FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to For Quarter Ended June 30, 2002 Commission file number 000-17596 Meridian Healthcare Growth and Income Fund Limited Partnership (Exact Name of Registrant as Specified in its Charter) Delaware 52-1549486 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 225 East Redwood Street, Baltimore, Maryland 21202 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (410) 727-4083 N/A (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP INDEX Page No. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS 2 Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Earnings 4 Condensed Consolidated Statements of Partners' Capital 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Part II. Other Information Item 1. through Item 6. 15 Signatures 16 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Cautionary Statement Regarding Forward Looking Statements Statements made in this report, and in our other public filings, which are not historical facts contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to: o certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations," such as our ability to meet our liquidity needs, scheduled debt and interest payments and expected future capital expenditure requirements; and o certain statements in the Notes to Condensed Consolidated Financial Statements (Unaudited). The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the future may differ materially. Factors that could cause actual results to differ materially include, but are not limited to the following: o changes in the reimbursement rates or methods of payment from Medicare and Medicaid, or the implementation of other measures to reduce the reimbursement for our services; o the expiration of enactments providing for additional governmental funding; o efforts of third party payors to control costs; o the impact of federal and state regulations; o changes in payor mix and payment methodologies; o further consolidation of managed care organizations and other third party payors; o competition in our business; o an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance; o competition for qualified staff in the healthcare industry; o our ability to control operating costs, and generate sufficient cash flow to meet operational and financial requirements; and o an economic downturn or changes in the laws affecting our business in those markets in which we operate. These risks are described in more detail in our Annual Report on Form 10-K. 2 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Condensed Consolidated Balance Sheets (Dollars in thousands) June 30, 2002 December 31, (Unaudited) 2001 --------------- --------------- Assets Current Assets Cash and cash equivalents $ 3,843 $ 2,066 Accounts receivable, net 7,945 9,140 Estimated third-party payor settlements 898 561 Prepaid expenses and other current assets 643 548 --------------- --------------- Total current assets 13,329 12,315 --------------- --------------- Property and equipment, net of accumulated depreciation 31,675 31,927 --------------- --------------- Other assets Goodwill, net 4,237 4,237 Loan acquisition costs, net 257 298 --------------- --------------- 4,494 4,535 --------------- --------------- Total assets $ 49,498 $ 48,777 =============== =============== Liabilities and Partners' Capital Current liabilities Current portion of long-term debt $ 492 $ 435 Accrued compensation and related costs 3,059 475 Accounts payable and other accrued expenses 3,241 4,605 Estimated third party payor settlements 1,925 1,898 --------------- --------------- Total current liabilities 8,717 7,413 --------------- --------------- Deferred management fee payable 1,000 978 Loan payable to the Development General Partner 1,266 1,240 Long-term debt 22,617 22,913 --------------- --------------- 24,883 25,131 --------------- --------------- Partners' capital General partners (157) (153) Assignee limited partners; 1,540,040 units issued and outstanding 16,055 16,386 --------------- --------------- Total partners' capital 15,898 16,233 --------------- --------------- Total liabilities and partners' capital $ 49,498 $ 48,777 =============== =============== See accompanying notes to condensed consolidated financial statements. -3- MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Condensed Consolidated Statements of Earnings (Unaudited) (Dollars in thousands except per unit amounts) Three Months Ended Six Months Ended --------------------------------- --------------------------------- June 30, June 30, June 30, June 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Revenues Medicaid and Medicare patients $ 13,105 $ 11,648 $ 25,638 $ 23,267 Private patients 2,292 2,601 4,802 5,185 Investment and other income 29 42 54 90 --------------- --------------- --------------- --------------- 15,426 14,291 30,494 28,542 --------------- --------------- --------------- --------------- Expenses Operating, including $2,776, $2,322, $5,281 and $4,633 to related parties 12,704 11,716 24,757 23,435 Management and administration fees to related parties 853 784 1,682 1,570 General and administrative 284 239 542 473 Depreciation and amortization 507 563 1,008 1,122 Interest expense 595 606 1,187 1,208 --------------- --------------- --------------- --------------- 14,943 13,908 29,176 27,808 --------------- --------------- --------------- --------------- Net earnings $ 483 $ 383 $ 1,318 $ 734 =============== =============== =============== =============== Net earnings per unit of assignee limited partnership interest (computed based on 1,540,040 units) $ 0.31 $ 0.25 $ 0.85 $ 0.47 =============== =============== =============== =============== See accompanying notes to condensed consolidated financial statements -4- MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Condensed Consolidated Statements of Partners' Capital For the Six Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in thousands) Assignee General Limited Partners Partners Total --------------- --------------- --------------- Balance at December 31, 2001 (153) 16,386 $ 16,233 Net earnings 13 1,305 1,318 Distributions to partners (17) (1,636) (1,653) --------------- --------------- --------------- Balance at June 30, 2002 (157) 16,055 $ 15,898 =============== =============== =============== Balance at December 31, 2000 (142) 17,490 $ 17,348 Net earnings 7 727 734 Distributions to partners (17) (1,636) (1,653) --------------- --------------- --------------- Balance at June 30, 2001 (152) 16,581 $ 16,429 =============== =============== =============== See accompanying notes to condensed consolidated financial statements -5- MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMTIED PARTNERSHIP Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, (Unaudited) (Dollars in thousands) 2002 2001 --------------- --------------- Cash flows from operating activities Net earnings $ 1,318 $ 734 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 1,008 1,122 Minority interest in net earnings of operating partnerships 12 9 Increase in loan payable to Development General Partner 26 26 Increase in deferred management fee payable 22 21 Change in other assets and liabilities Accounts receivable 1,183 287 Estimated third-party payor settlements (310) 420 Prepaid expenses and other current assets (95) 150 Accrued compensation and related costs 2,584 (581) Accounts payable and other accrued expenses (1,364) 590 --------------- --------------- Net cash provided by operating activities 4,384 2,778 --------------- --------------- Cash flows from investing activities - additions to property and equipment (715) (467) --------------- --------------- Cash flows from financing activities Repayment of long-term debt (239) (218) Distributions to partners (1,653) (1,653) --------------- --------------- Net cash used in financing activities (1,892) (1,871) --------------- --------------- Net increase in cash and cash equivalents 1,777 440 Cash and cash equivalents Beginning of period 2,066 1,108 --------------- --------------- End of period $ 3,843 $ 1,548 =============== =============== See accompanying notes to condensed consolidated financial statements. -6- MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) NOTE 1 - THE FUND AND BASIS OF PREPARATION 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. The Fund, through its seven operating partnerships, derives substantially all of its revenue from extended healthcare provided to nursing center residents including room and board, nursing care, drugs and other medical services. The accompanying condensed consolidated financial statements of Meridian Healthcare Growth and Income Fund Limited Partnership (the "Fund") do not include all of the information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The unaudited interim financial information contained in the consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the 2001 Annual Report. NOTE 2 - RELATED PARTY TRANSACTIONS The Fund is obligated to pay Brown-Healthcare, Inc. (Administrative General Partner) an annual administration fee of the greater of $75,000 per year or 1/2 of 1% of the Fund's annual revenues. The nursing centers owned by the operating partnerships are managed by Meridian Healthcare, Inc., an affiliate of Meridian Healthcare Investments, Inc. (Development General Partner), under the terms of existing management agreements which provide for management fees equal to 5% of the annual revenues of each nursing center. 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. Transactions with these related parties for the three and six months ended June 30, 2002 and 2001 are as follows: Three Months Ended Six Months Ended June 30, 2002 June 30, 2001 June 30, 2002 June. 30, 2001 Management and administration fees $ 853,000 $ 785,000 $1,682,000 $1,570,000 Drug and medical supplies purchases 1,081,000 1,013,000 1,997,000 2,096,000 Nursing and rehabilitation services 1,695,000 1,309,000 3,284,000 2,537,000 Interest expense on borrowings 23,000 22,000 44,000 43,000 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 an arrangement, including accumulated interest from inception of the loan at 9% per annum, were $1,266,000 at June 30, 2002 and $1,240,000 at December 31, 2001. 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. 7 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) NOTE 3 - DEBT 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 5-year term. The Fund established a $4,000,000 revolving credit facility with the same lender. Borrowings under the credit facility will bear interest at a floating rate, which shall equal the announced commercial prime rate. The bank shall renew the credit facility each year for a one-year extention. There were no borrowings under the revolving credit facility at June 30, 2002 or December 31, 2001. NOTE 4 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The Fund receives revenues from Medicare, Medicaid, private insurance, and self-pay residents. 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 the increasing influence of managed care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by the Fund. The Fund receives approximately 84% of its patient service revenues from Medicare and Medicaid. A number of the provisions of the Balanced Budget Act and the Benefits Improvement Protection Act 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 $34. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS") issued a press statement announcing that the agency would not proceed with its previously announced changes in the skilled nursing facility case-mix classification system. In its announcement, CMS made it clear that case-mix refinements would be postponed for a full year. CMS issued notice of fiscal year 2003 rates in the Federal Register, July 31, 2002. Rates effective October 1, 2002 will be increased by a 2.6% annual market basket adjustment. CMS estimates that even with this upward adjustment, average rates will by 8.8% lower than the current year because of the reduced payment caused by the expiring statutory add-ons. With regard to Congressional consideration, the House of Representatives passed a package of Medicare amendments in late June 2002. Under the House-passed measure, portions of the expiring provisions would be retained. The BBRA increase of 4% would expire, and the BIPA 16.6% add-on to the nursing portion of the SNF PPS rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005. Under this proposal fiscal year 2003 rates would be 5.2% lower than the current year. The Senate is expected to consider Medicare provider relief during September. Details of the Senate leadership proposal have not been released. It is premature to forecast the outcome of Congressional action. The Fund's previous estimates of the impact of the "Medicare SNF Cliff" which included the anticipated effort of CMS changes in the case-mix classification system was a decrease of approximately 18% of the per diem rate; the revised estimate factoring in the administrative decision not to proceed with changes at this time still exposes the facility sector to a negative 10% reduction. For the Fund, this could have an adverse revenue impact in excess of $1.6 million annually. 8 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) NOTE 4 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED) 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 governmental 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 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. 9 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources 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 are based on a 20-year amortization schedule with a balloon payment due at the end of the 5-year term. The Fund also replaced its $4,000,000 revolving credit facility with the same lender. There are no borrowings under this credit facility at this time. The Fund's working capital (excluding the current portion of long-term debt) decreased $233,000 to $5,104,000 at June 30, 2002 as compared to $5,337,000 at December 31, 2002. The Fund has sufficient liquid assets and other available credit resources to satisfy its operating expenditures and anticipated routine capital improvements at each of the seven nursing home facilities. Cash flow from operating activities was $4,384,000 for the six-month period ended June 30, 2002 as compared to $2,778,000 for the same period of 2001. This significant increase in cash flow was due primarily to the collection of accounts receivable and increased accrued compensation and related costs that were paid in early July. Cash used in investing activities for the six-month period ended June 30, 2002 was $715,000 and included improvements to the Fund's seven operating facilities. Similar improvements made during the first six months of 2001 were $467,000. The Fund believes that the short-term liquidity needs will be met through expected cash flow from operations and available working capital from the existing revolving credit facility. Between 1988 and 1989 the Development General Partner loaned the Fund $597,000 to support operating deficits generated by the Mooresville, Salisbury and Woodlands nursing centers during each centers' first two years of operation. Loans outstanding under this arrangement, including interest at 9% per annum, were $1,266,000 at June 30, 2002 and $1,240,000 at December 31, 2001. On August 15, 2002 the Fund will make its second quarter 2002 distribution to partners of $826,000. This distribution will be funded by second quarter operations and working capital of approximately $269,000. Through the first half of the year, working capital of approximately $302,000 has been utilized to make the scheduled distributions to the partners. Review of the remainder of the 2002 budget suggests operations from the seven nursing centers will be sufficient to fund a similar distribution throughout the year and reimburse working capital utilized to date. Cash flow generated during the second half of the year is projected to increase due to lower capital improvements when compared to the first six months of the year. The major challenge to the Fund in the foreseeable future is to control operating expenses, to maintain a quality mix of patients and to increase the overall census at each of the facilities. Revenue Sources The Fund receives revenues from Medicare, Medicaid, private insurance, and self-pay residents. 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 the increasing influence of managed care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by the Fund. 10 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue Sources (continued) A number of the provisions of the Balanced Budget Act and the Benefits Improvement Protection Act 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 $34. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS") issued a press statement announcing that the agency would not proceed with its previously announced changes in the skilled nursing facility case-mix classification system. In its announcement, CMS made it clear that case-mix refinements would be postponed for a full year. CMS issued notice of fiscal year 2003 rates in the Federal Register, July 31, 2002. Rates effective October 1, 2002 will be increased by a 2.6% annual market basket adjustment. CMS estimates that even with this upward adjustment, average rates will by 8.8% lower than the current year because of the reduced payment caused by the expiring statutory add-ons. With regard to Congressional consideration, the House of Representatives passed a package of Medicare amendments in late June 2002. Under the House-passed measure, portions of the expiring provisions would be retained. The BBRA increase of 4% would expire, and the BIPA 16.6% add-on to the nursing portion of the SNF PPS rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005. Under this proposal fiscal year 2003 rates would be 5.2% lower than the current year. The Senate is expected to consider Medicare provider relief during September. Details of the Senate leadership proposal have not been released. It is premature to forecast the outcome of Congressional action. The Fund's previous estimates of the impact of the "Medicare SNF Cliff" was approximately 18% of the per diem rate; the revised estimate factoring in the administrative decision still exposes the facility sector to a negative 10% reduction. For the Fund, this could have an adverse revenue impact in excess of $1.6 million. 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 governmental 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 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. Results of Operations Three Months Ended June 30, 2002 versus Three Months Ended June 30, 2001 Net earnings for the Fund were $483,000 for the three months ended June 30, 2002 as compared to $383,000 for the same period in fiscal year 2001. The increase in earnings is primarily due to an increase in Medicaid and Medicare patients revenue, offset partially by increased operating costs. Overall revenues of $15,426,000 increased $1,135,000 or 7.9% for the three months ended June 30, 2002 compared to $14,291,000 for the same period in fiscal year 2001. The increase in revenue is primarily due to an increase in revenues from Medicaid and Medicare patients of $1,457,000. Medicaid revenue of $8,762,000 increased $1,021,000 for the three months ended June 30, 2002 compared to the same period in the prior year. The growth in revenue is primarily due to an overall Medicaid rate increase of approximately 9.6% driven primarily by the four Maryland centers, which received their annual Medicaid rate adjustment in July 2001. Also the Medicaid average daily census for the second quarter ended June 20, 2002 increased 3.9% or 26 customers compared to the second quarter of fiscal year 2001. Medicare revenue of $4,343,000 increased $436,000 or 11.1% for the three month period ended June 30, 2002 compared to the same period in fiscal year 2001. This increase is primarily due to an increase in the Medicare rate of approximately 2.5% and a growth in census. The average daily Medicare census increased 11 customers or 8.1% to 141 for the three months ended June 30, 2002 as compared to the same period in the prior year. 11 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) Second quarter 2002 expenses of $14,943,000 increased $1,035,000 or 7.4% from $13,908,000 for the three months ended June 30, 2001. Operating expenses increased $988,000 or 8.4% in the second quarter of 2002 as compared to the same period in fiscal year 2001. This increase is primarily due to the increased cost of nursing services and ancillary costs. Nursing costs increased $633,000 for the three months ended June 30, 2002 as compared to the same period in fiscal year 2001. This increase is primarily due to increases in salary, wages, employee benefits, and an increase in the utilization of temporary nurse staffing, which is being driven by the strong market demand for nursing personnel. Salary, wage, and benefits expense for nurses increased $261,000 and temporary nurse staffing expense increased $372,000 for the three months ended June 30, 2002 compared to the same period in fiscal year 2001. Bad debt expense of $338,000 increased $147,000 for the three month period ended June 30, 2002 compared to the same period in fiscal year 2001. Second quarter ancillary expenses increased $43,000 or 2.3% for the three months ended June 30, 2002 as compared to the same period in fiscal year 2001. This increase is attributable to the 8.1% increase in the average daily Medicare census, and the increased utilization of Medicare Part B ancillary services. The remaining increase in operating costs is due to general inflationary cost increases. Management and administrative fees of $853,000 increased $69,000 or approximately 8.8% for the second quarter 2002 compared to the same period in fiscal year 2001. This increase is due to an increase in the management fee expense, which is calculated at 5% of the Fund's net revenues. Depreciation and amortization expense decreased $56,000 to $507,000 for the second quarter 2002 compared to the same period in fiscal year 2001. This decrease is due to the adoption of Statement 142 (described below under Recently Issued Accounting Pronouncements), which does not recognize the amortization of goodwill. Six Months Ended June 30, 2002 versus Six Months Ended June 30, 2001 Net earnings for the Fund were $1,318,000 for the six months ended June 30, 2002 as compared to $734,000 for the same period in fiscal year 2001, representing an increase of $584,000 or 79.6%. Overall revenues of $30,494,000 increased $1,952,000 or 6.8% for the six months ended June 30, 2002 as compared to the same period in fiscal year 2001. This increase in revenue is primarily due to increases in revenue from Medicaid and Medicare patients. Medicaid and Medicare revenue increased $2,371,000 to $25,638,000 for the six month period ended June 30, 2002 compared to the same period in 2001. Medicaid revenue for the six months ended June 30, 2002 increased $2,027,000 compared to the same period in the prior year. This increase is primarily due to an overall Medicaid rate increase of approximately 9.3% driven primarily by the four Maryland centers, which received their annual Medicaid rate adjustment in July 2001. Also the Medicaid average daily census for the 6 months ended June 30, 2002 increased 4.0% or 27 customers compared to the same period in fiscal year 2001. Medicare revenue increased $344,000 or 4.3% for the six month period ended June 30, 2002 compared to the same period in fiscal year 2001. This increase is primarily due to an increase in the Medicare rate of approximately 5.7% and the increased utilization of Medicare Part B services. Medicare Part B revenue increased $143,000 or 36.0% due to an increase in Part B utilization. Overall expenses increased $1,368,000 or 4.9% to $29,176,000 for the six months ended June 30, 2002 as compared to $27,808,000 for the same period in fiscal year 2001. Operating expenses increased $1,322,000 or 5.6% to $24,757,000 for the six months ended June 30, 2002 as compared to the same period in fiscal year 2001. This increase is primarily due to the increased cost of nursing services and bad debt expense which is being partially offset by decreased ancillary costs. Nursing costs increased $1,074,000 for the six months ended June 30, 2002 as compared to the same period in fiscal year 2001. This increase 12 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) is primarily due to increases in salary, wages, employee benefits, and an increase in the utilization of temporary nurse staffing, which is being driven by the strong market demand for nursing personnel. Salary, wage, and benefits expense for nurses increased $322,000 and temporary nurse staffing expense increased $752,000 for the six months ended June 30, 2002 compared to the same period in fiscal year 2001. Bad debt expense of $672,000 increased $308,000 for the six months ended June 30, 2002 compared to the same period in fiscal year 2001. Ancillary expenses for the six months ended June 30, 2002 decreased $267,000 or 7.0% compared to the same period in the fiscal year 2001. The remaining increase in operating costs is due to general inflationary cost increases. Management and administrative fees of $1,682,000 increased $112,000 or approximately 7.1% for the six months ended June 30, 2002 compared to the same period in fiscal year 2001. This increase is due to an increase in the management fee expense, which is calculated at 5% of the Fund's net revenues. Depreciation and amortization expense decreased $114,000 to $1,008,000 for the six months ended compared to the same period in fiscal year 2001. This decrease is due to the adoption of SFAS 142 (described below under Recently Issued Accounting Pronouncements), which does not recognize the amortization of goodwill. Recently Issued Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires 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 requires 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 adopted the provisions of Statement 142 effective January 1, 2002. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement requires the Fund to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Fund was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Fund is considered to have one reporting unit. The Fund had up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Fund must perform the second step of the transitional impairment test. In the second step, the Fund must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Fund's statement of earnings. The Fund performed the first step of the transitional goodwill impairment evaluation as of January 1, 2001 and no impairment was indicated. 13 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP Management's Discussion and Analysis of Financial Condition and Results of Operations Recently Issued Accounting Pronouncements (continued) The following table reconciles the prior year's reported net earnings to its respective pro forma balances adjusted to exclude goodwill amortization expense which is no longer amortized under the provisions of Statement 142. Current period results are presented for comparative purposes. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------------------------- ------------------------- Reported net earnings $ 483 $ 383 $ 1,318 $ 734 Add back: goodwill amortization - 63 - 126 ------------------------- ------------------------- Adjusted net earnings $ 483 $ 446 $ 1,318 $ 860 ========================= ========================= 14 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP PART I. FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk The Fund has exposure to changing interest rates and is currently not engaged in hedging activities. Interest on the Fund's $23.1 million mortgage is at a fixed rate of 9.75%. PART II. OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities and Use of Proceeds Inapplicable Item 3. Defaults upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders Inapplicable Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K: None 15 MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP DATE: 08/06/02 By: /s/ John M. Prugh John M. Prugh President and Director Brown-Healthcare, Inc. Administrative General Partner DATE: 08/06/02 By: /s/ Timothy M. Gisriel Timothy M. Gisriel Treasurer Brown-Healthcare, Inc. Administrative General Partner 16