six months ended June 30, 2003 in comparison to the six months ended June 30, 2002 primarily due to cash proceeds from the sale of the Hearthstone and Trinity Hills facilities and cash distributions incurred during the six months ended June 30, 2002. Accounts payable and accrued expenses increased $20,851 at June 30, 2003, from the balance at December 31, 2002 primarily due to increased accrued taxes and overhead charges. 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. 8 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, 2003. The Registrant entered into an Agreement to sell the Crenshaw Creek facility for $1.1 million. The Registrant expects this transaction to close during the third quarter of fiscal 2003. Hearthstone and Trinity Hills Facilities The Hearthstone lease expired on November 7, 2000. The lessee and the Registrant attempted to negotiate an extension of the lease, but were unsuccessful in doing so. On January 18, 2000, the parent company of the lessee filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. The Hearthstone lessee did not pay its April 2001 rent to the Registrant. 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 Registrant has been released from this claim. The Trinity Hills lease expired on June 30, 2000, however, the lessee continued to lease the facility on a month-to-month basis. On February 2, 2000, the parent company of the lessee filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. The lessee was current on its rent and lease participation payments through December 31, 2001. 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 $506,080 and net cash proceeds of $1,747,323 after payment of settlement costs. 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. Item 4. Controls and Procedures The Registrant's General Partner, including its Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Registrant's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) have concluded in their judgment that, as of the end of the period covered by this quarterly report on Form 10-Q, the Registrant's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Registrant and its subsidiaries would be made known to them. There were no significant changes in the Registrant's internal controls or, to the General Partner's knowledge, in other factors that could significantly affect its disclosure controls and procedures subsequent to the date of evaluation. 9 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 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: 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 (duly authorized officer and principal financial officer) Date: August 14, 2003

HEALTHCARE PROPERTIES L P 10-Q