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SCHEDULE 14C
(Rule 14c-101)
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
(Amendment No. 3)
Check the appropriate box:
/X/ Preliminary information statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/ / Definitive information statement
HealthCare Properties, L.P.
---------------------------
(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14c-5(g)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Units of Limited Partnership Interests
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(2) Aggregate number of securities to which transaction applies:
4,148,325
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
A filing fee of $2,625.43 was calculated by multiplying one-50th of one percent
by the aggregate cash proceeds to be received by the Registrant ($13,127,131).
(4) Proposed maximum aggregate value of transaction:
$13,127,131
-----------
(5) Total fee paid: $2,625.43
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $2,625.43
(2) Form Schedule or Registration Statement No.: Preliminary Schedule 14C
(Amendment No. 2)
(3) Filing Party: HealthCare Properties, L.P.
(4) Date Filed: October 5, 1998
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PRELIMINARY COPY
For Information Purposes
No Reply Necessary
October 31, 1998
Dear Unit Holders:
In recent reports to the Unit Holders of HealthCare Properties, L.P.
(the "Partnership"), we informed you of our continuing efforts to enhance your
investment's value. We are extremely pleased to provide to you the attached
Information Statement, which we believe, constitutes a major step in meeting
this goal.
The Partnership was formed in 1987 with the original investment
objective of acquiring and leasing health care properties. Capital Realty Group
Senior Housing, Inc., your General Partner, began its association with the
Partnership in 1992 and assumed general partner duties in June 1993. At that
time, the Partnership faced severe economic problems because the lessees of
eight of the twelve health care properties the Partnership owned defaulted,
including one which filed for bankruptcy due to alleged Medicaid over
reimbursements. As a result, the Partnership faced a severe cash flow crisis and
a number of lenders threatened actions against the Partnership for back due
mortgage payments that exceeded several million dollars.
Your General Partner immediately began to restructure the Partnership's
management and assets. The restructuring included, among other activities,
negotiating a sale or deedback of four distressed Partnership properties with
significant past due mortgages and a full release of liability to the
Partnership, restructuring the Rebound lease with significantly increased lease
payments to the Partnership, and taking back control the Cambridge facility out
of Chapter 11 bankruptcy proceedings.
As mentioned in previous communications, the General Partner has
continued to explore ways to enhance Unit Holder returns and improve the
Partnership's long-term value. The General Partner has been primarily focused on
optimizing the value of the Partnership's assets. The General Partner believes
that it is in the Partnership's best interests that once the asset value is
optimized, the Unit Holder's interest be converted into cash.
The General Partner believes that it has optimized the investment
returns that could be provided by the Partnership's assets. Accordingly, it
believes the continued management of these assets will not further optimize the
returns to the Unit Holders. Moreover, the General Partner does not believe that
significant investment opportunities exist in the subacute-care/nursing-care
industry, and related real estate assets. The General Partner believes,
therefore, the next step in optimizing your Partnership investment involves the
merger of an affiliated entity with and into the Partnership and the Unit
Holders, other than Capital Senior Living Properties, Inc. (the "Company") which
owns approximately 56.6 percent of the Units, receiving cash in exchange for
their Partnership Units (the "Merger").
The Merger is based on the Partnership being valued at approximately
$30,282,755 approximately $7.30 per Unit, which exceeds the Partnership's
approximately $25,575,701 net book value as of June 30, 1998. It is anticipated
that the Merger, if completed, will result in Unit Holders, other than the
Company ("Unaffiliated Unit Holders"), receiving, after deducting certain
closing expenses and withholding reserves as discussed in more detail herein,
approximately $6.43 per Unit. Over the past two years, the Units have traded
primarily among
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both affiliated and non-affiliated entities between $3 and $6 per Unit. These
prices are before deducting brokerage and other fees and costs.
Before deciding to proceed with the Merger, various alternatives were
considered in order to optimize Unit Holder returns, including continued
management of the Partnership's assets, as well as the sale of substantially all
the assets and reinvesting the proceeds. Each alternative is discussed in the
Information Statement and should be reviewed. The General Partner concluded
ultimately that Unit Holder returns would not be further optimized, and that the
Merger is the best course of action.
There are conflicts of interest between the various parties to the
transaction of which Unaffiliated Unit Holders should be aware. First, although
the General Partner delivered its fairness recommendation on June 19, 1998, the
negotiations took place while the General Partner was affiliated with the
Company and Capital Senior Living Corporation ("CSLC") and thus a conflict of
interest arises from the fact that the persons negotiating the transaction were
on both sides of the negotiations. Second, the General Partner is now owned 100%
by Retirement Associates Inc. ("Associates"), which is in turn owned 100% by
Robert L. Lankford. CSLC, the parent of the Company, provides Mr. Lankford
complimentary use of a small office, supplies, telephone and fax in connection
with Mr. Lankford's services as an independent contractor for CSLC or its
affiliates. Mr. Lankford has his own separate principal office space. Mr.
Lankford also was an independent broker for Capital Realty Brokerage, Inc.
("Capital Brokerage"), an affiliate of CSLC, from 1988 to 1997. Mr. Lankford
received non-employee compensation from Capital Brokerage in 1997, 1996 and
1995, in the amounts of $18,750, $203,505.43 and $13,608.75, respectively. Mr.
Lankford's current relationship with CSLC accounts for less than 20% of his
total compensation.
The General Partner and Mr. Lankford entered into an employment
agreement on June 10, 1998. Under the terms of the employment agreement, Mr.
Lankford will be paid an annual salary by the General Partner in an amount to be
agreed upon by the parties. Mr. Lankford will also be reimbursed by the General
Partner for reasonable business expenses. The General Partner will also
reimburse Mr. Lankford's attorney expenses up to $10,000 through September 30,
1998. Additionally, the General Partner has also entered into an employment
agreement with Wayne R. Miller, Mr. Lankford's attorney and an officer of the
General Partner. Under the terms of the employment agreement, Mr. Miller will be
paid an annual salary by the General Partner, in an amount to be agreed upon by
the parties. Mr. Miller will also be reimbursed by the General Partner for
reasonable business expenses. Finally the General Partner and Associates entered
into a contract for professional services whereby Associates will provide the
General Partner certain consulting services. Associates is to be paid $10,000 on
the first day of each quarter. The first payment was made on June 10, 1998.
The Unaffiliated Unit Holders should also be aware that the Partnership
Agreement provides that the Partnership cannot consummate a transaction with an
affiliate of the General Partner unless either: (i) an independent advisory
board approves the transaction, or (ii) a majority of the Unit Holders approve
the transaction and a qualified advisor gives an opinion that the transaction is
fair and at least as favorable to the Partnership as one with an unaffiliated
entity. In connection with a proposed asset purchase agreement that was drafted
in January and February 1998 between the General Partner and the Company, the
General Partner engaged Dain Rauscher Wessels, Inc. as a financial advisor to
provide a fairness opinion ("Fairness Opinion"). The structure of the
transaction was subsequently changed to a merger (See "Background of the
Merger"). The Fairness Opinion was not delivered because on June 10, 1998,
Capital Realty
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Group Corporation sold its shares of the General Partner to Associates, an
entity unaffiliated with the Company, and the General Partner, now unaffiliated,
with the Company, concluded that the merger is fair to the Partnership, and that
an opinion of a financial advisor was not required under the Partnership
Agreement.
In connection with the General Partner's determination that an opinion
of the financial advisor was not required under the Partnership Agreement,
Section B(5) of the Partnership Agreement defines "Affiliates" as follows:
When used with reference to a specified Person: (i) any Person
that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with
the specified Person; (ii) any Person who is an officer, partner
or trustee of, or serves in a similar capacity with respect to,
the specified Person, or of which the specified Person is an
officer, partner or trustee, or with respect to which the
specified Person serves in a similar capacity; and (iii) any
Person who, directly or indirectly, is the beneficial owner of
10% or more of any class of voting securities of, or otherwise
has a substantial beneficial interest in, the specified Person
or which the specified Person is directly or indirectly the
owner of 10% or more of any class of equity securities, or in
which the specified Person has a substantial beneficial
interest.
For the reasons set forth below, the General Partner believes that
CSLC does not control Robert Lankford ("Lankford"), the General Partner or
Associates, and Lankford does not control CSLC, and that neither of the other
two tests of affiliations under the Partnership Agreement are met.
The General Partner notes that the Delaware Limited Partnership statute
does not address the definition of "affiliate," and thus does not help to
interpret the term "control." Section 203 of the Delaware General Corporation
Law ("DGCL"), however, defines both "affiliate" and "control." Affiliate is
defined as "any person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
another person" (see Section 203(c)(1)). Section 203(c)(4) then defines
"control" as "the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a person, whether through
the ownership of voting stock, by contract, or otherwise."
Although there is no case law directly on point, the General Partner
believes the statute is clear in that control is the power "to direct or cause
the direction of the management and policies." Therefore, in the General
Partner's opinion, what is required for "control" is the right, whether
contractual or based on ownership, to appoint or remove officers or directors or
to direct corporate decisions.
CSLC does not have, either directly or indirectly, an equity
interest in the General Partner. CLSC does not hold any debt of the General
Partner. There is no current contractual relationship between CSLC and the
General Partner. Prior to the sale of the General Partner's capital stock to
Associates, there was a contractual relationship. As part of the initial
public offering of CSLC's common stock, Messers Beck and Stroud, as the CSLC
control persons and as the then beneficial owners of the General Partner,
were required to assign the fees and distributions the General Partner
receives from both the Partnership and NHP Retirement Partners I, L.P.
("NHP") to CSLC. Therefore, Capital Realty Group Corporation ("Capital
Realty"), an affiliate of CSLC, and the General Partner and CSLC entered into
an option agreement (the "Option Agreement") whereby Capital Realty granted
CSLC the option to
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purchase the capital stock of the General Partner at fair market value at any
time for a period of 10 years from the date of the Option Agreement. The Option
Agreement also assigned all fees and distribution that the General Partner
receives from the Partnership and NHP. The Option Agreements was never signed,
but the fees and distributions were paid to CSLC pursuant to an oral agreement
with the same terms and conditions as the Option Agreement. The Option Agreement
was orally terminated by the parties prior to the sale of the General Partner's
stock to Associates. During the period the Option Agreement was in effect, the
General Partner assigned $224,102 in distributions from the Partnership to CSLC.
No fees or distribution the General Partner receives have been paid to CSLC
since June 10, 1998. CSLC, therefore, does not have the power to elect or remove
either the officers or directors of the General Partner. Moreover, CSLC does not
possess, either directly or indirectly, any interest in the General Partner that
could be used to coerce the General Partner. Therefore, in the General Partner's
opinion, CSLC does not control the General Partner.
Similarly, the General Partner does not have, either directly or
indirectly, an equity interest in CSLC. The General Partner, therefore, does not
have the power to elect or remove either the officers or directors of CSLC. The
General Partner does not hold any debt of CSLC. There is no contractual
relationship between CSLC and the General Partner. The General Partner believes
that it does not control CSLC.
CSLC does not have an equity interest in Associates, and thus
cannot elect or remove the director of Associates. Associates, in order to
purchase the stock of the General Partner, issued a non-recourse promissory
noted dated June 10, 1998 (the "Note"), whereby Associates agreed to pay
Capital Realty $855,000 plus interest at a rate of 10% per annum on June 1,
2003. The security for the Note is Associate's capital stock and all right,
title, distributions, proceeds and interest of the General Partner in either
the Partnership or NHP. Pursuant to the Security Agreement among Capital
Realty, Associates and the General Partner, any fees or distribution the
General Partner receives, except the $40,000 per year that is paid to
Associates pursuant to a consulting agreement, are paid to Capital Realty in
payment of the Note. Capital Realty does not have the right to acquire or
vote the capital stock of Associates, and the Note does not provide CSLC,
indirectly through Capital Realty, power to direct the management or policy
of Associates. Therefore, in the General Partner's opinion, CSLC does not
control Associates.
Associates does not hold an equity interest in CSLC, and thus cannot
elect or remove the directors of CSLC. Associates does not hold any CSLC debt,
and the only contractual relationships between the parties are those discussed
above which do not provide Associates with any control over CSLC. The General
Partner therefore concludes that Associates does not Control CSLC.
The General Partner believes that CSLC does not control Lankford. From
1988 to 1997, Lankford was an independent broker with Capital Brokerage, an
affiliate of CSLC. From 1997 to the present, however, Lankford has been a
principal with Kamco. In this capacity Lankford provides independent commercial
real estate brokerage services for various clients including CSLC which accounts
for less than 20% of his compensation. CSLC also provides Lankford with
complimentary use of an office and administrative support when Lankford is
providing such services to CSLC. Lankford's independent broker relationship with
CSLC, however, does not rise to the level of control. In determining whether
CSLC controls Lankford, the General Partner expects, based on the General
Partner's review of the case law, a Delaware court would look to see if a de
facto employer/employee relationship has been established. In Fisher v.
Townsends, Inc., 695 A2d. 53 (1996), the Delaware Supreme Court held that to
determine if a person was an
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employee depended on whether the company controlled the person. To determine
control, the Court looked to a variety of factors such as whether the company
engaged in that particular business, whether the person has his own business,
and whether the company directed general goals and requirements of the person or
the specific tasks to be performed. In this case, Mr. Lankford has his own
business, Kamco. CSLC has moved out of the brokerage business, and into the
development business necessitating the use of independent brokers. Also, CLSC
does not direct Mr. Lanksford's specific tasks. Finally, in his capacity as the
owner of Associates, Mr. Lankford has retained his own legal representation. In
the General Partner's opinion, CSLC does not control Lankford.
Accordingly, Lankford does not control CSLC because (i) Lankford does
not own any debt or equity of CSLC; (ii) he cannot elect or remove CSLC
directors; and (iii) his independent broker relationship with CSLC does not give
him the power to direct the management of CLSC.
The General Partner believes that CSLC is not under common control
either with the General Partner, Associates or Lankford. Mr. Beck and Mr. Stroud
control CSLC. Neither Mr. Beck nor Mr. Stroud own any interest in or have any
contractual relationship with Associates or the General Partner. Also, neither
Mr. Beck or Mr. Stroud have a contractual relationship with Lankford.
The General Partner believes the relationships between the General
Partner and CSLC also fail to meet the second test of affiliation under the
Partnership Agreement. Lankford is the sole officer of Associates. The officers
of CSLC are Jeffrey L. Beck, James A. Stroud, Lawrence A. Cohen, Keith N.
Johannssen, and David R. Brickman. There are no overlapping officers in the two
entities. Moreover, the General Partner does not serve CLSC in any capacity, and
CLSC does not serve the General Partner in any capacity.
Finally, the General Partner believes that the relationships between
the General Partner and CSLC fail the Partnership's third test of affiliation.
As stated earlier, CSLC does not, directly or indirectly, beneficially own any
securities of either the General Partner or Associates. Similarly, as stated
earlier, neither the General Partner nor Associates owns any securities of CSLC.
Finally, with the acquisition of the General Partner by Associates, there is no
contractual relationship between the General Partner and CSLC.
The General Partner notes that because there are no Delaware
statutes or cases that specifically define "control" for the purpose of
partnership affiliation, a court could disagree with the General Partner's
view and conclude that the General Partner and CSLC are affiliates. The
General Partner believes that if a court concluded that there was an
affiliation, it is extremely unlikely that the court would unwind the Merger;
instead, a court would likely award damages to the Partnership in an amount
equal to the excess of the brokerage fee paid and the brokerage fee payable
to an affiliate under the Partnership Agreement, and an amount, if any, that
a plaintiff could prove resulted from the failure to obtain a fairness
opinion.
The General Partner has a two percent general partnership interest in
the Partnership and the Company owns approximately 56.6 percent of the Units.
The General Partner and the Company have confirmed that they will approve the
Merger. ACCORDINGLY, NO ACTION BY THE UNAFFILIATED UNIT HOLDERS IS REQUIRED TO
CONSUMMATE THE MERGER, AND THE PARTNERSHIP IS NOT SOLICITING YOUR APPROVAL.
Upon consummation of the Merger, Unaffiliated Unit Holders will receive
cash for their Units. Neither the Partnership Agreement nor the Delaware Revised
Uniform Limited
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Partnership Act provide for dissenter's or appraisal rights regardless of
whether such Unit Holder has consented to the Merger. As a result of the Merger,
Unaffiliated Unit Holders will no longer have an interest in the Partnership,
and therefore, will not participate in possible future Partnership earnings.
The Information Statement contains important information about the
Merger, including the fees that the General Partner and its affiliates will
receive. You should review this material carefully.
Thank you for your time and consideration.
Very truly yours,
Capital Realty Group Senior Housing, Inc.
Your General Partner
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PRELIMINARY COPY
Introduction
This Information Statement, which is being mailed to all holders of
record as of the close of business on October 31, 1998 (the "Unit Holders") of
one or more units representing beneficial units of limited partnership interests
(the "Units") in HealthCare Properties, L.P., a Delaware limited partnership
(the "Partnership"), on or about October 31, 1998 is furnished in accordance
with the requirements of Regulation 14C under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), by Capital Realty Group Senior Housing,
Inc., a Texas corporation and the general partner of the Partnership (the
"General Partner").
Information Statement
This Information Statement is being provided to you by the General
Partner for use in connection with the proposed merger of Capital Senior
Living Merger, LLC (the "Merger Sub"), a Delaware limited liability company
and a wholly-owned subsidiary of the Partnership's affiliate, Capital Senior
Living Properties, Inc., a Texas corporation (the "Company") with and into
the Partnership (the "Merger"). As a result of the Merger, the Unit Holders'
interest in the Partnership, other than the Company's ("Unaffiliated Unit
Holders"), will be converted into cash. Accordingly, the Unaffiliated Unit
Holders will have no interest in the surviving company. Neither the
Partnership Agreement nor the Delaware Revised Uniform Limited Partnership
Act provide for dissenter's or appraisal rights regardless of whether such
Unit Holder has consented to the Merger. The Merger is expected to occur on
or after November 20, 1998. As a result of the Merger, the Partnership will
cease to be a public entity subject to the informational reporting
requirements of the Exchange Act.
There are conflicts of interest between the various parties to the
transaction of which Unaffiliated Unit Holders should be aware. First,
although the General Partner delivered its fairness recommendation on June
19, 1998, the negotiations took place while the General Partner was
affiliated with the Company and Capital Senior Living Corporation ("CSLC")
and thus a conflict of interest arises from the fact that the persons
negotiating the transaction were on both sides of the negotiations. Second,
the General Partner is now owned 100% by Retirement Associates Inc.
("Associates"), which is in turn owned 100% by Robert L. Lankford. CSLC, the
parent of the Company, provides Mr. Lankford complimentary use of a small
office, supplies, telephone and fax in connection with Mr. Lankford's
services as an independent contractor for CSLC or its affiliates. Mr.
Lankford has his own separate principal office space. Mr. Lankford also was
an independent broker for Capital Realty Brokerage, Inc. ("Capital
Brokerage"), an affiliate of CSLC, from 1988 to 1997. Mr. Lankford received
non-employee compensation from Capital Brokerage in 1997, 1996 and 1995, in
the amounts of $18,750, $203,505.43 and $13,608.75, respectively. Mr.
Lankford's relationship with CSLC accounts for less than 20% of his total
compensation.
The General Partner and Mr. Lankford entered into an employment
agreement on June 10, 1998. Under the terms of the employment agreement, Mr.
Lankford will be paid an annual salary by the General Partner in an amount to
be agreed upon by the parties. Mr. Lankford will also be reimbursed by the
General Partner for reasonable business expenses. The General Partner will
also reimburse Mr. Lankford's attorney expenses up to $10,000 through
September 30, 1998. Additionally, the General Partner has also entered into
an employment agreement with Wayne R. Miller, Mr. Lankford's attorney and an
officer of the General Partner.
1
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Under the terms of the employment agreement, Mr. Miller will be paid an
annual salary by the General Partner, in an amount to be agreed upon by the
parties. Mr. Miller will also be reimbursed by the General Partner for
reasonable business expenses. Finally the General Partner and Associates
entered into a contract for professional services whereby Associates will
provide the General Partner certain consulting services. Associates is to be
paid $10,000 on the first day of each quarter. The first payment was made on
June 10, 1998.
The Unaffiliated Unit Holders should also be aware that the
Partnership Agreement provides that the Partnership cannot consummate a
transaction with an affiliate of the General Partner unless either: (i) an
independent advisory board approves the transaction, or (ii) a majority of
the Unit Holders approve the transaction and a qualified advisor gives an
opinion that the transaction is fair and at least as favorable to the
Partnership as one with an unaffiliated entity. In connection with a proposed
asset purchase agreement that was drafted in January and February 1998
between the General Partner and the Company, the General Partner engaged Dain
Rauscher Wessels, Inc. as a financial advisor to provide a fairness opinion
("Fairness Opinion"). The structure of the transaction was subsequently
changed to a merger (See "Background of the Merger"). The Fairness Opinion
was not delivered because on June 10, 1998, Capital Realty Group Corporation
sold its shares of the General Partner to Associates, an unaffiliated entity
and the now unaffiliated General Partner concluded that the merger is fair to
the Partnership, and that an opinion of a financial advisor was not required
under the Partnership Agreement.
In connection with the General Partner's determination that an
opinion of the financial advisor was not required under the Partnership
Agreement, Section B(5) of the Partnership Agreement defines "Affiliates" as
follows:
When used with reference to a specified Person: (i) any Person
that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with
the specified Person; (ii) any Person who is an officer, partner
or trustee of, or serves in a similar capacity with respect to,
the specified Person, or of which the specified Person is an
officer, partner or trustee, or with respect to which the
specified Person serves in a similar capacity; and (iii) any
Person who, directly or indirectly, is the beneficial owner of
10% or more of any class of voting securities of, or otherwise
has a substantial beneficial interest in, the specified Person
or which the specified Person is directly or indirectly the
owner of 10% or more of any class of equity securities, or in
which the specified Person has a substantial beneficial
interest.
For the reasons set forth below, the General Partner believes that
CSLC does not control Robert Lankford ("Lankford"), the General Partner or
Associates, and Lankford does not control CSLC, and that neither of the other
two tests of affiliations under the Partnership Agreement are met.
The General Partner notes that the Delaware Limited Partnership
statute does not address the definition of "affiliate," and thus does not
help to interpret the term "control." Section 203 of the Delaware General
Corporation Law ("DGCL"), however, defines both "affiliate" and "control."
Affiliate is defined as "any person that directly or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, another person" (see Section 203(c)(1)). Section 203(c)(4) then
defines "control" as "the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of voting stock, by contract, or otherwise."
2
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Although there is no case law directly on point, the General Partner
believes the statute is clear in that control is the power "to direct or
cause the direction of the management and policies." Therefore, in the
General Partner's opinion, what is required for "control" is the right,
whether contractual or based on ownership, to appoint or remove officers or
directors or to direct corporate decisions.
CSLC does not have, either directly or indirectly, an equity
interest in the General Partner. CLSC does not hold any debt of the General
Partner. There is no current contractual relationship between CSLC and the
General Partner. Prior to the sale of the General Partner's capital stock to
Associates, there was a contractual relationship. As part of the initial
public offering of CSLC's common stock, Messers Beck and Stroud, as the CSLC
control persons and as the then beneficial owners of the General Partner,
were required to assign the fees and distributions the General Partner
receives from both the Partnership and NHP Retirement Partners I, L.P.
("NHP") to CSLC. Therefore, Capital Realty Group Corporation ("Capital
Realty"), an affiliate of CSLC, and the General Partner and CSLC entered into
an option agreement (the "Option Agreement") whereby Capital Realty granted
CSLC the option to purchase the capital stock of the General Partner at fair
market value at any time for a period of 10 years from the date of the Option
Agreement. The Option Agreement also assigned all fees and distribution that
the General Partner receives from the Partnership and NHP. The Option
Agreements was never signed, but the fees and distributions were paid to CSLC
pursuant to an oral agreement with the same terms and conditions as the
Option Agreement. The Option Agreement was orally terminated by the parties
prior to the sale of the General Partner's stock to Associates. During the
period the Option Agreement was in effect, the General Partner assigned
$224,102 in distributions from the Partnership to CSLC. No fees or
distribution the General Partner receives have been paid to CSLC since June
10, 1998. CSLC, therefore, does not have the power to elect or remove either
the officers or directors of the General Partner. Moreover, CSLC does not
possess, either directly or indirectly, any interest in the General Partner
that could be used to coerce the General Partner. Therefore, in the General
Partner's opinion, CSLC does not control the General Partner.
Similarly, the General Partner does not have, either directly or
indirectly, an equity interest in CSLC. The General Partner, therefore, does
not have the power to elect or remove either the officers or directors of
CSLC. The General Partner does not hold any debt of CSLC. There is no
contractual relationship between CSLC and the General Partner. The General
Partner believes that it does not control CSLC.
CSLC does not have an equity interest in Associates, and thus cannot
elect or remove the director of Associates. Associates, in order to purchase
the stock of the General Partner, issued a non-recourse promissory noted
dated June 10, 1998 (the "Note"), whereby Associates agreed to pay Capital
Realty $855,000 plus interest at a rate of 10% per annum on June 1, 2003. The
security for the Note is Associate's capital stock and all right, title,
distributions, proceeds and interest of the General Partner in either the
Partnership or NHP. Pursuant to the Security Agreement among Capital Realty,
Associates and the General Partner, any fees or distribution the General
Partner receives, except the $40,000 per year that is paid to Associates
pursuant to a consulting agreement, are paid to Capital Realty in payment of
the Note. Capital Realty does not have the right to acquire or vote the
capital stock of Associates, and the Note does not provide CSLC, indirectly
through Capital Realty, power to direct the management or policy of
Associates. Therefore, in the General Partner's opinion, CSLC does not
control Associates.
3
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Associates does not hold an equity interest in CSLC, and thus cannot
elect or remove the directors of CSLC. Associates does not hold any CSLC
debt, and the only contractual relationships between the parties are those
discussed above which do not provide Associates with any control over CSLC.
The General Partner therefore concludes that Associates does not Control CSLC.
The General Partner believes that CSLC does not control Lankford.
From 1988 to 1997, Lankford was an independent broker with Capital Brokerage,
an affiliate of CSLC. From 1997 to the present, however, Lankford has been a
principal with Kamco. In this capacity Lankford provides independent
commercial real estate brokerage services for various clients including CSLC
which accounts for less than 20% of his compensation. CSLC also provides
Lankford with complimentary use of an office and administrative support when
Lankford is providing such services to CSLC. Lankford's independent broker
relationship with CSLC, however, does not rise to the level of control. In
determining whether CSLC controls Lankford, the General Partner expects,
based on the General Partner's review of the case law, a Delaware court would
look to see if a de facto employer/employee relationship has been
established. In Fisher v. Townsends, Inc., 695 A2d. 53 (1996), the Delaware
Supreme Court held that to determine if a person was an employee depended on
whether the company controlled the person. To determine control, the Court
looked to a variety of factors such as whether the company engaged in that
particular business, whether the person has his own business, and whether the
company directed general goals and requirements of the person or the specific
tasks to be performed. In this case, Mr. Lankford has his own business,
Kamco. CSLC has moved out of the brokerage business, and into the development
business necessitating the use of independent brokers. Also, CLSC does not
direct Mr. Lanksford's specific tasks. Finally, in his capacity as the owner
of Associates, Mr. Lankford has retained his own legal representation. In the
General Partner's opinion, CSLC does not control Lankford.
Accordingly, Lankford does not control CSLC because (i) Lankford
does not own any debt or equity of CSLC; (ii) he cannot elect or remove CSLC
directors; and (iii) his independent broker relationship with CSLC does not
give him the power to direct the management of CLSC.
The General Partner believes that CSLC is not under common control
either with the General Partner, Associates or Lankford. Mr. Beck and Mr.
Stroud control CSLC. Neither Mr. Beck nor Mr. Stroud own any interest in or
have any contractual relationship with Associates or the General Partner.
Also, neither Mr. Beck or Mr. Stroud have a contractual relationship with
Lankford.
The General Partner believes the relationships between the General
Partner and CSLC also fail to meet the second test of affiliation under the
Partnership Agreement. Lankford is the sole officer of Associates. The
officers of CSLC are Jeffrey L. Beck, James A. Stroud, Lawrence A. Cohen,
Keith N. Johannssen, and David R. Brickman. There are no overlapping officers
in the two entities. Moreover, the General Partner does not serve CLSC in any
capacity, and CLSC does not serve the General Partner in any capacity.
Finally, the General Partner believes that the relationships between
the General Partner and CSLC fail the Partnership's third test of
affiliation. As stated earlier, CSLC does not, directly or indirectly,
beneficially own any securities of either the General Partner or Associates.
Similarly, as stated earlier, neither the General Partner nor Associates owns
any securities of CSLC. Finally, with the acquisition of the General Partner
by Associates, there is no contractual relationship between the General
Partner and CSLC.
4
<PAGE>
The General Partner notes that because there are no Delaware
statutes or cases that specifically define "control" for the purpose of
partnership affiliation, a court could disagree with the General Partner's
view and conclude that the General Partner and CSLC are affiliates. The
General Partner believes that if a court concluded that there was an
affiliation, it is extremely unlikely that the court would unwind the Merger;
instead, a court would likely award damages to the Partnership in an amount
equal to the excess of the brokerage fee paid and the brokerage fee payable
to an affiliate under the Partnership Agreement, and an amount, if any, that
a plaintiff could prove resulted from the failure to obtain a fairness
opinion.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
The approval of Unit Holders holding a majority of the Units is
required to approve the Merger. The Company owns 2,350,087 Units, which
represents approximately 56.6 percent of the total Units outstanding. The
Company has confirmed that it will approve the Merger. The General Partner
has also determined that it will approve the Merger. CONSEQUENTLY, THE
PARTNERSHIP IS NOT SOLICITING YOUR APPROVAL. This document is being provided
to you for information purposes only. The Merger will be consummated on or
after November 20, 1998 (more than 20 days from the date hereof). No meeting
of the Unit Holders will be held.
WE ARE NOT ASKING YOU FOR A PROXY OR WRITTEN CONSENT AND YOU ARE
REQUESTED NOT TO SEND US A PROXY OR WRITTEN CONSENT.
Additional Information
The Partnership is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements,
and other information with the Securities and Exchange Commission (the
"SEC"). Such reports, proxy statements, and other information may be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC also maintains a Website at http://www.sec.gov that contains
reports, proxy statements and other information. After consummation of the
Merger, the Partnership will no longer be required to file reports, proxy
statements, or other information with the SEC.
This Information Statement is accompanied by copies of the
Partnership's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and the Form 10-Q for the quarter ended June 30, 1998 as filed with
the SEC (attached hereto as Annex A and Annex B respectively).
This Information Statement incorporates by reference documents that
are not presented herein or delivered herewith. Copies of such documents are
available, at the expense of the requester, to any person entitled to receive
this Information Statement, upon written request, from the General Partner.
Written requests should be sent to the General Partner at the following
address: 3516 Merrell Road, Dallas, Texas 75229, Attention: Capital Realty
Group Senior Housing, Inc. A requested exhibit will be furnished by
first-class mail, or other equally prompt means, within two business days of
such request.
5
<PAGE>
Incorporation of Documents By Reference
The following documents are heretofore filed with the SEC pursuant to
the Exchange Act and incorporated herein by reference.
(1) Partnership's Annual report on Form 10-K for the fiscal year ended
December 31, 1997;
(2) Partnership's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998; and
(3) Partnership's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
All reports and other documents filed with the SEC by the
Partnership pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Information Statement and prior to the date of
the consummation of the Merger shall be deemed to be incorporated by
reference herein and to be a aprt hereof from the dates of filing of such
reports and documents. Any statements contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Information Statement to the extent that a
statement contained herein, or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein,
modified or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Information Statement.
Forward-Looking Statements
CERTAIN STATEMENTS IN THIS INFORMATION STATEMENT (INCLUDING
DOCUMENTS INCORPORATED BY REFERENCE HEREIN) CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE, OR ACHIEVEMENTS OF THE PARTNERSHIP OR ANY OF ITS AFFILIATES TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN THIS INFORMATION
STATEMENT, THE WORDS "ESTIMATE," "PROJECT," "INTEND," "EXPECT," "BELIEVE" AND
SIMILAR EXPRESSIONS WHEN USED IN CONNECTION WITH THE PARTNERSHIP OR ANY OF
ITS AFFILIATES INCLUDING THEIR RESPECTIVE MANAGEMENTS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS WERE
BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS IMPORTANT
ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
6
<PAGE>
Organizational Relationships
[GRAPHIC OMITTED]
The following chart indicates the organizational relationships of the various
parties to this transaction.
7
<PAGE>
The Partnership
The Partnership (formerly known as Jacques-Miller Healthcare
Properties, L.P.) was formed in March 1987 under the Delaware Revised Uniform
Limited Partnership Act ("DRULPA"), and will continue until December 31, 2075,
unless terminated earlier under certain provisions of the Partnership's
partnership agreement (the "Partnership Agreement"). The Partnership's executive
office address is 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and the
telephone number is (972) 770-5600.
The Partnership originally was formed for the purpose of acquiring,
leasing, operating, and disposing of existing or newly constructed health care
properties. The original managing general partner was Jacques-Miller, Inc. The
Partnership commenced an offering of its Units to the public on August 31, 1987
(the "Offering"). The Offering was terminated on August 31, 1989, and some Units
were sold to existing investors pursuant to the Partnership's distribution
reinvestment plan until July of 1991. The Partnership issued a total of
4,172,457 Units in the Offering and received gross proceeds from the Offering of
$43,373,269 and net proceeds of $38,748,791. In November and December of 1997,
the Partnership repurchased 20,922 Units at $6 per Unit. As of June 30, 1998,
the Partnership had 4,148,325 Units outstanding.
The Offering's net proceeds were invested in twelve properties (the
"Properties") or used for working capital reserves. The Partnership partially
financed the acquisition of eight of its original Properties with nonrecourse
debt. The other four properties initially were unleveraged. As of June 30, 1998,
four of the original Properties either had been sold or deeded back to the
lenders, leaving the Partnership with four properties secured by debt and four
properties unleveraged (the "Assets").
By June of 1993, the general business focus of the Partnership had
changed greatly. Eight facility leases had been in default, and the Partnership
was operating three facilities. As a result, the Partnership's focus changed
from leasing and disposing of health care properties to conducting complex and
extensive lease and mortgage renegotiations complicated by actual or threatened
bankruptcy proceedings and related litigation, and operating nursing homes.
These changes were further compounded by the fact that the former general
partners were experiencing their own financial problems. Therefore, the
Partnership's then-current general partners sought a replacement general partner
with the necessary experience and willingness to operate the Partnership. After
a diligent search, Capital Realty Group Senior Housing, Inc. (the "General
Partner") was selected and approved as the sole general partner through a
Consent Solicitation dated June 9, 1993. The General Partner's main policy
objective since assuming its role has been to maintain sufficient cash and cash
equivalents to address disruptions in the Partnership's lease revenues, and to
have adequate additional funds for investment in Asset improvements.
As a continuation toward achieving its objective, the General Partner
has been exploring ways to enhance Unit Holders' returns and improve long-term
value to the Partnership. The General Partner believes that it has optimized the
investment returns that could be provided by the Partnership's current Assets.
Accordingly, in the General Partner's opinion, the continued management of these
Assets will not further optimize the returns to the Unit Holders. Moreover, the
General Partner does not believe that significant investment opportunities exist
in the subacute-care/nursing-care industry. The General Partner believes,
therefore, the next step in accomplishing the full potential for your
Partnership investment involves the merger of an affiliated entity with and into
the Partnership, and the Unaffiliated Unit Holders receiving cash in exchange
for their Partnership Units. The Merger, if completed, will result in
Unaffiliated Unit
8
<PAGE>
Holders, based on a Partnership value of more than $30 million
(approximately $7.30 per Unit), receiving nearly $11.6 million or approximately
$6.43 per Unit after deducting certain expenses and withholding reserves as
discussed in more detail herein. The Units, over the past two years, have traded
primarily among both affiliated and non-affiliated entities between $3 and $6
per Unit before deducting brokerage and other fees and costs.
Partnership's Units
There is no public market for the Units and the General Partner does
not plan to list the Units on a national exchange or automated quotation system.
The Partnership formerly had a liquidity reserve feature which, under certain
circumstances, permitted Unit Holders to liquidate their Units. Due to the
Partnership's inadequate liquidity and the adverse impact on Unit values caused
by defaults of certain of the Partnership's lessees, the prior general partners
suspended all redemptions pursuant to the liquidity reserve in March 1991. The
General Partner does not anticipate the Partnership redeeming Units in the
foreseeable future.
Pursuant to the terms of the Partnership Agreement, there are
restrictions on the ability of the Unit Holders to transfer their Units. In all
cases, the General Partner must consent in writing to any substitution of a Unit
Holder. The Internal Revenue Code contains provisions which have an adverse
impact on investors in "publicly traded partnerships." Accordingly, the General
Partner has established a policy of imposing limited restrictions on the
transferability of the Units in private transactions. This policy is intended to
prevent a public trading market from developing and may impact the ability of a
Unit Holder to liquidate his investment quickly.
The following chart indicates the privately negotiated purchases of the
Partnership's Units by the Partnership and by affiliates of the Partnership
since 1996. The prices reflect the gross price paid, not the net price after
deducting brokerage and other fees.
<TABLE>
<CAPTION>
Number of Average Gross Price
Units Purchased Range of Prices Per Unit
--------------- --------------- --------------------
<S> <C> <C> <C>
1st Quarter 1996 212,601 $1.25-$3.00 $2.24
2nd Quarter 1996 629,453 $3.00-$3.35 $3.15
3rd Quarter 1996 142,499 $3.00 $3.00
4th Quarter 1996 36,510 $3.00-$3.84 $3.08
1st Quarter 1997 83,284 $3.00-$8.10 $4.38
2nd Quarter 1997 297,991 $4.00-$6.18 $4.93
3rd Quarter 1997 328,434 $5.00-$6.18 $5.55
4th Quarter 1997 2,356,664 $6.00-$6.69* $6.68*
1st Quarter 1998 0 -- --
2nd Quarter 1998 0 -- --
</TABLE>
* On November 3, 1997, the Company purchased 2,335,742 Units from an
affiliate for $6.69 per Unit. After deducting the brokerage fees, but
before deducting the other fees and costs, the net price was $6.29 per
Unit.
9
<PAGE>
Partnership Assets
The following table summarizes key information about each of the
Assets:
HEALTHCARE PROPERTIES, L.P.
PROPERTY SUMMARY
<TABLE>
<CAPTION>
CEDARBROOK CANE CREEK CRENSHAW CREEK SANDY BROOK
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Location Nashville, TN Martin, TN Lancaster, SC Orlando, FL
Type Rehabilitation Rehabilitation Rehabilitation Rehabilitation
Date Purchased 10/87 11/87 6/88 9/88
Purchase Price $3,955,000** $4,000,000 $3,900,000 $4,200,000
Original Mortgage Amount $2,000,000 $2,200,000 $0 $0
12/31/97 Mortgage Balance $729,622 $581,555 $0 $0
Mortgage Maturity June 30, 1997* December 1, 2001 N/A N/A
End of Lease Term 2001 2001 2001 2001
CAMBRIDGE TRINITY HILLS HEARTHSTONE MCCURDY
------------------------------------------------------------------------------
Location Cambridge, MA Ft. Worth, TX Round Rock, TX Evansville, IN
Type Nursing Nursing Nursing Nursing
Date Purchased 9/90 2/88 11/88 9/89
Purchase Price $5,100,000 $2,700,000 $3,625,000 $7,100,000
Original Mortgage Amount $0 $0 $1,500,000 $4,700,000
12/31/97 Mortgage Balance $0 $0 $1,306,222 $4,060,033
Mortgage Maturity N/A N/A July 1, 2002 April 1, 2012
End of Lease Term N/A 2000 2000 2001
</TABLE>
* On March 21, 1997, the lender agreed not to exercise its call rights on June
30, 1997 and the Partnership is currently negotiating the extension of this note
until December 1, 2000.
** Includes two residential properties
Cedarbrook, Cane Creek, Crenshaw Creek and Sandy Brook Facilities
Rebound, Inc. (a subsidiary of HealthSouth Corporation) leases the
Cedarbrook, Cane Creek, Crenshaw Creek and Sandy Brook properties pursuant to a
master lease with the Partnership. Due to low occupancy of the Sandy Brook
facility, it was closed in 1994 and at this time the lessee has not provided any
information on when it might reopen. Rental payments in March and April 1995
were discontinued by HealthSouth causing an interruption in the master lease.
The General Partner met with HealthSouth and those payments were subsequently
made in the second quarter of 1995. In February 1997, the Partnership was
notified by HealthSouth of the closing of the Cedarbrook facility due to the low
occupancy. At this time, the Partnership can not determine when this facility
might reopen. HealthSouth has continued to make lease payments.
Two recourse loans on Cedarbrook and Cane Creek were due in January
1996 in the aggregate amount of approximately $2,400,000. The Cedarbrook note
was extended through March 31, 1996 and subsequently extended to June 30, 1997.
The Partnership currently is negotiating an extension of the loan until December
1, 2001. The lender of the Cane Creek note agreed to extend the loan to December
1, 2001, pending completion of final loan documents.
10
<PAGE>
Cambridge Facility
The lessee of the Cambridge facility, NCAC, filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code in February of 1992. The
Partnership 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 Nursing Home Limited Liability Company, a subsidiary of the
Partnership, thereby releasing the operations of the facility from the
jurisdiction of the United States Bankruptcy Court. This property is now
operated by the Partnership.
Trinity Hills, McCurdy, and Hearthstone Facilities
The Partnership's other facility lessees are all current in their
lease. In addition, the Partnership believes it likely that two of these lessees
will pay additional rental amounts to the Partnership during future years based
upon increased revenues at those facilities. There can be no assurance, however,
of such increased revenue. Two of these facilities appear to be generating cash
flow sufficient to fund their lease obligations, but Trinity Hills, at this
time, is not generating sufficient cash flow to fund its lease obligations from
property operations. The lessee, however, continues to fund the lease deficit.
On June 17, 1998, the Partnership filed suit in Dallas County against
the lessee of the McCurdy facility. The complaint seeks a declaratory judgment
stating that the lessee of the McCurdy facility cannot exercise its option to
purchase the facility until the end of its term in October 2001. The lessee had
threatened to exercise this option immediately (subject to a final determination
of value). The lessee has currently sought to dismiss this action on
jurisdictional grounds.
The General Partner
The general partner of the Partnership is Capital Realty Group Senior
Housing, Inc., a Texas corporation (the "General Partner"). The General Partner
holds a 2 percent general partner interest in the Partnership. Effective June
10, 1998, the owner of the General Partner transferred its stock to Retirement
Associates, Inc., a nonaffiliated entity incorporated in Texas on June 9, 1998
("Associates"). The General Partner's executive office address is 3516 Merrell
Road, Dallas, Texas 75229, and the telephone number is (972) 308-8336.
At the initiation of the Merger negotiations, the General Partner was
owned 100% by Capital Realty Group Corporation, a Texas corporation ("Capital").
Capital was owned 50% by James A. Stroud (through a trust) and 50% by Jeffrey L.
Beck. Therefore, the General Partner was initially an affiliate of the Company
and the Merger Sub. The General Partner's board of directors consisted of Mr.
Beck and Mr. Stroud (the "Old Board"). Effective June 10, 1998, Capital sold its
shares of the General Partner's stock to Associates. See "Change in Control." As
a result of this new ownership structure, the General Partner is no longer an
affiliate of the Company or Merger Sub.
After the transfer to Associates, the initial directors of the General
Partner were Kathy Granzberg and Karri Hickman who also served as Vice President
and Secretary of the General Partner, respectively. At the time Ms. Granzberg
was the Corporate Controller and Ms. Hickman the Assistant Controller of Capital
Senior Living Corporation. Effective June 29, 1998, Ms.
11
<PAGE>
Granzberg and Ms. Hickman, for personal reasons, resigned their board and
officer positions with the General Partner.
On June 29, 1998, Mr. Lankford was elected the sole director of the
General Partner (the "New Board"). Mr. Lankford also serves as the President of
the General Partner, and Mr. Wayne R. Miller serves as the Vice President of the
General Partner.
Capital Senior Living Properties, Inc.
Capital Senior Living Properties, Inc. (the "Company"), is a wholly
owned subsidiary of Capital Senior Living Corporation, a Delaware corporation
("CSLC"). The Company owns approximately 56.6 percent of the Partnership Units.
The Company's principal executive offices are at 14160 Dallas Parkway, Suite
300, Dallas, Texas 75240 and its telephone number is (972) 770-5600.
CSLC consummated its initial public offering of its shares of common
stock in November 1997. CSLC raised approximately $139 million in that offering.
CSLC is a provider of senior living services with a resident capacity of 5,300.
CSLC and its predecessors have provided senior living services since 1990.
Messrs. Stroud and Beck collectively own approximately 46 percent of
CSLC, and are executive officers and members of its board of directors.
Capital Senior Living Merger, LLC
Capital Senior Living Merger, LLC (the "Merger Sub"), is a newly formed
Delaware limited liability company whose sole member is the Company. The Merger
Sub was created for the purpose of effectuating this transaction. The Merger
Sub's principal executive offices are at 14160 Dallas Parkway, Suite 300,
Dallas, Texas 75240 and its telephone number is (972) 770-5600.
Special Factors
Background of the Merger
The General Partner has from time to time considered and acted upon
strategic alternatives for the Partnership, including acquisitions of additional
properties and the sale of all or part of the Partnership's assets. During the
first quarter of 1997, the General Partner entered into discussions with
HealthCare Property Appraisers of America, Inc., a North Carolina corporation
(the "Appraiser") and a financial advisor specializing in these types of
appraisals, with a view toward retaining the Appraiser. The appraisals were
sought in connection with the acquisition of the Partnership's Units by the
Company as part of the public offering of CSLC's shares in November 1997. Under
the terms of an engagement letter entered into in March 1997, the Appraiser
performed certain inspections of the Assets and delivered the appraisals in
April 1997.
In November 1997, the General Partner and the Company began
discussing the possibility of selling the Assets to the Company with the Unit
Holder's receiving cash for their Units. At that time, the General Partner
and the Company were affiliates with Messrs. Beck and Stroud controlling both
entities.
12
<PAGE>
The General Partner then contacted the Appraiser to ensure the
Appraisals provided in April 1997 were still valid. Pursuant to the terms of
the engagement letter, dated as of December 12, 1997, the Partnership engaged
the Appraiser to deliver updated appraisals by December 26, 1997. The updated
appraisals were delivered on December 20, 1997 (collectively with the
appraisals completed in April 1997, the "Appraisals"). The appraised value of
the Assets remained unchanged from April 1997.
The General Partner and the Company began drafting an asset purchase
agreement in January and February 1998 based on the appraised value of the
Assets. Under the terms of the Partnership Agreement, the Partnership could not
consummate a transaction with an affiliate of the General Partner unless either
an independent advisory board approved the transaction, or a majority of the
Unit Holders approved the transaction and a qualified advisor gave an opinion
that the transaction is fair and at least as favorable to the Partnership as one
with an unaffiliated entity in similar circumstances. Since an independent
advisory board was not created, the General Partner began to seek bids in
connection with obtaining a fairness opinion. On April 1, 1998, the Partnership
engaged Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (the
"Financial Advisor"), an unaffiliated party to provide a fairness opinion (the
"Fairness Opinion"). The Partnership was to receive the Fairness Opinion in June
1998.
About this time, the General Partner and the Company determined that an
asset sale was not feasible. Under the terms of the leases of the Partnership's
properties, the lessees have the right of first refusal if the Partnership were
to sell the property. The Company was not interested in acquiring only some of
the Partnership's properties, especially since the best properties would likely
be purchased by the lessees. The Company believed that it would not be in the
interests of its sole shareholder, CSLC, and thus not in the best interest of
CSLC's shareholders, to acquire only the weakest Partnership properties.
Therefore, the General Partner and the Company restructured the transaction as a
merger, whereby a subsidiary of the Company would merge with and into the
Partnership, with the Partnership being the surviving entity so that the lessees
would not have the right of first refusal. Potential conflicts of interest with
affiliates were not considered in making the decision to restructure the
transaction. Under the terms of the Partnership Agreement, mergers, asset sales
or other transactions with affiliates are treated in the same manner. Therefore,
potential conflicts of interest with affiliates pose the same issues
irrespective of the structure of the transaction. The Financial Advisor was
informed about the change in the transaction structure.
On June 10, 1998, Capital sold its shares of the General Partner to
Associates, thereby breaking the affiliation between the General Partner and the
Company. Capital Realty Group Senior Housing, Inc. is not only the general
partner of HealthCare Properties, L.P., but also of NHP Retirement Housing
Partners I, L.P. ("NHP"). CSLC, or one of its affiliates, was considering a
transaction with NHP that required NHP's general partner to break its
affiliation with CSLC, which thereby broke the affiliation between the General
Partner and the Company. Therefore, the General Partner was sold to Associates
for reasons unrelated to the Partnership merger negotiations.
On June 30, 1998 the General Partner's New Board reviewed the Merger
that had been negotiated by the Old Board. At that time, the Financial Advisor
had not delivered the Fairness Opinion, and could not commit to a specific date
for the delivery of the Fairness Opinion. The New Board was concerned that the
nursing and acute-care market would continue to deteriorate, and thus the
Company would seek to lower the price paid to Unaffiliated Unit Holders.
13
<PAGE>
Moreover, the New Board was aware that the Financial Advisor was retained
because of the prior affiliation between the General Partner and the Company.
Since the affiliation no longer existed, the Partnership Agreement no longer
required the Fairness Opinion, and the Merger price was likely to decline the
longer the transaction was delayed, the General Partner terminated the
relationship with the Financial Advisor.
On June 30, 1998, the New Board met and approved the Merger and
ratified the retention of Capital Realty Brokerage, Inc. as broker for the
transaction with the Merger Sub.
Summary of the Material Terms of the Merger
The Partnership, the Company and the Merger Sub intend to enter into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the
Merger Sub will merge with and into the Partnership. The Partnership will be the
surviving entity with the same General Partner and assignor limited partner, and
with the Company becoming the sole Unit Holder. The structure of the transaction
was chosen for several reasons. First, the Merger does not trigger certain
rights of the lessees of the Partnership's properties to purchase such
properties upon the sale of the properties. Second, the Merger will have a
minimal impact on the operation of the Partnership by keeping all existing
contractual relations in place, and not requiring the approval of the parties
thereto in connection with any required assignments of the contracts. Finally,
the Merger keeps the Partnership in place as an operating entity.
A consequence of the Merger is that interests of the Unaffiliated Unit
Holders will be converted into the right to receive cash. Accordingly, the
Unaffiliated Unit Holders will have no interest in the surviving entity. The
amount of cash available for the conversion is based on the appraised value of
the Assets, plus the cash held by the Partnership, plus receivables, plus
prepaid expenses, less payables and liabilities. As of June 30, 1998, the
General Partner estimates the appraised value of the Assets is approximately
$25,320,000, cash on hand is approximately $11,324,744, receivables $840,260,
prepaid expense $28,966, payables $831,216, and long-term liabilities
$6,399,999. Accordingly, the General Partner estimates, as of June 30, 1998, the
Partnership's net value to be $30,282,755 or approximately $7.30 per Unit.
Unaffiliated Unit Holders own approximately 43.4 percent of the Units (1,798,238
Units) worth approximately $13,127,131. The amount distributed per Unit will be
reduced to reflect a brokerage fee of 6 percent payable to an entity
unaffiliated with the General Partner (although affiliated with the Company), a
5 percent reserve to cover unknown pre-closing liabilities such as Medicare and
Medicaid cost report adjustments, and other closing fees and expenses. The
reserves will be maintained until the pre-closing liabilities have been paid and
the excess funds, if any, will be distributed to Unaffiliated Unit Holders on a
pro-rata basis. Therefore, such Unaffiliated Unit Holders will receive
approximately $11,561,432, which is approximately $6.43 per Unit.
The Merger Agreement provides that the Merger will close on the second
business day after the preconditions for closing have been met which is
estimated to be on or about November 20, 1998.
Source of Funds
The total amount of funds required by the Company to consummate the
Merger is approximately $13,127,131. All necessary funds will be supplied by
utilizing the working capital of CSLC.
14
<PAGE>
Expenses
The General Partner anticipates that certain fees and expenses will be
incurred in connection with the Merger including, without limitation, filing
fees imposed by the SEC or other governmental entities, brokerage fees,
appraiser fees, legal and accounting fees, and printing costs. In accordance
with the Partnership Agreement, these expenses will be paid by the Partnership
and are estimated to be as follows:
<TABLE>
<S> <C>
Brokerage fees*...................................... $1,816,965.00
Appraiser fees and expenses**........................ $ 28,000.00
Legal and Accounting fees and expenses............... $ 100,000.00
Miscellaneous\Filing\Printing........................ $ 20,000.00
TOTAL............................................ $1,964,965.00
</TABLE>
* - Capital Realty Brokerage, Inc. an entity unaffiliated
with the General Partner but affiliated with the Company.
** - These fees were paid prior to March 31, 1998.
Plans for the Partnership After the Merger
As a result of the Merger, the Partnership will no longer be a public
entity, and therefore, will suspend its obligations to file reports pursuant to
Section 15(d) of the Exchange Act. The General Partner expects to continue its
general partner duties until such time that the Company may decide to dissolve
the Partnership. At present the Company does not plan to dissolve the
Partnership.
The Partnership's properties are currently leased under triple net
leases to third parties. These leases expire in 2000 or 2001 depending on the
property, and certain of the lessees have the option to extend their leases for
a period of five years as well as an option to purchase the property. Therefore,
the Company has no immediate plans to change the Partnership's current business.
Following the termination of the leases, and assuming the Partnership retains
the properties, the Company intends to convert and operate the facilities as
assisted living and Alzheimer's care facilities.
Purposes and Reasons of General Partner in Agreeing to the Merger
As discussed earlier, the General Partner began its association with
the Partnership in 1992 and assumed general partner duties in June 1993. At that
time, the Partnership faced severe economic problems because the lessees of
eight of the twelve health care properties the Partnership owned defaulted,
including one which filed for bankruptcy due to alleged Medicaid over
reimbursements. As a result, the Partnership faced a severe cash flow crisis,
and a number of lenders threatened actions against the Partnership for back due
mortgage payments that exceeded several million dollars.
After assuming the general partner duties, the General Partner
immediately began to restructure the Partnership's management and assets. The
restructuring included, among other activities, negotiating a sale or deedback
of four distressed Partnership properties with significant past due mortgages,
and a full release of liability to the Partnership, restructuring the Rebound
lease with significantly increased lease payments to the Partnership, and taking
back control the Cambridge facility out of Chapter 11 bankruptcy proceedings.
15
<PAGE>
The General Partner continued to explore ways to enhance Unit Holder
returns and improve the Partnership's long-term value. The General Partner has
been primarily focused on optimizing the value of the Assets, believing that it
is in the Unit Holder's best interests that once the Asset value is optimized,
the Unit Holder's interest be converted into cash.
The General Partner believes that it has optimized the investment
returns that can be provided by the Assets. Therefore, during the fourth quarter
of 1997, the General Partner began exploring selling the Assets to the Company,
and in January 1998 began negotiating an asset purchase agreement with the
Company. The Company was then an affiliate of the General Partner and the
Partnership. The terms, including the purchase price, were similar to the
proposed Merger transaction.
After additional investigation, however, the General Partner
determined that an asset sale was not desired for two reasons. First, new
investment opportunities were not sufficiently available to ensure that the
Partnership's ongoing business would result ultimately in regular cash
distributions to each Unit Holder. The General Partner based this assessment
on the lack of third-party interest in the Partnership's properties, the
closing of two Partnership properties, and the general decline in the
sub-acute and skilled-care nursing markets. Second, an asset sale might have
a negative impact on certain leases. Under the terms of certain leases, the
lessees have the right of first refusal if the property is sold. The General
Partner believes the properties are more valuable as a complete package to
the Company, which was willing to offer a higher price for all the
properties. The higher Merger price, compared to an asset sale, would benefit
the Unaffiliated Unit Holders, and the Company would obtain control of the
Assets just as it would in an asset sale. Therefore, the General Partner
abandoned its plans to sell all or substantially all of the Assets and began
considering the Merger.
An alternative to the Merger considered by the General Partner was to
continue the Partnership as it currently exists. Continuing the Partnership
would have a number of benefits, including the following:
--The Partnership would continue to own the same Assets and have the same
liabilities, and would maintain its existing investment objectives,
consistent with the guidelines, restrictions and safeguards contained in
the Partnership Agreement; and
--Although there would be no immediate change in the cash distribution
policy (which currently provides that the Partnership does not make any
regular cash distributions), it is possible that sometime in the future
the Partnership might be in a position to resume making regular cash
distributions.
Despite these benefits, the General Partner rejected this
alternative because it concluded that maintaining the Partnership as it
currently exists was less advantageous when compared with the benefits that
the General Partner believes the Unit Holders will derive from the Merger.
For example:
--There is, and has been, limited liquidity for Unit Holders and this
alternative provides cash in an amount greater than the current trading
price of the Units which benefits the Unaffiliated Unit Holders.
--To date, Unit Holders have not been able to realize their hoped for
return on investment. The General Partner does not believe that the
returns on The Partnership's
16
<PAGE>
current Assets will be further optimized over the next
several years. Therefore, continuing the operation of the Partnership would
benefit neither the Unaffiliated Unit Holders nor the Company;
--Unaffiliated Unit Holders will receive cash for their Units if the Merger
is consummated, but are unlikely to receive regular cash distributions, in
the foreseeable future, if the Partnership continues in existence;
--Tighter Medicare and Medicaid regulations and government restraints may
cause smaller increases or even decreases in revenues to subacute and
skilled-care facilities, which would have a negative impact on all Unit
Holders if the Partnership remained in operation; and
--Two Partnership facilities have closed decreasing the Partnership's
ability to remain competitive, which would negatively impact all Unit
Holders if the Partnership remained in operation.
The General Partner considered selling the Assets to an unaffiliated
entity as well as soliciting bids from independent third parties. The General
Partner, however, did not explore these options in any detail for the following
reasons. First, the General Partner had never received unsolicited interest in
the properties. Second, existing leases, which do not expire until 2000 to 2001,
will keep the properties in the nursing and acute-care market, which is
experiencing a significant downturn. Third, two of the eight properties have
been shut down, which the General Partner believes reduces the likelihood of any
third-party interest. Finally, the value of the properties in the Merger
transaction is greater than the current trading price of the Units.
The General Partner also considered structuring the Merger transaction
so Unaffiliated Unit Holders would have the option of acquiring shares of CSLC
instead of cash. This option was rejected for two reasons. The transaction costs
would increase, because CSLC would have to register additional securities and
comply with the exchange offer rules and regulations, thereby lowering the
return to Unaffiliated Unit Holders. Second, CSLC shares are traded on public
markets. If Unaffiliated Unit Holders want to own shares of CSLC, they can take
the proceeds from the merger transaction and purchase such shares on the open
market.
Position of the General Partner as to the Fairness of the Merger
In determining the substantive fairness of the Merger, the General
Partner's New Board met on June 30, 1998 and considered each of the following
factors, all of which had a positive effect on its fairness determination. The
factors are listed in descending order of importance, that is, the first factor
listed was given the most weight in the determination that the proposed
transaction is substantively fair, although, as a practical matter, this process
is an approximation of the weight given to each factor because each factor is
relevant and the General Partner's New Board was not able to weigh the relative
importance of each factor precisely:
(i) The Units are at present illiquid and the cash to be distributed
to the Unaffiliated Unit Holders as a result of the proposed Merger will provide
Unaffiliated Unit Holders with liquidity and cash in an amount greater than the
current trading price of the Units;
17
<PAGE>
(ii) The Merger represents the fair market valuation of the Assets as
determined by a qualified independent appraiser;
(iii) The General Partner's unsuccessful efforts in seeking
alternatives to increase Unit Holder value including selling the Assets and
reinvesting the proceeds;
(iv) The conditions and prospects of the nursing and acute-care
industry in which the Partnership is engaged will continue to worsen with
tighter Medicare and Medicaid regulations and other government restraints; and
(v) The lack of a firm offer from any unaffiliated entity.
The Merger represents the current fair market value of the Partnership
on a going concern basis. The Merger also exceeds the approximately $25,575,781
net book value of the Partnership on June 30, 1998. The liquidation value of a
nursing and acute-care provider, that is, the sale of the business on other than
a going concern basis, is not usually considered to be an accurate indicator of
the value of a nursing and acute-care provider, primarily because the assets of
a nursing and acute-care provider typically are worth less when considered
separately than when considered as a going concern. The assets of a nursing and
acute-care provider consequently are not normally sold or purchased separately.
A fair market valuation of a nursing care provider should, in the General
Partner's view, be a valuation as a going concern. The liquidation value of the
Partnership therefore, was not considered by the General Partner in reaching its
fairness determination.
Since there has never been an established trading market for the Units,
the General Partner did not have access to reliable, official information about
the historical or current market prices for the Units other than the sporadic
transactions where such Units have been sold. Nevertheless, the General Partner
did consider the fact that the Merger will result in a per Unit price to Unit
Holders which exceeds such trades between affiliates and non-affiliates when
reaching its fairness determination. The General Partner did not consider the
price paid by Unaffiliated Unit Holders, because the market conditions for this
industry have changed dramatically since many of the Units were first purchased
making the original purchase price an unrealistic measure.
In approving the transaction, the General Partner was aware of and
considered as a negative factor that as a result of the Merger, the Unaffiliated
Unit Holders would no longer participate in the Partnership's possible future
earnings. Taking into account, however, that the Partnership has made no regular
cash distributions, additional restrictions have been placed on Medicare and
Medicaid reimbursements, the risks associated with real estate investments and
the fees required to manage and administer the Assets, the General Partner
believes that the Merger will achieve a fair price for the Units, and will
optimize the value for the Unit Holders better than if it remained an operating
entity.
The General Partner is aware and considered that consummation of this
Merger will result in cash distributions to the Unaffiliated Unit Holders and
may require certain Unaffiliated Unit Holder to recognize, for federal income
tax purposes, a gain. The General Partner, nevertheless, concluded that the cash
distributions to the Unit Holders from the Merger outweighed this consequence.
18
<PAGE>
The General Partner believes that the Merger is procedurally fair to
the Unit Holders although, consistent with the Partnership Agreement, the
approval of the Unaffiliated Unit Holders is not separately required, and an
unaffiliated representative was not retained to act on behalf of the
Unaffiliated Unit Holders. In reaching this conclusion, the General Partner took
into account a number of factors relevant to procedural fairness including
compliance with the Partnership Agreement, the appraisals provided by an
unaffiliated entity, and the General Partner's own lack of affiliation with the
Company.
In making its recommendation, the General Partner's New Board is aware
that the Merger negotiations were conducted by the General Partner's Old Board
which was affiliated with the Company, the Merger Sub, and CSLC. As a result of
that affiliation, the Old Board, in accordance with the Partnership Agreement,
retained an outside adviser to provide a fairness opinion. The Old Board
believed that the independent adviser and the property appraisals delivered by
an unaffiliated entity were sufficient procedural protections for Unaffiliated
Unit Holders. Therefore, consistent with the Partnership Agreement, the Old
Board did not structure the transaction to require the approval of a majority of
the Unaffiliated Unit Holders. Likewise, the Old Board did not obtain more than
one appraisal, because there were sufficient procedural protections and the
increased costs would decrease returns to Unaffiliated Unit Holders.
With the election of the New Board, the General Partner is no longer an
affiliate of the Company, the Merger Sub, or CSLC. Therefore, an independent
adviser was no longer needed or required by the Partnership Agreement to protect
the interests of the Unaffiliated Unit Holders. Consequently, the adviser was
terminated and did not provide a report to any individual or entity concerning
the Merger. The New Board did not obtain additional appraisals for the same
reasons as the Old Board, and the New Board was concerned that any further delay
in the transaction might jeopardize the favorable Merger price.
Finally, the New Board reviewed and specifically ratified the Old
Board's decision to retain Capital Realty Brokerage, Inc. ("Capital Brokerage"),
an affiliate of the Company and the Old Board. The New Board recognized that
Capital Brokerage had provided valuable services in structuring the transaction
to ensure that bank loans were not accelerated and that no change in licenses to
provide healthcare services would result, as well as other significant services
in structuring the Merger.
Purposes and Reasons of Associates and Mr. Lankford in Agreeing to the Merger
Robert L. Lankford is the sole shareholder, sole director, and
President of Associates. He is also the sole director and President of the
General Partner, and the beneficial owner of all General Partner's voting stock.
Therefore, the purpose and reasons of Mr. Lankford and Associates in agreeing to
the Merger are identical to those of the General Partner, specifically the
implementation of the strategic plan to optimize the value of the Partnership's
assets and then convert the Unit Holder's interest into cash. See "--Purposes
and Reasons of the General Partner in Agreeing to the Merger."
Position of Associates and Mr. Lankford as to the Fairness of the Merger
Robert L. Lankford is the sole shareholder, sole director, and President of
Associates. He is also the sole director and President of the General
Partner, and the beneficial owner of all General Partner's voting stock.
Therefore, the position of Mr. Lankford and Associates as to the fairness of
the Merger is identical to that of the General Partner. Mr. Lankford and
Associates
19
<PAGE>
each believe that the Merger is both substantively and procedurally fair,
and each explicitly adopts the analysis of the General Partner as to the
fairness of the Merger. See "--Position of the General Partner as to the
Fairness of the Merger."
Purposes and Reasons of Company, Merger Sub and CSLC in Agreeing to the Merger
CSLC, as the sole shareholder of the Company which is the sole
member of the Merger Sub, believes that the Merger is in the best interest of
CSLC, the Company, and the Merger Sub for the following reasons:
The acquisition will be accretive on an earnings per share basis;
The resulting increased owned assets will make CSLC more attractive to
investors;
CSLC also believes that it will benefit from the resulting larger asset
base in its ability to spread costs; and
CSLC believes that it will be able to achieve operating efficiencies by
combining certain general and administrative functions at the corporate
level in order to reduce overhead.
Position of Company, Merger Sub and CSLC as to the Fairness of the Merger
CSLC is the sole shareholder of the Company, and the Company is the
sole member of the Merger Sub. Therefore the positions of the Company, Merger
Sub and CSLC as to the fairness of the Merger are identical.
The Company, Merger Sub and CSLC, as the parties proposing to acquire
the Partnership, did not participate in the deliberations of the General
Partner's New Board regarding the fairness of the Merger to the Partnership's
Unit Holders. As a result, the Company, Merger Sub, and CSLC are not in a
position to specifically adopt the conclusions of the General Partner's New
Board as to the fairness of the Merger. Based upon their own knowledge from
publicly available information regarding the Company and their understanding
from discussions with senior management of the Partnership regarding the factors
considered by the General Partner's New Board referred to herein, and their
close relationship as affiliates of the Partnership and of the General Partner's
Old Board, the Company, Merger Sub and CSLC also believe that the Merger is
substantively and procedurally fair to the Partnership.
The Company, Merger Sub and CSLC believe the Merger at least equals and
may exceed the current fair market value of the Partnership on a going concern
basis. They also believe the Merger exceeds the approximately $25,575,781 net
book value of the Partnership on June 30, 1998. The liquidation value of a
nursing and acute-care provider is not usually considered to be an accurate
indicator of the value of a nursing and acute-care provider, primarily because
the assets of a nursing and acute-care provider typically are worth less when
considered separately than when considered as a going concern. The assets of a
nursing and acute-care provider consequently are not normally sold or purchased
separately. A fair market valuation of such a provided should, in the Company,
Merger Sub and CSLC's view, be a valuation as a going concern. The liquidation
value of the Partnership therefore was not considered by the Company, Merger Sub
and CSLC in reaching its determination of fairness.
20
<PAGE>
Since there has never been an established trading market for the Units,
the Company, Merger Sub and CSLC did not have access to reliable, official
information about the historical or current market prices for the Units other
than the sporadic transactions where such Units have been sold. Nevertheless,
the Company, Merger Sub and CSLC did consider the fact that the Merger will
result in a per Unit price to Unit Holders which exceeds such trades between
affiliates and non-affiliates when reaching its fairness determination. The
Company, Merger Sub and CSLC did not consider the price paid by Unaffiliated
Unit Holders, because the market conditions for this industry have changed
dramatically since many of the Units were first purchased making the original
purchase price an unrealistic measure.
The Company, Merger Sub and CSLC also considered that the merger price
is based on the appraised value of the Assets, and that the appraisal was
performed by a qualified independent entity, in reaching their opinion that the
transaction is fair. Also, the Company, Merger Sub and CSLC note, as far as they
are aware, that the Partnership has not received any firm offers from
unaffiliated entities.
The Company, Merger Sub and CSLC believe these factors provide a
reasonable basis for them to believe, as they do, that the Merger is
substantively fair to the Unit Holders of the Partnership. Neither the Company,
Merger Sub nor CSLC has assigned specific relative weights to the factors
considered by them.
The Company, Merger Sub, and CSLC believe that the Merger is
procedurally fair to the Unaffiliated Unit Holders, although the approval of a
majority of the Unaffiliated Unit Holders is not separately required, and an
unaffiliated representative was not retained to act on behalf of such
Unaffiliated Unit Holders. In reaching this conclusion, the Company, Merger Sub
and CSLC took into account a number of factors relevant to procedural fairness
as described above, including compliance with the Partnership Agreement and the
appraisals of the Assets by a qualified independent entity. Specifically, the
Company, Merger Sub and CSLC explicitly adopt the General Partner's analysis of
the procedural fairness of the Merger.
Purposes and Reasons of Mr. Beck in Agreeing to the Merger
The purposes and reasons of Jeffrey L. Beck in agreeing to the
transactions contemplated by the Merger Agreement are to continue the pursuit of
his strategic view of CSLC's future, and to enable existing shareholders of CSLC
to realize the benefits described above. Mr. Beck explicitly adopts the
Company's purposes and reasons in agreeing to the Merger. See "--Purposes and
Reasons of Company, Merger Sub and CSLC in Agreeing to the Merger."
Position of Mr. Beck as to the Fairness of the Merger
Mr. Beck believes that the Merger is substantively fair to the
Partnership's Unaffiliated Unit Holders. Mr. Beck has not undertaken any formal
evaluation of the Merger's fairness to the Partnership's Unit Holders, and did
not find it practicable to quantify or otherwise attach relative weights to the
various factors considered by him.
In arriving at his belief that the Merger is fair to the Partnership's
Unit Holders, however, Mr. Beck considered the same factors as considered by the
General Partner's New Board, as well as certain considerations resulting from
his general familiarity with, and significant experience in, the skilled and
acute-care nursing industry. Mr. Beck believes the Merger at least equals and
may exceed the current fair market value of the Partnership on a going concern
basis. He
21
<PAGE>
also believes the Merger exceeds the approximately $25,575,781 net book value
of the Partnership on June 30, 1998. The liquidation value of a nursing and
acute-care provider is not usually considered to be an accurate indicator of
the value of a nursing and acute-care provider, primarily because the assets
of a nursing and acute-care provider typically are worth less when considered
separately than when considered as a going concern. The assets of a nursing
and acute-care provider consequently are not normally sold or purchased
separately. A fair market valuation of such a provided should, in Mr. Beck's
view, be a valuation as a going concern. The liquidation value of the
Partnership therefore was not considered by Mr. Beck in reaching his
determination of fairness.
Since there has never been an established trading market for the Units,
Mr. Beck did not have access to reliable, official information about the
historical or current market prices for the Units other than the sporadic
transactions where such Units have been sold. Nevertheless, Mr. Beck considers
the fact that the Merger will result in a per Unit price to Unit Holders which
exceeds such trades between affiliates and non-affiliates when reaching its
fairness determination. Mr. Beck did not consider the price paid by Unaffiliated
Unit Holders, because the market conditions for this industry have changed
dramatically since many of the Units were first purchased making the original
purchase price an unrealistic measure.
Mr. Beck also considered that the merger price is based on the
appraised value of the Assets, and that the appraisal was performed by a
qualified independent entity, in reaching their opinion that the transaction is
fair. Also, Mr. Beck notes, as far as he is aware, that the Partnership has not
received any firm offers from unaffiliated entities.
Mr. Beck believes these factors provide a reasonable basis for him to
believe, as he does, that the Merger is substantively fair to the Unit Holders
of the Partnership. Mr. Beck has not assigned specific relative weights to the
factors considered by him.
Mr. Beck believes that the Merger is procedurally fair, although the
approval of a majority of the Unaffiliated Unit Holders is not separately
required, and an unaffiliated representative was not retained to act on behalf
of such Unaffiliated Unit Holders. In reaching this conclusion, Mr. Beck took
into account a number of factors relevant to procedural fairness including the
Appraisals by an unaffiliated party and the large premium being offered in the
Merger. Mr. Beck explicitly adopts the analysis of the General Partner as to the
procedural fairness of the Merger.
Purposes and Reasons of Mr. Stroud in Agreeing to the Merger
The purposes and reasons of James A. Stroud in agreeing to the
transactions contemplated by the Merger Agreement are to continue the pursuit of
his strategic view of CSLC's future, and to enable existing shareholders of CSLC
to realize the benefits described above. Mr. Stroud explicitly adopts the
Company's purposes and reasons in agreeing to the Merger. See "--Purposes and
Reasons of Company, Merger Sub and CSLC in Agreeing to the Merger."
Position of Mr. Stroud as to the Fairness of the Merger
Mr. Stroud believes that the Merger is fair to the Partnership's
Unaffiliated Unit Holders. Mr. Stroud has not undertaken any formal evaluation
of the Merger's fairness to the Partnership's
22
<PAGE>
Unit Holders, and did not find it practicable to quantify or otherwise attach
relative weights to the various factors considered by them.
In arriving at his belief that the Merger is fair to the
Partnership's Unit Holders, however, Mr. Stroud considered the same factors
as considered by the General Partner's New Board, as well as certain
considerations resulting from his general familiarity with, and significant
experience in, the skilled and acute-care nursing industry. Mr. Stroud
believes the Merger at least equals and may exceed the current fair market
value of the Partnership on a going concern basis. He also believes the
Merger exceeds the approximately $25,575,781 net book value of the
Partnership on June 30, 1998. The liquidation value of a nursing and
acute-care provider is not usually considered to be an accurate indicator of
the value of a nursing and acute-care provider, primarily because the assets
of a nursing and acute-care provider typically are worth less when considered
separately than when considered as a going concern. The assets of a nursing
and acute-care provider consequently are not normally sold or purchased
separately. A fair market valuation of such a provided should, in Mr.
Stroud's view, be a valuation as a going concern. The liquidation value of
the Partnership therefore was not considered Mr. Stroud in reaching his
determination of fairness.
Since there has never been an established trading market for the Units,
Mr. Stroud did not have access to reliable, official information about the
historical or current market prices for the Units other than the sporadic
transactions where such Units have been sold. Nevertheless, the Mr. Stroud did
consider the fact that the Merger will result in a per Unit price to Unit
Holders which exceeds such trades between affiliates and non-affiliates when
reaching its fairness determination. Mr. Stroud did not consider the price paid
by Unaffiliated Unit Holders, because the market conditions for this industry
have changed dramatically since many of the Units were first purchased making
the original purchase price an unrealistic measure.
Mr. Stroud also considered that the merger price is based on the
appraised value of the Assets, and that the appraisal was performed by a
qualified independent entity, in reaching their opinion that the transaction is
fair. Also, Mr. Stroud notes, as far as he is aware, that the Partnership has
not received any firm offers from unaffiliated entities.
Mr. Stroud believes these factors provide a reasonable basis for him to
believe, as he does, that the Merger is substantively fair to the Unit Holders
of the Partnership. Mr. Stroud has not assigned specific relative weights to the
factors considered by him.
Mr. Stroud believes that the Merger is procedurally fair, although the
approval of a majority of the Unaffiliated Unit Holders is not separately
required, and an unaffiliated representative was not retained to act on behalf
of such Unaffiliated Unit Holders. In reaching this conclusion, Mr. Stroud took
into account a number of factors relevant to procedural fairness including the
Appraisals by an unaffiliated party and the large premium being offered in the
Merger. Mr. Stroud explicitly adopts the analysis of the General Partner as to
the procedural fairness of the Merger
Purposes and Reasons of Mr. Cohen in Agreeing to the Merger
The purposes and reasons of Lawrence A. Cohen in agreeing to the
transactions contemplated by the Merger Agreement are to continue the pursuit of
his strategic view of CSLC's future, and to enable existing shareholders of CSLC
to realize the benefits described above. Mr. Cohen explicitly adopts the
Company's purposes and reasons in agreeing to the
23
<PAGE>
Merger. See "--Purposes and Reasons of Company, Merger Sub and CSLC in
Agreeing to the Merger."
Position of Mr. Cohen as to the Fairness of the Merger
Mr. Cohen believes that the Merger is fair to the Partnership's
Unaffiliated Unit Holders. Mr. Cohen has not undertaken any formal evaluation of
the Merger's fairness to the Partnership's Unit Holders, and did not find it
practicable to quantify or otherwise attach relative weights to the various
factors considered by them.
In arriving at his belief that the Merger is fair to the
Partnership's Unit Holders, however, Mr. Cohen considered the same factors as
considered by the General Partner's New Board, as well as certain
considerations resulting from his general familiarity with, and significant
experience in, the skilled and acute-care nursing industry. Mr. Cohen
believes the Merger at least equals and may exceed the current fair market
value of the Partnership on a going concern basis. He also believes the
Merger exceeds the approximately $25,575,781 net book value of the
Partnership on June 30, 1998. The liquidation value of a nursing and
acute-care provider is not usually considered to be an accurate indicator of
the value of a nursing and acute-care provider, primarily because the assets
of a nursing and acute-care provider typically are worth less when considered
separately than when considered as a going concern. The assets of a nursing
and acute-care provider consequently are not normally sold or purchased
separately. A fair market valuation of such a provided should, in Mr. Cohen's
view, be a valuation as a going concern. The liquidation value of the
Partnership therefore was not considered by Mr. Cohen in reaching his
determination of fairness.
Since there has never been an established trading market for the Units,
Mr. Cohen did not have access to reliable, official information about the
historical or current market prices for the Units other than the sporadic
transactions where such Units have been sold. Nevertheless, Mr. Cohen did
consider the fact that the Merger will result in a per Unit price to Unit
Holders which exceeds such trades between affiliates and non-affiliates when
reaching its fairness determination. Mr. Cohen did not consider the price paid
by Unaffiliated Unit Holders, because the market conditions for this industry
have changed dramatically since many of the Units were first purchased making
the original purchase price an unrealistic measure.
Mr. Cohen also considered that the merger price is based on the
appraised value of the Assets, and that the appraisal was performed by a
qualified independent entity, in reaching their opinion that the transaction is
fair. Also, Mr. Cohen notes, as far as he is aware, that the Partnership has not
received any firm offers from unaffiliated entities.
Mr. Cohen believes these factors provide a reasonable basis for him to
believe, as he does, that the Merger is substantively fair to the Unit Holders
of the Partnership. Mr. Cohen has not assigned specific relative weights to the
factors considered by him.
Mr. Cohen believes that the Merger is procedurally fair, although the
approval of a majority of the Unaffiliated Unit Holders is not separately
required, and an unaffiliated representative was not retained to act on behalf
of such Unaffiliated Unit Holders. In reaching this conclusion, Mr. Cohen took
into account a number of factors relevant to procedural fairness including the
Appraisals by an unaffiliated party and the large premium being offered in the
Merger. Mr. Cohen explicitly adopts the analysis of the General Partner as to
the procedural fairness of the Merger.
24
<PAGE>
Certain Related Party Transactions
Pursuant to the Partnership Agreement, the General Partner or its
affiliates are entitled to certain benefits from the operation of the
Partnership. For property management services, the General Partner or its
affiliates are entitled to receive leasing and property management fees. Under
the Partnership Agreement, the General Partner or affiliates are reimbursed for
all expenses of managing the Assets, including the salaries of on-site managers
and out-of-pocket expenses. Also, the General Partner or its affiliates are
entitled to receive a property management fee. Since most of the Partnership's
properties have long-term, triple-net leases and others have independent fee
management engagements for most services, the General Partner or its affiliates
received one percent of the monthly gross rental or operating revenues, totaling
approximately $90,000, $72,000, and $80,000, in 1997, 1996, and 1995
respectively. The General Partner also received distributions of $66,000 and
$92,250 in 1996 and 1995 respectively, in connection with the sale of certain
Partnership Assets. Property management fees paid to CSLC or its affiliates were
approximately $330,000, $208,000, and $252,000, in 1997, 1996, and 1995
respectively. Asset management fees paid to CSLC or its affiliates were
approximately $484,000, $740,000, and $712,000, in 1997, 1996, and 1995
respectively. CSLC or its affiliates received $206,000, $256,000, and $235,000
in reimbursements for administrative and other expenses in 1997, 1996, and 1995
respectively. In addition, CSLC or its affiliates received $3,173,000,
$1,859,000 and $2,256,000 for salary and benefit reimbursements in 1997, 1996
and 1995 respectively. In addition CSLC and the Company are affiliated with
Capital Brokerage which will receive a 6 percent brokerage fee for its services
associated with the transaction.
Jeffrey L. Beck is the Chairman of the Board and the principal
stockholder of a bank where the majority of the Partnership's operating accounts
are maintained.
CSLC, in addition to brokerage commissions, provides Robert L. Lankford
complimentary use of a small office, supplies, telephone and fax in connection
with Mr. Lankford's services as an independent contractor for CSLC and its
affiliates. Mr. Lankford has his own principal office space. Mr. Lankford was an
independent broker for Capital Brokerage from 1988 to 1997. Mr. Lankford
received non-employee compensation from Capital Brokerage in 1997, 1996 and 1995
in the amount of $18,750, $203,505.43 and $13,608.75, respectively. Mr.
Lankford's current relationship with CSLC accounts for less than 20% of his
total compensation.
The General Partner and Mr. Lankford entered into an employment
agreement on June 10, 1998. Under the terms of the employment agreement, Mr.
Lankford will be paid an annual salary by the General Partner in an amount to be
agreed upon by the parties. Mr. Lankford will also be reimbursed by the General
Partner for reasonable business expenses. The General Partner will also
reimburse Mr. Lankford's attorney expenses up to $10,000 through September 30,
1998.
The General Partner and Associates entered into a contract for
professional services whereby Associates will provide the General Partner
certain consulting services. Associates is to be paid $10,000 on the first day
of each quarter. The first payment was made on June 10, 1998.
In connection with the General Partner's determination that an opinion
of the financial advisor was not required under the Partnership Agreement,
Section B(5) of the Partnership Agreement defines "Affiliates" as follows:
25
<PAGE>
When used with reference to a specified Person: (i) any Person
that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with
the specified Person; (ii) any Person who is an officer, partner
or trustee of, or serves in a similar capacity with respect to,
the specified Person, or of which the specified Person is an
officer, partner or trustee, or with respect to which the
specified Person serves in a similar capacity; and (iii) any
Person who, directly or indirectly, is the beneficial owner of
10% or more of any class of voting securities of, or otherwise
has a substantial beneficial interest in, the specified Person
or which the specified Person is directly or indirectly the
owner of 10% or more of any class of equity securities, or in
which the specified Person has a substantial beneficial
interest.
For the reasons set forth below, the General Partner believes that
CSLC does not control Robert Lankford ("Lankford"), the General Partner or
Associates, and Lankford does not control CSLC, and that neither of the other
two tests of affiliations under the Partnership Agreement are met.
The General Partner notes that the Delaware Limited Partnership statute
does not address the definition of "affiliate," and thus does not help to
interpret the term "control." Section 203 of the Delaware General Corporation
Law ("DGCL"), however, defines both "affiliate" and "control." Affiliate is
defined as "any person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
another person" (see Section 203(c)(1)). Section 203(c)(4) then defines
"control" as "the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a person, whether through
the ownership of voting stock, by contract, or otherwise."
Although there is no case law directly on point, the General Partner
believes the statute is clear in that control is the power "to direct or cause
the direction of the management and policies." Therefore, in the General
Partner's opinion, what is required for "control" is the right, whether
contractual or based on ownership, to appoint or remove officers or directors or
to direct corporate decisions.
CSLC does not have, either directly or indirectly, an equity
interest in the General Partner. CLSC does not hold any debt of the General
Partner. There is no current contractual relationship between CSLC and the
General Partner. Prior to the sale of the General Partner's capital stock to
Associates, there was a contractual relationship. As part of the initial
public offering of CSLC's common stock, Messers Beck and Stroud, as the CSLC
control persons and as the then beneficial owners of the General Partner,
were required to assign the fees and distributions the General Partner
receives from both the Partnership and NHP Retirement Partners I, L.P.
("NHP") to CSLC. Therefore, Capital Realty Group Corporation ("Capital
Realty"), an affiliate of CSLC, and the General Partner and CSLC entered into
an option agreement (the "Option Agreement") whereby Capital Realty granted
CSLC the option to purchase the capital stock of the General Partner at fair
market value at any time for a period of 10 years from the date of the Option
Agreement. The Option Agreement also assigned all fees and distribution that
the General Partner receives from the Partnership and NHP. The Option
Agreements was never signed, but the fees and distributions were paid to CSLC
pursuant to an oral agreement with the same terms and conditions as the
Option Agreement. The Option Agreement was orally terminated by the parties
prior to the sale of the General Partner's stock to Associates. During the
period the Option Agreement was in effect, the General Partner assigned
26
<PAGE>
$224,102 in distributions from the Partnership to CSLC. No fees or
distribution the General Partner receives have been paid to CSLC since June
10, 1998. CSLC, therefore, does not have the power to elect or remove either
the officers or directors of the General Partner. Moreover, CSLC does not
possess, either directly or indirectly, any interest in the General Partner
that could be used to coerce the General Partner. Therefore, in the General
Partner's opinion, CSLC does not control the General Partner.
Similarly, the General Partner does not have, either directly or
indirectly, an equity interest in CSLC. The General Partner, therefore, does not
have the power to elect or remove either the officers or directors of CSLC. The
General Partner does not hold any debt of CSLC. There is no contractual
relationship between CSLC and the General Partner. The General Partner believes
that it does not control CSLC.
CSLC does not have an equity interest in Associates, and thus cannot
elect or remove the director of Associates. Associates, in order to purchase
the stock of the General Partner, issued a non-recourse promissory noted
dated June 10, 1998 (the "Note"), whereby Associates agreed to pay Capital
Realty $855,000 plus interest at a rate of 10% per annum on June 1, 2003. The
security for the Note is Associate's capital stock and all right, title,
distributions, proceeds and interest of the General Partner in either the
Partnership or NHP. Pursuant to the Security Agreement among Capital Realty,
Associates and the General Partner, any fees or distribution the General
Partner receives, except the $40,000 per year that is paid to Associates
pursuant to a consulting agreement, are paid to Capital Realty in payment of
the Note. Capital Realty does not have the right to acquire or vote the
capital stock of Associates, and the Note does not provide CSLC, indirectly
through Capital Realty, power to direct the management or policy of
Associates. Therefore, in the General Partner's opinion, CSLC does not
control Associates.
Associates does not hold an equity interest in CSLC, and thus cannot
elect or remove the directors of CSLC. Associates does not hold any CSLC debt,
and the only contractual relationships between the parties are those discussed
above which do not provide Associates with any control over CSLC. The General
Partner therefore concludes that Associates does not Control CSLC.
The General Partner believes that CSLC does not control Lankford. From
1988 to 1997, Lankford was an independent broker with Capital Brokerage, an
affiliate of CSLC. From 1997 to the present, however, Lankford has been a
principal with Kamco. In this capacity Lankford provides independent commercial
real estate brokerage services for various clients including CSLC which accounts
for less than 20% of his compensation. CSLC also provides Lankford with
complimentary use of an office and administrative support when Lankford is
providing such services to CSLC. Lankford's independent broker relationship with
CSLC, however, does not rise to the level of control. In determining whether
CSLC controls Lankford, the General Partner expects, based on the General
Partner's review of the case law, a Delaware court would look to see if a de
facto employer/employee relationship has been established. In Fisher v.
Townsends, Inc., 695 A2d. 53 (1996), the Delaware Supreme Court held that to
determine if a person was an employee depended on whether the company controlled
the person. To determine control, the Court looked to a variety of factors such
as whether the company engaged in that particular business, whether the person
has his own business, and whether the company directed general goals and
requirements of the person or the specific tasks to be performed. In this case,
Mr. Lankford has his own business, Kamco. CSLC has moved out of the brokerage
business, and into the development business necessitating the use of independent
brokers. Also, CLSC does
27
<PAGE>
not direct Mr. Lanksford's specific tasks. Finally, in his capacity as the
owner of Associates, Mr. Lankford has retained his own legal representation.
In the General Partner's opinion, CSLC does not control Lankford.
Accordingly, Lankford does not control CSLC because (i) Lankford does
not own any debt or equity of CSLC; (ii) he cannot elect or remove CSLC
directors; and (iii) his independent broker relationship with CSLC does not give
him the power to direct the management of CLSC.
The General Partner believes that CSLC is not under common control
either with the General Partner, Associates or Lankford. Mr. Beck and Mr. Stroud
control CSLC. Neither Mr. Beck nor Mr. Stroud own any interest in or have any
contractual relationship with Associates or the General Partner. Also, neither
Mr. Beck or Mr. Stroud have a contractual relationship with Lankford.
The General Partner believes the relationships between the General
Partner and CSLC also fail to meet the second test of affiliation under the
Partnership Agreement. Lankford is the sole officer of Associates. The officers
of CSLC are Jeffrey L. Beck, James A. Stroud, Lawrence A. Cohen, Keith N.
Johannssen, and David R. Brickman. There are no overlapping officers in the two
entities. Moreover, the General Partner does not serve CLSC in any capacity, and
CLSC does not serve the General Partner in any capacity.
Finally, the General Partner believes that the relationships between
the General Partner and CSLC fail the Partnership's third test of affiliation.
As stated earlier, CSLC does not, directly or indirectly, beneficially own any
securities of either the General Partner or Associates. Similarly, as stated
earlier, neither the General Partner nor Associates owns any securities of CSLC.
Finally, with the acquisition of the General Partner by Associates, there is no
contractual relationship between the General Partner and CSLC.
The General Partner notes that because there are no Delaware
statutes or cases that specifically define "control" for the purpose of
partnership affiliation, a court could disagree with the General Partner's
view and conclude that the General Partner and CSLC are affiliates. The
General Partner believes that if a court concluded that there was an
affiliation, it is extremely unlikely that the court would unwind the Merger;
instead, a court would likely award damages to the Partnership in an amount
equal to the excess of the brokerage fee paid and the brokerage fee payable
to an affiliate under the Partnership Agreement, and an amount, if any, that
a plaintiff could prove resulted from the failure to obtain a fairness
opinion.
Appraisal of the Partnership Assets.
During the first quarter of 1997, the Partnership engaged HealthCare
Property Appraisers of America, Inc., a North Carolina corporation (the
"Appraiser"), an unaffiliated party, to appraise the value of the Assets. The
General Partner sought bids in connection with obtaining an appraisal of the
Assets. The General Partner selected the Appraiser based on its experience and
expertise in real estate and its knowledge of the Partnership's business. There
are no past or present material relationships between the Appraiser and its
affiliates and the General Partner or any of its affiliates. The compensation
payable by the Partnership to the Appraiser in connection with the rendering of
the Appraisal is not contingent on the Merger's approval or completion.
The Appraiser is a nationally recognized firm engaged in the general
business of providing business and real estate appraisal services. As part of
its appraisal business, the
28
<PAGE>
Appraiser is continually engaged in the valuation of businesses and real
estate in connection with mergers and acquisitions.
The appraisals were completed in April 1997. The total value of the
Assets was $25,320,000 including two residential properties that were appraised
by Robert Collier, SRA. In December 1997, the Partnership engaged the Appraiser
to update the appraisals (collectively with the appraisals completed in April
1997, the "Appraisals") it delivered in April, 1997 to ensure that the Assets'
value had not materially changed. The updated Appraisals were received on
December 20, 1997 and showed no material change in the value of the Assets. The
Cedarbrook Rebound facility appraisal was $200,000 in April 1997 and $1.38
million in December 1998. The difference is that the December appraisal also
contained two residential properties worth $390,000 and $790,000, respectively,
that are part of the assets to be transferred. The appraisal of the facility
itself remained at $200,000.
The Partnership paid the Appraiser $24,000 (plus its out of pocket
expenses) to perform the appraisals during the second quarter of 1997. The
General Partner or its affiliates has paid the Appraiser $4,000 (plus its out of
pocket expenses) in connection with delivering the updated Appraisals. No
portion of this fee is contingent on the valuation of the Assets or consummation
of the Merger.
The General Partner placed the following restrictions and conditions on
scope of the Appraiser's investigation. The Appraisals must be completed in a
professional manner and comply with the requirements of the Uniform Standards of
Professional Practice established by The Appraisal Institute. The Appraiser will
make a visual inspection of the properties to observe how this type of property
is considered in the open real estate market as it would relate to market value.
Each inspection will be of a general nature and will not include a detailed
inspection of the site or the structure(s). Some of the excluded items are a
detailed inspection of the structure(s) as to its condition, the floor load,
electric power capacity, air conditioning, heat and ventilating system,
structural impediments, code violations (including earthquake), soil condition,
toxic waste or any similar effects of toxic materials affecting the property.
The Appraisals will assume (i) responsible ownership and competent management of
each property; (ii) that there are no hidden or unapparent conditions affecting
each property that will render it more or less valuable; (iii) full compliance
with all applicable federal, state and local zoning and environmental
regulations and laws (unless noncompliance is stated, defined and considered in
the Appraisals); and (iv) that all required licenses, certificates of occupancy
and other governmental consents have been or can be obtained and renewed for any
use on which the value estimates in the Appraisals are based.
The Appraiser utilized the following approaches in valuing the Assets.
Some assets were appraised under an income capitalization approach, which
analyzes the asset's capacity to generate income (or other monetary benefit) and
converts this capacity into an indication of market value. This approach assumes
that there is a definite relationship between the amount of income a property
will earn and its market value. It also assumes value is created by the
expectation of future benefits. Since the Assets have a high occupancy with
short-term leases, the Appraiser also utilized a direct capitalization method.
Direct capitalization allows for the estimate of market value in one direct step
by applying a market-derived overall capitalization rate to the stabilized net
operating income of each Asset.
The Appraiser also considered the sales comparison approach. This
approach compares the Assets to other properties that have recently sold in the
relevant market area. In addition, the
29
<PAGE>
Appraiser utilized the cost approach. In this approach, the costs to replace
improvements are estimated. Deductions were made for accrued depreciation,
and the result will be combined with the estimated value of the underlying
land.
The Appraiser determined that the appraised value of the Assets is
$25,320,000. The specific results are summarized in the following table:
30
<PAGE>
HEALTHCARE PROPERTIES, L.P.
APPRAISAL SUMMARY
<TABLE>
<CAPTION>
CEDARBROOK CANE CREEK CRENSHAW CREEK SANDY BROOK
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Location Nashville, TN Martin, TN Lancaster, SC Orlando, FL
Type Rehabilitation Rehabilitation Rehabilitation Rehabilitation
Date Purchased 10/87 11/87 6/88 9/88
Appraised Value 4/97 $ 200,000(1) $2,000,000(3) $240,000(5) $500,000(7)
Appraised Value 12/97 $1,380,000(2) $2,000,000(4) $240,000(6) $500,000(8)
</TABLE>
<TABLE>
<CAPTION>
CAMBRIDGE TRINITY HILLS HEARTHSTONE MCCURDY
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Location Cambridge, MA Ft. Worth, TX Round Rock, TX Evansville, IN
Type Nursing Nursing Nursing Nursing
Date Purchased 9/90 2/88 11/88 9/89
Appraised Value 4/97 $1,650,000(9) $2,400,000(11) $5,900,000(13) $11,250,000(15)
Appraised Value 12/97 $1,650,000(10) $2,400,000(12) $5,900,000(14) $11,250,000(16)
</TABLE>
- -------------------
1 The above value includes no value for the building improvements and assumes
a buyer cannot be found who can use and will pay something for the building
improvements.
2 Same as 4/97 value, except includes the two residential properties appraised
by Robert Collier, SRA at $390,000 and $790,000, respectively.
3 Same as 12/97 value.
4 This value estimate included only real property. Any business value or
furniture, fixtures and equipment were assumed to belong to someone other
than the property owner and not valued in this analysis. The land value is
estimated to be $450,000.
5 Same as 12/97 value.
6 The above value includes no value for the building improvements and assumes
a buyer cannot be found who can use and will pay something for the building
improvements.
7 Same as 12/97 value.
8 The above value includes no value for the building improvements and assumes
a buyer cannot be found who can use and will pay something for the building
improvements.
9 Same as 12/97 value.
10 This value estimate included all real and personal property as well as the
business value as a going concern. The furniture, fixtures and equipment
were estimated to have a contributory value of approximately $124,950 and
the intangible business assets were estimated to contribute $250,000 to the
total value. The real estate alone was estimated to contribute $1,275,050.
These estimated contributory values are allocations of the going concern and
may not represent the amount that would be realized if components were sold
separately. The above Value Estimate was predicated upon completion of the
deferred maintenance of $25,000 and assuming initial occupancy.
11 Same as 12/97 value.
12 This value estimate included all real and personal property, as well as the
business value as a going concern. Furniture, fixtures and equipment were
estimated to have a contributory value of approximately $199,500 and
intangible business assets were estimated to contribute $500,000 to the
total value. The real estate alone was estimated to contribute $1,700,500.
These estimated contributory values are allocations of the going concern and
may not represent the amount that would be realized if components were sold
separately.
13 Same as 12/97 value.
14 This value estimate included all real and personal property, as well as the
business value as a going concern. Furniture, fixtures and equipment were
estimated to have a contributory value of approximately $399,000 and
intangible business assets were estimated to contribute $1,000,000 to the
total value. The real estate alone was estimated to contribute $4,501,000.
These estimated contributory values are allocations of the going concern and
may not represent the amount that would be realized if components were sold
separately.
15 Same as 12/97 value.
16 This value estimate included all real and personal property, as well as the
business value as a going concern. Furniture, fixtures and equipment were
estimated to have a contributory value of approximately $518,000 and
intangible business assets were estimated to contribute $2,000,000 to the
total value. The real estate alone was estimated to contribute $8,732,000.
These estimated contributory values are allocations of the going concern and
may not represent the amount that would be realized if components were sold
separately.
Effect of the Merger on Unit Holders' Rights
Unaffiliated Unit Holders will have their interest in the Partnership
converted into cash. Accordingly, these Unaffiliated Unit Holders will have no
interest in the surviving entity.
Accounting Treatment of the Transaction
The Merger will be accounted for under the "purchase" method in
accordance with generally accepted accounting principles ("GAAP"). Therefore,
the aggregate consideration paid
31
<PAGE>
by Merger Sub will be allocated to the Partnership's assets and liabilities
based upon their fair market value with any excess being treated as excess of
investment over net assets acquired.
Federal Income Tax Consequences
The following discussion is a summary of the Merger's material U.S.
Federal income tax consequences to a Unit Holder who holds such Units as a
capital asset. The discussion is based on laws, regulations, rulings and
decisions in effect on the date of mailing of this Information Statement, all of
which are subject to change, possibly with retroactive effect. This discussion
does not address all aspects of U.S. Federal taxation that may be relevant to
particular Unit Holders in light of their personal circumstances or to Unit
Holders subject to special treatment under the Internal Revenue Code of 1986, as
amended. In addition, the discussion does not address the Merger's state, local
or foreign tax consequences arising under the laws of any state, local or
foreign jurisdiction.
EACH UNIT HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT
TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH UNIT HOLDER.
The Partnership is classified as a partnership for federal income tax
purposes. Accordingly, the Partnership is not itself subject to federal income
tax. It files an annual partnership information return with the IRS and reports
the results of operations using the accounting method selected by the General
Partner. Each Unit Holder's distributive share of the Partnership's income,
gain, losses, deductions and credits are reported separately on such Unit
Holder's personal income tax return. Each Unit Holder's distributive shares of
the Partnership's taxable income or gain is taxed to such Unit Holder regardless
of whether such Unit holder receives any distribution of cash or assets from the
Partnership. Thus, in any particular year, a Unit Holder's taxable income from
the Partnership, and under certain circumstances, even the tax on that income,
could exceed the amount of distributions, if any, such Unit Holder receives from
the Partnership in that year.
The receipt of the per Unit merger consideration pursuant to the Merger
will be treated as a sale of Units for cash for U.S. Federal income tax
purposes, and may also be a taxable transaction under applicable state, local,
foreign and other tax laws. The Unit Holder will recognize gain on the sale of
his Units to the extent the amount realized on the sale exceeds the Unit
Holder's adjusted basis in the Units. Generally, each Unit Holder should qualify
for capital gain treatment on the sale of his Units. Each Unit Holder will,
however, recognize ordinary income to the extent the Partnership holds, at the
time of the Merger, inventory items or unrealized receivables (including, for
this purpose, certain items of property subject to depreciation recapture
rules).
Federal or State Regulatory Requirements
No federal or state regulatory requirements must be complied with, and
no approvals from federal or state agencies must be obtained.
Reports
The Partnership received the updated Appraisals on December 20, 1997
regarding the assets currently owned by the Partnership. HealthCare Property
Appraisers of America, Inc., an
32
<PAGE>
unaffiliated third party appraiser and a specialist in making valuations of
this type, gave the updated Appraisals. Copies of the Appraisals are
available for inspection and copying at 3516 Merrell Road, Dallas, Texas
75229, and will be furnished, at the expense of the requester, to interested
Unit Holders upon written request to the General Partner at the preceding
address. The Appraisals have been filed as exhibits 17(b)(1) through
17(b)(16) of the Partnership's Schedule 13E-3. The Schedule 13E-3 may be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC also maintains a Website at http://www.sec.gov that contains
reports, proxy statements and other information.
Material Contracts
The terms of the Merger will be contained in the Merger Agreement. See
"Special Factors--Summary of the Material Terms of the Merger," "Special
Factors--Appraisal of the Partnership Assets" and "Special Factors--Related
Party Transactions."
Financial Information
A copy of the Partnership's latest Form 10-K accompanies this
Information Statement, for the fiscal year ended December 31, 1997 as well as a
copy of its Form 10-Q for the quarter ended June 30, 1998. Reference to the
Partnership's financial statements may be made to these documents.
Comparative Per Unit Data
Set forth below is comparative per Unit data for the Partnership on a
historical basis. Historical information for the Partnership has been derived
from its selected financial data included elsewhere herein.
<TABLE>
<CAPTION>
12 Months Ending 6 Months Ending
Dec 31, 1997 June 30, 1998
---------------- ---------------
<S> <C> <C>
Book Value per Unit
Equity 25,191,959 25,575,781
Outstanding Units 4,172,457 4,148,325
---------- ----------
Book Value per Unit 6.04 6.17
Cash Dividends per Unit
Dividends 325,000 0
Outstanding Units 4,172,457 4,148,325
--------- ---------
Cash Dividends per Units 0.08 0.00
Net Income per Unit
Net Income 1,452,334 528,613
Outstanding Units 4,172,457 4,148,325
--------- ---------
Net Income per Unit 0.35 0.13
</TABLE>
Note: Cash dividends per share since inception ($11,713,434/4,172,457) - $2.81
33
<PAGE>
Ratio of Earnings to Fixed Charges
Set forth below is the ratio of earnings to fixed charges for the
Partnership for the preceding two fiscal years and the interim periods.
<TABLE>
<CAPTION>
6 Months Ending 6 Months Ending 12 Months Ending 12 Months Ending
June 30, 1998 June 30, 1997 December 31, 1997 December 31, 1996
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Income $528,613 $608,056 1,452,334 1,637,343
Adjustments:
Add: Interest Expense 323,390 343,823 678,905 784,092
Earnings 852,003 951,879 2,131,239 2,421,435
Ratio of Earning
to Fixed Charges 2.63 2.77 3.14 3.09
</TABLE>
Appraisal Rights
Neither DRULPA nor the Partnership Agreement provides for dissenter's
or appraisal rights (that is, rights of non-consenting Unit Holders to exchange
their Units for payment of their fair market value), regardless of whether such
Unit Holder has consented to the Merger.
Voting Securities and Principal Holders Thereof
Units of Limited Partnership.
The number of Units outstanding as of June 30, 1998 is 4,148,325. Each
Unit is entitled to one vote.
The following table sets forth certain information as of June 30, 1998
concerning the beneficial ownership, as such term is defined in Rule 13d-3 of
the SEC under the Exchange Act, of management and persons who own more than 5%
of the outstanding Units.
<TABLE>
<CAPTION>
Name and address Amount and nature
of beneficial owner of beneficial owner Percent of class
------------------- ------------------- ----------------
<S> <C> <C>
Capital Senior Living 2,350,087 56.6%
Properties, Inc. (1)
14160 Dallas Parkway
Suite 300
Dallas, TX 75240
Capital Realty Group Senior - -
Housing, Inc. (2)
14160 Dallas Parkway
Suite 300
Dallas, TX 75240
</TABLE>
(1) The Company is a wholly owned subsidiary of CSLC. Jeffrey L. Beck and
James A. Stroud own approximately 46% of CSLC and may be deemed
beneficial owners of the Units held by the Company.
34
<PAGE>
(2) Capital owns a 2% interest in the Partnership as the General Partner.
Changes in Control
Since January 1, 1997, there have been two changes in control affecting
the Partnership. First, the ownership interest of an affiliate of the Company in
the Partnership exceeded 50% on June 26, 1997. On November 3, 1997, this
affiliate sold its ownership interest in the Partnership to the Company. Second,
on June 10, 1998, the sole owner of the General Partner sold all of its shares
of General Partner's common stock to Associates for $855,000. See "Special
Factors - Affiliation."
Year 2000 Issue
The Partnership has developed a plan to modify its information
technology to be ready for the year 2000. The Partnership relies upon PC-based
systems and does not expect to incur material costs to transition to Year 2000
compliant systems in its internal operations. The Partnership does not expect
this project to have a significant effect on operations. The Partnership will
continue to implement systems and all new investments are expected to be with
Year 2000 compliance software.
35
<PAGE>
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, 1997, 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 0-17695.
-------
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 organizations) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
- --------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (972) 770-5600
--------------
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Limited Partnership Interest
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sec tion 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]
The Registrant's outstanding securities consist of units of 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
------
Exhibit Index Page : 38
Page 1 of 38
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
----
<S> <C>
Item 1 Business 2
Item 2 Properties 3
Item 3 Legal Proceedings 4
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for Registrant's Common Equity
and Related Security Holder Matters 6
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 8 Financial Statements and Supplementary Data 11
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 11
PART III
Item 10 Directors and Executive Officers of the Registrant 12
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners and Management 14
Item 13 Certain Relationships and Related Transactions 15
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36
SIGNATURES 37
Exhibit Index 38
</TABLE>
1
<PAGE>
PART I
Item 1. Business
--------
HealthCare Properties, L.P. ("Registrant"), is a Delaware limited
partnership formed in March 1987, for the purpose of acquiring, leasing and
operating existing or newly constructed health care properties. The General
Partner of Registrant is Capital Realty Group Senior Housing, Inc. ("Capital")
The offering of Registrant's limited partnership interests (the "Units")
terminated on August 31, 1989, although some Units were sold to existing
investors pursuant to Registrant's distribution reinvestment plan (the "Plan")
until July of 1991 when the Plan was suspended. Registrant received gross
proceeds from the offering of $43,373,269 and net proceeds of $38,748,791.
All of the net proceeds of the offering were originally invested in 12
properties (the "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 December
31, 1997, four of the original twelve properties had either been sold or deeded
back to the lender, leaving the Registrant with four properties secured by debt
and four properties unleveraged. See Item 2. "Properties" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a description of Registrant's properties and their history.
As of December 31, 1997, Registrant had seven properties leased to
unaffiliated operators under triple net leases, whereby the lessee is
responsible for all operating expenses, insurance and real estate taxes. The
eighth facility is Cambridge Nursing Home. On August 1, 1996, the United States
Bankruptcy Court approved the transfer of the operations of Cambridge Nursing
Home, Inc. to Cambridge Nursing Home Limited Liability Company ("Cambridge
LLC"), a subsidiary of the Registrant, thereby releasing the operations of this
facility from the jurisdiction of the Bankruptcy Court.
All of Registrant's triple net leases with unaffiliated operators require
operators to make necessary repairs. Registrant inspects or receives reports
from each facility at least annually to insure that necessary repairs are made.
Registrant is responsible for capital improvements and debt service payments
under mortgage obligations secured by certain properties.
Both the income and expenses of operating the Properties owned by
Registrant are subject to factors outside the control of both Registrant and the
operators of the facilities, such as oversupply of similar properties resulting
from overbuilding, increases in unemployment or population shifts, reduced
availability of permanent mortgage funds, changes in taxes and regulations,
including healthcare regulations and zoning laws, or changes in patterns or
needs of users.
For the year ended December 31, 1997, Registrant's Properties accounted for
100% of Registrant's gross revenues.
Registrant's original objective was to maintain and hold its properties for
long-term appreciation. Registrant may reinvest net sale or refinancing proceeds
in additional health care properties.
2
<PAGE>
The terms of transactions between Registrant and affiliates of the General
Partner of Registrant are set forth below. Also, See Item 13.
Replacement of Prior General Partners with Capital
- --------------------------------------------------
In June 1993, the holders of Units ("Unit Holders") approved the
replacement of the existing general partners of the Partnership, Jacques-Miller,
Inc. and Jacques and Associates, L.P., (collectively, the "Prior General
Partners"), with Capital as well as various amendments to the Partnership
Agreement (the "Partnership Agreement").
Competition
- -----------
The real estate business is highly competitive. Registrant's properties are
subject to competition from similar properties within their service area. In
addition, the health care industry segments in which Registrant's lessees
participate are also subject to intense competitive pressures, which may impact
such lessees' ability to generate sufficient revenues to fulfill their
obligations to Registrant under their leases.
Employees
- ---------
The Registrant is managed by an affiliate of Capital. There were no
employees of Registrant at December 31, 1997.
Regulatory Matters
- ------------------
Federal, state and local government regulations govern fitness and
adequacy, equipment, personnel and standards of medical care at a health care
facility, as well as health and fire codes. Changes in the applicable
regulations could adversely affect the operations of a property, which could
also affect the financial results of Registrant. Risks of inadequate cost
reimbursements from various government programs such as Medicaid and Medicare
may also impact lessees' ability to fulfill their lease obligations to
Registrant. Any impact from future health care legislation is not known at this
time; however, such impact could adversely affect cost reimbursements from
various government programs.
Item 2. Properties
----------
Registrant owns eight properties at December 31, 1997 consisting of four
nursing homes and four rehabilitation centers purchased between October 1987 and
October 1990. Four facilities were newly constructed when purchased. Four
facilities are security for mortgage loans. Two of these loans are non-recourse
to Registrant while two loans are guaranteed by Registrant. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
3
<PAGE>
The following table summarizes key information about each of Registrant's
properties:
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P.
PROPERTY SUMMARY
CEDARBROOK CANE CREEK CRENSHAW CREEK SANDY BROOK
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Location Nashville, TN Martin, TN Lancaster, SC Orlando, FL
Type Rehab Rehab Rehab Rehab
Date Purchased 10/87 11/87 6/88 9/88
Purchase Price $3,955,000 $4,000,000 $3,900,000 $4,200,000
Original Mortgage Amount $2,000,000 $2,200,000 $0 $0
12/31/9 7 Mortgage Balance $729,622 $581,555 $0 $0
Mortgage Maturity June 30, 1997* December 1, 2001 N/A N/A
End of Lease Term 2001 2001 2001 2001
CAMBRIDGE TRINITY HILLS HEARTHSTONE MCCURDY
--------------------------------------------------------------------------------------
Location Cambridge, MA Ft. Worth, TX Round Rock, TX Evansville, IN
Type Nursing Nursing Nursing Nursing
Date Purchased 9/90 2/88 11/88 9/89
Purchase Price $5,100,000 $2,700,000 $3,625,000 $7,100,000
Original Mortgage Amount $0 $0 $1,500,000 $4,700,000
12/31/97 Mortgage Balance $0 $0 $1,306,222 $4,060,033
Mortgage Maturity N/A N/A July 1, 2002 April 1, 2012
End of Lease Term N/A 2000 2000 2001
<FN>
*On March 21, 1997, the lender agreed not to exercise its call rights on June
30, 1997 and the Partnership is currently negotiating the extension of this note
until December 1, 2001.
</FN>
</TABLE>
Item 3. Legal Proceedings
-----------------
A. On January 21, 1992 Registrant won a judgment against Mr. Barry Lieberman
(a guarantor of SentinelCare's lease) in connection with his guaranties and
is currently pursuing efforts to collect on that judgment in the
Connecticut state courts.
B. In December 1991, Registrant initiated litigation in Massachusetts against
NCA Cambridge Nursing Home (NCAC) and Richard Wolfe (NCAC's operator/lessee
and a guarantor of NCAC's lease obligations to Registrant) in an attempt to
enforce certain obligations of NCAC and Mr. Wolfe under the terms of NCAC's
lease of Registrant's Cambridge Nursing Home facility. In February 1992,
NCAC filed a voluntary Chapter 11 proceeding in the Southern District of
Florida. Registrant subsequently learned that in addition to NCAC's default
under certain terms of its lease, the State of Massachusetts asserted
claims against NCAC regarding prior Massachusetts Medicaid payments made to
4
<PAGE>
NCAC for fiscal years 1988 through 1991. The Massachusetts claims were
against NCAC; however, Massachusetts has regulations requiring successor
operators of a facility to indemnify the state for its losses suffered in
connection with a prior operator of the same facility. It was therefore
possible that Registrant could have been subject to such liability based on
certain interpretations of state regulations. As a result, the Registrant
could have become liable for approximately $1,400,000 in connection with
the recovery of Medicaid overpayments. Additionally, property taxes were
owed to the City of Cambridge in an amount in excess of $600,000. On May
24, 1993, Registrant reached an agreement with Mr. Wolfe to repossess that
facility pending emergence from Bankruptcy Court. In December 1995,
Registrant reached a settlement with the State of Massachusetts and the
City of Cambridge with regard to the outstanding issues facing the
Cambridge facility. This settlement was approved by the United States
Bankruptcy Court. The settlement eliminated the Registrant's exposure in
connection with the $1,400,000 Medicaid overpayments and allowed the
Registrant to pay a settlement amount with regard to unpaid property taxes.
On August 1, 1996, the United States Bankruptcy Court approved the transfer
of the operations of Cambridge Nursing Home, Inc. to Cambridge LLC, a
subsidiary of the Registrant, thereby releasing the operations of this
facility from the jurisdiction of the Bankruptcy Court. The Registrant has
filed an administrative claim for advances and past due rent in the
Bankruptcy Court. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
5
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
----------------------------------------------------------------------
Matters
-------
At March 1, 1998, there were 1,791 Unit Holders of record in Registrant
owning an aggregate of 4,172,457 Units. There is no public market for these
Units and Capital does not plan to list the Units on a national exchange or
automated quotation system. Registrant formerly had a liquidity reserve feature
which, under certain circumstances, permitted Unit Holders to liquidate their
Units. Due to inadequate liquidity of Registrant and the adverse impact on Unit
values caused by defaults of certain of Registrant's lessees, the prior General
Partners suspended all redemptions pursuant to the liquidity reserve in March of
1991. Due to the valuation formula required to be used by Registrant in any such
redemptions, it is unlikely that the General Partner will be able to reinstate
the liquidity feature in the foreseeable future.
Pursuant to the terms of the Partnership Agreement, there are restrictions
on the ability of the Unit Holders to transfer their Units. In all cases, the
General Partner must consent in writing to any substitution of an Unit Holder.
The Internal Revenue Code contains provisions which have an adverse impact on
investors in "publicly traded partnerships." Accordingly, the General Partner
has established a policy of imposing limited restrictions on the transferability
of the Units in private transactions. This policy is intended to prevent a
public trading market from developing and may impact the ability of a Unit
Holder to liquidate his investment quickly.
The Registrant distributed $325,000 to its partners collectively in 1997
(to cover tax liabilities of the partners) and did not make any distributions in
1996. The ability of Registrant to make distributions of Operating Cash Flow in
the future is dependent upon operational performance of properties operated by
Registrant and collection of adequate rental revenues from properties leased to
third party operators.
6
<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P.
(A Delaware Limited Partnership)
December 31, 1997, 1996, 1995, 1994 and 1993
(Unaudited - not covered by Independent Auditors' Report)
Year Ended December 31
1997 1996 1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 32,801,853 $ 32,487,547 $ 33,812,286 $ 40,914,991 $ 43,375,924
Mortgage Debt $ 6,677,432 $ 7,207,414 $ 9,775,601 $ 16,268,668 $ 16,713,020
Total Revenue from
Operations $ 8,977,628 $ 7,560,104 $ 8,419,024 $ 12,574,481 $ 14,024,311
Weighted Average
Number of Units 4,172,457 4,172,457 4,172,457 4,172,457 4,172,457
Income (Loss) Before
Extraordinary Item $ 1,452,334 $ 684,651 $ (2,354,181) $ (3,035,459) $ (2,395,486)
Extraordinary Gain $ 0 $ 952,692 $ 3,604,514 $ 0 $ 0
Net Income (Loss) $ 1,452,334 $ 1,637,343 $ 1,250,333 $ (3,035,459) $ (2,395,486)
Net Income (Loss) Per
Unit
Income (Loss) before
Extraordinary Item $ 0.34 $ 0.16 $ (0.56) $ (0.71) $ (0.56)
Extraordinary Gain $ 0 $ 0.23 $ 0.79 $ 0 $ 0
Net Income (Loss) $ 0.34 $ 0.39 $ 0.23 $ (0.71) $ (0.56)
Net Income (Loss)
Tax $ 1,832,184 $ 794,101 $ (1,692,342) $ (393,245) $ 1,710,132
Per Unit $ .44 $ .19 $ (.41) $ (.09) $ .41
Cash Distributions $ 325,000 $ 0 $ 0 $ 0 $ 250,000
Per Unit $ .08 $ 0 $ 0 $ 0 $ .06
========================================================================================================
<FN>
The above selected financial data should be read in conjunction with the
consolidated financial statements and the related notes appearing elsewhere in
this annual report. See Footnote 3. "Property and Improvements" to the
Consolidated Financial Statements for discussion of property dispositions.
</FN>
</TABLE>
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources
- -------------------------------
Registrant raised gross proceeds from the offering of over $43,300,000 and
purchased twelve properties. Registrant does not anticipate additional capital
investments by Unit Holders. Sources for Registrant's liquidity include rental
revenues from lessees of certain of Registrant's properties, operational income
from property operated by a subsidiary of Registrant, potential proceeds from
mortgage financing on one or more of Registrant's four unleveraged properties,
or potential sale proceeds from any of Registrant's eight properties. The
Registrant anticipates sufficient cash flow to meet debt service requirements
and cover all other operational expenses. The Registrant may reinvest net sale
proceeds and available cash in additional healthcare properties. For further
information, see the discussion below on each individual property.
Registrant ended 1997 with cash and cash equivalents of $10,722,118 as
compared with $8,995,455 at December 31, 1996. Cash and cash equivalents
primarily increased in 1997 due to improved cash flow provided by operating
activities.
Accounts receivable at December 31, 1997 slightly increased from
approximately $800,000 as compared to $794,000 at December 31, 1996.
Accounts payable and accrued expenses were approximately $818,000 at
December 31, 1997, as compared to $1,004,000 at December 31, 1996. This decrease
resulted largely from the payment of a Medicaid accrual in connection with the
Countryside facility.
Operating facility accounts payable were approximately $114,000 at December
31, 1997, and $211,000 at December 31, 1996.
Decreases from December 31, 1996 to 1997 in property and improvements,
deferred charges and mortgage loans payable primarily relate to depreciation,
amortization and note payments, respectively .
Two loans of the Registrant became due in January 1996; however, one loan
was extended to March 31, 1996 and subsequently extended to June 30, 1997. The
Registrant is currently negotiating extension of this loan until December 1,
2001. The lender of the other loan agreed to extend the loan to December 1,
2001, pending completion of final loan documents.
The mortgage loan for the Hearthstone facility became due on July 1, 1997
and the lender of the loan agreed to extend the loan to July 1, 2002.
Results of Operations
- ---------------------
Rental revenues were approximately $4,276,000 in 1997 compared to
approximately $4,590,000 in 1996, and approximately $5,100,000 in 1995. The
decrease of rental revenues from 1996 to 1997 is primarily due to the loss of
lease revenue from the Cambridge facility prior to its release from the United
States Bankruptcy Court on August 1, 1996. The decrease of rental revenues from
1995 to 1996 is primarily due to the loss of lease revenue generated from the
Heritage Manor property upon its sale on July 5, 1995.
8
<PAGE>
Patient revenues of approximately $4,702,000 for the year ended December
31, 1997, approximately $2,970,000 for the year ended December 31, 1996, and
approximately $3,269,000 for the year ended December 31, 1995, related to the
operations at the Cambridge LLC, Countryside, Diablo/Tamarack, and Foothills
facilities. The increase in patient revenues from 1996 to 1997 resulted from a
full year of operations from the Cambridge facility in 1997 and a partial year
of operations from the Cambridge and Countryside facilities in 1996. The
decrease in patient revenues for 1996 as compared to 1995 resulted from the sale
of the Countryside facility on May 1, 1996 and was partially offset by the
commencement of operations of Cambridge LLC on August 1, 1996.
Facility operating expenses were approximately $4,578,000 in 1997 compared
to approximately $2,728,000 in 1996, and approximately $3,238,000 in 1995. The
increase in facility operating expenses from 1996 to 1997 resulted from a full
year of operations from the Cambridge facility in 1997 and a partial year of
operations from the Cambridge and Countryside facilities in 1996. The decrease
in facility operating expenses in 1996, compared to 1995, resulted from the sale
of the Countryside facility on May 1, 1996 and was partially offset by the
commencement of operations of Cambridge LLC on August 1, 1996.
Depreciation was approximately $1,369,000 for 1997, $1,418,000 for 1996,
and $1,722,000 for 1995. Depreciation decreased in 1997 and 1996 due to the
above mentioned dispositions of properties.
Fees to affiliates were approximately $1,110,000, $1,276,000, and
$1,279,000 for the years ended 1997, 1996, and 1995, respectively. The decrease
of fees to affiliates in 1997 from 1996 resulted from decreased asset management
fees upon the closure of the Cedarbrook facility in February, 1997, leased by
HealthSouth. Fees to affiliates were relatively unchanged from 1996 compared to
1995.
Bad debt expense was approximately $43,000, $875,000, and $1,586,000 for
the years ended 1997, 1996, and 1995, respectively. Bad debt expense decreased
in 1997, compared to 1996, and decreased in 1996, compared to 1995, because the
Registrant stopped making lease rent accruals on the Cambridge facility during
1996, which accruals had been fully reserved by the Registrant, upon release of
facility operations by the Bankruptcy Court on August 1, 1996. See Item 3.
"Legal Proceedings".
Lease default expenses of approximately $15,000 , $115,000, and $286,000
for the years ended 1997, 1996, and 1995, respectively, decreased in 1997 and
1996 from 1995 due to the resolution of the Countryside, Cambridge,
Diablo/Tamarack and Foothills lease defaults.
Administrative and other expenses were $506,000, $192,000, and $115,000 for
the years ended 1997, 1996, and 1995, respectively. Administrative and other
expenses increased from 1996 to 1997 due to increased printing, accounting and
professional fees in addition to increased salaries, benefits and overhead
allocated from Capital and affiliates of Capital for personnel performing
services on behalf of the Partnership. Administrative and other expenses
increased from 1995 to 1996 due to increased accounting and professional fees
Interest income was approximately $359,000, $239,000, and $186,000 for the
years ended 1997, 1996, and 1995, respectively. Interest income increased in
1997 and 1996 from 1995 due to additional cash available as a result of lower
debt service requirements, proceeds received upon the sale of Heritage Manor
earning interest for a full year and increased operational cash flow.
9
<PAGE>
Interest expense was approximately $679,000, $784,000, and $1,325,000 for
the years ended 1997, 1996, and 1995, respectively. Interest expense decreased
in 1997 and in 1996 from 1995 due to the repayment of the mortgage upon the sale
of the Countryside facility.
Amortization was approximately $109,000, $114,000, and $171,000 for the
years ended 1997, 1996, and 1995, respectively. Amortization decreased in 1997
and 1996 from 1995, primarily due to fully amortized deferred costs for the
Diablo/Tamarack, Countryside, and Foothills facilities.
During 1996, the gain on disposition of operating properties of
approximately $388,000 and extraordinary gain of approximately $953,000 resulted
from the sale of the Countryside facility. During 1995, the loss on disposition
of operating properties of approximately $1,237,000 and extraordinary gain of
approximately $3,605,000 resulted from the sale of Heritage Manor and deed
transfers in lieu of foreclosure of the Diablo/Tamarack and Foothills
facilities.
During 1997, other income of approximately $524,000 primarily resulted from
the collection of a $71,000 distribution from Rebound, Inc., and $440,007 paid
in compliance with Section 16b of the Securities and Exchange Act by Capital
Senior Living Communities, L.P., an affiliate of the General Partner, for gains
on purchases of HCP units made within a six month period prior to the sale of
HCP units.
This item should be read in conjunction with the consolidated financial
statements and other items contained elsewhere in this report.
Operations of the Registrant's Properties
- -----------------------------------------
Cedarbrook, Cane Creek, Crenshaw Creek and Sandy Brook facilities. Rebound,
Inc. (a subsidiary of HealthSouth Corporation) leases the Cedarbrook, Cane
Creek, Crenshaw Creek and Sandy Brook properties pursuant to a master lease with
the Registrant.
Due to low occupancy of the Sandybrook facility, it was closed in 1994 and
at this time the lessee has not provided any information on when it might
reopen. Rental payments in March and April 1995 were discontinued by HealthSouth
causing an interruption in the master lease. Registrant met with HealthSouth and
those payments were subsequently made in the second quarter of 1995. Subsequent
to that time period, all payments have been made on a timely basis. In February
1997, the Registrant was notified by HealthSouth of the closing of the
Cedarbrook facility due to low occupancy. At this time, the Registrant cannot
determine when this facility might reopen. HealthSouth has continued to make
lease payments on a timely basis.
Two recourse loans, Cedarbrook and Cane Creek, were due in January 1996 in
the aggregate amount of approximately $2,400,000. The Cedarbrook note was
extended through March 31, 1996 and subsequently extended to June 30, 1997. The
Registrant is currently negotiating extension of the loan until December 1,
2001. The lender of the Cane Creek note agreed to extend the loan to December 1,
2001, pending completion of final loan documents.
Countryside facility. On May 1, 1996, the Countryside facility was sold to
a third party buyer for approximately $2,200,000. With the sale proceeds,
Registrant paid off the lender on Countryside an amount agreed to by the lender
10
<PAGE>
in full settlement of all obligations to the lender. Registrant netted
approximately $26,000 in cash as a result of this sale, after payment to lender
and closing costs. Registrant also obtained a full release of all potential
liability from the lender.
Cambridge facility The lessee of the Cambridge facility, 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. See Item 3, B.
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 facility from the
jurisdiction of the United States Bankruptcy Court.
Trinity Hills, McCurdy. and Hearthstone facilities The Registrant's other
facility lessees are all current in their lease obligations to the Registrant.
In addition, the Registrant believes it likely that two of these lessees will
pay additional rental amounts to the Registrant during future years based upon
increased revenues at those facilities. However, there can be no assurance of
such increased revenue. Two of these facilities appear to be generating cash
flow sufficient to fund their lease obligations, but Trinity Hills is, at this
time, not generating sufficient cash flow to fund its lease obligations from
property operations. However, the lessee continues to fund the lease deficit.
Impact of Inflation
- -------------------
To offset potential adverse effect of inflation, Registrant has required
each of its unaffiliated tenants to execute "triple-net" leases with the tenant
being responsible for all operating expenses, insurance and real estate taxes.
Such leases generally require additional participating rent payments based on
certain increases in the lessee's collected revenues. To the extent that
Registrant undertakes to operate certain facilities through wholly-owned
subsidiaries, those subsidiaries, and ultimately Registrant, will be directly
exposed to the inflationary pressures on health care industry operating costs.
Year 2000 Issue
- ---------------
The Registrant has developed a plan to modify its information technology to
be ready for the year 2000. The Registrant relies upon PC-based systems and does
not expect to incur material costs to transition to Year 2000 compliant systems
in its internal operations. The Registrant does not expect this project to have
a significant effect on operations. The Registrant will continue to implement
systems and all new investments are expected to be with Year 2000 compliant
software.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
See the Consolidated Financial Statements with Independent Auditors'
Report thereon.
Item 9. Changes in and Disagreements with Accountants on Accounting and
----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
11
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
(a) The Registrant is a Limited Partnership managed by an affiliate of
Capital and has no directors, officers, or significant employees.
(b) The General Partner of Registrant is:
Capital Realty Group Senior Housing, Inc., ("Capital") a Texas
corporation, that was formed under the laws of the State of Texas
in 1988.
(c) As of December 31, 1997 the officers and directors of Capital, the
General Partner, were:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jeffrey L. Beck 53 Chief Executive Officer and
Director
James A. Stroud 47 Chief Operating Officer,
Secretary and Director
Keith N. Johannessen 41 President
David Beathard 50 Vice President
Rob L. Goodpaster 45 Vice President, National
Director of Marketing
David Brickman 39 Vice President
Robert F. Hollister 42 Property Controller
</TABLE>
Jeffrey L. Beck, age 53. Mr. Beck has served as an officer and a director
of Capital since December 1988, most recently serving as Chief Executive Officer
since November 1990. Mr. Beck is currently Co-Chairman of the Board and Chief
Executive Officer of Capital Senior Living Corporation. He owns 50% of Capital
Realty Group Corporation, the parent of Capital and has served as its Chief
Executive Officer since February 1988. From 1975 to 1985, he was President of
Beck Properties, Inc., which was the predecessor of Capital. From 1973 to 1974,
he was Regional Controller with Trammell Crow & Company, a real estate company
based in Dallas, Texas. Mr. Beck is Chairman of the Board of Directors of United
Texas Bank of Dallas. Mr. Beck served as Chairman of the American Senior Housing
Association.
James A. Stroud, age 47. Mr. Stroud has served as an officer and a director
of Capital since December 1988, most recently serving as Chief Operating Officer
and Secretary since May 1991. Mr. Stroud is currently Co-Chairman of the Board
and Chief Operating Officer of Capital Senior Living Corporation. He owns 50%
(through a trust) of Capital Realty Group Corporation, the parent of Capital and
has served as its President, Secretary and a Director since February 1988. From
1984 until 1985, he was Executive Vice-President of Equity Management
Corporation, Dallas, Texas, a full service real estate company. From 1980 to
1983, he was director in charge of the Tax Department of the law firm of Baker,
Glast & Middleton, Dallas, Texas. From 1978 until 1980, he was an associate with
Brice & Mankoff (formerly Durant and Mankoff), a law firm in Dallas, Texas. Mr.
Stroud is a Certified Public Accountant and a licensed attorney. He received his
B.B.A. from Texas Tech University with highest honors, his J.D. from the
University of Texas with honors, and his L.L.M. in taxation from New York
12
<PAGE>
University with honors. While at New York University, he was a graduate editor
of the New York University Tax Law Review and a Wallace Scholar. Mr. Stroud is a
founder and director of the Assisted Living Facilities Association of America, a
member of the Health Industry Council, President-elect of the National
Association for Senior Living Industries ("NASLI"), and has delivered speeches
on health care topics to the NASLI, National Investment Conference, and the
Urban Land Institute.
Keith N. Johannessen, age 41. Mr. Johannessen became Executive Vice
President of Capital in May 1993 with responsibility for supervising the
day-to-day operations of Capital's retirement communities. In March 1994, Mr.
Johannessen became President of Capital. He is also President of Capital Senior
Living Corporation. From September 1992 through May 1993, Mr. Johannessen was a
Senior Manager in the North Central Region for the health care practice of Ernst
& Young LLP, responsible for assisting in the development and direction of the
firm's long term care center consulting projects in the region as well as on a
national basis. From August 1987 through September 1992, Mr. Johannessen was
Executive Vice President with Oxford Retirement Services, Inc. responsible for
the sales, marketing and operations of retirement communities and nursing homes.
From August 1978 to August 1987, Mr. Johannessen was employed by Life Care
Services Corporation in a variety of operations management positions, from
single retirement projects to multi-facility responsibilities. He is a licensed
nursing home administrator and holds a Bachelor of Arts Degree from Nyack
College, New York. Mr. Johannessen is active in the American Senior Housing
Association, National Association for Senior Living Industries and the American
Association of Homes and Services for the Aging.
David Beathard, age 50. Mr. Beathard is Vice President of Capital with
responsibility for supervising the daily operations of Capital Nursing Homes and
Senior Communities. He is also Vice President - Operations of Capital Senior
Living Corporation. Prior to joining Capital, Mr. Beathard was a management
consultant for the retirement housing industry in Ohio. From 1978 to 1991, Mr.
Beathard served as Executive Director , Regional Administrator, Regional Vice
President, and Vice President and Director of Operations Management for Life
Care Services Corp. Mr. Beathard has been in the senior housing and services
business for 20 years.
Rob L. Goodpaster, age 45. Mr. Goodpaster became National Director of
Marketing of Capital in December 1992, with overall responsibility for marketing
and lease-up functions of Capital's managed properties. He is also Vice
President - National Marketing of Capital Senior Living Corporation. With 19
years of experience in the industry, Mr. Goodpaster has an extensive background
in retirement housing marketing. His experience includes analyzing demographics,
developing and implementing marketing plans, creating outreach and advertising
programs, hiring and training sales personnel and implementing lead management
and tracking systems. Prior to joining Capital, Mr. Goodpaster was National
Director of Marketing for Autumn America from January 1990 to November 1992.
From 1985 until December 1989, he was President of Retirement Living Concepts,
Inc. where he marketed retirement properties throughout the United States. Mr.
Goodpaster was formerly Vice President, Marketing for U.S. Retirement Corp. from
1984 to 1985 and Vice President, Development for American Retirement Corp. from
1980 to 1984. Mr. Goodpaster is a graduate of Ball State University with a B.S.
in Business Management and Marketing. Mr. Goodpaster is a member of the National
Association of Senior Living Industry and the Texas Association of Retirement
Communities.
David Brickman, age 39. Mr. Brickman has served as Vice President and
Counsel of Capital since 1992. He is also Vice President and General Counsel of
Capital Senior Living Corporation. Mr. Brickman received his bachelor of Arts
degree from Brandeis University. He holds a J.D. from the University of South
Carolina Law School, an M.B.A. from the University of South Carolina School of
Business Administration and a Masters of Health Administration from Duke
University. Prior to joining Capital in 1992, he served as in-house counsel from
13
<PAGE>
1986 through 1987 with Cigna Health Plan, Inc., from 1987 through 1989 with
American General Group Insurance Company and from 1989 until joining Capital,
with LifeCo Travel Management Company located in Houston, Texas. In addition to
his legal responsibilities, Mr. Brickman is also responsible for asset
management activities, operational activities and investor relations for
Capital's portfolio.
Robert F. Hollister, age 42. Mr. Hollister has served as Property
Controller of Capital since 1992. He is also Property Controller for Capital
Senior Living Corporation. Mr. Hollister received his Bachelor of Science in
Accounting from the University of Maryland. His experience includes public
accounting as well as private experience in fields such as securities,
construction, and nursing homes. Prior to joining Capital in 1992, Mr. Hollister
was the chief financial officer and controller for Kavanaugh Securities, Inc.
from December 1985 until 1992. Mr. Hollister is the property controller and
supervises the day-to-day accounting and financial aspects of Capital. Mr.
Hollister is a Certified Financial Planner and a member of both local and
national professional accounting organizations.
(d) 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 Registrant pursuant to Rule 16a-3(e) of the SEC rules, the
Registrant is not aware of any failure of any officer or director of Capital or
beneficial owner of more than ten percent of the Units to timely file with the
SEC any Form 3, 4 or 5 relating to the Registrant for 1997 except that the
following persons or entities failed to file in a timely basis the following
reports: Capital filed five late reports on Form 4 reporting fourteen
transactions; Capital Retirement Group, Inc. filed five late reports on Form 4
reporting fourteen transactions; Capital Senior Living Communities, L.P. filed
five late reports on Form 4, reporting fourteen transactions; and each of
Messrs. Beck and Stroud filed five late reports on Form 4, reporting fourteen
transactions.
Item 11. Executive Compensation
----------------------
The Registrant has no officers or directors. The officers and directors of
the General Partner receive no direct current remuneration from Registrant nor
is it proposed that they receive remuneration in such capacities. Registrant is
required to pay certain fees to the General Partner or its affiliates, make
distributions, and allocate a share of the profits and losses of Registrant to
the General Partner. The relationship of the General Partner (and its directors
and officer) to its affiliates is set forth above in Item 10. Reference is also
made to Note 6 of the Notes to the Consolidated Financial Statements included
herein, for a description of such distributions, allocations and the
compensation and reimbursements paid to the General Partner and certain
affiliates. Also see Item 13. "Certain Relationships and Related Transactions"
for additional information.
There are no compensatory plans or arrangements resulting from resignation
or retirement of the partners, directors or executive officers of the General
Partner which require payments to be received from Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Capital Senior Living Properties, Inc., an affiliate of Capital, owns
56.8% of outstanding Units of Registrant as of March 1, 1998.
Otherwise, no other person or group owns more than 5% of Registrant as
of March 1, 1998.
(b) No partners, officers or directors of the General Partner directly own
any Units at March 1, 1998 . However, Messrs. Beck and Stroud (through
a trust) each own indirectly 50% of Capital and they may be deemed
beneficial owners of the 2% interest in the Registrant owned by
Capital as the general partner. Messrs. Beck and Stroud and their
affiliates own a substantial interest (approximately 46%) in the
parent of Capital Senior Living Properties, Inc.
14
<PAGE>
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Under the terms of the Partnership Agreement, Registrant is entitled to
engage in various transactions involving affiliates of the General Partner.
Pursuant to the Partnership Agreement, the General Partner receives a share of
Registrant's profits and losses.
The General Partner and its affiliates are entitled to receive an
Acquisition Fee, as defined in Registrant's Partnership Agreement, for their
services rendered to Registrant in connection with the selection and purchase of
any property by Registrant whether designated as real estate commissions or
other fees, however designated and however treated for tax or accounting
purposes. Aggregate Acquisition Fees payable to all persons in connection with
the purchase of Registrant's properties may not exceed the lesser of: (a) 2% of
the gross proceeds of Registrant's offering; or (b) such compensation as is
customarily charged in similar arm's-length transactions. If there are
insufficient proceeds to pay such fee to the General Partner and their
affiliates, such amount will not be deferred. No amounts were earned in 1997 and
1996 in connection with such services. In connection with any reinvestment of
sale or refinancing proceeds as provided in the Partnership Agreement, the
Registrant will pay a reinvestment acquisition fee of 2% of the price of
additional properties payable from Net Sale or Refinancing Proceeds utilized
solely for the acquisition. No such fees were paid in 1997 or in 1996.
Registrant may pay the General Partner or its affiliates a Regulatory
Approval Fee, as defined in the Partnership Agreement, of up to 6% of the costs
of any newly constructed property which is acquired by Registrant. The services
rendered in connection with such fee will include: obtaining the appropriate
certificates of need, licenses, Medicare and Medicaid clearances, regulatory
approvals of transfer as is necessary, and such other federal, state, local and
other regulatory agency approvals as are necessary, and completion of various
other items which pertain to the commencement of the operation of a newly
constructed health care facility. Said services are expected to continue over
the term for which such Registrant properties are subject to compliance with
regulatory agencies, so as to ensure that the newly constructed property can be
placed into service on a timely basis and remain operational. This fee will not
exceed $1,150,000. The General Partner or its affiliates did not earn any
compensation in 1997 or in 1996 in connection with such services. The prior
General Partners earned $455,000 since inception.
Registrant may pay to the General Partner or its affiliates, for services
rendered in connection with the refinancing of a Registrant property, a mortgage
placement fee equal to the lesser of: (a) 2% of the refinancing proceeds of the
Registrant property; or (b) fees which are competitive for similar services in
the geographical area where the Registrant property is located. Amounts earned
by the General Partner in 1997 for the extension of the Hearthstone loan was
$13,245. No such fees were paid in 1996.
Registrant may pay to the General Partner or its affiliates, for services
rendered in connection with the sale of a Registrant property, and shall be
entitled to receive the lessor of: (a) 3% of the sale price of the Registrant's
property, or (b) an amount not to exceed 50% of the standard real estate
commission. No such fees were paid in 1997. Amounts earned by the General
Partner in 1996 for the sale of Countryside were $66,000 and in 1995 for the
sale of the Heritage Manor was $92,250.
For property management services, the General Partner or its affiliates are
entitled to receive leasing and property management fees. Since most of
Registrant's properties have long-term, triple-net leases and others have
independent fee management engagements for most services, the General Partner or
15
<PAGE>
its affiliates received 1% of the monthly gross rental or operating revenues,
totaling approximately $90,000, $72,000, and $80,000 in 1997, 1996, and 1995,
respectively. Property management fees paid to the General Partner were
approximately $330,000, $208,000, and $252,000 in 1997, 1996, and 1995,
respectively. Asset management fees paid to the General Partner were
approximately $484,000, $740,000, and $712,000 in 1997, 1996, and 1995,
respectively.
The General Partner may be reimbursed for its direct expenses relating to
offering and administration of Registrant. The General Partner or its affiliates
received $206,000, $256,000, and $235,000 reimbursements for such out-of-pocket
expenses in 1997, 1996, and 1995, respectively. In addition, the General partner
or its affiliates received $3,173,000, $1,859,000, and $2,256,000 for salary and
benefit reimbursements.
In addition, a 50% owner of the General Partner is chairman of the board
and an owner of a bank, United Texas Bank of Dallas, where the Registrant holds
the majority of its operating cash accounts.
16
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
HealthCare Properties, L.P.:
We have audited the accompanying consolidated balance sheets of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1997 and 1996, and the related consolidated statements of income,
partnership equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 4, 1998
<PAGE>
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 10,722,118 8,995,455
Accounts receivable, less allowance for doubtful accounts of
of $301,042 in 1997 and $256,042 in 1996 (note 9) 800,029 794,234
Prepaid expenses 50,221 85,295
Property and improvements, net (notes 3, 4 and 5) 20,823,913 22,112,619
Deferred charges, less accumulated amortization of $876,760
in 1997 and $765,409 in 1996 405,572 499,944
------------ ------------
Total assets $ 32,801,853 32,487,547
============ ============
Liabilities and Partnership Equity
----------------------------------
Accounts payable and accrued expenses $ 818,252 1,004,204
Operating facility accounts payable 114,211 211,304
Mortgage loans payable (note 4) 6,677,431 7,207,414
------------ -----------
7,609,894 8,422,922
------------ -----------
Partnership equity:
Limited partners (4,172,457 units) 25,156,971 24,058,684
General partner 34,988 5,941
------------ -----------
25,191,959 24,064,625
Commitments and contingencies (note 4) ------------ -----------
Total liabilities and partnership equity $ 32,801,853 32,487,547
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Revenues (notes 5 and 9):
Net patient service $ 4,702,017 2,969,991 3,268,800
Rental 4,275,611 4,590,113 5,100,085
----------- --------- ---------
8,977,628 7,560,104 8,368,885
----------- --------- ---------
Expenses:
Facility operating expenses 4,577,735 2,727,909 3,238,004
Depreciation 1,368,941 1,418,293 1,721,605
Fees to affiliates (note 6) 1,110,278 1,275,833 1,279,428
Bad debts, net of recoveries 43,061 875,143 1,585,555
Lease default expenses 14,687 114,523 286,108
Administrative and other 505,736 192,385 114,625
----------- ---------- ---------
7,620,438 6,604,086 8,225,325
----------- ---------- ---------
Income from operations 1,357,190 956,018 143,560
----------- ---------- ---------
Other income (expense):
Interest income 358,856 239,215 185,650
Interest expense (678,905) (784,092) (1,324,845)
Amortization (108,851) (114,107) (171,265)
Gain (loss) on disposition of operating
properties, net (note 3) - 387,617 (1,237,420)
Other (note 7) 524,044 - 50,139
----------- ---------- ----------
95,144 (271,367) (2,547,880)
----------- ---------- ----------
Income (loss) before extraordinary item 1,452,334 684,651 (2,354,181)
----------- ---------- ----------
Extraordinary gain on disposition of
operating properties (note 3) - 952,692 3,604,514
----------- ---------- ----------
Net income $ 1,452,334 1,637,343 1,250,333
=========== ========== ==========
Allocation of net income:
Limited partners $ 1,423,287 1,609,067 960,336
General partners 29,047 28,276 289,997
----------- ---------- ----------
$ 1,452,334 1,637,343 1,250,333
=========== ========== ==========
Basic earnings per limited partnership unit:
Income (loss) before extraordinary item $ .34 .16 (.56)
Extraordinary gain - .23 .79
---- --- ---
Net income $ .34 .39 .23
==== === ===
Distributions $ .08 - -
==== === ===
Weighted average number of units 4,172,457 4,172,457 4,172,457
============= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Partnership Equity
Years ended December 31, 1997, 1996 and 1995
Limited General
Partners Partner Total
-------- ------- -----
<S> <C> <C> <C>
Equity at December 31, 1994 $ 21,489,281 (312,332) 21,176,949
Net income 960,336 289,997 1,250,333
------------ ------- ----------
Equity at December 31, 1995 22,449,617 (22,335) 22,427,282
Net income 1,609,067 28,276 1,637,343
------------ ------- ----------
Equity at December 31, 1996 24,058,684 5,941 24,064,625
Net income 1,423,287 29,047 1,452,334
Distributions (325,000) - (325,000)
------------ ------- ----------
Equity at December 31, 1997 $ 25,156,971 34,988 25,191,959
============ ======= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,452,334 1,637,343 1,250,333
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,477,792 1,532,400 1,892,870
Bad debts, net of recoveries 43,061 875,143 1,585,555
(Gain) loss on disposition of operating
properties, net - (387,617) 1,237,420
Extraordinary gain on disposition of operating
properties - (952,692) (3,604,514)
Changes in assets and liabilities, net of
effects of property dispositions:
Accounts receivable (48,856) (1,458,968) (1,228,720)
Prepaid expenses 35,074 43,647 39,406
Accounts payable and accrued expenses (283,045) 443,384 (89,940)
------------- --------- ---------
Net cash provided by operating activities 2,676,360 1,732,640 1,082,410
------------- --------- ---------
Cash flows from investing activities:
Purchases of property and improvements (80,235) (21,969) (760)
Proceeds from sale of property - 2,246,114 2,958,287
Cash forfeiture on disposition of property held in
receivership - - (67,969)
------------- ---------- ---------
Net cash provided by (used in)
investing activities (80,235) 2,224,145 2,889,558
------------- ---------- ---------
Cash flows from financing activities:
Payments on mortgage loans payable (529,983) (2,568,187) (1,971,385)
Distributions to limited partners (325,000) - -
Increase in deferred charges (14,479) - -
------------- ---------- ---------
Net cash used in financing activities (869,462) (2,568,187) (1,971,385)
------------- ---------- ---------
Net increase in cash and cash equivalents 1,726,663 1,388,598 2,000,583
Cash and cash equivalents at beginning of year 8,995,455 7,606,857 5,606,274
------------- ---------- ---------
Cash and cash equivalents at end of year $ 10,722,118 8,995,455 7,606,857
============= ========== =========
Cash paid for interest $ 678,905 716,910 850,747
============= ========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) General
HealthCare Properties, L.P. (HCP or the Partnership), is a Delaware limited
partnership established for the purpose of acquiring, leasing and operating
existing or newly constructed long-term health care properties. These
properties are operated by the Partnership or are leased to qualified
operators who provide specialized health care services. Effective July 1,
1993, Capital Realty Group Senior Housing, Inc. (CRG) became the sole
general partner of the Partnership. Effective February 1, 1995 Capital
Senior Living, Inc., (CSL), an affiliate of CRG became the managing agent
for the Partnership replacing CRG, which had been managing agent since July
1, 1992.
At December 31, 1995, CRG owned approximately 9% of the Partnership's
limited partner units. During 1996, Capital Senior Living Communities, L.P.
(CSLC), an affiliate of CRG, acquired CRG's 9% interest in the Partnership.
At December 31, 1996 and 1995, CSLC owned approximately 31% and 6% of the
Partnership's limited partner units, respectively. In 1997, CSLC was sold
to Capital Senior Living Properties (CSLP), a subsidiary of Capital Senior
Living Corporation. At December 31, 1997, CSLP owned approximately 56% of
the Partnership's limited partner units.
The consolidated financial statements as of and for the years ended
December 31, 1997 and 1996, include the accounts of the Partnership's
wholly owned subsidiary, Cambridge Nursing Home Limited Liability Company
(Cambridge LLC), which began operating Cambridge Nursing Home, located in
Cambridge, Massachusetts, effective August 1, 1996. In addition, the
consolidated financial statements for 1995 include the accounts of the
Partnership and its wholly owned subsidiaries, Danville Care, Inc.,
Foothills Care, Inc., Countryside Care, Inc. and Countryside Care, LP. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
At December 31, 1997, 1996 and 1995, the status of the Partnership's
properties was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operated under bankruptcy and managed by CSL - - 1
Leased to unaffiliated operators on a triple net basis 7 7 7
Operated by subsidiaries of the Partnership and
managed by CSL 1 1 1
--- --- ---
8 8 9
=== === ===
</TABLE>
During 1996, one of the properties (Countryside) operated by a subsidiary
of the Partnership was sold to an unrelated third party. Additionally,
during 1996, the operations of a property (Cambridge) previously operated
under bankruptcy and managed by CSL were transferred to Cambridge LLC. CSL
continues to manage this property. During 1995, one of the Partnership's
leased properties was sold to an unrelated third party and the deeds for
two of the Partnership's operated properties were transferred to the
noteholders in lieu of foreclosure (see note 3).
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
(2) Summary of Significant Accounting Policies
Property and improvements are stated at cost. The Partnership adopted the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. The fair value is based on either the
expected future cash flows discounted at a rate which varies based on
associated risk or an independent third-party appraisal. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, using
declining-balance and straight-line methods, as follows: buildings and
improvements, 25 to 31 years; furniture, fixtures and equipment, 5 to 10
years.
The financial statements and federal income tax returns are prepared on the
accrual method of accounting and include only those assets and liabilities
and results of operations which relate to the business of the Partnership
and its wholly owned subsidiaries. No provision has been made for federal
and state income taxes since such taxes are the responsibility of the
individual partners. Although the Partnership's subsidiaries file federal
corporate income tax returns, none of the subsidiaries had significant net
income for financial reporting or income tax purposes in 1997, 1996 or
1995. Accordingly, no provision has been made for federal and state income
taxes for these subsidiaries in 1997, 1996 or 1995.
Net income (loss) of the Partnership and taxable income (loss) are
generally allocated 98% to the limited partners and 2% 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% Liquidation Preference, and (iv) thereafter, 80% to the limited
partners and 20% 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% to
the limited partners and 2% to the general partner. Distributions of
available cash flow are generally distributed 98% to the limited partners
and 2% to the general partner, until the limited partners have received an
annual preferential distribution, as defined. Thereafter, available cash
flow is distributed 90% to the limited partners and 10% to the general
partner. The partnership made a $325,000 distribution to the limited
partners in 1997 and no distributions in 1996 and 1995.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
Deferred charges primarily represent initial fees and other costs incurred
in negotiating leases and mortgage loans payable. These costs are being
amortized using the straight-line method over the lives of the related
leases or mortgage loans.
Net patient service revenue is reported at the estimated net realizable
amounts due from residents, third-party payors (including the Medicare and
Medicaid programs), and others for service rendered. Revenue under
third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party payor settlements are
provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement. Laws and regulations
governing the Medicare and Medicaid programs are complex and subject to
interpretation. The Partnership believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing.
While no such regulatory inquiries have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
The Partnership records accounts receivable for contingent rentals and past
due rents only when circumstances indicate a substantial probability of
collection. Existing receivables are reserved to the extent collection is
deemed doubtful by the Partnership's management. Deductions to the
allowance for doubtful accounts were $-0-, $45,682 and $29,953 for 1997,
1996 and 1995, respectively.
The Partnership classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.
The Partnership adopted Statement of Financial Accounting Standards No.
128, Earnings per Share, on December 31, 1997. The adoption of this
statement had no effect on the Partnership.
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these consolidated financial statements. Actual results could differ from
those estimates.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
(3) Property and Improvements
-------------------------
<TABLE>
<CAPTION>
Property and improvements consist of:
December 31
1997 1996
<S> <C> <C>
---- ----
Land $ 3,145,803 3,145,803
Buildings and improvements 31,425,543 31,397,383
Furniture, fixtures and equipment 1,656,040 1,603,965
------------- ----------
36,227,386 36,147,151
Less allowance for reduction in carrying value of
operating property (2,185,381) (2,185,381)
------------- ----------
34,042,005 33,961,770
Less accumulated depreciation (13,218,092) (11,849,151)
------------- ----------
$ 20,823,913 22,112,619
============= ==========
</TABLE>
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
The following is a summary of information for the individual Partnership
properties from inception of the Partnership through December 31, 1997. The
information presented includes furniture, fixtures and equipment which are
immaterial to the Partnership.
<TABLE>
<CAPTION>
Costs
Costs
Capitalized
Subse-
Initial Cost to quent to
Partnership Acquisition Gross Amount at which Carried at Close of Period
-------------------------------------------------------------------------------
Build-
ings Buildings Accumu-
and and lated Date of Date
Improve- Improve- Improve- Valuation Encum- Depre- Const- Ac- Useful
Description Land ments ments Land ments Allowance Total brances ciation ruction quired Life
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cedarbrook $807,861 3,147,139 783,608 807,861 3,930,747 - 4,738,608 729,622 1,725,113 1985 1987 25-31 yrs
rehab facility
Nashville, TN
Cane Creek 97,560 3,902,440 225,118 97,560 4,127,558 - 4,225,118 581,555 1,941,859 1985 1987 25-31 yrs
rehab facility
Martin, TN
Crenshaw Creek 123,801 3,776,199 102,732 123,801 3,878,931 - 4,002,732 - 1,551,238 1988 1988 25-31 yrs
rehab facility
Lancaster, SC
Sandy Brook 563,072 3,636,928 128,434 563,072 3,765,362 - 4,328,434 - 1,468,773 1985 1988 25-31 yrs
rehab facility
Orlando, FL
Cambridge 497,470 4,602,530 182,006 497,470 4,784,536 (2,185,381) 3,096,625 - 1,616,348 1967 1990 25-31 yrs
nursing home
Cambridge, MA
Trinity Hills 300,000 2,400,000 26,152 300,000 2,426,152 - 2,726,152 - 1,192,245 1971 1988 25-31 yrs
nursing home
Ft. Worth, TX
Hearthstone 756,039 2,868,961 116,365 756,039 2,985,326 - 3,741,365 1,306,222 1,216,698 1988 1988 25-31 yrs
nursing home
Round Rock, TX
McCurdy - 7,100,000 74,064 - 7,174,064 - 7,174,064 4,060,033 2,500,670 1916 1989 25-31 yrs
nursing home
Evansville, IN
Partnership
assets
Dallas, TX - - 8,907 - 8,907 - 8,907 - 5,148 n/a 1991- 10 yrs
1993
---------- ---------- -------- -------- ---------- --------- -------- --------- ---------
Total $3,145,803 31,434,197 1,647,386 3,145,803 33,081,583 (2,185,381)34,042,005 6,677,432 13,218,092
========== ========== ========= ========= ========== ========= ========== ========= ==========
</TABLE>
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
The following information is a summary of Partnership additions to and
deductions from property and improvements and accumulated depreciation for the
years ended December 31, 1997, 1996 and 1995. The information presented includes
furniture, fixtures and equipment which are immaterial to the Partnership.
<TABLE>
<CAPTION>
Property and Improvements 1997 1996 1995
------------------------- ---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 33,961,770 36,862,974 46,272,927
Additions during the period:
Acquisitions - - -
Improvements 80,235 21,969 760
------------ ---------- ----------
34,042,005 21,969 760
Deductions during period:
Cost of property sold - 2,923,173 3,520,068
Cost of property transferred in lieu of
foreclosure - - 5,890,645
Write-down in value of property - - -
------------ ---------- ----------
Total deductions - 2,923,173 9,410,713
------------ ---------- ----------
Balance at close of period $ 34,042,005 33,961,770 36,862,974
============ ========== ==========
Accumulated depreciation:
Balance at beginning of period $ 11,849,151 11,611,719 12,576,670
Additions 1,368,941 1,418,293 1,721,605
Deductions during period:
Property sold - 1,180,861 989,422
Property transferred in lieu of foreclosure - - 1,697,134
------------ ---------- ----------
Total deductions - 1,180,861 2,686,556
------------ ---------- ----------
Balance at close of period $ 13,218,092 11,849,151 11,611,719
============ ========== ==========
</TABLE>
The federal income tax basis of the Partnership's property and improvements at
December 31, 1997 is $25,775,120.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
The following property dispositions occurred during 1996 and 1995:
<TABLE>
<CAPTION>
Net property Mortgage Net gain
and loans Net on
improvements payable Other proceeds disposition
------------ -------- ----- -------- -----------
<S> <C> <C> <C> <C> <C>
1996:
Sale of Countryside
on May 1, 1996 $ 1,742,401 (2,068,539) (987,804) (26,367) 1,340,309
========= ========= ========== ========== =========
1995:
Sale of Heritage
Manor on July 5,
1995 $ 2,530,645 (1,500,000) 63,857 (1,458,287) 363,785
Deed transferred to
noteholder in
lieu of foreclosure:
Foothills 2,122,178 (2,360,895) (872,587) - 1,111,304
Diablo/Tamarack 2,071,334 (2,160,787) (802,552) - 892,005
----------- --------- ---------- ---------- ---------
$ 6,724,157 (6,021,682) (1,611,282) (1,458,287) 2,367,094
========= ========= ========= ========= =========
</TABLE>
"Other" consists primarily of disposition costs, accrued interest payable and
deferred charges (prepaid loan fees).
The Countryside property was sold to an unrelated third-party investor on May 1,
1996 for $2,246,114. The resulting net gain is comprised of (1) an ordinary gain
of $387,617 representing the difference between the carrying value of the
property and the sales proceeds and (2) an extraordinary gain of $952,692
representing the difference between the agreed-upon cash settlement with the
lender and the mortgage loan payable including accrued interest payable.
The Heritage Manor property was sold on July 5, 1995 to an unrelated third-party
investor for $3,075,000. With the proceeds, the Partnership paid the $1,500,000
mortgage loan balance. The resulting ordinary net gain of $363,785 represents
the difference between the carrying value of the property and the sales
proceeds.
The deed to the Diablo/Tamarack property was transferred to the noteholder in
lieu of foreclosure on July 31, 1995. The resulting net gain is comprised of (1)
an ordinary loss of $686,770 representing the difference between the carrying
value and the fair value of the property and, (2) an extraordinary gain of
$1,578,775 representing the difference between the fair value of the property,
and the mortgage loan payable including accrued interest payable.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
Effective December 1, 1994, the Foothills property was placed in receivership.
The deed to the property was subsequently transferred to the noteholder in lieu
of foreclosure on JulyE19, 1995. The resulting net gain is comprised of (1) an
ordinary loss of $914,435, representing the difference between the carrying
value and the fair value of the property and, (2) an extraordinary gain of
$2,025,739 representing the difference between the fair value of the property,
and the mortgage loan payable including accrued interest payable.
Combined operating results for Cambridge, Foothills, Countryside and
Diablo/Tamarack follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net patient service revenue $ 4,702,017 2,969,991 3,268,800
--------- --------- ---------
Facility operating expenses 4,577,735 2,727,909 3,238,004
Depreciation 205,563 248,134 275,815
Fees to affiliates 390,059 261,517 319,454
Bad debts 43,061 79,682 325,921
Lease default expenses - 35,923 120,258
--------- --------- ---------
5,216,418 3,353,165 4,279,452
--------- --------- ---------
Loss from operations $ (514,401) (383,174) (1,010,652)
========== ========= =========
Interest expense $ - 67,181 457,691
========== ========= =========
</TABLE>
The 1997 and 1996 operating results consist primarily of activity at the
Cambridge facility. The 1996 operations for Cambridge were from August 1,
1996 through December 31, 1996 and at the Countryside facility from January
1, 1996 through April 30, 1996. Operating results consist of amounts at the
Countryside facility for the year ended December 31, 1995 and at the
Diablo/Tamarack facility from January 1, 1995 through July 31, 1995.
(4) Mortgage Loans Payable
----------------------
Mortgage loans payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cane Creek property - note payable to bank $ 581,555 789,198
Cedarbrook property - note payable to bank 729,622 899,029
Hearthstone property - note payable to life insurance
company 1,306,222 1,341,859
McCurdy property - note payable to bank 4,060,032 4,177,328
--------- ---------
Total mortgage loans payable $ 6,677,431 7,207,414
========= =========
</TABLE>
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
Mortgage loans payable bear interest ranging from 6.6% to 10.75% at
December 31, 1997 and 6.6% to 10.75% at December 31, 1996. These notes are
payable in monthly installments of $100,812 at December 31, 1997 and
$101,092 at December 31, 1996, including interest. The notes are secured by
properties with net book values aggregating $12,494,825 and $13,246,635 at
December 31, 1997 and 1996, respectively. The notes range in maturity from
2001 to 2012.
The Partnership leases four of its properties under a master lease (see
note 5). The rentals under the master lease provide additional security for
two notes payable used to finance two of the master lease properties. One
of the lenders agreed to extend the maturity date of its note to December
1, 2001, pending completion of final loan documents. On March 21, 1997, the
other lender agreed not to exercise its call rights on June 30, 1997 and
the Partnership is currently negotiating the extensio of this note until
December 1, 2001.
Presented below is a summary of required principal payments on mortgage
loans payable. The note callable on June 30, 1997 is included in amounts
due currently.
1998 $ 932,664
1999 382,640
2000 417,147
2001 378,170
2002 and thereafter 4,566,810
---------
$ 6,677,431
=========
(5) Leases
The Partnership leases its property and equipment to tenants under
noncancelable operating leases. The lease terms range from 9 to 12 years
with options to renew for additional five-year terms and options to
purchase the leased property at the current fair market value at the end of
the initial lease term. The leases generally provide for contingent rentals
based on the performance of the property. Contingent rentals aggregated
$271,340, $192,325 and $165,042 in 1997, 1996 and 1995, respectively.
Minimum rentals for the next two years are $3,971,328 per year, subject to
change based on changes in interest rates. Minimum rentals are $3,761,262
and $2,858,619 for the years 2000 and 2001. There are no minimum rentals
thereafter. Property and improvements less accumulated depreciation
attributable to such rentals, amounted to $19,339,886 and $20,502,517 at
December 31, 1997 and 1996, respectively.
Four of the Partnership's properties are subject to a master lease with a
single operator, Rebound, Inc., a subsidiary of HealthSouth Corporation
(HealthSouth). This master lease, as amended, contains a nine-year renewal
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
option and provides for contingent rentals equal to 4% of the revenue
differential, as defined, effective January 30, 1997. As of December 31,
1997, no contingent rentals have been accrued on the master lease.
During 1994, HealthSouth closed the Partnership's Sandybrook facility. In
February 1997, HealthSouth closed the Cedarbrook facility. Despite these
closures, HealthSouth has continued making its full lease payments under
the terms of the master lease.
The following summary consolidated financial data was obtained from the
September 30, 1997 Form 10-Q and the December 31, 1996 Form 10-K of
HealthSouth:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
Cash $ 189,408 148,028
Accounts receivable, net 659,415 510,567
Property and equipment, net 1,659,300 1,390,873
Intangible assets, net 1,379,500 1,049,658
Other assets 362,148 272,826
---------- ---------
Total assets $ 4,249,771 3,371,952
========= =========
Long-term debt $ 1,882,466 1,450,620
Other liabilities 429,894 405,408
Stockholders' equity 1,937,411 1,515,924
--------- ---------
Total liabilities and stockholders' equity $ 4,249,771 3,371,952
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, Year ended
December 31
1997 1996 1995
---- ---- ----
(unaudited)
(in thousands)
<S> <C> <C> <C>
Net revenue $ 2,163,018 2,436,537 2,003,146
========= ========= =========
Net income $ 231,818 220,818 92,521
========= ========= =========
</TABLE>
(6) Related Party Transactions
--------------------------
Personnel working at the property sites and certain home office personnel
who perform services on behalf of HCP are employees of CSL. HCP reimburses
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
CSL for the salaries, related benefits, and overhead reimbursements of such
personnel. In addition, HCP pays fees to the general partner and affiliates
of the general partner. The approximate costs of these arrangements are
reflected below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C>
Salary and benefit reimbursements $ 3,173,000 1,859,000 2,256,000
========= ========= =========
Asset management fees $ 484,000 740,000 712,000
Property management fees 330,000 208,000 252,000
Administrative and other expenses 206,000 256,000 235,000
General partner management fees 90,000 72,000 80,000
--------- --------- ---------
$ 1,110,000 1,276,000 1,279,000
========= ========= =========
</TABLE>
In October 1997, HCP paid CRG a refinancing fee of $13,245.
In connection with the sale of Countryside in 1996, the general partner was
paid fees aggregating $66,000. In connection with the sale of Heritage
Manor in 1995, the general partner was paid fees aggregating $92,250.
As of December 31, 1997, Capital Senior Living Corporation, which is owned
by James A. Stroud (through a trust), Jeffrey L. Beck and Lawrence A.
Cohen, indirectly owned 56% of the limited partnership units of HCP. HCP is
included in the consolidated financial statements of Capital Senior Living
Corporation, a public company that files with the Securities and Exchange
Commission. In addition, the general partner of HCP, CRG, is beneficially
owned by Messrs. Beck and Stroud.
Mr. Beck is chairman of the board of a bank where the Partnership holds the
majority of its operating cash accounts.
(7) Other Income
------------
On November 3, 1997, CSLC sold all of its units of HCP to CSLP in
conjunction with the initial public offering of its parent company, Capital
Senior Living Corporation. In connection with the sale of its investment in
HCP, and in compliance with Section 16b of the Securities Exchange Act of
1934, CSLC subsequently paid to HCP $440,007 in gains recognized on
purchases of HCP units made within a six month period prior to the sale of
HCP units to CSLP. This gain is included in other income in the
accompanying 1997 consolidated statement of income.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
(8) Income Taxes
Reconciliation of financial statement basis partners' equity to federal
income tax basis partners' equity is as follows:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1997 1996 1995
<S> <C> <C> <C>
---- ---- ----
Total partners' equity - financial statement
basis $ 25,191,959 24,064,625 22,427,282
Current year tax basis net earnings
over (under) financial statement basis 321,264 (684,329) (2,942,675)
Cumulative tax basis net earnings over
financial statement basis 4,452,249 5,136,578 8,079,253
----------- ---------- ----------
Total partners' equity - federal income
tax basis $ 29,965,472 28,516,874 27,563,860
========== ========== ==========
</TABLE>
Because many types of transactions are susceptible to varying
interpretations under federal and state income tax laws and regulations,
the amounts reported above may be subject to change at a later date upon
final determination by the taxing authorities.
(9) Business and Credit Concentrations
----------------------------------
The Partnership's eight facilities are located in the southeastern United
States, Texas, Indiana and Massachusetts. The four facilities operated by
HealthSouth (note 5) are located in the southeastern United States and
accounted for approximately $2,367,000 (26%), $2,367,000 (31%) and
$2,367,000 (28%) of Partnership revenues in 1997, 1996 and 1995,
respectively. One property leased to an unaffiliated operator accounted for
approximately $998,000 (11%) and $1,024,000 (14%) of Partnership revenue in
1997 and 1996, respectively.
The Partnership also derives revenue from Medicaid programs funded by the
states of Michigan and Massachusetts. The Partnership derived 32% and 15%
of its revenues from the state program in Massachusetts in 1997 and 1996,
respectively. The Partnership derived 15% of its revenues from the Michigan
state program in 1995. The Partnership also derived 13% of its revenue from
the Medicare program in 1997.
Receivables due from state Medicaid programs aggregated $372,033 and
$438,350 at December 31, 1997 and 1996, respectively.
The Partnership does not require collateral or other security to support
financial instruments subject to credit risk.
(Continued)
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
(10) Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments presented below.
(a) Cash and Cash Equivalents, Receivables and Payables
---------------------------------------------------
The carrying amount approximates fair value because of the short
maturity of these instruments.
(b) Mortgage Loans Payable
----------------------
The fair value of the Partnership's mortgage loans payable is
calculated by discounting scheduled cash flows through maturity using
discount rates that are currently available to the Partnership on
other borrowings with similar risk and maturities. Issuance costs and
other expenses that would be incurred in an actual borrowing are not
reflected in this amount.
Carrying value Fair value
-------------- ----------
Mortgage loans payable $ 6,677,431 6,611,128
========= =========
(11) Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
Fiscal 1997 Quarters Fiscal 1996 Quarters
----------------------- ---------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,304,372 2,348,896 2,229,873 2,094,487 1,797,847 1,437,060 2,051,544 2,273,653
Income before
extraordinary item 348,820 259,236 286,026 558,252 39,064 546,684 53,695 45,208
Net income 348,820 259,236 286,026 558,252 39,064 1,499,376 53,695 45,208
Basic earnings per
limited partnership
unit .08 .06 .07 .13 .01 .36 .01 .01
</TABLE>
Quarterly operating results are not necessarily representative of
operations for a full year.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following Consolidated Financial Statements of
HealthCare Properties, L.P. and Subsidiaries are incorporated by
reference as set forth in PART II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Partnership Equity - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows- Years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable,
not required, or the information is included in the financial
statements or notes thereto.
(3) Exhibits
The list of exhibits is incorporated herein by reference to the
exhibit index on page 38 of this report
36
<PAGE>
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 on
its behalf of the undersigned, thereunto duly authorized.
HEALTHCARE PROPERTIES, L.P.
By: Capital Realty Group Senior Housing, Inc.,
General Partner
By: /s/ James A. Stroud
----------------------------------------
James A. Stroud
Chief Operating Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in capacities and on the dates indicated.
By: /s/ James A. Stroud
__________________________________ March 27, 1998
James A. Stroud
Chief Operating Officer and Director of General Partner
(Chief financial, and accounting officer)
By: /s/ Jeffrey L. Beck
__________________________________ March 27, 1998
Jeffrey L. Beck
Chief Executive Officer and Director of General Partner
37
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Page Nos. in
Exhibit Number This Filing
- -------------- ------------
<S> <C> <C>
3 Restated Limmited Partnership Agreement is incorporated N/A
by reference to Exhibit A to the Prospectus of Registrant
dated August 31, 1987, as filed with the Commission
pursuant to Rule 424(b).
10 Restructuring Agreement dated November 30, 1992, between N/A
Registrant and Rebound, Inc. with exhibits.
27* Financial Data Schedule (included only in Edgar filing) -
28 Partnership Management Agreement, dated July 29, 1992, N/A
with Capital Realty Group Properties, Inc. as filed with
the Commission in the Third Quarter 10-Q, dated September 20,
1992.
</TABLE>
*Filed herewith
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
38
<PAGE>
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, 1998
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 oganization) 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
----- -----
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
-----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 11,324,744 $ 10,722,118
Accounts receivable, less allowance for doubtful
accounts of $331,042 in 1998 and $301,042 in 1997 840,260 800,029
Prepaid Expenses and other 28,966 50,221
Property and improvements, net 20,250,759 20,823,913
Deferred charges, less accumulated amortization
of $926,627 in 1998 and $876,760 in 1997 362,267 405,572
---------------- ----------------
$ 32,806,996 $ 32,801,853
---------------- ----------------
---------------- ----------------
LIABILITIES AND PARTNERSHIP EQUITY
----------------------------------
Accounts payable and accrued expenses $ 672,126 $ 818,252
Operating facility accounts payable 159,090 114,211
Mortgage loans payable 6,399,999 6,677,431
---------------- ----------------
7,231,215 7,609,894
---------------- ----------------
Partnership equity:
Limited partners (4,148,325 and 4,172,457 units outstanding
in 1998 and 1997, respectively) 25,530,221 25,156,971
General partner 45,560 34,988
---------------- ----------------
25,575,781 25,191,959
---------------- ----------------
$ 32,806,996 $ 32,801,853
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to financial statements
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three months ended, Three months ended,
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenues:
Rental $ 1,063,469 $ 1,059,749
Net patient services 1,163,961 1,289,147
--------------- ---------------
2,227,430 2,348,896
--------------- ---------------
Expenses:
Facility operating expenses 1,147,288 1,121,592
Depreciation 326,579 340,960
Lease default expenses 0 10,037
Administrative and other 348,120 490,041
Bad debts 15,000 14,844
--------------- ---------------
1,836,987 1,977,474
--------------- ---------------
Income from operations 390,443 371,422
--------------- ---------------
Other income (expenses):
Interest income 126,705 85,886
Interest expenses (160,423) (171,222)
Amortization (26,384) (26,850)
--------------- ---------------
(60,102) (112,186)
--------------- ---------------
Net income $ 330,341 $ 259,236
--------------- ---------------
--------------- ---------------
NET INCOME PER UNIT $ .08 $ .06
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE
NUMBER OF UNITS 4,156,240 4,172,457
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to financial statements
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Six months ended, Six months ended,
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenues:
Rental $ 2,130,970 $ 2,157,973
Net patient services 2,148,881 2,495,295
--------------- ---------------
4,279,851 4,653,268
--------------- ---------------
Expenses:
Facility operating expenses 2,255,645 2,256,544
Depreciation 651,943 681,920
Lease default expenses 0 14,687
Administrative and other 678,043 830,111
Bad debts 30,000 28,061
--------------- ---------------
3,615,631 3,811,323
--------------- ---------------
Income from operations 664,220 841,945
--------------- ---------------
Other income (expenses):
Interest income 240,149 163,635
Interest expenses (323,390) (343,823)
Amortization (52,366) (53,701)
--------------- ---------------
(135,607) (233,889)
--------------- ---------------
Net income $ 528,613 $ 608,056
--------------- ---------------
--------------- ---------------
NET INCOME PER UNIT $ .13 $ .15
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE
NUMBER OF UNITS 4,156,240 4,172,457
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to financial statements
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF PARTNERSHIP EQUITY
---------------------------------------------
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
Allocation of Net Income 98% 2% 100%
--- -- ----
--- -- ----
EQUITY at
December 31, 1997 $ 25,156,971 $ 34,988 $ 25,191,959
Net Income 194,307 3,965 198,272
Repurchased Limited Partner Units (125,529) 0 (125,529)
-------------- ------------ --------------
EQUITY at
March 31, 1998 $ 25,225,749 $ 38,953 $ 25,264,702
Net Income 323,734 6,607 330,341
Repurchased Limited Partner Units (19,262) 0 (19,262)
-------------- ------------ --------------
EQUITY at
June 30, 1998 $ 25,530,221 $ 45,560 $ 25,575,781
-------------- ------------ --------------
-------------- ------------ --------------
</TABLE>
See notes to financial statements
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 528,613 $ 608,056
Adjustments to reconcile net income to
net cash provided by operating activities:
Bad debts 30,000 28,061
Depreciation and amortization 704,309 735,621
Changes in assets and liabilities:
Accounts receivable (70,230) (181,164)
Prepaid expenses 21,255 12,572
Accounts payable &
accrued expenses (101,247) (351,158)
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,112,700 851,988
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and improvement (78,789) (38,409)
------------- -------------
NET CASH USED IN
INVESTING ACTIVITIES (78,789) (38,409)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage loans payable (277,432) (260,991)
Repurchased limited partner units (144,791) 0
Increase in deferred charges (9,062) 0
------------- -------------
NET CASH USED IN
FINANCING ACTIVITIES (431,285) (260,991)
------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 602,626 552,588
CASH AND CASH EQUIVALENTS
Beginning of Period 10,722,118 8,995,455
------------- -------------
CASH AND CASH EQUIVALENTS
End of Period $ 11,324,744 $ 9,548,043
------------- -------------
------------- -------------
CASH PAID FOR INTEREST $ 323,390 $ 343,823
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
<PAGE>
HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six months ended
-----------------------------------------------------------
June 30, 1998 AND 1997
(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 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, 1998. The 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, 1997.
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), 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
financial statements. Reimbursements and fees paid to CRGSH and CSL are as
follows:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Salary and benefit reimbursements $ 1,532,161 $ 1,579,494
Administrative reimbursements 64,579 85,694
Asset management fees 275,567 222,289
Property management fees 150,072 169,558
General partner management fees 42,749 45,802
-------------- --------------
$ 2,065,128 $ 2,102,837
-------------- --------------
-------------- --------------
</TABLE>
Currently, Capital Senior Living Properties, Inc., formerly an
affiliate of CRGSH, holds approximately 56% 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. Capital Senior Living Corporation also holds an option to
purchase the stock of CRGSH at fair market value.
On June 10, 1998, the sole owner of the General Partner, Capital 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 10% per annum. The interest will accrue on the Promissory Note and be payable
at the maturity of the Promissory Note. Associates is the make 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.
<PAGE>
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 and is material, then a write-down to fair value is recorded.
The Registrant performs such evaluations on an on-going basis. During the six
months ended June 30, 1998, based on the Registrant's evaluation of the
properties, the Registrant did not record any additional write-down was
warranted.
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 June 30, 1998, four of
the original twelve properties had either been sold or deeded back to the
lender, leaving the Registrant with four properties secured by debt and four
properties unleveraged. With the exception of the Cambridge facility, which has
no long-term net lease, the initial term of the seven properties with long-term
net leases are due to expire in the years 2000 and 2001.
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 June 30, 1998, Registrant had cash and cash equivalents
aggregating $11,324,744. 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 lease, such action would require
additional investment in working capital for operating reserves, capital
expenditures and related debt payments. As a consequence of prior defaults,
Registrant suspended cash distributions on July 1, 1991, pending successful
resolution of the various problems within its portfolio. Due to the uncertainty
of the timing and conditions under which the Liquidity Reserve (which was
suspended in March of 1991) might be reactivated, on August 15, 1991, Registrant
ceased accepting additional liquidation requests. As required by the Partnership
Agreement for Limited Partners to be paid their portion for federal income
taxes, $250,000 and $325,000 in cash distributions were made in June 1993 and
July 1997, respectively. Future cash distributions will be dependent upon
improved operational income and successful refinancing on certain Registrant
mortgages. The Units are not publicly traded and as a result the liquidity of
each Limited Partner's individual investment is limited. For the six months
ended June 30, 1998, the Registrant has repurchased 24,132 limited partner units
for a total amount of $144,791.
<PAGE>
Results of Operations
- ---------------------
Discussion of Six Months Ending June 30, 1998
---------------------------------------------
Rental revenues for the six months ended June 30, 1998, decreased
$27,003 from the comparable six months ended June 30, 1997, due to decreased
revenue participation from leased facilities. Net patient services for the six
months ended June 30, 1998, decreased $346,414 from the six months ended June
30, 1997, and was primarily due to a 1997 Medicare charge of $108,423 and
decreased ancillary revenues from the Cambridge facility. Interest income for
the six months ended June 30, 1998 increased $76,514 from the six months ended
June 30, 1997 and was primarily due to increasing cash available for investment.
Facility operating expenses for the six months ended June 30, 1998
slightly decreased by $899 from the comparable 1997 period. Depreciation for the
six months ended June 30, 1998, decreased $29,977 from the comparable 1997
period. Lease default expense decreased $14,687 for the six months ended June
30, 1998 from the comparable 1997 period due to decreasing legal fees incurred
on the resolution of defaulted leases. Administrative expenses, including fees
to the General Partner, decreased $152,068 for the six months ended June 30,
1998 in comparison to 1997 and is primarily due to decreased professional fees.
Bad debt expense for the six months ended June 30, 1998 slightly increased
$1,939 from the comparable 1997 period. Interest expense and amortization for
the six months ended June 30, 1998 decreased by $20,433 and $1,335,
respectively, from the comparable 1997 period.
For the three months ended June 30, 1998 as compared with the three
months ended June 30, 1997, the Partnership's revenue was impacted by the same
shifts of revenue as discussed above with the exception of an increase of $3,720
in rental revenue for the three months ended June 30, 1998 from the comparable
1997 period. Similarly, a comparison of second quarter 1998 operating expenses
versus second quarter 1997 reflects the same variances as discussed above with
the exception of an increase of $25,696 in facility operating expenses for the
three months ended June 30, 1998 from the comparable 1997 period.
Cash and cash equivalents as of June 30, 1998 increased $602,626 over
the balance at December 31, 1997. Cash increased by $50,038 for the six months
ending June 30, 1998 in comparison to 1997 is primarily due to improved
operating cash flow. Net accounts receivable of $840,260 at June 30, 1998
reflected an increase of $40,231 over 1997 year-end balances and is due to
delayed collection of Medicaid and Medicare claims from the Cambridge facility.
Accounts payable, accrued expenses, and facility accounts payable balances
decreased $101,247 at June 30, 1998, from December 31, 1997 and is primarily due
to the decrease in accrued Medicare liabilities on the Cambridge facility.
The following is a brief discussion of the status of Registrant's
properties:
Cedarbrook, Cane Creek, Crenshaw Creek and Sandy Brook facilities. Rebound,
Inc. (a subsidiary of HealthSouth Corporation) leases the Cedarbrook, Cane
Creek, Crenshaw Creek and Sandy Brook properties pursuant to a master lease with
the Registrant.
Due to low occupancy of the Sandybrook facility, it was closed in 1994
and at this time the lessee has not provided any information on when it might
reopen. Rental payments in March and April 1995 were discontinued by HealthSouth
causing an interruption in the master lease. Registrant met with HealthSouth and
those payments were subsequently made in the second quarter of 1995. Subsequent
to that time period, all payments have been made on a timely basis. In February
1997, the Registrant was notified by HealthSouth of the closing of the
Cedarbrook facility due to the low occupancy. At this time, the Registrant
cannot determine when this facility might reopen. HealthSouth has continued to
make lease payments on a timely basis.
Two recourse loans, Cedarbrook and Cane Creek, were due in January 1996
in the aggregate amount of approximately $2,400,000. Both of these notes were
callable by the lenders at any time between January 1, 1993 and November 30,
1995; however, the lenders agreed not to exercise their call rights prior to
maturity on January 31, 1996 as long as the Partnership remained in compliance
with the loan agreements. One of the lenders agreed to extend the
<PAGE>
maturity date of its note to December 1, 2001, pending completion of final loan
documents. On March 21, 1997, the other lender agreed not to exercise its call
rights until June 30, 1997. The Partnership is currently negotiating the
extension of this note until December 1, 2001.
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.
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 facility
from the jurisdiction of the United States Bankruptcy Court. A Registrant's
subsidiary now operates this property.
Trinity Hills, McCurdy, and Hearthstone facilities. The Registrant's
other facility lessees are all current in their lease obligations to the
Registrant. In addition, the Registrant believes it likely that two of these
lessees will pay additional rental amounts to the Registrant during future years
based upon increased revenues at those facilities. However, there can be no
assurance of such increased revenue. Two of these facilities appear to be
generating cash flow sufficient to fund their lease obligations, but Trinity
Hills is, at this time, not generating sufficient cash flow to fund its lease
obligations from property operations. However, the lessee at Trinity Hills
continues to fund the deficits and its lease payments.
Year 2000 Issue
- ---------------
The Partnership has developed a plan to modify its information
technology to be ready for the year 2000. The Partnership relies upon PC-based
systems and does not expect to incur material costs to transition to Year 2000
compliant systems in its internal operations. The Partnership does not expect
this project to have a significant effect on operations. The Partnership will
continue to implement systems and all new investments are expected to be with
Year 2000 compliant software.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
***********JAS-McCurdy lawsuit*******
Registrant was previously engaged in litigation in an attempt to
recover damages from defaulting lessees and their guarantors. Such actions
involve claims against a prior operator of the Diablo/Tamarack facility.
Registrant settled with the alleged defaulting guarantor of this facility for
$60,000 plus 10% interest - payable in installments of $10,000 per year plus
interest over five years.
On June 17, 1998, Registrant filed a lawsuit in Dallas County against
the lessee of the McCurdy facility. The complaint seeks a declaratory judgement
affirming that the lessee of the McCurdy facility cannot exercise its option to
purchase the McCurdy facility until the end of its term in October 2001. The
lessee had asserted its right to exercise this option immediately (subject to a
final determination of value). The lessee has currently sought to dismiss this
action based on jurisdictional grounds.
<PAGE>
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
--------------------------------
None.
<PAGE>
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:
-------------------
Robert Langford
President
Date: August 13, 1998
