10-Q 1 hcplp10q331.txt FORM 10Q- MARCH 31, 2001 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 March 31, 2001 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 75240 ---------------------------------------------------- (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 ----- ----- 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

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

See notes to financial statements 4 HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 and 2000 (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 footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary have been included. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. Net income (loss) of the Partnership 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 Partnership 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 Partnership from the disposition of a property is allocated (i) to partners with positive capital accounts on a pro rata basis and (ii) thereafter, 98 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. The Financial Accounting Standards Board issued Statement 133; ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities" in June 1998. The Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Because of the Partnership's minimal use of derivatives, the adoption of FAS 133 by the Partnership in the first quarter of fiscal 2001 did not have a material effect on the Partnership's earnings or financial position. 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 the Registrant, which was until June 10, 1998, an affiliate of Capital Realty Group Senior Housing, Inc. ("CRGSH"), the General Partner of the Registrant. The 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 CRGSH and CSL are as follows: 5 THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 -------------- -------------- Salary and benefit reimbursements $ 952,503 $ 842,597 Administrative reimbursements 49,329 45,592 Asset management fees 0 61,452 Property management fees 101,727 100,314 General partner fees 22,545 24,196 -------------- -------------- $ 1,126,104 $ 1,074,151 ============== ============== Currently, Capital Senior Living Properties, Inc., formerly an affiliate of CRGSH, holds approximately 57 percent of the outstanding units of the Registrant. The 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 the 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. The Registrant performs such evaluations on an on-going basis. During the three months ended March 31, 2001, based on the Registrant's evaluation of the properties, the Registrant did not record any impairment. 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. The Registrant partially financed the acquisition of eight of its original properties with non-recourse debt. Four properties were initially unleveraged. As of March 31, 2001, seven of the original twelve properties had either been sold or deeded back to the lender, leaving the Registrant with two properties secured by debt and three properties unleveraged. With the exception of the Cambridge facility, which is operated by the Registrant and consequently not leased to a third party operator, the status of the remaining triple net leases to third party operators is as follows: the McCurdy and Crenshaw Creek facility expire on November 2001, and the Hearthstone facility lease expires on May 2006. The Trinity Hills lease expired in June of 2000 with the lessee continuing to lease the property on a month-to-month basis. These leases are subject to renewal options. As of March 31, 2001, a remaining Cedarbrook facility and the McCurdy facility are classified as assets held for sale. 6 Potential sources of liquidity for Registrant include current holdings of cash and cash equivalents, collection of outstanding receivables and/or revenue participation related to various leased facilities, collection on defaulted rent and/or damage settlements related to leases in default, new mortgage financing on one or more of Registrant's unencumbered assets, and a potential sale of one or more of the Registrant's assets. As of March 31, 2001, Registrant had cash and cash equivalents aggregating $9,140,969. The cash and cash equivalents will be used for working capital and emergency reserves. 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 existing assets for improvements. To the extent that Registrant deems it necessary to take over the operations of any of its facilities currently under long-term net leases, such action would require additional investment in working capital for operating reserves, capital expenditures and related debt payments. Future cash distributions will be dependent on the status of future operational control of these properties. Cash distributions of $5,000,000 and $0 were made for the first quarters ending March 31, 2001 and 2000 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 ENDING MARCH 31, 2001 Rental revenues for the three months ended March 31, 2001 increased $38,070 from the comparable three months ended March 31, 2000, due to increased revenue participation from leased facilities. Net patient services for the three months ended March 31, 2001 increased $17,577 from the three months ended March 31, 2000 primarily due to increased occupancy at the Cambridge facility. Interest income for the three months ended March 31, 2001 decreased $62,648 from the three months ended March 31, 2000 and was primarily due to decreasing cash available for investment. A gain of $302,787 was recognized for the three months ended March 31, 2000 due to the sale of the Cane Creek facility. Facility operating expenses for the three months ended March 31, 2001 increased by $83,361 from the comparable 2000 period primarily due to increased nursing salary cost at the Cambridge facility. Depreciation for the three months ended March 31, 2001, slightly increased $658 from the comparable 2000 period. . Administrative expenses decreased $78,710 for the three months ended March 31, 2001 in comparison to 2000 due to decreased professional fees, asset management fees and maintenance costs on held for sale properties. Bad debt expense increased $229,623 for the three months ended March 31, 2001 in comparison to the 2000 period due to non-collection of rent on the McCurdy lease. Interest expense for the three months ended March 31, 2001 decreased by $13,404 from the comparable 2000 period, and is due to the sale of the Cane Creek facility and retirement of the related mortgage. Amortization expense for the three months ended March 31, 2001 decreased $16,503 from the comparable 2000 period, and is due to the write-off of certain deferred charges upon the sale of the Cane Creek and Sandybrook facilities. Cash and cash equivalents as of March 31, 2001 decreased by $4,373,286 from the balance at December 31, 2000. Cash flows decreased by $8,226,607 for the three months ending March 31, 2001 in comparison to the three months ending March 31, 2001 primarily due to cash proceeds from the sale of the Cane Creek facility in 2000, collection of a $700,000 bad-debt recovery administrative claim approved by the United States Bankruptcy Court related to the Cambridge facility and the bankruptcy proceedings of the former lessee of that facility in 2000, and a $5,000,000 cash distribution in 2001. Net accounts receivable of $623,161 at March 31, 2001 reflected a decrease of $130,653 from the balance at December 31, 2000 and is due to increased allowance for doubtful accounts on lease receivables for the McCurdy facility. Accounts payable, accrued expenses, and operating facility accounts payable balances decreased $143,325 at March 31, 2001, from the balance at December 31, 2000 primarily due to paid real estate taxes on the Hearthstone facility. 7 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, originally leased four properties: Cedarbrook (a main campus with two houses not adjacent on the campus), Crenshaw Creek, Cane Creek and Sandybrook. Due to low occupancy, HealthSouth closed the Sandybrook facility in 1994, the Cedarbrook facility in 1997, and the Crenshaw Creek facility in May 2000. HealthSouth continues to make full lease payments under the terms of the master lease on a timely basis. HealthSouth Corporation currently leases the Crenshaw Creek property and a house affiliated with the remaining Cedarbrook facility pursuant to a master lease with the Registrant. The master lease expires on November 2001. Effective August 5, 1999, HealthSouth agreed to transfer control of the Cedarbrook and Sandybrook facilities to the Registrant and to continue making its full lease payments under the terms of the master lease to the Registrant. On September 30, 1999, the Registrant sold the main facility of the Cedarbrook campus for $2,825,000, resulting in a $772,286 gain on the sale and $2,308,734 in net cash proceeds after payment of settlement costs and mortgage payable. On July 12, 2000, one of the two small Cedarbrook facilities was sold for $390,546, resulting in a gain on sale of $115,717 and net cash proceeds of approximately $360,380 after payment of settlement costs. One of the two small facilities on the Cedarbrook campus is still owned by the Registrant as of December 31, 2000. On January 11, 2000, the Cane Creek facility was sold to a subsidiary of HealthSouth for $2,350,000, resulting in a $302,787 gain on the sale and $2,143,400 in net cash proceeds after payment of settlement costs and mortgage payable. On August 4, 2000, the Sandybrook facility was sold for $2,025,000 resulting in a loss of approximately $766,400, and net cash proceeds of approximately $1,829,130 after payment of settlement costs. HealthSouth still leases and maintains the Crenshaw Creek facility. The Crenshaw Creek facility was closed in May 2000. CAMBRIDGE FACILITY The lessee of the Cambridge facility, Nursing Centers of America-Cambridge (NCAC), filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in February of 1992. The Registrant commenced litigation against NCAC seeking full payment of future rentals under the lease of NCAC. On August 1, 1996, the United States Bankruptcy Court approved the transfer of the operations of NCA Cambridge Nursing Home to Cambridge LLC, a subsidiary of the Registrant, thereby releasing the operations of the Cambridge facility from the jurisdiction of the United States Bankruptcy Court. The Registrant's subsidiary now operates this property. The Registrant had filed an administrative claim with the trustee of the United States Bankruptcy Court for unpaid lease payments. At December 31, 1999, the Registrant recorded a receivable for $700,000 related to this administrative claim, which was approved by the United States Bankruptcy Court. The $700,000 account receivable was collected on March 1, 2000. It is unlikely that material future disbursements will be made to the Registrant regarding this matter. HEARTHSTONE, TRINITY HILLS, AND MCCURDY FACILITIES The Hearthstone lease expired on November 7, 2000. The parent company of the lessee filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. The lessee and the Registrant attempted to negotiate an extension of the lease, but were unsuccessful in doing so. The Hearthstone lessee has notified the Registrant that it does not currently intend to extend or renew the lease and the Registrant has negotiated with an unaffiliated operator to take over the lease effective May 1, 2001. The Hearthstone lessee did not pay their April rent to Registrant. The Trinity Hills lease expired on June 30, 2000, however, the lessee continues to lease the facility on a month-to-month basis. On February 2, 2000, the parent company of the lessee of the Trinity Hills facility, filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. At this time, it is uncertain 8 if bankruptcy protection will disrupt future payments of lease obligations. The Trinity Hills lessee is current on their minimum lease obligations, but is delinquent on three rent participation payments to the Registrant. The lessee is attempting to obtain bankruptcy court approval to approve a renewal of their lease. There is no guarantee that this will occur. Registrant is exploring its options regarding this property , including finding a new lessee or selling the property. The lessee of the McCurdy facility has defaulted on its minimum lease payments as of January 2001. The Registrant is working with the current lessee to stabilize its census, but is also evaluating its alternatives. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Registrant's primary market risk exposure is from fluctuations in interest rates and the effects of those fluctuations on the market values of its cash equivalent short-term investments. The cash equivalent short-term investments consist primarily of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None 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: None (B) Reports on Form 8-K: None 9 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: May 14, 2001 10

HEALTHCARE PROPERTIES L P 10-Q