MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Letter to Investors
1
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
2001 Annual Report
April 10, 2002
Dear Investor:
The general partners of Meridian Healthcare Growth and Income Fund
Limited Partnership (the Fund) are pleased to discuss the operating performance
of our seven nursing home facilities.
OPERATIONS
Operating income from the nursing centers showed a modest increase in
2001 when compared to 2000, however higher interest costs and greater non-cash
expenses resulted in decreased earnings in 2001 when compared to 2000. Similar
operating income and profitability trends occurred in 2000 when compared to
1999.
Overall, 2001 revenues of $59,933,000 increased $4,169,000 or 7.5% when
compared to revenues received during 2000. This increase was primarily the
result of Medicaid rate increases and an increase in the number of Medicare
days. Medicaid revenue increased $2,365,000 primarily due to overall rate
increases of approximately 8.7% driven primarily by the four Maryland centers.
Medicare revenue increased $2,143,000 relating to growth in the Medicare census.
In fiscal year 2001 Medicare census made up 13.9% of the overall census as
compared to 12.8% in fiscal year 2000.
Revenues from private and other patients decreased $200,000 to
$10,760,000 as compared to $10,960,000 in 2000. This decrease was a result of
lower private pay and insurance census.
Operating expenses increased $4,269,000 or 9.6% from the same period in
the prior year. This increase was primarily due to the increased cost of nursing
services and ancillary costs. Nursing costs increased $2,194,000 primarily due
to increased salaries and a higher utilization of temporary nurse staffing. The
increase in nursing salary and wages and utilization of temporary nurse staffing
was a result of an overall shortage of nurses within the healthcare industry.
Ancillary expenses increased $663,000 during 2001 when compared to 2000 due to
the increased acuity level of patients admitted to the centers. The remaining
increase in operating costs was due to higher health insurance costs, and
general inflationary cost increases.
Management and administration fees decreased $334,000 or approximately
9.2% in 2001 as compared to 2000. This decrease is due to an amendment to the
management agreement effective January 1, 2001, which reduced the management fee
from 6% to 5% of net patient service revenue.
Interest expense increased $250,000 in 2001 as compared to 2000. This
increase was the result of the first full year with the new mortgage, which
increased the beginning principal balance from $22,346,000 prior to the
refinancing to $24,000,000, at a higher interest rate.
2
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
FINANCING
The Fund closed its mortgage loan refinancing with a new bank for loans
totaling $24,000,000 on June 12, 2000. The renewal terms provide for a term of
five years at an interest rate of 9.75%. Monthly payments are based on a 20-year
amortization schedule with a balloon payment due at the end of the 5-year term.
Following the repayment of the original loan and transaction costs, the new loan
resulted in refinancing proceeds of approximately $1,225,000 which were
designated to fund certain improvements to the nursing facilities. The Fund also
replaced its $4,000,000 line of credit facility with the same lender under terms
similar to the mortgage loan terms described above, except the line of credit
facility requires annual reaffirmation.
CASH DISTRIBUTION
On February 15, 2002 the Fund made its fourth quarter 2001 distribution
to partners of $826,410. This distribution was funded by fourth quarter 2001
operations. During 2000 operations funded the distributions to partners. Review
of the 2002 budget suggests operations from the seven nursing centers will be
sufficient to fund a similar distribution in 2002.
SUMMARY
The major challenge to the Fund in the foreseeable future is to control
operating expenses in light of Medicare's conversion to the Prospective Payment
System, to maintain a quality mix of patients and to increase the overall census
at each of the facilities
Very truly yours,
/s/ John M. Prugh /s/ Michael R. Walker
John M. Prugh, President Michael R. Walker, President
Brown Healthcare, Inc. Meridian Healthcare Investments, Inc.
Administrative General Partner Development General Partner
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Financial Statements
4
INDEPENDENT AUDITORS' REPORT
To the Partners of
Meridian Healthcare Growth and
Income Fund Limited Partnership:
We have audited the accompanying consolidated balance sheets of Meridian
Healthcare Growth and Income Fund Limited Partnership (the Fund) as of December
31, 2001 and 2000 and the related consolidated statements of earnings, partners'
capital and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Fund'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 auditing standards generally accepted
in the United States of America. 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 Meridian Healthcare
Growth and Income Fund Limited Partnership as of December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLC
March 14, 2002
Philadelphia, Pennsylvania
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Consolidated Balance Sheets (Dollars in thousands)
December 31,
--------------------------------------
2001 2000
--------------- ----------------
Assets
Current assets
Cash and cash equivalents $ 2,066 $ 1,108
Accounts receivable, net of allowance for doubtful
accounts of $1,656 in 2001 and $1,245 in 2000 9,140 8,990
Estimated third-party payor settlements 561 843
Prepaid expenses and other current assets 548 650
--------------- ----------------
Total current assets 12,315 11,591
--------------- ----------------
Property and equipment
Land and improvements 1,981 1,978
Buildings and improvements 45,535 45,142
Furniture and equipment 6,044 5,538
--------------- ----------------
53,560 52,658
Accumulated depreciation (21,633) (19,724)
--------------- ----------------
31,927 32,934
--------------- ----------------
Other assets
Goodwill, net of accumulated amortization 4,237 4,490
Loan acquisition costs, net of accumulated amortization 298 383
--------------- ----------------
4,535 4,873
--------------- ----------------
Total assets $ 48,777 $ 49,398
=============== ================
Liabilities and Partners' Capital
Current liabilities
Current portion of long-term debt $ 435 $ 397
Accrued compensation and related costs 475 1,055
Accounts payable and other accrued expenses
Trade 1,331 829
Related party 3,274 2,937
Estimated third-party payor settlements 1,898 1,328
--------------- ----------------
Total current liabilities 7,413 6,546
--------------- ----------------
Deferred management fee payable 978 937
Loan payable to Development General Partner 1,240 1,188
Long-term debt 22,913 23,379
--------------- ----------------
25,131 25,504
--------------- ----------------
Partners' capital
General partners (153) (142)
Assignee limited partners; 1,540,040 units
issued and outstanding 16,386 17,490
--------------- ----------------
Total partners' capital 16,233 17,348
--------------- ----------------
Total liabilities and partners' capital $ 48,777 $ 49,398
=============== ================
See the accompanying notes to consolidated financial statements.
6
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Consolidated Statements of Earnings
(Dollars in thousands except per unit amounts)
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Revenues
Medicaid and Medicare patients $ 49,022 $ 44,514 $ 41,031
Private and other patients 10,760 10,960 9,965
Investment and other income 151 290 282
--------------- -------------- --------------
59,933 55,764 51,278
--------------- -------------- --------------
Expenses
Operating, including $10,062, $8,449 and $6,441
to related parties 48,774 44,505 40,396
Management and administration fees
to related parties 3,295 3,629 3,368
General and administrative 972 920 902
Depreciation and amortization 2,244 2,221 2,018
Interest expense 2,457 2,207 1,729
--------------- -------------- --------------
57,742 53,482 48,413
--------------- -------------- --------------
Net earnings $ 2,191 $ 2,282 $ 2,865
=============== ============== ==============
Net earnings per unit of assignee limited partnership interest - basic (computed
based on 1,540,040 units
outstanding in 2001, 2000 and 1999) $ 1.41 $ 1.47 $ 1.84
=============== ============== ==============
See the accompanying notes to consolidated financial statements.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Consolidated Statement of Partners' Capital
(Dollars in thousands)
Assignee
General Limited
Partners Partners Total
-------------- ----------------- --------------
Balance at December 31, 1998 $ (128) $ 18,941 $ 18,813
Net earnings 29 2,836 2,865
Distributions to partners (33) (3,273) (3,306)
-------------- ----------------- --------------
Balance at December 31, 1999 (132) 18,504 18,372
Net earnings 23 2,259 2,282
Distributions to partners (33) (3,273) (3,306)
-------------- ----------------- --------------
Balance at December 31, 2000 (142) 17,490 17,348
Net earnings 22 2,169 2,191
Distributions to partners (33) (3,273) (3,306)
-------------- ----------------- --------------
Balance at December 31, 2001 $ (153) $ 16,386 $ 16,233
============== ================= ==============
See the accompanying notes to consolidated financial statements.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------- -------------- ---------------
Cash flows from operating activities
Net earnings $ 2,191 $ 2,282 $ 2,865
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation of property and equipment 1,909 1,834 1,765
Amortization of intangibles 338 387 253
Minority interest in net earnings of operating
partnerships 33 30 34
Increase in loan payable to Development General Partner 52 51 51
Increase in deferred management fee payable 41 43 42
Change in other assets and liabilities
Accounts receivable (150) (1,766) 55
Estimated third-party payor settlements, net 852 (1,107) 381
Prepaid expenses and other current assets 102 (172) 87
Accrued compensation and related costs (580) 277 (163)
Accounts payable and other accrued expenses 915 781 (177)
------------- -------------- ---------------
Net cash provided by operating activities 5,703 2,640 5,193
------------- -------------- ---------------
Cash flows from investing activities -
additions to property and equipment (902) (1,421) (1,458)
------------- -------------- ---------------
Cash flows from financing activities
Deferred financing fees - (429) -
Proceeds from long-term debt - 24,000 -
Repayment of long-term debt (428) (22,829) (731)
Distributions to partners (3,306) (3,306) (3,306)
Distributions to minority interests (109) (58) (115)
------------- -------------- ---------------
Net cash used in financing activities (3,843) (2,622) (4,152)
------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 958 (1,403) (417)
Cash and cash equivalents, beginning of year 1,108 2,511 2,928
------------- -------------- ---------------
Cash and cash equivalents, end of year $ 2,066 $ 1,108 $ 2,511
============= ============== ===============
See the accompanying notes to consolidated financial statements.
9
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Organization and Operations
Meridian Healthcare Growth and Income Fund Limited Partnership (the
Fund) was organized under the laws of the State of Delaware and will
continue to operate through December 31, 2037, unless terminated
sooner under the provisions of the Partnership Agreement. The Fund's
Administrative General Partner is Brown Healthcare, Inc. and the
Fund's Development General Partner is Meridian Healthcare Investments,
Inc. Brown Healthcare Holding Co., Inc. is the Fund's Assignor Limited
Partner. Meridian Healthcare Investments, Inc. is a subsidiary of
Genesis Health Ventures, Inc. (Genesis).
The Fund owns 98.99% limited partnership interests in each of the seven
operating partnerships. Each partnership owns and operates a nursing
center located in Maryland, New Jersey, or North Carolina. As described
further in Note 3, Meridian Healthcare, Inc. (MHC) and other affiliates
of the Development General Partner manage the nursing centers and provide
personnel to the operating partnerships, along with certain other goods
and services.
The Fund, through its operating partnerships, derives substantially all
of its revenue from extended healthcare provided to nursing center
residents, including room and board, nursing care, and drugs and other
medical services. The operations of the Fund are managed and its
performance is evaluated based on the consolidated results of operations
and financial position of the Fund. Total patient days available and
occupancy (unaudited) at the facilities in each of the three years were
as follows:
Available
Year Days Occupancy
--------------- -------------- -----------------
2001 406,000 90.0%
2000 430,000 86.2%
1999 429,000 87.9%
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Fund
and each of its 98.99% owned consolidated partnerships based on the
ability of the Fund to control the major operating and financial policies
of each of the operating partnerships under the terms of the partnership
agreements. All significant transactions and balances between the Fund
and its consolidated partnerships have been eliminated in consolidation.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash deposits in banks,
money market funds, and certificates of deposit. All cash and cash
equivalents have an original maturity of less than three months, and are
stated at cost which approximates market value.
Revenue
Revenue is recognized by the Fund in the period the related services are
rendered. The Fund derives a substantial portion of its revenue under
Medicaid and Medicare reimbursement programs. Under certain retrospective
Medicaid systems, revenues are generally based on reimbursement of the
reasonable direct and indirect costs of providing services to program
participants. The Fund separately estimates revenues due from each third
party with which it has a contractual arrangement and records anticipated
settlements with these parties in the contractual period during which
services were rendered. The amounts actually reimbursable under the cost
based reimbursement programs are determined by filing cost reports which
are then subject to audit and retroactive adjustment by the payor. The
Fund provides an allowance for potential audit adjustments to the interim
reimbursement amounts received under these cost reimbursement programs.
Revisions to this allowance, if any, are recorded as an adjustment to
revenues in the year such amounts are determined. Factors that management
considers when establishing or adjusting an allowance for potential audit
adjustments include, but are not limited to, changes in estimates
resulting from improved cost information and preliminary results of
third-party audits and reviews. Adjustments and final settlements with
third-party payors are reflected in operations at the time of the
adjustment or settlement as an increase or decrease to the balance of
estimated third-party payor settlements and revenue. At December 31,
2001, in the aggregate the Fund's operating partnerships have recorded
assets of $561,000 for cost report receivables and $1,898,000 for cost
report liabilities relating to Medicare and Medicaid cost reports that
have accumulated for the years 2001, 2000 and 1999.
Revisions to prior year cost reimbursement settlements resulted in an
increase to revenues of $362,000, $797,000 and $389,913 for fiscal years
ended in 2001, 2000 and 1999, respectively. These revenue adjustments are
primarily due to the revision of the estimated settlements based upon
final and interim audit settlements of the open cost report years.
Pursuant to the Balanced Budget Act of 1997, effective January 1, 1999
the Fund's operating partnerships were converted to the Medicare
Prospective Payment System (PPS). Under PPS, skilled nursing facilities
are reimbursed at a prospective per diem rate for all covered Part A
skilled nursing facility services, as well as many services for which
payment may be made under Part B when a beneficiary who is a resident of
a skilled nursing facility
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Revenue (continued)
receives covered skilled nursing facility care. There can be no
assurances that any future healthcare legislation will not adversely
affect the business of the Fund.
Property and Depreciation
Property and equipment are stated at cost less accumulated depreciation.
Major renewals and betterments are capitalized and ordinary repairs and
maintenance are charged against operations in the period incurred. Asset
costs and related accumulated depreciation are removed from the accounts
upon disposition of an asset and the resulting gain or loss is included
in the determination of earnings. Property and equipment are reviewed for
impairment whenever events or circumstances provide evidence that
suggests that their carrying amount may not be recoverable. The Fund
assesses the recoverability of property and equipment by determining
whether the carrying value can be recovered through projected
undiscounted cash flows.
Depreciation is computed using the straight-line method. Estimated useful
lives established for purposes of computing depreciation range from
thirty to forty years for buildings, twenty years for building
improvements, ten years for land improvements, and from five to ten years
for furniture and equipment.
Goodwill
Goodwill arose from the Fund's purchase of its limited partnership
interests in the operating partnerships and is amortized on a
straight-line basis over thirty years. Accumulated amortization of
goodwill aggregated $3,426,000 and $3,173,000 at December 31, 2001 and
2000, respectively.
Goodwill is reviewed for impairment whenever events or circumstances
provide evidence that suggests that the carrying amount of goodwill may
not be recoverable. The Fund assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance can be
recovered through projected undiscounted cash flows.
Income Taxes
The consolidated financial statements of the Fund do not include any
provision for federal or state income taxes. All items of Fund earnings,
deductions and credits are allocated among
12
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
the partners. The distributive share of the Fund's earnings, deductions
and credits are included in each partner's federal and state income tax
returns.
A reconciliation of net earnings, as reported on the Fund's consolidated
statements of earnings, to taxable earnings for the years ended December
31, is summarized as follows (dollars in thousands):
2001 2000 1999
---------- ----------- -----------
Net earnings per consolidated statements of earnings $ 2,191 $ 2,282 $ 2,865
Accelerated depreciation deducted for income
tax purposes over straight-line depreciation
deducted for financial reporting purposes (129) (153) (164)
Amortization of goodwill deducted for financial reporting
purposes, not deducted for income tax purposes 253 252 251
Differences in timing of revenue recognition
for financial reporting purposes and
income tax purposes, primarily related to cost
reimbursement settlements 68 (743) (38)
Differences in timing of expense deductions for
financial reporting purposes and income tax purposes 785 (44) 516
---------- ----------- -----------
Taxable earnings $ 3,168 $ 1,594 $ 3,430
========== =========== ===========
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimated.
New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
13
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill. Statement 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment.
The Fund is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior
to July 1, 2001, and Statement 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July
1, 2001 will continue to be amortized prior to the adoption of Statement
142.
As of the date of adoption, the Fund expects to have unamortized goodwill
in the amount of $4,237,000 which will be subject to the transition
provisions of Statement 142. Amortization expense related to goodwill was
$253,000 in 2001, 2000 and 1999.
FASB Statement No. 143, Accounting for Asset Retirement Obligations
(Statement No. 143), which was released in August 2001, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset
retirement costs. Statement No. 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period
in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise
also is to record a corresponding increase to the carrying amount of the
related long-lived asset (i.e., the associated asset retirement costs)
and to depreciate that cost over the life of the asset.
The liability is changed at the end of each period to reflect the passage
of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. Because of the
extensive use of estimates, most enterprises will record a gain or loss
when they settle the obligation. The Fund is required to adopt Statement
No. 143 for its fiscal year beginning January 1, 2003.
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets (Statement No. 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121,
14
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions
of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. However, it retains the requirement
in Opinion 30 to report separately discontinued operations and extends
that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Statement No. 144 is effective for the Fund
for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years.
(3) Related Party Transactions
The nursing centers owned by the operating partnerships are managed by
MHC, an affiliate of the Development General Partner. Under the terms of
the management agreements, the operating partnerships are obligated to
pay monthly management fees at an annual rate equal to 5% in 2001 and 6%
in 2000 and 1999 of each nursing center's revenue. However, payment of
one-half of the fees incurred for the management of the Mooresville,
Salisbury and Woodlands nursing centers was deferred during the two-year
period commencing with the Fund's acquisition of partnership interests in
1988 and 1989. As of December 31, 2001 and 2000, the amounts deferred
under this agreement, including interest at 9% per annum, aggregated
$978,000 and $937,000, respectively. The Fund is obligated to repay these
amounts when certain financial criteria are met.
The Fund is obligated to pay the Administrative General Partner
administration fees equal to the greater of 1/2 of 1% of the Fund's
annual revenue or $75,000. Certain of the operating partnerships also
purchase drugs and medical supplies and other services from affiliates of
the Development General Partner. Such purchases are in turn billed to
patients or third-party payors at prices which on average approximate the
nursing center's cost.
The Development General Partner loaned the Fund $597,000, as required by
the Cash Flow Deficit Guaranty Agreement, to support the operating
deficits generated by the Mooresville, Salisbury and Woodlands nursing
centers during each center's first two years of operations subsequent to
the Fund's acquisition of partnership interests. Loans outstanding under
this arrangement, including accumulated interest from inception of the
loan at 9% per annum, were $1,240,000 and $1,188,000 at December 31, 2001
and 2000, respectively. The Fund is obligated to repay these loans when
certain specified financial criteria are met, the most significant of
which is the payment of a preferred return to the assignee limited
partners as defined in the Fund's partnership agreement.
15
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(3) Related Party Transactions (continued)
Transactions with the Fund's general partners and their affiliates for
the years ended December 31 are summarized as follows (in thousands):
2001 2000 1999
-------- ------- --------
Management and administration fees $ 3,295 $ 3,629 $ 3,368
Drugs and medical supplies purchases 4,344 3,601 3,012
Nursing and rehabilitation services 5,718 4,848 3,429
Interest expense on borrowings 93 94 93
Neither the Fund nor the operating partnerships employ any personnel. All
staff required by the nursing centers are employees of MHC which charges
the operating partnerships for all costs related to such personnel,
including payroll taxes, workers' compensation, health insurance and
other fringe benefits. Salaries and benefits represented approximately
62%, 64% and 67% in 2001, 2000 and 1999, respectively, of total operating
expenses.
(4) Debt
Effective June 12, 2000, the Fund established a revolving credit facility
with a maximum borrowing limit of $4,000,000. Borrowing under the credit
facility will bear interest at a floating rate, which shall equal the
announced commercial prime rate. The bank shall review the credit
facility each year for a one-year extension. This credit facility has
been reaffirmed until June 1, 2002. There were no borrowings outstanding
under either the line of credit agreement or the revolving credit
facility at December 31, 2001 and 2000. Borrowings are secured primarily
by the accounts receivable of the Fund.
Effective February 28, 2000, the Fund extended all existing mortgages
through June 12, 2000. The mortgages bore interest at LIBOR plus 1.55%.
The Fund closed its mortgage loan refinancing with a new bank for loans
totaling $24,000,000 on June 12, 2000. The renewal terms became effective
on June 12, 2000 and provide for a term of five years at an interest rate
of 9.75%. Monthly payments of $229,886 are based on a 20-year
amortization schedule with a balloon payment due at the end of the five
year term.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements (continued)
(4) Debt (continued)
Debt at December 31 consisted of the following (in thousands):
2001 2000
------------- ------------
Mortgage notes payable
Maryland facilities $ 10,474 $ 10,667
Woodlands facility 5,475 5,575
Frederick facility 4,673 4,758
Hamilton facility 2,726 2,776
------------- ------------
23,348 23,776
Less current portion (435) (397)
------------- ------------
$ 22,913 $ 23,379
============= ============
The mortgage loans mature in 2005. Principal payments on the mortgage
loans during the next four years are as follows: $435,000 in 2002,
$519,000 in 2003, $564,000 in 2004 and $21,830,000 in 2005.
The mortgage notes payable are secured by deeds of trust on the related
property. Under the terms of these loan agreements, the operating
partnerships are obligated to conform with specific financial criteria
and are subject to certain other covenants.
Cash outflows from operating activities included interest paid of
$2,134,000, $2,082,000 and $1,602,000 in 2001, 2000 and 1999,
respectively.
(5) Distributions to Partners and Allocation of Net Earnings
Cash is distributable and net earnings are allocable 1% to the Fund's
general partnership interests and 99% to its limited partnership
interests. Cash distributable to partners is determined at the discretion
of the Fund's general partners. Cash distributions to partners were made
from net cash provided by operating activities as disclosed on the
statements of cash flows in 2001 and 1999 and reserves of $666,000 in
2000. Cash distributions per unit aggregated $2.12 in 2001, 2000 and
1999.
(6) Commitments and Contingencies
The Fund is a party to litigation arising in the ordinary course of
business. The Fund does not believe the results of such litigation, even
if the outcome is unfavorable to the Fund, would have a material effect
on its consolidated financial position or results of operations.
(7) Fair Value of Financial Instruments
The Fund believes the carrying amount of cash and equivalents, accounts
receivable (net of allowance for doubtful accounts), estimated
third-party payor settlements, prepaid expenses
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Notes to Consolidated Financial Statements (continued)
(7) Fair Value of Financial Instruments (continued)
and other current assets, accounts payable and other accrued expenses and
accrued compensation and related costs approximates fair value because of
the short-term maturity of these instruments.
The carrying value of the Fund's debt approximates its fair value.
(8) Certain Significant Risks and Uncertainties
The Fund receives revenues from Medicare, Medicaid, private insurance,
self-pay residents, other third party payors and long-term care
facilities which utilize our pharmacy and other specialty medical
services. The healthcare industry is experiencing the effects of the
federal and state governments' trend toward cost containment, as
government and other third party payors seek to impose lower
reimbursement and utilization rates and negotiate reduced payment
schedules with providers. These cost containment measures, combined with
increasing influence of managed care payors and competition for patients,
have resulted in reduced rates of reimbursement for services provided by
the Fund.
In recent years, several significant actions have been taken with respect
to Medicare and Medicaid reimbursement including the following:
o The adoption of the Medicare Prospective Payment System pursuant to
Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget
Refinement Act ("BBRA") and the Benefit Improvement Protection Act of 2000
("BIPA").
o The repeal of the "Boren Amendment" federal payment standard for Medicaid
payments to nursing facilities.
o A number of the provisions of the BBRA and BIPA enactments providing
additional funding for Medicare participating skilled nursing facilities expire
on September 30, 2002. Expiring provisions are estimated to, on average, reduce
per beneficiary per diems by $30. Moreover, CMS has indicated its desire to
complete refinements to the case mix classification system as part of the Fiscal
2003 rule-making. Under the law, when these revisions are implemented, the
add-on's authorized by the BBRA and BIPA will expire. Combined, the Medicare
skilled nursing facility sector face an 18% reduction in the average median per
diems. If the Fund were to experience an 18% decline in our current average
Medicare rate per patient day, the estimated annual reduction in Medicare
revenues of approximately $2,800,000 would have a material adverse affect on our
financial position, results of operations, and cash flows. Trade organizations
representing the skilled nursing facility sector are aggressively pursuing
strategies to minimize the potential impact of the "Medicare Rate Cliff".
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
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Notes to Consolidated Financial Statements (continued)
(8) Certain Significant Risks and Uncertainties (continued)
o The 1997 Act included several provisions affecting Medicaid. The 1997 Act
repealed the "Boren Amendment" federal payment standard for Medicaid payments to
nursing facilities effective October 1, 1997. The Boren Amendment required that
Medicaid payments to certain health care providers be reasonable and adequate in
order to cover the costs of efficiently and economically operated healthcare
facilities. Under the 1997 Act, states must now use a public notice and comment
period in order to determine rates and provide interested parties a reasonable
opportunity to comment on proposed rates and the justification for and the
methodology used in calculating such rates. With the repeal of the Federal
payment standards, there can be no assurances that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities and pharmacies or that payments to nursing facilities and pharmacies
will be made on timely basis. The 1997 Act also grants greater flexibility to
states to establish Medicaid managed care projects without the need to obtain a
federal waiver. Although these projects generally exempt institutional care,
including nursing facilities, no assurances can be given that these projects
ultimately will not change the reimbursement methodology for nursing facility
services from fee-for-service to managed care negotiated or capitated rates. The
Fund anticipates that federal and state governments will continue to review and
assess alternative health care delivery systems and payment methodologies.
o The BIPA enactment mandates a phase out of intergovernmental transfer
("IGT") transactions by states whereby states artificially initiate the payments
to certain public facilities to increase federal matching funds. This action may
reduce federal support for a number of state Medicaid plans. The reduced federal
payments may impact aggregate available funds requiring states to further
contain payments to providers. The Fund operates in several states that may
experience a contraction of federal matching funds.
It is not possible to fully quantify the effect of recent legislation,
the interpretation or administration of such legislation or any other
governmental initiatives on the Fund's business. Accordingly, there can
be no assurance that the impact of these changes or any future healthcare
legislation will not adversely affect the Fund's business. There can be
no assurance that payments under government and private third-party payor
programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable
to patients eligible for reimbursement pursuant to such programs. The
Fund's financial condition and results of operations may be affected by
the revenue reimbursement process, which in the Fund's industry is
complex and can involve lengthy delays between the time that revenue is
recognized and the time that reimbursement amounts are settled.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
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Partnership Information
Directors and Executive Officers
Meridian Healthcare Investments, Inc.
Development General Partner
Michael R. Walker
President and Director
Richard R. Howard
Director
George V. Hager, Jr.
Vice President and Treasurer
Brown Healthcare, Inc.
Administrative General Partner
John M. Prugh
President and Director
Peter E. Bancroft
Vice President and Director
Terry F. Hall
Secretary
Timothy M. Gisriel
Treasurer
Form 10-K
A copy of the Fund's Annual Report on Form 10-K for 2001 as filed with the
Securities and Exchange Commission is available to partners without charge on
request by writing to:
Investor Services
Brown Healthcare, Inc.
225 East Redwood Street
Baltimore, Maryland 21202
Auditors
KPMG LLP
1600 Market Street
Philadelphia, Pennsylvania 19103
Legal Counsel
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Further Information
Please submit changes in name, address, investment representative and
distribution instructions to Investor Services at the above address.
For further information or questions regarding your investment, please call
Yolanda Harris, Investor Services Coordinator, at 410-547-3016
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