10-K 1 form10k-2002.txt 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, 2002, 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 0-16815 ------- NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 52-1453513 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240 ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 770-5600 -------------- Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Assignee Interests -------------------------------------- (Title of Class) 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 twelve 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 (Section 229.405 of this Chapter) 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. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The Registrant's outstanding securities consist of assignee interests in 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 ---- Page 1 of 33 Exhibit Index: Page 32 1 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP 2002 FORM 10-K TABLE OF CONTENTS
PART I Page Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for the Registrant's Pension Notes and Limited Partnership Assignee Interests and Related Partnership Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A. Qualitative and Quantitative Disclosure About Market Risk 10 Item 8. Financial Statements and Supplementary Data 10 PART III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 Item 10. Directors and Executive Officers of the Registrant 29 Item 11. Executive Compensation 30 Item 12. Security Ownership of Certain Beneficial Owners and Management 30 Item 13. Certain Relationships and Related Transactions 31 Item 14. Controls and Procedures 31 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
2 PART I ITEM 1. BUSINESS NHP Retirement Housing Partners I Limited Partnership (the Partnership), a Delaware limited partnership, was formed under the Delaware Revised Uniform Limited Partnership Act as of March 10, 1986. On September 23, 1986, the Partnership commenced offering 25,000 Assignee Interests and 50,000 Pension Notes, both at a price of $1,000 per unit (the Offering). The Partnership subsequently exercised its right to increase the offering to 75,000 Assignee Interests and 100,000 Pension Notes. The offering was managed by NHP Real Estate Securities, Inc. and was terminated on September 22, 1987, with subscriptions for 42,711 Assignee Interests and 42,697 Pension Notes. The Assignee Interests were sold to taxable individuals or entities and represent assignments of limited partnership interests in the Partnership issued to NHP RHP-I Assignor Corporation (Assignor Corporation), a Delaware corporation, the assignor and sole limited partner. Pension Notes were sold to qualified profit-sharing, pension and other retirement trusts, bank commingled trust funds for such trusts, Keogh Plans and IRAs, government pension and retirement trusts, and other entities intended to be exempt from Federal taxation. The Pension Notes are obligations of the Partnership issued under a Trust Indenture between the Partnership and The National Bank of Washington (NBW), Washington, D.C., as Trustee, and have a preference over the Assignee Interests with respect to payment. In August 1990, Riggs National Bank, Washington, D.C., which became the successor trustee, purchased the assets of NBW. In November 1996, Riggs National Bank transferred its trust operations to the Bank of New York, New York City, which claims to be the successor trustee. The original General Partner of the Partnership was NHP/RHGP-I Limited Partnership (NHP/RHGP-I), a Delaware limited partnership, and NHP/RHGP-I held a 2 percent interest as General Partner in the Partnership. On December 19, 1991, NHP/RHGP-I executed an amended and restated purchase agreement with Capital Realty Group Properties, Inc. (CRG), a Texas corporation, for the transfer of its General Partner interests in the Partnership. CRG assigned its rights under this purchase agreement to an affiliate, Capital Realty Group Senior Housing, Inc. (CRGSH), a Texas corporation. Effective January 1, 1992, CRGSH was selected by NHP/RHGP-I to manage the five properties of the Partnership. Effective June 1, 1993, the Partnership entered into a Partnership Management Agreement with CRGSH to provide administrative services on behalf of the Partnership. This Partnership management agreement was terminated effective upon CRGSH becoming the substitute General Partner. The substitution of CRGSH as sole General Partner of the Partnership required the consent of 50 percent or more of the outstanding Assignee Interests, which had been issued by the Partnership and assigned by Assignor Corporation to the Assignee Holders. Under the Partnership Agreement, holders of the Pension Notes were not entitled to vote. Pursuant to a Consent Solicitation dated October 25, 1994, Assignee Holders holding more than 64 percent of the equity interests in the Partnership approved the election of CRGSH as the replacement General Partner of the Partnership. Effective January 23, 1995, CRGSH became the new sole General Partner of the Partnership. CRGSH was a wholly owned subsidiary of 3 Capital Realty Group Corporation, a Texas corporation (Capital). Capital is owned by James A. Stroud (50 percent through a trust) and Jeffrey L. Beck (50 percent). CRGSH assigned its contract rights to manage the Partnership properties to Capital Senior Living, Inc. (CSL), a subsidiary of Capital Senior Living Corporation (CSLC), effective February 1, 1996. On June 10, 1998, Capital 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 8 percent per annum since December 1, 1999. Prior to December 1, 1999, the Promissory Note had an interest rate of 10 percent per annum; the interest rate was decreased to adjust to a market rate and in consideration of an early, unscheduled payment of interest due. As of December 31, 2002, the interest on this note has been paid and the unpaid balance on this note is $717,938. Associates is the maker of the Note and Capital 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. From 1988 to 1997, Mr. Lankford was an independent broker with Capital Realty Group Brokerage, Inc., an affiliate of Capital. From 1997 to the present, however, Mr. Lankford has been a principal with Kamco Property Company Commercial Real Estate Brokerage. In this capacity, Mr. Lankford provides independent commercial real estate brokerage services for various clients including CSLC, which accounts for less than 20 percent of his compensation. The address of the principal executive offices of CRGSH is 3516 Merrell Road, Dallas, Texas 75229. Until 2001, the Partnership's business was to operate residential rental properties for retirement age occupants (the Properties). During 2001, the Partnership owned a 99.99 percent partnership interest in one property. The property was sold on December 31, 2001. See Item 2, Properties, for a description of this property. The Partnership is in the process of liquidating its other assets and receivables, pending continuing litigation. See Item 3, Legal Proceedings. The Partnership did not have any employees as of December 31, 2002. Dissolution of Partnership On February 12, 2001, due to the pending maturity of the Pension Notes at December 31, 2001 and to obtain maximum value through an organized disposition of Partnership assets, the General Partner notified the Pension Note holders and Assignee Interest holders of its intent to dissolve the Partnership effective May 21, 2001 and liquidate its remaining property, the Amberleigh. On December 31, 2001, the Partnership sold the Amberleigh to an unaffiliated entity for $20,000,000. The Partnership received two $1,000,000 promissory notes, each payable within 12 months from the date of sale, one Note subject to the purchaser obtaining certain levels of financing proceeds and the other note subject to the property achieving certain levels of operating income. The Partnership did not satisfy the requirements for payment under these promissory notes, and therefore the Partnership will not receive any proceeds from these notes. The balance of the sale proceeds net of settlement costs and other direct costs associated with the sale was paid in cash, resulting in net sale proceeds of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale in 2001. On December 31, 2001, the principal on the Pension Notes and deferred interest of approximately $35,504,000 matured. 4 Relating to the sale of the Amberleigh on December 31, 2001, the Partnership paid $9,538,066 for a partial redemption of Notes, and paid $7,461,934 for a partial payment of deferred interest, effective February 28, 2002. Cash funds were not sufficient at February 28, 2002 to fully repay the outstanding principal balance of $18,991,176 in Notes and deferred interest. Since available cash after payment of Partnership expenses and potential collection of the Amberleigh promissory notes was insufficient to repay the outstanding Pension Notes and deferred interest, the unpaid debt related to the Pension Notes has been treated as forgiven for book purposes and resulted in $18,991,176 of extraordinary income for the year ended 2002. For tax purposes, any extraordinary income relating to the forgiveness of unpaid debt and deferred interest will be recognized in the year the Pension Notes are deemed cancelled, which has not yet occurred. Upon final liquidation of the Partnership's cash reserves, to the extent any funds are in excess of liabilities, those funds will be distributed to the Pension Note holders. ITEM 2. PROPERTIES On December 31, 2001, the Partnership sold its remaining property, the Amberleigh, to an unaffiliated entity for $20,000,000. The Partnership received two $1,000,000 promissory notes, payable within 12 months from the date of sale, subject to the purchaser obtaining certain levels of financing proceeds and the property achieving certain levels of operating income. The Partnership did not satisfy the requirements for payment under these notes, and therefore the Partnership will not receive any proceeds from these notes. The balance of the sale proceeds was paid in cash, resulting in net sale proceeds of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale. 5 ITEM 3. LEGAL PROCEEDINGS On September 17, 2002, William Bren filed a putative class action complaint on behalf of certain holders of Pension Notes of the Partnership in the Delaware Court of Chancery, C.A. No. 19902 (the "Bren Action"), against the Partnership and the General Partner. The complaint in the Bren Action, which was amended on December 3, 2002, alleges that the General Partner breached its fiduciary duty by failing to initiate a lawsuit against, among others, the former General Partner and its principals in connection with the sale of four properties by the Partnership in September 1998; failed to disclose material information and promised to make certain distributions when it solicited consents from the Pension Note holders in 2001 to facilitate the sale of the Partnership's fifth property, the Amberleigh, which sale occurred in December 2001; and failed to disclose material information in connection with obtaining releases from the Pension Note holders in 2002. The Bren Action also seeks a judgment against the Partnership for failing to pay the full amount of the principal and interest owed on the Pension Notes on December 21, 2001, the maturity date of the Pension Notes. On February 10, 2003, the defendants moved to dismiss the amended complaint in the Bren Action or, alternatively, for summary judgment. Briefing has been completed on this motion and the matter is expected to be submitted to the Court shortly for decision. Previously, on October 15, 2002, plaintiff filed a motion for class certification, which plaintiff is pursuing at the present time. The Partnership believes the allegations asserted in the Bren Action are without merit and intends to defend against these claims. The Partnership is unable at the time to estimate liability, if any, related to this claim. The Partnership has made previous disclosures concerning an action filed by Robert Lewis on October 23, 1998, in the Delaware Court of Chancery, Civil Action No. 16725 (the "Lewis Action"), on behalf of a putative class of holders of Assignee Interest against the Partnership, the General Partner, Capital Senior Living Corporation and Capital Senior Living Properties 2 NHPCT, Inc. The Lewis Action has been settled. On October 18, 2002, the Delaware Court of Chancery entered a Final Order and Judgment approving a settlement of the Lewis Action which included the creation of a settlement fund in the amount of $840,000. The Partnership contributed $250,000 to this settlement fund, the amount of the deductible under its director and officers' liability policy, and virtually all of the balance of the settlement fund was contributed by various insurance brokers and agents, and their insurers. In accordance with the settlement, approximately $590,000 (the amount of the settlement fund minus an award of attorney's fees and expenses approved by the Court) has been distributed to the members of the class certified by the Court. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S PENSION NOTES AND LIMITED PARTNERSHIP ASSIGNEE INTERESTS AND RELATED PARTNERSHIP MATTERS a. Assignee Interests and Pension Notes were sold through a public offering managed by NHP Real Estate Securities, Inc. There is not currently, and it is not anticipated that there will be, any established public trading market for resale of Assignee Interests or Pension Notes. Accordingly, an investor may be unable to sell or otherwise dispose of his interest in the Partnership. As of March 1, 2003, there were 2,266 registered holders of Assignee Interests and 3,104 registered holders of Pension Notes. As of March 1, 2003, Capital Senior Living Properties, Inc., a wholly owned subsidiary of Capital Senior Living Corporation, owned approximately 14,131 Pension Notes, or approximately 33 percent of the Partnership's outstanding Pension Notes. Each Pension Note bears stated interest in an amount equal to 13 percent per annum, 9 percent of which was subject to deferral through December 31, 1988 and 6 percent of which is subject to deferral thereafter. Interest is payable quarterly. Quarterly distributions of Cash Available for Distribution (as defined in the Partnership Agreement) are payable to Assignee Interest holders within 60 days after the end of each three-month period, subject to the General Partner's right to restrict or suspend such distributions, if the General Partner, in its absolute discretion, determines that such restriction or suspension is in the best interests of the Partnership. For each of the years ended December 31, 2001 and 2000, interest paid to the Pension Note holders as a group totaled $4,411,805 and $1,416,337, respectively, per year. During 2001, an additional $3,000,000 was paid for deferred interest not scheduled to become due until December 31, 2001. Relating to the sale of The Amberleigh on December 31, 2001, the Partnership paid $9,538,066 for a partial redemption of Pension Notes, and paid $7,461,934 for a partial redemption of deferred interest, effective February 28, 2002. No cash distributions were paid to the Assignee Interest holders during 2002, 2001 or 2000. As presented in the Statement of Cash Flows (as stated below), cash and cash equivalents (decreased) increased $(18,056,716), $12,625,072, and $(60,769) for the years ended December 31, 2002, 2001 and 2000, respectively. Future cash requirements have caused the General Partner to determine that it is not financially appropriate to make distributions to Assignee Interest holders. b. Not applicable. 7 ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Revenue $ 13,223 $ 5,406,768 $ 5,274,800 $ 5,322,600 $ 13,746,088 ============= ============= ============= ============= ============ Net Income (Loss) $ 17,888,053 $ (3,988,526) $ (2,473,796) $ (2,474,347) $ 3,409,569 ============= ============= ============= ============= ============ Net Income (Loss) per Assignee Interest $ 419 $ (94) $ (58) $ (57) $ 61 ============= ============= ============= ============= ============ Total assets $ 396,807 $ 18,464,086 $ 23,753,479 $ 24,333,572 $ 25,262,800 ============= ============= ============= ============= ============ Long-term obligations, Pension Notes, and related interest payable $ - $ 35,504,347 $ 36,938,253 $ 35,036,889 $ 33,300,689 ============= ============= ============= ============= ============ Cash distributions per Assignee Interest $ 0 $ 0 $ 0 $ 0 $ 0 ============= ============= ============= ============= ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (Loss) income from rental operations decreased to $(73,155) from $1,295,341 and $1,350,158 for the years ended December 31, 2002, 2001, and 2000, respectively. Rental revenues decreased in 2002 to $13,223 from $5,406,768 in 2001 due to the sale of the Amberleigh on December 31, 2001. Rental expenses decreased to $86,378 in 2002 from $4,111,427 in 2001 due to the sale of the Amberleigh on December 31, 2001. Interest expense decreased to $423,591 in 2002 from $2,977,899 in 2001 due to the forgiveness of debt recognized for book purposes at February 28, 2002. Amortization of Pension Note issuance costs was $0 for 2002 having been fully amortized in 2001. Other expenses decreased to $606,377 in 2002 from $695,280 in 2001 due to a decrease in professional fees. Due to the forgiveness of debt recognized for book purposes at February 28, 2002, the Partnership recognized $18,991,176 in extraordinary income in 2002. Rental revenue increased in 2001 to $5,406,768 from $5,274,800 in 2000 due to increased occupancies at the Property. Rental expenses increased to $4,111,427 in 2001 from $3,924,642 in 2000 due to increased salary and related benefit costs and costs attributable to inflation. Due to the sale of the property on December 31, 2001, the Partnership recognized a loss on sale of $1,491,679. Interest expense decreased to $2,977,899 in 2001 from $3,317,701 in 2000 due to a change of interest calculation from the effective interest rate to the stated interest rate. Other expense increased to $695,280 in 2001 from $387,249 in 2000 primarily due to a $250,000 accrual for a lawsuit settlement provision. The Partnership's net income (loss) was $17,888,053, $(3,988,526), and $(2,473,796) for the years ended December 31, 2002, 2001 and 2000, respectively. 8 Liquidity and Capital Resources Net cash used by operating activities during 2002 was $8,518,650, representing a increase over 2001 net cash used by operating activities of $3,169,181. This increase was primarily due to $7,461,934 of interest paid to Pension Note holders on February 28, 2002. Rent collections decreased to $21,646 in 2002 from $5,222,146 in 2001, due to the sale of the Amberleigh on December 31, 2001. Operating expenses paid decreased to $1,090,387 in 2002 from $4,103,892 in 2001 due to the sale of the Amberleigh on December 31, 2001. Net cash used by operating activities during 2001 was $3,169,181, representing a decrease over 2000 net cash provided by operating activities of $126,945. This decrease was primarily due to an additional $3,000,000 payment for deferred interest not scheduled to become due until December 31, 2001. Rent collections increased to $5,222,146 in 2001 from $4,985,113 in 2000, primarily due to increased occupancies at the Property. Operating expenses paid increased to $4,103,892 in 2001 from $3,721,034 in 2000 primarily due to increased costs paid for salary and related benefits and other costs attributable to inflation. Interest paid was $7,461,934 in 2002, $4,411,805 in 2001, and $1,416,337 in 2000. For the year ended 2000, cash generated from rental operations was sufficient to pay the base interest amount on the outstanding Pension Notes of $1,416,337. However, cash generated from rental operations during 2002 and 2001 was insufficient to pay the interest amount of $7,461,934 and $4,411,805, respectively. During 2001, an additional $3,000,000 was paid for deferred interest not scheduled to become due until December 31, 2001. Interest payments on the Pension Notes were accrued at a 13 percent rate, but were paid based on a 7 percent pay rate in 2001 and 2000. The remaining 6 percent unpaid portion for these years as well as amounts deferred in prior years in accordance with the terms of the Pension Notes were accrued and became due at maturity, December 31, 2001. Relating to the sale of The Amberleigh on December 31, 2001, the Partnership paid $9,538,066 for a partial redemption of Pension Notes, and paid $7,461,934 for a partial redemption of deferred interest, effective February 28, 2002. Cash funds were not sufficient at February 28, 2002 to fully repay the outstanding balance of $18,927,938 in Pension Notes and deferred interest. Since available cash after payment of Partnership expenses and potential collection of the Amberleigh promissory notes was insufficient to repay the outstanding Pension Notes and deferred interest, the unpaid debt related to the Pension Notes has been treated for book purposes as forgiven and resulted in $18,991,176 of extraordinary income for the year ended 2002. For tax purposes any extraordinary income relating to the forgiveness of unpaid debt and deferred interest will be recognized in the year the Pension Notes are deemed cancelled, which has not yet occurred. Upon final liquidation of the Partnership's cash reserves, to the extent any funds are in excess of liabilities, those funds will be distributed to Pension Note holders. Cash and cash equivalents at December 31, 2002 amounted to $60,944 as compared to $18,117,660 at December 31, 2001. 9 Dissolution of Partnership On February 12, 2001, due to the pending maturity of the Notes at December 31, 2001 and to obtain maximum value through an organized disposition of Partnership assets, the General Partner notified the Pension Note holders and Assignee Interest holders of its intent to dissolve the Partnership effective May 21, 2001 and liquidate its remaining property, the Amberleigh. On December 31, 2001, the Partnership sold the Amberleigh to an unaffiliated entity for $20,000,000. The Partnership received two $1,000,000 promissory notes, each payable within 12 months from the date of sale, one note subject to the purchaser obtaining certain levels of financing proceeds and the other note subject to property achieving certain levels of operating income. The Partnership did not satisfy the requirements for payment under these promissory notes, and therefore the Partnership will not receive any proceeds from these notes. The balance of the sale proceeds net of settlement costs and other direct costs associated with the sale was paid in cash, resulting in net sale proceeds of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale. On December 31, 2001, the principal on the Pension Notes and deferred interest of approximately $35,504,000 matured. Relating to the sale of the Amberleigh on December 31, 2001, the Partnership paid $9,538,066 for a partial redemption of Pension Notes, and paid $7,461,934 for a partial payment of deferred interest, effective February 28, 2002. Cash funds were not sufficient at February 28, 2002 to fully repay the outstanding principal balance of $18,991,176 in Pension Notes and deferred interest. Since available cash after payment of Partnership expenses and potential collection of the Amberleigh promissory notes was insufficient to repay the outstanding Pension Notes and deferred interest, the unpaid debt related to the Pension Notes has been treated for book purposes as forgiven and resulted in $18,991,176 of extraordinary income for the year ended 2002. For tax purposes, any extraordinary income relating to the forgiveness of unpaid debt and deferred interest will be recognized in the year the Pension Notes are deemed cancelled, which has not yet occurred. Upon final liquidation of the Partnership's cash reserves, to the extent any funds are in excess of liabilities, those funds will be distributed to the Pension Note holders. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Partnership's primary market risk exposure is from fluctuations in interest rates and the effects of those fluctuations on the market values of its cash equivalent short-term investments. The cash equivalent short-term investments consist primarily of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Partnership are included on pages 11 through 28 of this report. 10 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Partners NHP Retirement Housing Partners I Limited Partnership We have audited the accompanying statement of net assets (liabilities) in liquidation of NHP Retirement Housing Partners I Limited Partnership as of December 31, 2002 and 2001 and the related statement of changes in net assets (liabilities) in liquidation for the year ended December 31, 2002, and the related statements of operations, partners' equity (deficit), and cash flows for the year ended December 31, 2002 (liquidation basis) and the related statements of operations, partner's capital, and cash flows for each of the two years in the period ended December 31, 2001 (going concern basis). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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. As described in Note 1 to the financial statements, the partners of NHP Retirement Housing Partners I Limited Partnership approved a plan of liquidation on May 21, 2001, and the Partnership commenced liquidation shortly after the sale of its remaining property on December 31, 2001. As a result, the Partnership has changed its basis of accounting on December 31, 2001, and for periods subsequent thereto from the going-concern basis to a liquidation basis. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets (liabilities) in liquidation of NHP Retirement Housing Partners I Limited Partnership as of December 31, 2002 and 2001, the changes in net assets (liabilities) in liquidation for the year ended December 31, 2002, and the results of its operations and its cash flows for year ended December 31, 2002 (liquidation basis) and the related statements of operations, partner's capital, and cash flows for each of the two years in the period ended December 31, 2001 (going concern basis) in conformity with accounting principles generally accepted in the United States applied on the basis described in the preceding paragraph. Ernst & Young LLP Dallas, Texas February 14, 2003 11 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARNERSHIP STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION (LIQUIDATION BASIS)
December 31, 2002 2001 ---- ---- ASSETS (Notes 1 and 6) Cash and cash equivalents (Note 2) $ 60,944 $ 18,117,660 Receivables 75,978 96,426 Prepaid Expenses 7,187 - Other assets 252,698 250,000 ---------------- ----------------- Total assets 396,807 18,464,086 LIABILITIES Accounts payable - 185,374 Interest payable (Notes 1 and 6) - 15,346,521 Pension notes (Notes 1 and 6) - 20,157,826 Other liabilities 264,477 530,088 ---------------- ----------------- Total liabilities 264,477 36,219,809 ---------------- ----------------- Contingencies (Note 12) Net assets (liabilities) in liquidation $ 132,330 $ (17,755,723) ================ =================
See notes to financial statements 12 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP Statement of Changes in Net Assets (Liabilities) in Liquidation (LIQUIDATION BASIS) For the Year Ended December 31, 2002 Net liabilities in liquidation at January 1, 2002 $ (17,755,723) Net Income 17,888,053 Net assets in liquidation at December 31, 2002 $ 132,330 See Notes to Financial Statements 13 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (Liquidation (Going Concern (Going Concern Basis) Basis) Basis) REVENUES Rental income $ 1,198 $ 5,282,398 $ 4,995,597 Interest income 4,705 90,783 216,442 Other income 7,320 33,587 62,761 -------------- -------------- -------------- 13,223 5,406,768 5,274,800 -------------- -------------- -------------- COSTS AND EXPENSES Salaries, related benefits and overhead reimbursements (Note 3) - 1,173,466 1,080,206 Management fees, dietary fees and other services (Note 3) - 483,078 460,444 Administrative and marketing 73,879 242,272 235,967 Utilities - 297,709 286,361 Maintenance - 173,400 181,526 Resident services, other than salaries - 38,860 38,661 Food services, other than salaries - 564,067 533,939 Depreciation - 593,240 582,861 Taxes and insurance 12,499 545,335 524,677 -------------- -------------- -------------- 86,378 4,111,427 3,924,642 -------------- -------------- -------------- (LOSS) INCOME FROM RENTAL OPERATIONS (73,155) 1,295,341 1,350,158 -------------- -------------- -------------- OTHER EXPENSES Loss on sale (Note 4) - 1,491,679 - Interest expense - Pension Notes (Note 6) 423,591 2,977,899 3,317,701 Amortization of Pension Notes issuance costs - 119,009 119,004 Other expenses 606,377 695,280 387,249 -------------- -------------- -------------- 1,029,968 5,283,867 3,823,954 -------------- -------------- -------------- NET LOSS BEFORE EXTRAORDINARY INCOME $ (1,103,123) (3,988,526) (2,473,796) Extraordinary income-debt forgiveness 18,991,176 - - -------------- -------------- -------------- NET INCOME (LOSS) $ 17,888,053 $ (3,988,526) $ (2,473,796) -------------- -------------- -------------- ALLOCATION OF NET INCOME (LOSS) General Partner $ 357,761 $ (64,854) $ (49,476) Assignor Limited Partner 17,530,292 (3,923,672) (2,424,320) -------------- -------------- -------------- $ 17,888,053 $ (3,988,526) $ (2,473,796) -------------- -------------- -------------- NET INCOME (LOSS) PER ASSIGNEE INTEREST: Net loss before extraordinary income $ (26) $ (94) $ (58) Extraordinary income 445 - 445 -------------- -------------- -------------- Net income (loss) $ 419 $ (94) $ (58) ============== ============== ============== Weighted average number of outstanding Assignee Interests 41,888 41,888 42,120 ============== ============== ==============
See Notes to Financial Statements 14 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Assignee General Limited Partner Partners Total ------- -------- ----- Partners' deficit at January 1, 2000 $ (928,115) $ (10,246,734) $ (11,174,849) Distributions (28,875) - (28,875) Repurchase of 571 assignee units subsequently cancelled - (571) (571) Net Loss (49,476) (2,424,320) (2,473,796) -------------- -------------- -------------- Partner's deficit at December 31, 2000 (1,006,466) (12,671,625) (13,678,091) Distributions (88,797) - (88,797) Repurchase of 309 assignee units - (309) (309) subsequently cancelled Net Loss (64,854) (3,923,672) (3,988,526) -------------- -------------- -------------- Partner's deficit at December 31, 2001 and net liabilities in liquidation (1,160,117) (16,595,606) (17,755,723) Net Income 357,761 17,530,292 17,888,053 -------------- -------------- -------------- Partner's (deficit) equity at December 31, 2002 and net assets in liquidation $ (802,356) $ 934,686 $ 132,330 ============== ============== ==============
See Notes to Financial Statements 15 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 (Liquidation (Going Concern (Going Concern Basis) Basis) Basis) CASH FLOWS FROM OPERATING ACTIVITIES Rent collections $ 21,646 $ 5,222,146 $ 4,985,113 Interest received 4,705 90,783 216,442 Other income 7,320 33,587 62,761 Management fees, dietary fees and other services (41,650) (480,900) (422,871) Salary, related benefits and overhead reimbursements (46,900) (1,170,100) (1,080,869) Other operating expenses paid (1,001,837) (2,452,892) (2,217,294) Interest paid (7,461,934) (4,411,805) (1,416,337) ---------------- ---------------- ---------------- Net cash (used in) provided by operating activities (8,518,650) (3,169,181) 126,945 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of properties - 16,014,830 - Capital expenditures - (131,471) (158,268) ---------------- ---------------- ---------------- Net cash provided by (used in) investing activities - 15,883,359 (158,268) CASH FLOWS FROM FINANCING ACTIVITIES Pension note payments (9,538,066) - - Repurchase of assignee units - (309) (571) Distributions - (88,797) (28,875) ---------------- ---------------- ---------------- Net cash used in financing activities (9,358,066) (89,106) (29,446) ---------------- ---------------- ---------------- Net (decrease) increase in cash and cash equivalents (18,056,716) 12,625,072 (60,769) Cash and cash equivalents at beginning of year 18,117,660 5,492,588 5,553,357 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 60,944 $ 18,117,660 $ 5,492,588 ================ ================ ================
See Notes to Financial Statements 16 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 (Liquidation (Going Concern (Going Concern Basis) Basis) Basis) RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) $ 17,888,053 $ (3,988,526) $ (2,473,796) --------------- ---------------- ---------------- ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Extraordinary income - debt forgiveness (18,991,176) - - Loss sale of properties - 1,491,679 - Depreciation - 593,240 582,861 Amortization of Pension Notes issuance costs - 119,009 119,004 Interest (paid) deferred (7,038,344) (1,433,906) 1,901,364 CHANGES IN OPERATING ASSETS AND LIABILITIES Other assets and receivables 17,750 (305,812) (10,381) Prepaid expenses (7,187) 132,989 (13,892) Accounts payable (122,135) (17,999) 27,878 Other liabilities (265,611) 240,145 (6,093) --------------- ---------------- ---------------- Net cash (used in) provided by operating activities $ (8,518,650) $ (3,169,181) $ 126,945 =============== ================ ================
See Notes to Financial Statements 17 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization NHP Retirement Housing Partners I Limited Partnership (the Partnership) is a limited partnership organized under the laws of the State of Delaware on March 10, 1986. The Partnership was formed for the purpose of raising capital by issuing both Pension Notes (Notes) to tax-exempt investors and selling additional Partnership interests in the form of Assignee Interests (Interests) to taxable individuals. Interests represent assignments of the limited partnership interests of the Partnership issued to the Assignor Limited Partner, NHP RHP-I Assignor Corporation. The proceeds from the sale of the Notes and Interests have been invested in residential rental properties for retirement age occupants. On December 31, 2001, the principal of the Notes and deferred interest of approximately $35,504,000 matured. The Partnership does not have sufficient funds to fully repay this amount. Due to the pending maturity of the Notes and to obtain maximum value through an organized disposition of Partnership assets, the General Partner on February 12, 2001 notified the holders of Notes (Note Holders) and holders of Interests (Assignee Holders) of its intent to dissolve the Partnership effective May 21, 2001 (see Note 9). The last remaining property in the Partnership, The Amberleigh, was sold on December 31, 2001 (see Note 4). The Partnership is in the process of liquidating its other assets and receivables, pending continuing litigation (see Note 10). Significant Accounting Policies As of December 31, 2001, the Partnership changed its basis of accounting from going-concern basis to liquidation basis. Under this basis of accounting, assets and liabilities are stated at their net realizable value and estimated costs through the liquidation date are provided to the extent reasonably determinable. Interest expense on Notes is calculated using the effective interest method through May 2001. Effective June 2001, the Partnership began recording accrued interest at the stated interest rate, which represents the amount which will be paid upon dissolution of the Partnership (see Note 6). 18 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED Buildings and improvements were depreciated using the straight-line method, assuming a 30-year life and a 30 percent salvage value. Furniture and equipment were depreciated using the straight-line method over 5 years. Rental income was recognized when earned based on residents' signed rental agreements. Rental payments received in advance were deferred and recognized when earned. In April 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB No. 13, and Technical Corrections", which is required to be applied in fiscal years beginning after May 15, 2002. This statement will require gains and losses on the extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement No. 4. The Partnership does not expect the adoption of this statement to have a material effect on the Partnership's earnings or financial position. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2. CASH AND CASH EQUIVALENTS As of December 31, 2002 and 2001, cash and cash equivalents consisted of demand deposits and repurchase agreements. All repurchase agreements have an original maturity of three months or less and, therefore, are considered to be cash equivalents. 19 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED NOTE 3. TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES Through January 22, 1995, the sole General Partner of the Partnership was NHP/RHGP-I Limited Partnership (NHP/RHGP-I) and the sole limited partner of the Partnership was NHP RHP-I Assignor Corporation, a Delaware corporation. Effective January 23, 1995, Capital Realty Group Senior Housing, Inc. (CRGSH) became the sole General Partner of the Partnership. Effective February 1, 1995, CRGSH assigned its contract rights to manage the Partnership's properties to Capital Senior Living, Inc. (CSL), which, in 1997, became a subsidiary of Capital Senior Living Corporation (CSLC). CSL received $41,650, $480,900, and $422,871, in 2002, 2001, and 2000, respectively, for management fees, dietary services fees and other operating expense reimbursements related to services provided to the Partnership. Personnel working at the property sites and certain home office personnel who perform services for the Partnership were employees of CSL, an affiliate of CRGSH until June 30, 1998. The Partnership reimbursed CSL for the salaries and related benefits of such personnel as reflected in the accompanying financial statements. During 2002, 2001, and 2000, such reimbursements for salaries, related benefits and overhead reimbursements amounted to $46,900, $1,170,100 and $1,080,869 respectively. At December 31, 2002, Capital Senior Living Properties, Inc., a wholly owned subsidiary of CSLC, held 14,131 Notes. CSLC is subject to the periodic reporting obligations of the Securities and Exchange Commission. 20 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 CONTINUED On June 10, 1998, Capital Realty Group Corporation sold all of its shares of CRGSH common stock to Retirement Associates, Inc. (Associates) for $855,000. The source of the funds is a Promissory Note for $855,000 with a five-year term and bearing an interest rate of 8 percent per annum as of December 1, 1999. Prior to December 1, 1999, the Promissory Note had an interest rate of 10 percent per annum; the interest rate was decreased to adjust to a market rate and in consideration of an early, unscheduled payment of interest due. As of December 31, 2002, the interest on this note has been paid and the unpaid balance on this note is $717,938. Associates is the maker of the Note and Capital Realty Group Corporation is the payee. Mr. Robert Lankford is the President of Associates and has had prior business relationships with Messrs. Beck and Stroud, the former principals of CRGSH. From 1988 to 1997, Mr. Lankford was an independent broker with Capital Realty Group Brokerage, Inc., an affiliate of Capital Realty Group Corporation. From 1997 to the present, however, Mr. Lankford has been a principal with Kamco Property Company Commercial Real Estate Brokerage. In this capacity, Mr. Lankford provides independent commercial real estate brokerage services for various clients including Capital Senior Living Corporation, which accounts for less than 20 percent of his compensation. The address of the principal executive offices of CRGSH is 3516 Merrell Road, Dallas, Texas 75229. In connection with the sale of The Amberleigh (see Note 4), the General Partner became entitled to a fee of $255,000. In January 2002, the Partnership paid the General Partner one-half of this amount, or $127,500. The General Partner remains entitled to receive the balance of this fee in the amount of $127,500, which has been accrued for payment at December 31, 2002. NOTE 4. DISPOSITION OF PROPERTY On December 31, 2001, the Partnership sold its last remaining property, The Amberleigh, to an unaffiliated entity for $20,000,000. The Partnership received two $1,000,000 promissory notes, payable within 12 months from the date of sale, subject to the purchaser obtaining certain levels of financing proceeds and the property achieving certain levels of operating income. The Partnership did not satisfy the requirements for payment under the promissory notes, and therefore the Partnership will not receive any proceeds from these notes. The balance of the sale proceeds was paid in cash, resulting in net sale proceeds of $16,014,830. The Partnership recognized a $1,491,679 loss on the sale. 22 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED NOTE 5. CASH DISTRIBUTION POLICIES The Partnership Agreement allows for quarterly payments of substantially all Cash Available For Distribution (as defined in the Partnership Agreement), subject to the following: (a) distributions to Assignee Holders may be restricted or suspended for limited periods when the General Partner determines in its absolute discretion that it is in the best interests of the Partnership; and (b) all Assignee Holder distributions are subject to the payment of Partnership expenses, payments to Note Holders and maintenance of working capital reserves. Distributions of cash available for distribution are made in the following order of priority, to the extent available: 1. To the General Partner in an amount equal to 2 percent of cash available for distribution before interest payments for each quarterly cash distribution period; 2. To the Assignee Holders until the Assignee Holders have received an amount equal to an aggregate annual non-compounded return of 10 percent on their adjusted capital contributions for each quarterly cash distribution period; 3. To the General Partner, a Partnership Management Incentive Fee in an amount equal to 8 percent of Cash Available For Distribution Before Interest Payments for the fiscal year; and 4. To the Assignee Holders, the balance. 22 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED No distributions were paid to the Assignee Holders during 2002, 2001 or 2000. Future cash requirements have caused the General Partner to determine it is not financially appropriate to make distributions to Assignee Holders. Cash received from sales or re-financings of any Partnership Property, after retirement of applicable mortgage debt and the payment of all expenses related to the transaction and any payments of debt service on the Notes including interest at a non-compounded rate of 13 percent per annum less any prior payments (see Note 6) and establishment of reserves, is to be distributed in the following order of priority: 1. To the Assignee Holders until their adjusted capital accounts are reduced to zero; 2. To the Assignee Holders until cumulative cash distributions received equal a 13 percent non-compounded return on their adjusted capital accounts, reduced by prior distributions; 3. To the General Partner in the amount of a disposition fee of not more than 3 percent of sales price; and 4. To the Assignee Holders, 85 percent, and to the General Partner, 15 percent. Taxable net income or loss from operations is allocated to the Assignee Holders as a class and to the General Partner in proportion to available cash distributed during the fiscal year. If no cash is distributed during the year, net income or loss is allocated 90 percent to the Assignee Holders as a class and 10 percent to the General Partner. Other provisions exist if there is net income or loss other than from operations. As discussed in Note 7, 2 percent for 2001 and 2000 of the Cash Available For Distribution Before Interest Payments was paid to the General Partner. For 2002, the General Partner was not paid a 2% distribution. Accordingly, net income and loss for each of the three years in the period ended December 31, 2002, was allocated in the same manner. The deficit balance in the Assignee Limited Partner account reflects their percentage interest in the Partnership's cumulative net losses, although there are no restoration requirements for the Assignee Limited Partner interest upon termination of the Partnership. 23 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED NOTE 6. PENSION NOTES The Notes bear stated simple interest at a rate equal to 13 percent per annum. Payment of up to 9 percent of stated interest was subject to deferral through December 31, 1988 and payment of up to 6 percent of stated interest is subject to deferral thereafter. Deferred interest does not bear interest. Interest not deferred is payable quarterly. Using the effective interest method, interest on principal and accrued interest of the Notes has been accrued at the rate of approximately 9 percent per annum compounded quarterly through May 2001. The approximate 9 percent effective interest rate was calculated using estimates of the amounts of interest that will be deferred and the time period in which such deferred amounts will be paid. As of June 2001, the Partnership began recording accrued interest on the principal at the stated interest rate which represents the amount which will be paid upon dissolution of the Partnership. The Partnership made minimum interest payments of $1,411,805 and $1,416,337 in 2001 and 2000, respectively, to Note Holders. During 2001, an additional $3,000,000 was paid for deferred interest not scheduled to become due until December 31, 2001. Relating to the sale of the Amberleigh on December 31, 2001, the Partnership paid $9,538,066 for a partial redemption of Notes, and paid $7,461,934 for a partial redemption of deferred interest, effective February 28, 2002. Cash funds were not sufficient at February 28, 2002 to fully repay the outstanding principal and deferred interest balance of $18,991,176. Since available cash after payment of Partnership expenses and potential collection of the Amberleigh promissory notes was insufficient to repay the outstanding Notes and deferred interest, the unpaid debt related to the Notes has been treated for book purposes as forgiven and resulted in $18,991,176 of extraordinary income for the year ended 2002. For tax purposes any extraordinary income relating to the forgiveness of unpaid debt and deferred interest will be recognized in the year the Notes are deemed cancelled, which has not yet occurred. Upon final liquidation of the Partnership's cash reserves, to the extent any funds are in excess of liabilities, those funds will be distributed to Note Holders. The Partnership's obligation to repay the principal amount of the Notes, which matured on December 31, 2001, and stated interest thereon, is secured by a lien on the Partnership's properties. The liability of the Partnership under the Notes is limited to the assets of the Partnership. The Notes are subject to redemption in whole or in part upon not less than 30 or more than 60 days prior notice, at the election of the Partnership. NOTE 7. DISTRIBUTIONS TO PARTNERS During 2001 and 2000, the General Partner received distributions, representing 2 percent of the Cash Available For Distribution Before Interest Payments to the Note Holders. The General Partner received no distributions in 2002. The Partnership did not make a distribution to the Assignee Holders during 2002, 2001 or 2000. 24 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED NOTE 8. INCOME TAXES The Partnership is not taxed on its income. The partners are taxed in their individual capacities upon their distributive share of the Partnership's taxable income and are allowed the benefits to be derived from possibly offsetting their distributive share of the tax loss against taxable income from other sources subject to application of passive loss rules and subject to At Risk basis limitation. The taxable income or loss differs from amounts included in the statement of operations primarily because of different methods used in computing depreciation and interest on the Notes and determining start-up and marketing expenses for financial reporting and federal income tax purposes. Cash funds were not sufficient at February 28, 2002 to fully repay the outstanding principal and deferred interest balance of $18,991,176. For tax purposes, any unpaid debt and deferred interest related to the Notes will be treated as forgiven and will result in recognition of income in the year the Notes are deemed cancelled, which has not yet occurred. For federal income tax purposes, the Partnership computes depreciation of buildings and improvements using the Modified Accelerated Cost Recovery System (MACRS) and the Accelerated Cost Recovery System (ACRS), while for financial statement purposes, depreciation is computed using the straight-line method. Interest on Notes is computed in accordance with Internal Revenue Service regulations for original issue discount for federal income tax purposes, while for financial statement purposes, interest on Notes is computed using the effective interest method. Start-up and marketing costs incurred prior to initial occupancy were capitalized and amortized over sixty months for federal income tax purposes, only those start-up and marketing costs that are expected to benefit future operations have been capitalized and amortized over sixty months for financial statement purposes. 25 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED Reconciliation between financial statement net income (loss) and net income (loss) for tax purposes follows:
Years Ended December 31, 2002 2001 2000 ---- ---- ---- Net income (loss) per financial statements $ 17,888,053 $(3,988,526) $(2,473,796) Temporary differences in determining income (losses) for federal income tax purposes: Debt forgiveness income (18,991,176) - - Excess tax basis over book in assets (8,848,636) - - Loss from pass-through entity (1,751,450) - - Gain on sale of properties - 5,812,954 - Depreciation - (138,774) (218,987) Amortization of start-up and marketing costs - (2,136) (2,141) Interest expense - Notes (8,969,529) (1,405,364) 1,933,772 Miscellaneous (42,832) (29,596) (5,540) ----------------- ------------ ------------ Net (loss) income per tax return $ (20,715,570) $ 248,585 $ (766,692) ================= ============ ============
For federal income tax purposes, the basis of building and improvements, net of accumulated depreciation, was $15,153,644 at December 31, 2000. NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments at December 31, 2002 and 2001 are as follows:
2002 2001 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and cash equivalents $ 60,944 $ 60,944 $ 18,117,660 $ 18,117,660 Pension Notes and accrued interest - - 35,504,347 17,748,624
Following are methods and assumptions used by the General Partner in estimating its fair value disclosures for financial instruments. 26 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 CONTINUED Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value. Pension Notes and Accrued Interest The fair values of Notes are based on available cash for note payment at December 31, 2001. NOTE 10. CONTINGENCIES On September 17, 2002, William Bren filed a putative class action complaint on behalf of certain holders of Pension Notes of the Partnership in the Delaware Court of Chancery, C.A. No. 19902 (the "Bren Action"), against the Partnership and the General Partner. The complaint in the Bren Action, which was amended on December 3, 2002, alleges that the General Partner breached its fiduciary duty by failing to initiate a lawsuit against, among others, the former General Partner and its principals in connection with the sale of four properties by the Partnership in September 1998; failed to disclose material information and promised to make certain distributions when it solicited consents from the Pension Note holders in 2001 to facilitate the sale of the Partnership's fifth property, the Amberleigh, which sale occurred in December 2001; and failed to disclose material information in connection with obtaining releases from the Pension Note holders in 2002. The Bren Action also seeks a judgment against the Partnership for failing to pay the full amount of the principal and interest owed on the Pension Notes on December 21, 2001, the maturity date of the Pension Notes. On February 10, 2003, the defendants moved to dismiss the amended complaint in the Bren Action or, alternatively, for summary judgment. Briefing has been completed on this motion and the matter is expected to be submitted to the Court shortly for decision. Previously, on October 15, 2002, plaintiff filed a motion for class certification, which plaintiff is pursuing at the present time. The Partnership believes the allegations asserted in the Bren Action are without merit and intends to defend against these claims. The Partnership is unable at the time to estimate liability, if any, related to this claim. The Partnership has made previous disclosures concerning an action filed by Robert Lewis on October 23, 1998, in the Delaware Court of Chancery, Civil Action No. 16725 (the "Lewis Action"), on behalf of a putative class of holders of Assignee Interest against the Partnership, the General Partner, Capital Senior Living Corporation and Capital Senior Living Properties 2 NHPCT, Inc. The Lewis Action has been settled. On October 18, 2002, the Delaware Court of Chancery entered a Final Order and Judgment approving a settlement of the Lewis Action which included the creation of a settlement fund in the amount of $840,000. The Partnership contributed $250,000 to this settlement fund, the amount of the deductible under its director and officers' liability policy, and 27 virtually all of the balance of the settlement fund was contributed by various insurance brokers and agents, and their insurers. In accordance with the settlement, approximately $590,000 (the amount of the settlement fund minus an award of attorney's fees and expenses approved by the Court) has been distributed to the members of the class certified by the Court. NOTE 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2002 Quarters ---------------------------------------------------------------------------- First (a) Second Third Fourth ---------------------------------------------------------------------------- Revenues $ 1,571 $ 521 $ 1,255 $ 9,876 Net income (loss) 18,476,698 (169,047) (246,003) (173,595) Basic income (loss) per assignee interest 432 (4) (6) (3) Fiscal 2001 Quarters ---------------------------------------------------------------------------- First Second Third Fourth (b) ---------------------------------------------------------------------------- Revenues 1,345,513 1,340,943 1,364,792 355,520 Net loss (611,579) (575,692) (427,676) (2,373,579) Basic loss per assignee interest (14) (13) (10) (57) (a) During the first quarter 2002, the Partnership recorded extraordinary income of debt forgiveness of $18,991,176. (b) During the fourth quarter 2001, the Partnership recorded a loss on sale of $1,491,679.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants that are required to be reported herein. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors, executive officers or significant employees of its own. On January 23, 1995, CRGSH became the sole General Partner of the Partnership. CRGSH is a privately owned corporation initially organized on December 1, 1988. Its principal business activity has been the ownership and management of real property for its own account and for the account of various limited partnerships of which it is the General Partner. Prior to June 10, 1998, CRGSH was a wholly owned subsidiary of Capital Realty Group Corporation, a Texas corporation (Capital), with its corporate headquarters in Dallas, Texas. Capital is owned by James A. Stroud (50 percent through a trust) and by Jeffrey L. Beck (50 percent). On June 10, 1998, Capital 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 8 percent per annum since December 1, 1999. Prior to December 1, 1999, the Promissory Note had an interest rate of 10 percent per annum; the interest rate was decreased to adjust to a market rate and in consideration of an early, unscheduled payment of interest due. As of December 31, 2002, the interest on this note has been paid and the unpaid balance on this note is $717,938. Associates is the maker of the Note and Capital 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. From 1988 to 1997, Mr. Lankford was an independent broker with Capital Realty Group Brokerage, Inc., an affiliate of Capital. From 1997 to the present, however, Mr. Lankford has been a principal with Kamco Property Company Commercial Real Estate Brokerage. In this capacity, Mr. Lankford provides independent commercial real estate brokerage services for various clients including Capital Senior Living Corporation, which accounts for less than 20 percent of his compensation. The address of the principal executive offices of CRGSH is 3516 Merrell Road, Dallas, Texas 75229. The Partnership properties during 1994 and through February 1, 1995, were managed by CRGSH. On February 1, 1995, CRGSH assigned its contract rights to manage the Partnership's properties to Capital Senior Living (CSL), a subsidiary of Capital Senior Living Corporation. Following are directors and executive officers of CRGSH, the General Partner of the Partnership. Name Position ---- -------- Robert L. Lankford President, Retirement Associates, Inc., sole stockholder of CRGSH, the General Partner Wayne R. Miller Secretary, Retirement Associates, Inc. 29 Robert L. Lankford Robert L. Lankford, age 48, has served as President of Retirement Associates, Inc. since June 1997. From 1988 to 1997, Mr. Lankford was an independent broker with Capital Realty Group Brokerage, Inc., an affiliate of Capital. From 1997 to the present, however, Mr. Lankford has been a principal with Kamco Property Company Commercial Real Estate Brokerage. In this capacity, Mr. Lankford provides independent commercial real estate brokerage services for various clients including Capital Senior Living Corporation, which accounts for less than 20 percent of his compensation. Wayne R. Miller Wayne R. Miller, age 53, has served as Secretary of Retirement Associates, Inc. since June 1997. From 1980 to 1994, Mr. Miller was an officer, director and shareholder of Miller, Hiersche, Martens and Hayward, Inc. From 1994 to the present, Mr. Miller has been President, Sole Director and Sole Shareholder of Wayne R. Miller P.C. 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 Partnership pursuant to Rule 16a-3(c) of the Securities and Exchange Commission (SEC) rules, the Partnership is not aware of any failure of any officer or director of CRGSH or beneficial owner of more than ten percent of the Assignee Interests to file timely with the SEC any Forms 3, 4 or 5 relating to the Partnership for 2002. ITEM 11. EXECUTIVE COMPENSATION NHP Retirement Housing Partners I Limited Partnership has no officers or directors. However, various fees and reimbursements are paid to the General Partner or its affiliates. Such fees paid or accrued during the year ended December 31, 2002 included $255,000 in brokerage fees for the sale of The Amberleigh property. See Item 8, Financial Statements and Supplementary Data. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person is known by the Partnership to own more than 5 percent of Assignee Interests. 30 As of March 1, 2003, Capital Senior Living Properties, Inc., a former affiliate of the General Partner, owns approximately 14,131 Pension Notes, or approximately 33 percent of the Partnership's outstanding Pension Notes. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Except as described in Items 8 (Note 3 in the Financial Statements), 10, 11 and 12, the Partnership had no other transactions or business relationships with CRGSH or its affiliates. ITEM 14. CONTROLS AND PROCEDURES The Partnership's management, including its Chief Executive Officer/Chief Financial Officer, after evaluating the effectiveness of the Partnership's disclosure controls and procedure (as defined in Rules 113a-14(c) and 15-d-14(c) under the Securities Exchange Act of 1934) as of a date (the "Evaluation Date"), which was within 90 days of this annual report on Form 10-K, has concluded in his judgment that, as of the Evaluation Date, the Partnership's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Partnership would be made known to him. There were no significant changes in the Partnership internal controls or, to its knowledge, in other factors that could significantly affect its disclosure controls and procedures subsequent to the Evaluation Date. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements Following are the financial statements, notes and reports listed included in this report. Page Report of Ernst & Young LLP, Independent Auditors 11 Statement of Net Assets (Liabilities) in Liquidation December 31, 2002 and 2001 12 Statement of Changes in Net Assets (Liabilities) in Liquidation 13 Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 14 Statements of Partners' Equity (Deficit) for the Years Ended December 31, 2002, 2001 and 2000 15 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 16 Notes to Financial Statements 18 31 Financial Statement Schedules All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. Exhibits 99.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 2002. 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 by the Registrant on its behalf by the undersigned, thereunto duly authorized. NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP By: CAPITAL REALTY GROUP SENIOR HOUSING, INC. General Partner By: /s/ Robert L. Lankford --------------------------------- ROBERT L. LANKFORD, President (Chief executive officer and chief financial officer) March 28, 2003 32 CERTIFICATION I, Robert Lankford, chief executive officer and chief financial officer of the General Partner of NHP Retirement Housing Partners I Limited Partnership, certify that: 1. I have reviewed this annual report on Form 10-K of NHP Retirement Housing Partners I Limited Partnership ("Partnership"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Partnership as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership, is made known to me by others within the Partnership, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date. 5. I have disclosed, based on my most recent evaluation, to the Partnership's auditors and the General Partner's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership 's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Robert L. Lankford -------------------------------- Robert L. Lankford Chief executive officer and chief financial officer of the General Partner March 28, 2003 33