-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VLsrukuFKgAioIQOfJKgDOVvO6XfaPOEzFagIGcU07IDzWdpuQZ3TiRfWkAadxhX hKXqbZE0YPmibNK6RiduYQ== 0000950144-97-003454.txt : 19970401 0000950144-97-003454.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003454 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL INCOME PROPERTIES 2B LTD PARTNERSHIP CENTRAL INDEX KEY: 0000820390 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 592726599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-06122-02 FILM NUMBER: 97569569 BUSINESS ADDRESS: STREET 1: 7000 CENTRAL PARKWAY STREET 2: STE 850 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4046681080 FORMER COMPANY: FORMER CONFORMED NAME: MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP DATE OF NAME CHANGE: 19900802 10-K 1 MEDICAL INCOME PROPERTIES 2B LTD PARTNERSHIP: 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended Commission File Number December 31, 1996 33-6122-02 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP (Exact Name of Registrant as Specified in its Charter) Delaware 59-2726599 -------- ---------- (State of Organization) (IRS Employer Identification Number) 7000 Central Parkway, Suite 850 Atlanta, GA 30328 (Address of Principal Executive Office) (770) 668-1080 Registrant's Telephone Number, Including Area Code Securities Registered Pursuant to Section 12 (b) of the Act: Title of Each Class Name of Each Exchange - ------------------------- on Which Registered LIMITED PARTNERSHIP UNITS ------------------- NONE Indicate by check 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 ---- ---- Aggregate market value of the voting stock held by non-affiliates of the Registrant is not applicable. The number of limited partnership units outstanding on February 27, 1997 was 10,907. The Prospectus of the Registrant dated October 22, 1986, filed pursuant to Rule 424(b) under the Securities Act of 1933 is incorporated by reference, to the extent indicated in Part III of this report. 2 RWB MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT ON FORM 10-K
PART I Page Item 1: Business 1 Item 2: Properties 3 Item 3: Legal Proceedings 3 Item 4: Submission of Matters to a Vote of Security Holders 3 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters 3 Item 6: Selected Financial Data 4 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 4 Item 8: Financial Statements and Supplementary Data 6 Item 9: Disagreements on Accounting and Financial Disclosure 6 PART III Item 10: Directors and Executive Officers of the Registrant 6 Item 11: Executive Compensation 7 Item 12: Security Ownership of Certain Beneficial Owners and Management 7 Item 13: Certain Relationships and Related Transactions 7 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 7 Signatures 10
3 PART I ITEM 1. BUSINESS Medical Income Properties 2B Limited Partnership (the Partnership), is a Delaware limited partnership which was organized on April 29, 1987. The Partnership is one of a series of three limited partnerships as represented by the registration statement filed with the Securities and Exchange Commission on October 22, 1986 (the Effective Date), providing for the sale of $10,000,000 of limited partnership units (the Units), with an option to increase the offering by an additional $10,000,000. The offering closed on January 31, 1988, upon the sale of 10,907 units for an aggregate purchase price of $10,907,000. The purpose of the Partnership is to engage in the business of acquiring and holding for investment income-producing health care related properties, primarily nursing homes, and operating such properties as skilled and intermediate care nursing homes. In 1988, the Partnership acquired a nursing home in Edwardsville, Illinois, a 45.45% interest in a joint venture nursing home in Decatur, Alabama and a 50% interest in two joint venture nursing homes in the Houston, Texas area. The Partnership employed approximately 88 employees as of February 12, 1997 at its wholly owned facility and 335 employees at the joint venture properties. Business Strategy The Partnership intends to hold real property investments until such time as a sale or other disposition appears to be advantageous. Such factors as potential capital appreciation, industry trends, cash flow and federal income tax consequences to the Limited Partners will be considered before Partnership property dispositions are made. The Partnership (the "Partnership") has entered into an asset Purchase and Sale Agreement effective as of February 3, 1997 (the "Sale Agreement"), by and among the Partnership, Qualicorp Management, Inc., the managing general partner of the Partnership, and Omega Healthcare Investors, Inc. ("Omega"). The Sale Agreement calls for the sale to Omega of the Partnership's interests in its facilities, and the personal property and intangible assets related to the operation of these facilities. The description of the Sale Agreement set forth herein does not purport to be complete and is qualified in its entirely by the provisions of the Sale Agreement, filed as an exhibit to the Company's Current Report on Form 8-K dated February 18, 1997, and as Appendix A to the Partnership's Consent Solicitation Statement filed March 12, 1997. Under the Sale Agreement, the Partnership will receive total sales consideration of $24,522,725, which will be reduced by accrued expenses of approximately $493,705 for vacation pay, sick pay, taxes and trust fund obligations as provided in the Sale Agreement, by approximately $3,539,444 of closing costs, brokerage fees, third party settlements and other obligations, and by approximately $3,398,905 for the payment of debt, resulting in estimated net proceeds from the sale of $17,090,671. These estimated net proceeds will be augmented by estimated current assets in excess of current liabilities of approximately $5,081,610 which will increase the total amount estimated to be available for distribution to approximately $22,173,281, which will be distributed to the Partnership's limited partners (the "Limited Partners") in three installments as follows: 1. First Installment. The Limited Partners will receive a check in the amount of $1,003 per unit, payable within 30 business days of the closing and surrender of Partnership certificates (an anticipated aggregate distribution to all of the Limited Partners of $18,702,485); 2. Second Installment. A second distribution of approximately $134 per unit is anticipated to be made within one year of the closing. This distribution is primarily attributable to the collection of accounts receivable in the period subsequent to the closing less the payment of accounts payable and other liabilities (an anticipated aggregate distribution to all of the Limited Partners of $2,503,337); and 3. Final Installments. A final distribution of up to $52 per unit is anticipated to be made following the expiration of the Partnership's representations and warranties to Omega and any additional period required to finally resolve any claims for indemnification against the Partnership brought prior to the termination of such period (an anticipated aggregate distribution to all of the Limited Partners of $966,459). The closing of the Sale Agreement is subject to a number of conditions, as outlined in the Sale 1 4 Agreement, including the approval of the Sale Agreement by the Limited Partners and the closing of facility acquisition agreements between Omega and three other affiliated partnerships. The approval of one of the partnerships has already been obtained and the consents of the other partnerships, including the Limited Partners, are being solicited. Long Term Care Industry The long term care industry is composed of many facilities offering services to subacute, skilled, assisted living, and personal care residents. The Partnership's nursing homes are considered to be in the skilled segment of the industry, although several of its homes offer subacute services. Historically, nursing homes have derived their revenues from Medicare, Medicaid and private pay patients. In the past few years, the industry has seen an increase in private insurance patients and to a greater extent, contractual services from Health Maintenance Organizations (HMO's) and Preferred Provider Organizations (PPO's). The industry has always faced a challenge in staffing facilities, particularly with regard to Registered Nurses, Licensed Practical Nurses and Certified Nurse Aides. Depending upon the geographic area, the Partnership competes with hotels, motels and restaurants for other employees, including dietary and housekeeping staff. The Partnership owns nursing facilities in the States of Illinois, Texas, and Alabama. Each state reimburses nursing facilities on a prospective basis, although Alabama is the only state which bases reimbursement on the nursing facilities' actual cost. Texas and Illinois use average cost derived from all filed cost reports. Texas reimburses nursing facilities on a patient specific need called Texas Index of Level of Effort (TILE). Illinois pays nursing facilities based upon different cost parameters, including paying additional incentives based on facility services provided. Approximately fifty percent of the Partnership's operating costs consist of employee salaries and benefits. In 1995 a federal law was passed which increased the minimum wage level to $4.75 per hour in 1996 and to $5.15 per hour in 1997. Management of the Partnership has already responded to these increases, and to a corresponding "ripple effect" for wages of employees paid above the new minimum wage, by increasing wages accordingly. To date, the State of Alabama has increased its reimbursement rates to reimburse actual expenses due to the 1996 minimum wage increase to $4.75. The States of Illinois and Texas have recently increased their reimbursement rates, but these increases were not related to, and do not reimburse providers for, the 1996 minimum wage increase. None of these states are committed to reimbursing nursing home expenses due to the 1997 increases in the minimum wage to $5.15 per hour, and there is considerable doubt as to whether such increases will be forthcoming. The federal government has been discussing changes in Medicare and Medicaid as it looks for ways to downsize government. The Medicaid program could be impacted through block grants or level funding programs which would cap federal funding. If federal funding were capped, and state wished to retain the current level of services, significant additional funding would be required, particularly if the Omnibus Budget Reconciliation Act regulations were not repealed. The Medicare program is being examined by the federal government for possible changes, including the implementation of cost limits on ancillary services (such as therapy programs, equipment and diagnostic services), capital cost reductions, a freeze of the routine cost limits and perhaps a prospective payment system. The potential impact of such changes, either alone or in combination, cannot be determined at this time. Information regarding industry segments is not applicable to the Partnership's business. Seasonality The Partnership's revenue and operating income fluctuate from quarter to quarter and tend to be higher in the first and second quarter of each fiscal year. This seasonality is due primarily to the state Medicaid programs in which the Partnership operates, rate increases and census cycles. SERVICES PROVIDED Routine Services All of the nursing facilities operated by the Partnership are licensed as skilled care facilities by the appropriate state regulatory agencies. Routine services include the provision of skilled care services and assistance with activities of daily living, depending upon the needs of each resident. Subacute care may also be provided as specified by each resident's physician. Skilled nursing care is rendered 24 hours per day by registered or licensed nurses and certified nurses aides. 2 5 Ancillary Services The Partnership provides a variety of rehabilitative services at its facilities for residents. These services include physical, speech, occupational, and respiratory therapies. The Partnership continues to expand these services as warranted by the needs of the residents and the requirements of third-party payor programs. ITEM 2. PROPERTIES As of December 31, 1996, the following property was wholly owned by the Partnership:
Average Daily Census Date of No. of -------------------- Property Acquisition Beds Description 1996 1995 1994 1993 1992 -------- ----------- ---- ----------- ---- ---- ---- ---- ---- Edwardsville (East), IL. 3/1/88 120 Nursing home 110 110 112 113 115
In addition, the Partnership has invested in joint ventures consisting of three nursing homes with Medical Income Properties 2A Limited Partnership:
Date of Owner- Average Daily Census Acqui- No. of ship -------------------- Property sition Beds Description % 1996 1995 1994 1993 1992 -------- ------ ---- ----------- ----- ---- ---- ---- ---- ---- Renaissance Place-Katy, TX. 5/1/88 130 Nursing home 50% 117 121 112 118 116 Renaissance Place-Humble, TX. 5/1/88 120 Nursing home 50% 115 116 115 113 113 Medical Park-Decatur, AL. 7/1/88 183 Nursing home 45.45% 174 170 175 178 179
A description of the Partnership's purchase of the properties is disclosed in Notes 1(f), 2, 3, 4, 5 and 12 of the Notes to Financial Statements. ITEM 3. LEGAL PROCEEDINGS At December 31, 1996, there were no material pending legal actions against the Partnership. As discussed in Note 9 to the Partnership's Audited Financial Statements, the Partnership does have certain contingent liabilities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS There is no established public trading market for the Partnership Units. There were 1,009 limited partners as of February 27, 1997. Distributions paid per limited partner unit for each quarter for the last five years of the Partnership are incorporated by reference from Item 6 below. 3 6 ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the period January 1, 1992 to December 31, 1996 is presented on a consolidation basis below: (000's omitted except for per share data and distribution)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Summary of Operations: Total Revenue $ 3,448 3,433 3,059 2,989 2,834 Operating Income (Loss) $ (222) (216) 36 264 419 Net Income $ 582 331 459 615 542 Per Share Data: Net Income per Limited Partner Unit $ 49.62 28.23 39.14 52.44 46.24 Financial Condition: Total Assets $ 11,087 11,206 10,954 10,597 10,510 Notes Payable $ 704 763 816 879 929 Partner's Capital $ 8,949 8,836 8,974 8,954 8,691 Distributions per Limited Partner Unit: First Quarter $ 10.00 10.00 7.50 7.50 5.00 Second Quarter $ 10.00 10.00 10.00 7.50 6.25 Third Quarter $ 10.00 10.00 10.00 7.50 6.25 Fourth Quarter $ 10.00 10.00 10.00 7.50 7.50
Quarterly Financial data for the period January 1, 1994 to December 31, 1996 (000's omitted):
1996 --------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- ------- ------- -------- Total Revenue $ 909 $ 880 $ 824 $ 835 Income (Loss) from Operations (6) (6) (29) (181) Net Income 177 151 216 38 1995 --------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- ------- ------- -------- Total Revenue $ 883 $ 828 $ 821 $ 901 Income (Loss) from Operations (12) (82) (82) (40) Net Income 138 38 31 124 1994 --------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- ------- ------- -------- Total Revenue $ 717 $ 745 $ 753 $ 844 Income (Loss) from Operations (23) 27 43 (11) Net Income (Loss) 171 180 200 (92)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Reserves Cash and equivalents increased during the year to $269,249, an increase of $227,886 over 1995. This improvement was due primarily to improvement in the payments being received from the State of Illinois for its Medicaid program. Medicare receivables, however, increased during the year due to increased 4 7 intermediary reviews of specific ancillary charges. Distributions from joint ventures increased during the year to $876,302 while total distributions during 1995 were $330,905. The Partnership spent $12,408 on improvements and equipment at its Edwardsville facility during 1996 and expects similar amounts to be spent in 1997. In 1996, the Partnership paid distributions to its limited partners totaling $40.00 per unit. This distribution equaled a 4% return on the initial investment of $1,000 per unit. Although the Partnership expects to continue to make distributions to its limited partners based on the cash flow generated from operations after considering cash required for debt obligations, necessary improvements to the property and working capital reserves, no assurance can be given that distributions will be made in the future. Results of Operations Fiscal Year 1996 Compared to 1995 Net income for 1996 was $581,970, as compared to $331,053 for 1994. The increase in earnings was due to an increase in the Partnership's share of joint venture income, which is derived from the results of operations of the Texas nursing facilities (the "Texas Joint Venture") and the Medical Park nursing facility in Alabama (the "Alabama Joint Venture") (together, the Alabama and Texas Joint Ventures are hereinafter referred to as the "Joint Ventures"). The operations of the wholly owned Edwardsville Care Center East facility improved during 1996 over 1995 due to better expense control on slightly higher revenue, even though ancillary volume was down in 1996 from 1995. Professional care of patients totaled $1,888,947 in 1996 versus $1,981,961 in 1995 due to lower salary and wages paid as well as lower ancillary contract service fees. The ancillary volume was impacted during the year due to fewer Medicare A patients being served in the facility. General and Administrative costs were $136,455 higher in 1996 than 1995 due to higher management fees, property management fees paid to Qualicorp, Inc., higher salaries and wages, auditing, legal expense and cost reimbursement. Employee health and welfare expense declined between years due to lower incentive compensation, employee physical examination expense and tax rates. Other income (expense) improved from 1995 to 1996 due to significantly improved operating income of the Joint Venture partners and lower interest expense incurred on debt obligations. The Joint Venture operating income is derived from three nursing home properties. The Texas Joint Venture Humble facility's net income increased from $137,279 to $461,265 due to increased room and board rates and ancillary services. Revenue increased $751,219 between years while expenses increased only $427,233, $313,672 of which was due to ancillary contract expense. The Texas Joint Venture Katy property profit increased to $653,851, $30,727 over 1995 levels. Net Income for the Medical Park nursing home improved to $816,707 in 1996 from $714,840 in 1995. Fiscal Year 1995 Compared to 1994 Net income for 1995 was $331,053, compared to $459,086 for 1994. The decrease in earnings was due to an operating loss of $215,675 at its wholly owned Illinois nursing facility. The facility had an operating income in the prior year of $36,082. During the year, net revenue from resident service increased $375,000. This increase was due in part to a higher level of care provided to residents through an expanded therapy program. In addition, the nursing home received a Medicaid rate increase in August 1995 of $4.11 per patient day. Professional care of residents increased $600,711 over the 1994 level due to higher labor costs of $162,000 and therapy services expenses of $484,000. Household and Plant expenses were $30,066 over 1994 due to higher maintenance, utilities and supply costs. General and Administrative costs decreased between years $19,087 due to lower insurance costs, partially offset by higher salary costs and fees. Other income (expense) was affected by the need to borrow operating funds. Net interest expense increased $97,000 over the previous year. The Partnership's share of joint venture income rose between years by $231,000 due to improved earnings at the Renaissance Place-Katy Nursing Home and Medical Park nursing home. The operating results at both facilities improved over the prior year due to increased Medicare utilization and expanded therapy programs. The Renaissance Place-Humble facility operating net income was $122,259 lower than 1994 due to higher salary costs, therapy costs, and maintenance expenses. 5 8 Fiscal Year 1994 Compared to 1993 Net income for the year was $459,086, compared to $614,975 for 1993. The decrease in earnings was due to a decrease in the Illinois Medicaid rate of $5.52 per patient per day in September 1993 for Edwardsville Care Center East along with higher labor and increased therapy services cost. In addition, general and administrative costs increased $81,814. This increase was due to increased workers compensation insurance charges which rose by almost $100,000 over the previous year. Other income (expense) was $423,004. This represented an increase of $71,586 over the previous year, even though the Partnership's share of joint venture income declined by $78,041 between years. This decline in joint venture earnings was due in part to increased cost in patient care for salaries and wages and higher ancillary service costs in the Texas facilities. Interest income increased due to higher interest rates. Provider fees decreased due to changes made in the Illinois program. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary date required by Regulation S-X are included in this Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes of auditors for the Partnership during fiscal years 1996 and 1995. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. QualiCorp Management, Inc. (QMI), a Delaware corporation, is the Managing General Partner of the Partnership. The directors and executive officers of QMI as of December 31, 1996 are listed below. Directors serve for one year or until the next annual meeting of stockholders of QMI or until their successors are elected and qualified. QMI is a wholly-owned subsidiary of QualiCorp, Inc., a Louisiana corporation. The directors and executive officers of QualiCorp, Inc. are also listed below. The relationship of the Managing General Partner to its Affiliates is described under the caption "Conflicts of Interest" on pages 38 through 42 of the Prospectus, which pages are specifically incorporated by reference herein. The directors and executive officers of QMI and QualiCorp, Inc. are as follows:
Name Age Positions and Recent Principal Occupations - ---- --- ------------------------------------------ John M. DeBlois 60 Chairman of the Board since 1981. Chairman of the Board of Qualicare, Inc., a hospital management company, from the mid 1970's to 1983. John H. Stoddard 54 President and Chief Financial Officer since July 1, 1988. Senior Vice President of Safecare Health Services, Inc., a health care management company, from September 1, 1985 to March 1988. From May 1983 to August 1985, Treasurer, Continental Health Services, a health care management company. Prior to May 1983, was Vice President - Finance with Qualicare, Inc. Wanda J. Honea 39 Vice President - Investor Services from May 1990. Office relocation consultant from October 1989 through April 1990. From October 1988 to October 1990, Office Administrator for Hunton & Williams, a law firm. Prior to 1988, administrative assistant at Hansell & Post.
6 9 Mr. DeBlois and Mr. Stoddard are Directors of QMI and Qualicorp, Inc. There are no family relationships among any of the above officers and/or directors. ITEM 11. EXECUTIVE COMPENSATION The Partnership has no officers or directors. No director or officer of the Managing General Partner received any remuneration from the Partnership for the three years ended December 31, 1996. The Partnership paid to Qualicorp, Inc. the parent of QMI the Managing General Partner $84,896 as reimbursement for administrative expenses (primarily salaries) incurred during the year. Qualicorp, Inc. also charged the Partnership $132,974 for property management fees in 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person or group is known by the Partnership to own beneficially more than 5% of the outstanding units of the Partnership. No executive officers or directors of QMI owned any units in the Partnership at December 31, 1996. Qualicorp, Inc., parent of QMI, the Partnership's Managing General Partner, held 44 Units in the Partnership at December 31, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For the five years ended December 31, 1996, Qualicorp, Inc., the parent of QMI, charged the Partnership for administrative services $84,896, $80,278, $86,348, $80,619, and $67,252, respectively. Qualicorp, Inc. also charged the Partnership $132,974 for property management fees in 1996. Under the Partnership Agreement, the General Partners are entitled to participate in distributions of the Partnership's Cash Flow as described under the caption "Management Compensation" at pages 32 through 36 of the Prospectus. Cash distributions of $32,838, $32,839, $30,786, $24,627, and $20,524, were made to the General Partners during 1996, 1995, 1994, 1993, and 1992, respectively. The General Partners also share in the Partnership's net profits and net losses. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial statements and supplementary information appears in a separate section of this Form 10-K commencing on pages referenced below: MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
Page ---- Independent Auditor's Report F-1 Financial Statements Balance Sheets F-2 Statements of Operations F-3 Statements of Partners' Capital F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-7 Information Accompanying the Basic Financial Statements Independent Auditor's Report on Additional Information F-19 Schedule VIII - Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts F-20
7 10 Schedule X - Consolidated Supplementary Income Statement Information F-21 Schedule XI - Real Estate and Accumulated Depreciation F-22
All schedules other than those indicated have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. THE TEXAS JOINT VENTURE
Page Independent Auditor's Report F-23 Financial Statements Balance Sheets F-24 Statements of Operations F-25 Statements of Partners' Capital F-26 Statements of Cash Flows F-27 Notes to Financial Statements F-29 Information Accompanying the Basic Financial Statements Independent Auditor's Report on Additional Information F-38 Schedule VIII - Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts F-39 Schedule X - Consolidated Supplementary Income Statement Information F-40 Schedule XI - Real Estate and Accumulated Depreciation F-41
All schedules other than those indicated have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. THE ALABAMA JOINT VENTURE
Page Independent Auditor's Report F-42 Financial Statements Balance Sheets F-43 Statements of Operations F-44 Statements of Partners' Capital F-45 Statements of Cash Flows F-46 Notes to Financial Statements F-48 Information Accompanying the Basic Financial Statements Independent Auditor's Report on Additional Information F-57 Schedule VIII - Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts F-58 Schedule X - Consolidated Supplementary Income Statement Information F-59 Schedule XI - Real Estate and Accumulated Depreciation F-60
All schedules other than those indicated have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 2. Exhibits Exhibits listed below which have been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, and which were filed as noted below, are hereby incorporated by reference and made a part of this report with the same effect as if filed herewith. 8 11 2. Purchase and Sale Agreement (the "Sale Agreement") dated February 3, 1997 (filed as an exhibit to the company's Form 8-K filed February 18, 1997, and as an appendix to the Partnership's Consent Solicitation Statement dated March 12, 1997). 3-A. The Prospectus of the Partnership dated October 22, 1986, as amended October 23, 1986, October 29, 1986 and supplemented on February 26, 1987 and filed pursuant to Rule 424(b) is hereby incorporated herein by reference. 3-B. Amended and restated Agreement of Limited Partnership set forth as Exhibit A to the Prospectus, incorporated herein by reference. 3-C. Consent Solicitation Statement dated March 12, 1997 and filed pursuant to Rule 14A is incorporated herein by reference. (b) No report on Form 8-K was filed during the fourth quarter of the fiscal year ended December 31, 1996. A report on Form 8-K was filed on February 18, 1997 pertaining to Disposition of Partnership Assets. 9 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP QUALICORP MANAGEMENT, INC. Managing General Partner By: /s/ John H. Stoddard Date: March 21, 1997 ----------------------------------- John H. Stoddard President, Director, Chief Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Position Date ---- -------- ---- /s/ John M. DeBlois Chairman of the Board March 21, 1997 - ----------------------------- John M. DeBlois /s/ John H. Stoddard President, Director, March 21, 1997 - ----------------------------- Chief Financial Officer John H. Stoddard and Principal Accounting Officer
10 13 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule (for SEC use only) 14 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Partners Medical Income Properties 2B Limited Partnership We have audited the balance sheets of Medical Income Properties 2B Limited Partnership as of December 31, 1996 and 1995 and the related statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Medical Income Properties 2B Limited Partnership as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-1 15 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- ASSETS Current assets Cash and cash equivalents $ 269,249 $ 41,363 ------------ ------------ Patient accounts receivable, net of allowance for doubtful accounts of $102,349 in 1996 and $54,188 in 1995 616,404 780,238 Estimated third-party payor settlements 203,628 316,962 Prepaid expense and other assets 54,122 42,144 ------------ ------------ Total current assets 1,143,403 1,180,707 Investment in joint ventures 7,087,148 7,034,698 Property and equipment, net of accumulated depreciation 2,855,196 2,988,787 Deferred financing costs, net of accumulated amortization of $1,743 in 1996 and $1,525 in 1995 1,744 1,962 ------------ ------------ Total assets $ 11,087,491 $ 11,206,154 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt $ 63,388 $ 57,447 Accounts payable 334,901 235,152 Accrued payroll and payroll taxes 73,433 47,516 Accrued vacation 32,722 31,082 Accrued insurance 10,657 28,384 Accrued real estate taxes 75,096 76,143 Accrued management fees 13,906 13,371 Patient deposits and trust liabilities 48,244 37,010 Other accrued expenses 4,949 387 Due to affiliates 840,835 1,137,913 ------------ ------------ Total current liabilities 1,498,131 1,664,405 Long-term debt, net of current maturities 640,309 705,550 ------------ ------------ Total liabilities 2,138,440 2,369,955 ------------ ------------ Partners' capital (deficit) Limited partners 8,993,158 8,888,206 General partners (44,107) (52,007) ------------ ------------ Total partners' capital 8,949,051 8,836,199 ------------ ------------ Total liabilities and partners' capital $ 11,087,491 $ 11,206,154 ============ ============
See accompanying notes to financial statements. F-2 16 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Revenues Net patient service revenue $ 3,443,725 $ 3,428,541 $ 3,053,550 Other revenue 4,345 4,147 5,791 ------------ ------------ ------------ Total revenue 3,448,070 3,432,688 3,059,341 ------------ ------------ ------------ Operating expenses Professional care of patients 1,888,947 1,981,961 1,381,250 Dietary 276,675 265,966 263,409 Household and plant 323,317 342,433 312,367 General and administrative 853,203 716,748 735,835 Employee health and welfare 182,010 190,721 180,033 Depreciation and amortization 146,217 150,534 150,365 ------------ ------------ ------------ Total operating expenses 3,670,369 3,648,363 3,023,259 ------------ ------------ ------------ Operating income (loss) (222,299) (215,675) 36,082 ------------ ------------ ------------ Other income (expenses) Interest income -- -- 55,313 Interest expense (58,603) (92,668) (51,027) Provider fees (65,880) (65,700) (55,397) Partnership share of joint venture income 928,752 705,096 474,115 ------------ ------------ ------------ Total other income (expenses) 804,269 546,728 423,004 ------------ ------------ ------------ Net income $ 581,970 $ 331,053 $ 459,086 ============ ============ ============ Net income attributable to limited partners (93%) $ 541,232 $ 307,879 $ 426,950 Net income attributable to general partners (7%) 40,738 23,174 32,136 ------------ ------------ ------------ $ 581,970 $ 331,053 $ 459,086 ============ ============ ============ Net income per limited partnership unit outstanding $ 49.62 $ 28.23 $ 39.14 ============ ============ ============
See accompanying notes to financial statements. F-3 17 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Limited Partners General Units Amount Partners Total ------- ----------- -------- ----------- Partners' capital (deficit) at December 31, 1993 $10,907 $ 8,998,669 $(43,692) $ 8,954,977 Distributions to partners ($37.50 per limited partnership unit outstanding) -- (409,011) (30,786) (439,797) Net income -- 426,950 32,136 459,086 ------- ----------- -------- ----------- Partners' capital (deficit) at December 31, 1994 10,907 9,016,608 (42,342) 8,974,266 Distributions to partners ($40.00 per limited partnership unit outstanding) -- (436,281) (32,839) (469,120) Net income -- 307,879 23,174 331,053 ------- ----------- -------- ----------- Partners' capital (deficit) at December 31, 1995 10,907 8,888,206 (52,007) 8,836,199 Distributions to partners ($40.00 per limited parnership unit outstanding) -- (436,280) (32,838) (469,118) Net income -- 541,232 40,738 581,970 ------- ----------- -------- ----------- Partners' capital (deficit) at December 31, 1996 $10,907 $ 8,993,158 $(44,107) $ 8,949,051 ======= =========== ======== ===========
See accompanying notes to financial statements. F-4 18 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Cash received from patient care $ 3,708,915 $ 3,186,524 $ 2,762,115 Interest and dividends received -- -- 55,313 Other operating receipts 4,345 4,147 5,791 Cash paid to suppliers and employees (3,399,289) (3,516,545) (2,670,505) Interest paid (58,603) (92,668) (51,027) Provider fees (65,880) (65,700) (55,397) ------------ ------------ ------------ Net cash provided (used) by operations 189,488 (484,242) 46,290 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (12,408) (52,424) (64,813) Distributions from joint ventures 876,302 330,905 276,354 ------------ ------------ ------------ Net cash provided (used) by investing activities 863,894 278,481 211,541 ------------ ------------ ------------ Cash flows from financing activities: Principal payments on long-term obligations (59,300) (53,492) (63,206) Distributions to partners (469,118) (469,120) (439,797) Net related party transactions (297,078) 644,286 110,592 ------------ ------------ ------------ Net cash provided (used) by financing activities (825,496) 121,674 (392,411) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 227,886 (84,087) (134,580) Cash and cash equivalents, beginning of year 41,363 125,450 260,030 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 269,249 $ 41,363 $ 125,450 ============ ============ ============
See accompanying notes to financial statements. F-5 19 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Reconciliation of net income to net cash provided by operating activities: Net income $ 581,970 $ 331,053 $ 459,086 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 146,217 150,534 150,365 Partnership share of joint venture income (928,752) (705,096) (474,115) Provision for losses on accounts receivable 15,177 7,625 16,445 (Increase) decrease in: Patient accounts receivable, net 148,657 130,735 (321,421) Estimated third-party payor settlements 113,334 (258,259) (58,703) Prepaid expenses and other assets (11,978) 23,537 (1,779) Increase (decrease) in: Accounts payable 99,749 26,905 116,354 Accrued expenses 13,880 (74,560) 90,004 Estimated third-party payor settlements -- (122,118) 72,244 Other liabilities 11,234 5,402 (2,190) ------------ ------------ ------------ Total adjustments (392,482) (815,295) (412,796) ------------ ------------ ------------ Net cash provided (used) by operating activities $ 189,488 $ (484,242) $ 46,290 ============ ============ ============
See accompanying notes to financial statements. F-6 20 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization Medical Income Properties 2B Limited Partnership (the Partnership) is a Delaware limited partnership formed on April 29, 1987 that is engaged in the business of acquiring, operating and holding for investment purposes, income-producing, health care related properties, primarily nursing homes. The Partnership is one of a series of three partnerships as represented by the Partnership Prospectus (Prospectus) dated October 22, 1986, providing for the sale of 10,000 units at $1,000 per unit (with an option to increase to 20,000 units per partnership). The Partnership's first closing on the sale of units was on July 16, 1987. The offering closed on January 31, 1988. For the period April 29, 1987 (inception) to April 28, 1988, the Partnership was in the development stage. On March 1, 1988, the Partnership began acquiring property. The general partners are QualiCorp Management, Inc. (a wholly-owned subsidiary of QualiCorp, Inc.) and QualiCorp Capital, Inc. (b) Allocation of Net Profits and Net Losses Net profits and net losses shall be determined and allocated as of December 31 of each year, as follows: - Net profits (losses) (exclusive of net profits (losses) attributable to the sale or disposition of Partnership properties) are allocated 93% to the limited partners and 7% to the general partners. - Net profits attributable to the sale or disposition of a Partnership property shall be allocated as follows: - First, to limited partners with negative balances in their capital accounts in proportion to such negative balances, to the extent of the total of such negative balances; - Second, 1% to the general partners and 99% to the limited partners until the capital account of each limited partner is equal to his capital investment; and F-7 21 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS - Third, the balance, if any, 85% to the limited partners and 15% to the general partners. - Net losses attributable to the sale or disposition of a Partnership property shall be allocated in a manner similar to above, except that limited and general partner accounts would be reduced pro rata to the amount of their respective capital investments, then, pro rata to zero, and for any remaining loss, 93% to the limited partners and 7% to the general partners. (c) Cash Distributions Cash distributions shall be made quarterly within 45 days after the end of the quarter. Cash flow shall be distributed 93% to the limited partners and 7% to the general partners. Sale or financing proceeds shall be distributed first to creditors and then to the limited partners to the extent of their original capital contribution and then the remainder shall be distributed 85% to the limited partners and 15% to the general partners. (d) Per Unit Information Limited partnership information per unit is based on the number of units outstanding of 10,907 in 1996, 1995, and 1994. (e) Patient Service Revenue Patient service revenue is recorded at the nursing homes' established rates with contractual adjustments ($1,888,312 in 1996, $1,832,743 in 1995, and $1,014,629 in 1994), provision for uncollectible accounts, (bad debt expense of $ 15,177 in 1996, $7,625 in 1995, and $16,445 in 1994) and other discounts deducted to arrive at net patient service revenue. Net patient revenue includes amounts estimated by management to be reimbursable by Medicare, Medicaid and other third-party programs under the provisions of cost and prospective payment reimbursement formulas in effect. Amounts received under these programs are generally less than the established billing rates of the nursing homes and the difference is reported as a contractual adjustment and deducted from gross revenue. The nursing homes recognize currently estimated final settlements due from or to third party programs. Final determination of amounts earned is subject to audit by the intermediaries. Differences between estimated provisions and final settlement will be reflected as charges or credits to operating revenues in the year the cost reports are finalized. F-8 22 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (f) Property and Equipment Property and equipment is stated at cost. Depreciation of the buildings is provided over their estimated useful lives of thirty years on the straight-line method. Equipment and other personal property are depreciated over five to seven years on the straight-line method. (g) Income Taxes Taxable income is allocated to the individual partners and, therefore, no income taxes have been provided for in these financial statements. (h) Cash Equivalents Policy For the purposes of the statement of cash flows, the Partnership considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. (i) Uninsured Cash Balances The Partnership maintains cash balances in several banks. Cash accounts at banks are insured by the FDIC for up to $100,000. The amount in excess of insured limits was approximately $1,360,579 (inclusive of unconsolidated joint ventures) at December 31, 1996. A portion of commingled funds discussed in Note 6., may be at risk, but the amount in excess of FDIC limits related to the Partnership is not determinable. (j) Uses of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. Note 2. ACQUISITIONS On March 1, 1988, the Partnership acquired Edwardsville - East Nursing Home, located in Illinois, for $3,750,000 plus capitalized acquisition costs and fees of $276,595. The Partnership assumed $1,133,690 of debt with the purchase. F-9 23 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS The acquisition has been accounted for under the purchase method of accounting. Consequently, only operations subsequent to the acquisition date have been included in the accompanying financial statements. Note 3. INVESTMENTS IN JOINT VENTURES The Partnership has invested in two joint ventures with Medical Income Properties 2A Limited Partnership (MIP2A). These joint ventures are accounted for under the equity method. The Texas Joint Venture On May 1, 1988, the Partnership purchased 50% of Renaissance Place - Katy Nursing Home located in Texas for $2,736,250 plus capitalized acquisition costs and fees of $254,645. The seller took back a note for $300,000 ($150,000 was the Partnership's share) due May 1, 1993 that has subsequently been paid. On May 1, 1988, the Partnership purchased 50% of Renaissance Place - Humble Nursing Home located in Texas for $2,243,750 plus capitalized acquisition costs and fees of $114,406. The Alabama Joint Venture On July 1, 1988, the Partnership purchased 45.45% of Medical Park Nursing Home located in Alabama for $2,317,950 plus capitalized acquisition costs and fees of $172,379. The condensed balance sheet information for the investments in joint ventures as of December 31, 1996 and 1995 and operating statement information for each of the years in the three-year period ending December 31, 1996 is as follows:
Katy 1996 1995 ---- ---- ---- Current assets $ 2,501,874 $ 1,684,094 Long-term assets 4,771,630 5,048,138 ----------- ----------- Total assets $ 7,273,504 $ 6,732,232 =========== =========== Current liabilities 860,008 684,328 Long-term liabilities - - Equity 6,413,496 6,047,904 ----------- ----------- Total liabilities and equity $ 7,273,504 $ 6,732,232 =========== ===========
F-10 24 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Katy (con't.) Partnership's investment at December 31, 1996 and 1995 $ 3,206,748 $ 3,023,952 =========== =========== 1996 1995 1994 ---- ---- ---- Revenues $ 5,039,616 $ 4,985,129 $ 3,700,538 Expenses 4,385,765 4,362,005 3,505,169 ----------- ----------- ----------- Net income $ 653,851 $ 623,124 $ 195,369 =========== =========== =========== Humble 1996 1995 ------ ---- ---- Current assets $ 1,498,372 $ 1,140,926 Long-term assets 3,377,314 3,651,762 ----------- ----------- Total assets $ 4,875,686 $ 4,792,688 =========== =========== Current liabilities 677,478 703,933 Long-term liabilities 631,250 691,850 Equity 3,566,958 3,396,905 ----------- ----------- Total liabilities and equity $ 4,875,686 $ 4,792,688 =========== =========== Partnership's investment at December 31, 1996 and 1995 $ 1,783,479 $ 1,698,453 =========== =========== 1996 1995 1994 ---- ---- ---- Revenues $ 4,415,307 $ 3,664,088 $ 3,373,417 Expenses 3,954,042 3,526,809 3,113,890 ----------- ----------- ----------- Net income $ 461,265 $ 137,279 $ 259,527 =========== =========== =========== Medical Park 1996 1995 ------------ ---- ---- Current assets $ 1,699,553 $ 2,370,621 Long-term assets 5,369,994 5,308,640 ----------- ----------- Total assets $ 7,069,547 $ 7,679,261 =========== =========== Current liabilities 743,586 713,232 Long-term liabilities 1,704,860 1,868,527 Equity 4,621,101 5,097,502 ----------- ----------- Total liabilities and equity $ 7,069,547 $ 7,679,261 =========== ===========
F-11 25 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Medical Park (con't.) Partnership's investment at December 31, 1996 and 1995 $ 2,100,682 $ 2,317,207 =========== =========== 1996 1995 1994 ---- ---- ---- Revenues $ 6,396,385 $ 5,907,763 $ 5,137,870 Expenses 5,579,678 5,192,923 4,595,148 ----------- ----------- ----------- Net income $ 816,707 $ 714,840 $ 542,722 =========== =========== ===========
See Note 9 for contingency. Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1996 1995 ---- ---- Land $ 90,000 $ 90,000 Buildings and improvements 3,812,869 3,817,099 Furniture and equipment 302,317 285,680 ---------- --------- Total 4,205,186 4,192,779 Accumulated depreciation and amortization (1,349,990) (1,203,992) ----------- ---------- Net property and equipment $ 2,855,196 $ 2,988,787 =========== ===========
Note 5. LONG-TERM DEBT Long-term debt consisted of the following at December 31:
1996 1995 ---- ---- Industrial Revenue Bonds payable at a variable rate of interest (7.755% at December 31, 1996 and 8.225% at December 31, 1995) with monthly principal and interest payments of $9,645 through April 1, 2005. The interest rate is adjusted every May 1 and November 1, secured by real estate. $ 703,697 $ 762,997 Less amounts due in one year or less 63,388 57,447 ---------- --------- $ 640,309 $ 705,550 ========== ==========
F-12 26 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS The aggregate annual maturities of long-term debt for the succeeding five fiscal years are as follows: 1997 $ 63,388 1998 68,482 1999 73,986 2000 79,932 2001 86,356 Thereafter 331,553 ---------- $ 703,697 ==========
Note 6. RELATED PARTY TRANSACTIONS QualiCorp, Inc. charged the Partnership $84,896 in 1996, $80,278 in 1995, and $86,348 in 1994 for administrative expenses (primarily salaries). QualiCorp, Inc. also charged the Partnership $132,974 for property management fees in 1996. Details of the amounts due to affiliates at December 31 are as follows:
1996 1995 ---- ---- Due to QualiCorp, Inc. $ 156,787 $ 48,917 Due to The Texas Joint Venture - Katy 184,075 184,075 Humble 26,556 26,556 Due to The Alabama Joint Venture - Medical Park 473,417 382,517 Due to affiliates of the general partner - 495,848 ----------- ----------- Due to affiliates $ 840,835 $ 1,137,913 =========== ===========
During the year ended December 31, 1995, the General Partners established a pooled investment account in which the General Partners and the partnerships in which they act as general partners could participate. This account was used by those entities to invest overnight cash balances, and borrow funds when an entity needed temporary access to funds. Each entity received its share of interest earned monthly, and was charged interest on any funds borrowed. The Articles of Limited Partnership of the partnerships involved state that no General Partner shall have the authority to cause those partnerships to make loans other than in connection with the purchase, sale or disposition of partnership property. The Articles of Limited Partnership of those partnerships also state that the F-13 27 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS partnerships' funds may not be commingled with any other entities' funds except as necessary for the operation of those partnerships. At December 31, 1995, the Partnership had borrowed $495,848 from the other entities, and had paid interest of $13,116 from this arrangement. See Footnote 12 for sale of affiliated assets. Note 7. INCOME TAXES No provision for income taxes is made in the financial statements since taxable income is reported in the income tax returns of the partners. Differences between the net income as reported in the financial statements and Federal taxable income arise from the nature and timing of certain revenue and expenses items. The following is a reconciliation of reported net income and Federal taxable income.
1996 1995 1994 ---- ---- ---- Net income as reported $ 581,970 $ 331,053 $ 459,086 Adjustments: Depreciation differences 17,720 41,967 59,055 Bad debt reserve 33,238 46,191 37,093 Vacation accrual 14,263 15,019 12,775 Insurance deductible - (51,636) - Nondeductible travel and entertainment 14,080 16,165 7,134 --------- --------- --------- Federal taxable income $ 661,271 $ 398,759 $ 575,143 ========= ========= ========= Federal taxable income per limited partnership unit outstanding $ 56.38 $ 34.00 $ 49.04 ========= ========= =========
Note 8. CONTRACTUAL AGREEMENTS In 1988, the Partnership entered into a management agreement whereby the Manager is required to perform certain services. The agreement had an initial five-year term with one additional five-year option that was exercised in 1993. Fees were based on 6% of gross collected operating revenues through June 30, 1992. Thereafter they were based on 5% of gross collected operating revenues, but not less than $140,000 in a calendar year and are increased by an inflation factor after 1992. The Manager has a right of first refusal to match a bona fide offer made by an outside party to purchase or lease the nursing home. The management agreement, as amended, contained a termination clause. F-14 28 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS The management agreement was amended on January 1, 1995. The amendment calls for a fixed monthly management fee of $13,371 with a cost of living factor equal to the greater of 4% per annum or the increase in the Consumer Price Index or such other measure mutually agreeable to the parties. The agreement expires December 31, 1998. The termination on sale clause was amended to base the fee on a sum equal to the discounted present value of the monthly management fee as of the date of termination of the agreement times the number of months remaining in the management agreement discounted to the date of termination at an annual interest rate of ten percent (10%). In addition, the parties agreed to terminate the Manager's right of first refusal. Commencing January 1, 1996, the Management Agreement was extended for a period of up to a maximum of eighteen months by one month for every month after January 1, 1996 in which the parties are engaged in the process of attempting to sell the Facilities. In the event of a sale of the Facilities, the termination on sale fee described above would be discounted to the date of termination at an annual rate of ten percent (10%) and then further discounted by a factor of thirty-three and one-third percent (33 1/3%). Management fees charged to the partnership were $166,875 in 1996, $160,456 in 1995, and $154,285 in 1994. Note 9. CONTINGENCY On May 1, 1990, the Texas Joint Venture, of which the Partnership owns 50%, began self insuring its workmen's compensation claims for two nursing home facilities located in Texas. Accrued liabilities have been estimated to cover all asserted and unasserted claims and assessments and funds have been escrowed to cover such claims. The Partnership maintains insurance or reserves which it believes are adequate to meet the needs of the Partnership. While the Partnership has been named as a defendant in several lawsuits, nothing has come to the attention of the Partnership which leads it to believe that it is exposed to a risk of material loss not covered by insurance or reserves. The real estate owned by The Texas Joint Venture and The Alabama Joint Venture is mortgaged as security on debt incurred by the Partnership's joint venture partner Medical Income Properties 2A Limited partnership (MIP2A). This debt is also secured by all other real estate owned by MIP2A. The total outstanding debt secured by all these properties is $3,805,555. F-15 29 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Note 10. CONCENTRATIONS IN REVENUE SOURCES The Partnership provides patient care services under various third party agreements. The principal sources of revenue under these contracts are derived primarily through the Medicaid and Medicare programs, as well as contracts with private pay patients who do not qualify for assistance from the other programs. The percentage of the Joint Venture's income from each of these sources for the years ended December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Private pay patients 12.05% 11.34% 11.71% Medicaid 48.03% 47.47% 62.82% Medicare 39.92% 41.19% 25.47% ------- ------- ------- Total 100.00% 100.00% 100.00% ======= ======= =======
The percentage attributable to private pay patients includes only amounts due for services where the primary payer is a private source. The Medicaid and Medicare percentages include amounts due from those programs as well as the patient's financial responsibility incurred under these contracts. Note 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Statement No. 107, Disclosures about Fair Value of Financial Instruments ("FAS 107") requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate the value. The assumptions used in the estimation of the fair value of the Company's financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represents a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Long-term Debt: For variable rate notes, fair values are based on carrying values. The other financial instruments of the Company are short-term assets and liabilities whose carrying amounts reported in the F-16 30 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS balance sheet approximate fair value. These items include cash, accounts receivable and accounts payable. Note 12. SUBSEQUENT EVENT On February 3, 1997, Medical Income Properties 2B Limited Partnership entered into a purchase agreement with Omega HealthCare Investors, Inc. to sell all of the real and personal property of the nursing home facilities. The purchase price is allocated among the facilities as follows: Edwardsville - East Nursing Home (120 beds) $ 2,383,000 Medical Park Convalescent Center (183 beds) - 45.45% ownership 4,522,275 Renaissance Place - Katy (130 beds) - 50% ownership 2,984,500 Renaissance Place - Humble (120 beds) - 50% ownership 2,487,500 ----------- Proceeds from sale $12,377,275 ===========
Proceeds from the sale will be reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments should approximate $3,965,000. The closing could take place as early as March 31, 1997 and can be extended by the Partnership until April 30, 1997. If conditions precedent to either party's obligation to close are not satisfied or waived, the closing can be extended to a date no later than July 31, 1997. Approximately $395,450 of these proceeds will be set aside in a joint signature account for the purpose of securing all of the seller's obligations under the purchase agreement. These funds will be available to the Partnership in the event that these obligations do not exceed the funds held in escrow. In addition, a separate amount of proceeds of approximately $500,000 will also be held in reserve by the Partnership pending final settlement of third-party cost reports and other contingencies. This agreement can be terminated by mutual consent of the parties and other conditions precedent. In conjunction with the above sale, Omega HealthCare Investors, Inc. has agreed to a similar purchase of assets from RWB Medical Properties Limited Partnership IV, of which an officer of QualiCorp, Inc. owns either directly or indirectly a 21.53% interest. This F-17 31 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS sale relates to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets is $5,350,000. F-18 32 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION To the Partners Medical Income Properties 2B Limited Partnership Our report on our audit of the basic financial statements of Medical Income Properties 2B Limited Partnership for 1996 appears on page 1. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts and Reserves, Schedule of Consolidated Supplementary Income Statement Information, and Schedule of Real Estate and Accumulated Depreciation are presented for purposes of additional analysis and are not required parts of the basic financial statements. Such information has been subjected to the auditing procedures applied to the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-19 33 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 -------- ------- -------- Balance at beginning of year $ 54,188 $35,327 $ 25,015 Charged to patient service revenues 32,984 11,236 (6,133) Write-offs 15,177 7,625 16,445 -------- ------- -------- Balance at end of year $102,349 $54,188 $ 35,327 ======== ======= ========
F-20 34 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP SCHEDULE X CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 -------- ---------- -------- Professional care of patients Nursing salaries and wages $986,150 $1,016,764 $854,741 Ancillary service expense 678,357 713,913 230,229 Supplies 89,576 108,192 113,202 Temporary labor 939 8,423 40,476 General and administrative Salaries and wages 93,837 87,897 77,150 Accounting and auditing 46,552 42,807 42,463 Insurance 150,623 161,912 198,425 Property tax 73,649 76,239 76,446 Management fees 166,875 160,456 154,285 Property management fees 132,974 -- -- Cost reimbursement 84,896 80,278 86,348 Dietary Food cost 134,948 128,930 133,949 Household and plant Repairs and maintenance 10,212 23,852 12,053 Utilities 126,040 120,078 115,921 Depreciation $145,999 $ 150,316 $150,147 ======== ========== ========
F-21 35 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1996
INITIAL COST COSTS CAPITALIZED TO PARTNERSHIP(A) SUBSEQUENT TO ACQUISITION BUILDING AND CARRYING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST ----------- ------------ ------------------------- -------------------------- EDWARDSVILLE - EAST $703,697 $90,000 $3,660,000 $178,591 $276,595 ======== ========================= ======================== LIFE ON WHICH GROSS AMOUNT AT WHICH CARRIED DEPRECIATION AS OF DECEMBER 31, 1996(B) IN LATEST STATEMENT OF BUILDING AND ACCUMULATED DATE OF DATE OPERATION IS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED --------------------------------------- ------------ ---------------------------------------- EDWARDSVILLE - EAST $90,000 $4,115,186 $4,205,186 $1,349,990 1987 05/01/88 5 TO 30 YEARS =========================================== ==========
(A) The initial cost to the Partnership represents the original purchase price of the properties. (B) The aggregate cost of real estate owned at December 31, 1996 for Federal Income tax purposes was approximately $4,140,355. (C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
1996 1995 1994 ---------- ---------- ---------- Balance at beginning of period $4,192,779 $4,140,355 $4,075,542 Additions 12,407 52,424 64,813 Reductions 0 0 0 ---------- ---------- ---------- Balance at end of period $4,205,186 $4,192,779 $4,140,355 ========== ========== ========== (D) Reconciliation of accumulated depreciation: Balance at beginning of period $1,203,992 $1,053,675 $ 903,528 Depreciation expense 145,998 150,317 150,147 Reductions 0 0 0 ---------- ---------- ---------- Balance at end of period $1,349,990 $1,203,992 $1,053,675 ========== ========== ==========
F-22 36 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Partners The Texas Joint Venture We have audited the balance sheets of The Texas Joint Venture as of December 31, 1996 and 1995 and the related statements of operations, partners' capital and cash flows for each of the three years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Joint Venture's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of The Texas Joint Venture as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-23 37 THE TEXAS JOINT VENTURE BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ---- ---- Current assets Cash and cash equivalents $ 770,794 $ 447,196 Marketable securities 2,190,840 1,409,670 Patient accounts receivable, net of allowance for doubtful accounts of $106,750 in 1996 and $132,796 in 1995 849,065 717,552 Interest receivable 16,304 4,826 Estimated third-party payor settlements 137,964 202,244 Prepaid expenses and other assets 35,279 43,532 ------------ ------------ Total current assets 4,000,246 2,825,020 Property and equipment, net of accumulated depreciation 7,718,372 8,110,133 Due from affiliates 423,087 576,998 Deferred financing costs, net of accumulated amortization of $18,935 in 1996 and $13,651 in 1995 7,485 12,769 ------------ ------------ Total assets $ 12,149,190 $ 11,524,920 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt $ 60,600 $ 60,600 Accounts payable 697,963 588,225 Accrued payroll and payroll taxes 164,591 139,197 Accrued vacation 105,438 93,309 Accrued insurance 200,788 200,952 Accrued management fees 32,634 31,379 Estimated third-party payor settlements 149,694 Patient deposits and trust liabilities 97,367 117,005 Other accrued expenses 28,411 157,594 ------------ ------------ Total current liabilities 1,537,486 1,388,261 Long-term debt, net of current maturities 631,250 691,850 ------------ ------------ Total liabilities 2,168,736 2,080,111 ------------ ------------ Partners' capital 9,980,454 9,444,809 ------------ ------------ Total liabilities and partners' capital $ 12,149,190 $ 11,524,920 ============ ============
See accompanying notes to financial statements. F-24 38
1996 1995 1994 ----------- ----------- ----------- Revenues Net patient service revenue $ 9,325,900 $ 8,647,019 $ 7,072,940 Other revenue 2,102 2,198 1,015 ------------ ------------ ------------ Total revenue 9,328,002 8,649,217 7,073,955 ------------ ------------ ------------ Operating expenses Professional care of patients 4,966,189 4,812,691 3,604,449 Dietary 628,473 616,733 586,512 Household and plant 637,129 618,775 571,882 General and administrative 1,248,000 1,063,756 1,051,234 Employee health and welfare 350,952 355,508 324,545 Depreciation and amortization 440,475 450,189 449,049 ------------ ------------ ------------ Total operating expenses 8,271,218 7,917,652 6,587,671 ------------ ------------ ------------ Operating income 1,056,784 731,565 486,284 ------------ ------------ ------------ Other income (expenses) Interest income 126,921 107,160 39,215 Interest expense (68,589) (78,322) (70,603) ------------ ------------ ------------ Total other income (expense) 58,332 28,838 (31,388) ------------ ------------ ------------ Net income $ 1,115,116 $ 760,403 $ 454,896 ============ ============ ============
See accompanying notes to financial statements. F-25 39 THE TEXAS JOINT VENTURE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
MEDICAL INCOME PROPERTIES LIMITED PARTNERSHIPS -------------------- 2A 2B TOTAL ----------- ----------- ----------- Partners' capital at December 31, 1993 $ 4,591,062 $ 4,591,062 $ 9,182,124 Distributions to partners (189,999) (189,999) (379,998) Net income 227,448 227,448 454,896 Unrealized loss on marketable securities available for sale (14,007) (14,008) (28,015) ----------- ----------- ----------- Partners' capital at December 31, 1994 4,614,504 4,614,503 9,229,007 Distributions to partners (290,000) (290,000) (580,000) Net income 380,202 380,201 760,403 Unrealized gain on marketable securities available for sale 17,699 17,700 35,399 ----------- ----------- ----------- Partners' capital at December 31, 1995 4,722,405 4,722,404 9,444,809 Distributions to partners (290,000) (290,000) (580,000) Net income 557,558 557,558 1,115,116 Unrealized gain on marketable securities available for sale 264 265 529 ----------- ----------- ----------- Partners' capital at December 31, 1996 $ 4,990,227 $ 4,990,227 $ 9,980,454 =========== =========== ===========
See accompanying notes to financial statements. F-26 40 THE TEXAS JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Cash received from patient care $ 9,416,614 $ 8,404,007 $ 7,066,092 Interest received 77,586 91,364 -- Other operating receipts 2,102 2,198 1,015 Cash paid to suppliers and employees (7,831,212) (7,362,426) (5,972,586) Interest paid (68,589) (78,322) (70,603) ----------- ----------- ----------- Net cash provided (used) by operations 1,596,501 1,056,821 1,023,918 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (43,430) (301,045) (352,677) Purchases of marketable securities (1,642,784) (503,438) (1,381,702) Maturities of marketable securities 900,000 500,000 -- ----------- ----------- ----------- Net cash provided (used) by investing activities (786,214) (304,483) (1,734,379) ----------- ----------- ----------- Cash flows from financing activities: Payments on long-term debt and lease obligations (60,600) (65,177) (71,908) Distributions to partners (580,000) (580,000) (379,998) Net related party transactions 153,911 (410,680) 55,651 ----------- ----------- ----------- Net cash provided (used) by financing activities (486,689) (1,055,857) (396,255) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 323,598 (303,519) (1,106,716) Cash and cash equivalents, beginning of year 447,196 750,715 1,857,431 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 770,794 $ 447,196 $ 750,715 =========== =========== ===========
See accompanying notes to financial statements. F-27 41 THE TEXAS JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ---- ---- ---- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 1,115,116 $ 760,403 $ 454,896 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 440,475 450,189 449,049 Provision for losses on accounts receivable 41,582 108,332 67,766 (Increase) decrease in: Patient accounts receivable, net (173,095) (185,722) (78,414) Interest receivable, securities premium amortization and securities discount accretion (49,335) (4,283) (39,215) Estimated third-party payor settlements 64,280 (177,135) 3,800 Prepaid expenses and other assets 8,253 4,746 (2,972) Increase (decrease) in: Accounts payable 109,738 37,306 187,004 Accrued expenses (90,569) 66,161 (47,627) Estimated third-party payor settlements 149,694 -- -- Other liabilities (19,638) (3,176) 29,631 ------------ ------------ ------------ Total adjustments 481,385 296,418 569,022 ------------ ------------ ------------ Net cash provided (used) by operations $ 1,596,501 $ 1,056,821 $ 1,023,918 ============ ============ ============ Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on marketable securities available for sale $ (529) $ (35,399) $ 28,015 ============ ============ ============
See accompanying notes to financial statements. F-28 42 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization The Texas Joint Venture was formed on April 29, 1988, and is engaged in the business of acquiring, operating and holding for investment purposes, income-producing, health care related properties, primarily nursing homes. The joint venture partners are Medical Income Properties 2A Limited Partnership and Medical Income Properties 2B Limited Partnership. Each partner owns 50% of the Joint Venture. Both partners are part of a series of three Delaware limited partnerships as represented by a Partnership Prospectus dated October 22, 1986. The Texas Joint Venture currently owns and operates two nursing homes in Texas. (b) Allocation of Net Profits and Net Losses Net profits and net losses are shared equally by the partners. (c) Cash Distributions Cash distributions are made quarterly within 45 days after the end of the quarter. Cash flow shall be distributed equally to the partners. Sale or financing proceeds will be distributed first to creditors and then to the partners equally. (d) Patient Service Revenue Patient service revenue is recorded at the nursing homes' established rates with contractual adjustments ($3,502,579 in 1996, $4,015,882 in 1995 and $2,929,956 in 1994), provision for uncollectible accounts, (bad debt expense of $41,632 in 1996, $108,332 in 1995 and $67,766 in 1994) and other discounts deducted to arrive at net patient service revenue. Net patient revenue includes amounts estimated by management to be reimbursable by Medicare, Medicaid and other third-party programs under the provisions of cost and prospective payment reimbursement formulas in effect. Amounts received under these programs are generally less than the established billing rates of the nursing homes and the difference is reported as a contractual adjustment and deducted from gross revenue. The nursing homes recognize currently estimated final settlements due from or to third-party programs. Final determination of amounts earned is subject to audit by the intermediaries. Differences between estimated provisions and F-29 43 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS final settlement will be reflected as charges or credits to operating revenues in the year the cost reports are finalized. (e) Property and Equipment Property and equipment are stated at cost. Depreciation of the buildings is provided over their estimated useful lives of thirty years on the straight-line method. Equipment and other personal property are depreciated over five to seven years on the straight-line method. (f) Income Taxes Taxable income is allocated to the partners and, therefore, no income taxes have been provided for in these financial statements. (g) Cash Equivalents Policy For the purposes of the statements of cash flows, the Joint Venture considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. (h) Uninsured Cash Balances The Joint Venture maintains cash balances in several banks. Cash accounts at banks are insured by the FDIC for up to $100,000. Amounts in excess of insured limits were approximately $531,586 at December 31, 1996 and $274,391 at December 31, 1995. The 1995 amount includes the total of commingled funds discussed in Note 8., since the amount in excess of FDIC limits related to these funds is not determinable. (i) Marketable Securities The classification of marketable securities is determined at the date of purchase. Gains or losses on the sale of securities are recognized on a specific identification basis. Marketable securities represent an investment of excess funds as a part of the Joint Venture's cash management policies. These securities are considered to be available for sale under Statement of Financial Accounting Standards No. 115 and are, thus, stated at fair value. Unrealized gains and losses are recognized as a component of partners' capital as is required by SFAS No. 115. F-30 44 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS (j) Uses of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. Note 2. ACQUISITIONS On May 1, 1988, the Joint Venture purchased Renaissance Place Katy Nursing Home located in Texas for $5,472,500 plus capitalized acquisition costs and fees of $509,290. The seller took back a note for $300,000 due May 1, 1992, that has subsequently been paid. On May 1, 1988, the Joint Venture purchased Renaissance Place - Humble Nursing Home located in Texas for $4,487,500 plus capitalized acquisition costs and fees of $228,812. Note 3. MARKETABLE SECURITIES Marketable securities consist of U.S. Treasury securities. The following schedule summarizes marketable securities activity for the years ended December 31, 1996 and 1995.
1996 1995 ---- ---- Beginning balance, amortized cost $1,402,286 $1,394,565 Purchase of marketable securities 1,642,784 503,438 Redemption of investments (900,000) (500,000) Net amortization of premiums and accretion of discounts 37,857 4,283 ---------- ---------- Amortized cost 2,182,927 1,402,286 Gross unrealized gain (loss) 7,913 7,384 ---------- ---------- Fair value $2,190,840 $1,409,670 ========== ==========
The maturities of investment securities at December 31, 1996 were as follows: Due in one year or less $ 500,713 Due in two years or less 1,682,214 ---------- $2,182,927 ==========
F-31 45 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1996 1995 ---- ---- Land $ 950,000 $ 950,000 Buildings and improvements 9,550,624 9,525,253 Furniture and equipment 1,136,348 1,118,289 ----------- ----------- Total 11,636,972 11,593,542 Accumulated depreciation (3,918,600) (3,483,409) ----------- ----------- Net property and equipment $ 7,718,372 $ 8,110,133 =========== ===========
Note 5. LONG-TERM DEBT Long-term debt at December 31 was as follows:
1996 1995 ---- ---- Mortgage note with a variable rate of interest (9.25% at December 31, 1996 and 9.5% at December 31, 1995) with monthly principal and interest payments of $5,050 through April 26, 1998, with a balloon payment due May 26, 1998. $ 691,850 $ 752,450 Less amounts due in one year or less 60,600 60,600 --------- --------- $ 631,250 $ 691,850 ========= =========
The aggregate annual maturities of long-term debts are as follows: 1997 $ 60,600 1998 631,250 --------- $ 691,850 =========
The mortgage note is secured by all real estate owned by the Joint Venture, as well as the real estate owned by The Alabama Joint Venture. Both the Joint Venture and The Alabama Joint Venture are jointly owned by the Medical Income Properties 2A Limited Partnership (MIP2A) and the Medical Income Properties 2B Limited Partnership (MIP2B). The General Partner of MIP2A and MIP2B has guaranteed the debt, as well as pledged its stock and partnership interest. The management company (See Note 6) has also guaranteed the debt and entered into a negative pledge agreement whereby it will not pledge, transfer or encumber its stock while the loan is outstanding. All management fees are subordinate to the debt. The loan document contains restrictive covenants associated with ratio F-32 46 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS and earnings requirements. Management is not aware of any conditions that exist that would cause them to be in noncompliance with these requirements. Note 6. CONTRACTUAL AGREEMENTS On May 1, 1988, the Joint Venture entered into a management agreement whereby the Manager is required to perform certain services. The agreement had an initial five-year term with one additional five-year option that was exercised in 1993. Fees were based on 6% of gross collected operating revenues through June 30, 1992. Thereafter they were based on 5% of gross collected operating revenues, but not less than $324,000 in a calendar year and were increased by an inflation factor after 1992. These fees are subordinated to the outstanding mortgage debt (See Note 5). The Manager has a right of first refusal to match a bona fide offer made by an outside party to purchase or lease the nursing home. The management agreement, as amended, contained a termination clause. The management agreement was amended on January 1, 1995. The amendment calls for a fixed monthly management fee of $31,379 with a cost of living factor equal to the greater of 4% per annum or the increase in the Consumer Price Index or such other measure mutually agreeable to the parties. The agreement expires December 31, 1998. The termination on sale clause was amended to base the fee on a sum equal to the discounted present value of the monthly management fee as of the date of termination of the agreement times the number of months remaining in the management agreement discounted to the date of termination at an annual interest rate of ten percent (10%). In addition, the parties agreed to terminate the Manager's right of first refusal. Commencing January 1, 1996, the Management Agreement was extended for a period of up to a maximum of eighteen months by one month for every month after January 1, 1996 in which the parties are engaged in the process of attempting to sell the Facilities. In the event of a sale of the Facilities, the termination on sale fee described above would be discounted to the date of termination at an annual rate of ten percent (10%) and then further discounted by a factor of thirty-three and one-third percent (33 1/3%). Management fees charged to the Joint Venture were $391,610 in 1996, $376,548 in 1995, and $362,065 in 1994. Note 7. INCOME TAXES No provision for income taxes is made in the financial statements since taxable income is reported in the tax returns of the partners. F-33 47 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Differences between the net income as reported in the financial statements and Federal taxable income arise from the nature and timing of certain revenue and expense items. The following is a reconciliation of reported net income and Federal taxable income.
1996 1995 1994 ---- ---- ---- Net income as reported $1,115,116 $760,403 $454,896 Adjustments: Depreciation differences 37,528 56,349 74,970 Bad debt reserve (26,045) 75,856 16,294 Nondeductible travel and entertainment 9,231 9,770 6,430 Accrued insurance - (80,000) - Vacation accrual 12,128 23,280 15,272 ---------- -------- -------- Federal taxable income $1,147,958 $845,658 $567,862 ========== ======== ========
Note 8. RELATED PARTY TRANSACTIONS Details of the amounts due from affiliates at December 31 are as follows:
1996 1995 ---- ---- Due from MIP2A $212,456 $212,456 Due from MIP2B 210,631 210,631 Due from affiliates of the general partner - 153,911 -------- -------- Due from affiliates $423,087 $576,998 ======== ========
During the year ended December 31, 1995, the General Partners established a pooled investment account in which the General Partners and the partnerships in which they act as general partners could participate. This account was used by those entities to invest overnight cash balances, and borrow funds when an entity needed temporary access to funds. Each entity received its share of interest earned monthly, and was charged interest on any funds borrowed. The Articles of Limited Partnership of the joint venture partners state that no General Partner shall have the authority to cause the joint venture partners to make loans other than in connection with the purchase, sale or disposition of partnership property. The Articles of Limited Partnership also state the joint venture partners' funds may not be commingled with any other entities' funds except as necessary for the operation of the partnerships. F-34 48 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS At December 31, 1995, the Joint Venture had loaned $153,911 to the other entities, and had earned interest of $24,238 from this arrangement. See Footnote 12 for sale of affiliated assets. Note 9. CONTINGENCY On May 1, 1990, the Joint Venture began self insuring its workmen's compensation claims for its two nursing home facilities. Accrued liabilities have been estimated to cover all asserted and unasserted claims and assessments and funds have been escrowed to cover such claims. The Joint Venture maintains insurance or reserves that it believes are adequate to meet the needs of the Joint Venture. While the Joint Venture Partners have been named as a defendant in several lawsuits, nothing has come to the attention of the Joint Venture that leads it to believe that it is exposed to a risk of material loss not covered by insurance or reserves. The real estate owned by The Texas Joint Venture is mortgaged as security on debt incurred by a joint venture partner Medical Income Properties 2A Limited partnership (MIP2A). This debt is also secured by all other real estate owned by MIP2A. The total outstanding debt secured by all these properties is $3,805,555. Note 10. CONCENTRATIONS IN REVENUE SOURCES The Joint Venture provides patient care services under various third party agreements. The principal sources of revenue under these contracts are derived primarily through the Medicaid and Medicare programs, as well as contracts with private pay patients who do not qualify for assistance from the other programs. The percentage of the Joint Venture's income from each of these sources for the years ended December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Private pay patients 15.07% 18.05% 19.42% Medicaid 39.62% 38.99% 47.81% Medicare 45.31% 42.96% 32.77% ------ ------ ------ Total 100.00% 100.00% 100.00% ====== ====== ======
The percentage attributable to private pay patients includes only amounts due for services where the primary payer is a private source. The Medicaid and Medicare percentages include amounts due from those programs as well as the patient's financial responsibility incurred under these contracts. F-35 49 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Statement No. 107, Disclosures about Fair Value of Financial Instruments ("FAS 107") requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate the value. The assumptions used in the estimation of the fair value of the Company's financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represents a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Investment securities available from sale: These securities are being carried at fair market value as determined by quoted market prices. Long-term Debt: For variable rate notes, fair values are based on carrying values. The other financial instruments of the Company are short-term assets and liabilities whose carrying amounts reported in the balance sheet approximate fair value. These items include cash, accounts receivable and accounts payable. Note 12. SUBSEQUENT EVENT On February 3, 1997, Medical Income Properties 2A Limited Partnership and Medical Income Properties 2B Limited Partnership, the general partners of The Texas Joint Venture, entered into a purchase agreement with Omega HealthCare Investors, Inc. to sell all of the real and personal property of the nursing home facilities. F-36 50 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS The purchase price is allocated among the facilities as follows: Renaissance Place - Katy (130 beds) $ 5,969,000 Renaissance Place - Humble (120 beds) 4,975,000 ----------- Proceeds from sale $10,944,000 ===========
Proceeds from the sale will be reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments should approximate $2,505,000. The closing could take place as early as March 31, 1997 and can be extended by the Partnership until April 30, 1997. If conditions precedent to either party's obligation to close are not satisfied or waived, the closing can be extended to a date no later than July 31, 1997. Approximately $365,000 of these proceeds will be set aside in a joint signature account for the purpose of securing all of the seller's obligations under the purchase agreement. These funds will be available to the Partnership in the event that these obligations do not exceed the funds held in escrow. In addition, a separate amount of proceeds of approximately $400,000 will also be held in reserve by the Alabama Joint Venture pending final settlement of third-party cost reports and other contingencies. This agreement can be terminated by mutual consent of the parties and other conditions precedent. In conjunction with the above sale, Omega HealthCare Investors, Inc. has agreed to a similar purchase of assets from RWB Medical Properties Limited Partnership IV, of which an officer of QualiCorp, Inc. owns either directly or indirectly a 21.53% interest. This sale relates to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets is $5,350,000. F-37 51 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION To the Partners The Texas Joint Venture Our report on our audits of the basic financial statements of The Texas Joint Venture for 1996 appears on page 1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts, Schedule of Consolidated Supplementary Income Statement Information, and Schedule of Real Estate and Accumulated Depreciation are presented for purposes of additional analysis and are not required parts of the basic financial statements. Such information has been subjected to the auditing procedures applied to the audits of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-38 52 THE TEXAS JOINT VENTURE SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 --------- --------- -------- Balance at beginning of year $ 132,796 $ 56,941 $ 40,647 Charged to patient service revenues (67,678) (32,477) (51,472) Write-offs 41,632 108,332 67,766 --------- --------- -------- Balance at end of year $ 106,750 $ 132,796 $ 56,941 ========= ========= ========
F-39 53 THE TEXAS JOINT VENTURE SCHEDULE X CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---------- ---------- ---------- Professional care of patients Nursing salaries and wages $2,442,501 $2,469,846 $2,197,347 Ancillary services expense 1,830,025 1,714,698 940,266 Supplies 138,992 151,705 107,170 Temporary labor 4,380 83,851 32,084 General and administrative Salaries and wages 236,614 207,708 192,944 Accounting and auditing 87,134 64,745 69,999 Insurance 132,282 13,436 48,076 Property tax 249,483 237,917 223,764 Management fees 391,610 376,548 362,065 Dietary Food 298,273 291,648 279,660 Household and plant Repairs and maintenance 73,771 103,388 73,199 Utilities 190,141 165,204 175,535 Depreciation $ 435,191 $ 444,905 $ 443,765 ========== ========== ==========
F-40 54 THE TEXAS JOINT VENTURE SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1996
INITIAL COST COSTS CAPITALIZED TO PARTNERSHIP(A) SUBSEQUENT TO ACQUISITION BUILDING AND CARRYING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST - ----------- ------------ ---------------------------- ------------------------- RENAISSANCE PLACE-KATY $ 0 $650,000 $4,822,500 $503,346 $509,290 RENAISSANCE PLACE-HUMBLE 691,850 300,000 4,187,500 435,524 228,812 -------- -------------------------- ------------------------ $691,850 $950,000 $9,010,000 $938,870 $738,102 ======== ========================== ======================== LIFE ON WHICH GROSS AMOUNT AT WHICH CARRIED DEPRECIATION AS OF DECEMBER 31, 1996(B) IN LATEST STATEMENT OF BUILDING AND ACCUMULATED DATE OF DATE OPERATION IS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED -------------------------------------------- ------------ ------------- -------- -------- RENAISSANCE PLACE-KATY $650,000 $ 5,835,136 $ 6,485,136 $2,082,569 1984 05/01/88 5 TO 30 YEARS RENAISSANCE PLACE-HUMBLE 300,000 4,851,836 5,151,836 1,836,031 1987 05/01/88 5 TO 30 YEARS ---------------------------------------------- ---------- $950,000 $10,686,972 $11,636,972 $3,918,600 ============================================== ==========
(A) The initial cost to the Partnership represents the original purchase price of the properties. (B) The aggregate cost of real estate owned at December 31, 1996 for Federal Income tax purposes was approximately $11,636,972. (C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
1996 1995 1994 ----------- ----------- ----------- Balance at beginning of period $11,593,542 $11,292,495 $10,939,816 Additions 43,430 301,047 352,679 Reductions 0 0 0 ----------- ----------- ----------- Balance at end of period $11,636,972 $11,593,542 $11,292,495 =========== =========== =========== (D) Reconciliation of accumulated depreciation: Balance at beginning of period $ 3,479,409 $3,038,503 $2,594,737 Depreciation expense 439,191 440,906 443,766 Reductions 0 0 0 ----------- ----------- ----------- Balance at end of period $ 3,918,600 $ 3,479,409 $ 3,038,503 =========== =========== ===========
F-41 55 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Partners The Alabama Joint Venture We have audited the balance sheets of The Alabama Joint Venture as of December 31, 1996 and 1995 and the related statements of operations, partners' capital and cash flows for each of the three years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Joint Venture's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of The Alabama Joint Venture as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-42 56 THE ALABAMA JOINT VENTURE BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ---------- ---------- ASSETS Current assets Cash and cash equivalents $ 491,979 $ 297,621 Marketable securities 250,100 955,515 Patient accounts receivable, net of allowance for doubtful accounts of $38,502 in 1996 and $42,684 in 1995 511,724 643,798 Interest receivable 1,320 2,213 Estimated third-party payor settlements 429,090 445,824 Prepaid expenses and other assets 15,340 25,650 ---------- ---------- Total current assets 1,699,553 2,370,621 Property and equipment, net of accumulated depreciation and amortization 4,383,681 4,372,881 Due from affiliates 980,471 925,792 Deferred financing costs, net of accumulated amortization of $14,780 in 1996 and $10,655 in 1995 5,842 9,967 ---------- ---------- Total assets $7,069,547 $7,679,261 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt 163,667 163,667 Accounts payable 254,902 317,881 Accrued payroll and payroll taxes 86,000 70,764 Accrued vacation 86,243 71,814 Accrued insurance 8,489 11,812 Accrued management fees 24,833 23,877 Estimated third-party payor settlements 58,291 -- Patient deposits and trust liabilities 39,668 31,787 Other accrued expenses 21,493 21,630 ---------- ---------- Total current liabilities 743,586 713,232 Long-term debt, net of current maturities 1,704,860 1,868,527 ---------- ---------- Total liabilities 2,448,446 2,581,759 ---------- ---------- Partners' capital 4,621,101 5,097,502 ---------- ---------- Total liabilities and partners' capital $7,069,547 $7,679,261 ========== ==========
See accompanying notes to financial statements. F-43 57 THE ALABAMA JOINT VENTURE STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- Revenues Net patient service revenue $ 6,393,242 $ 5,903,666 $ 5,132,454 Other revenue 3,143 4,097 5,416 ----------- ----------- ----------- Total revenue 6,396,385 5,907,763 5,137,870 ----------- ----------- ----------- Operating expenses Professional care of patients 3,025,669 2,698,179 2,073,096 Dietary 517,954 479,390 454,212 Household and plant 483,065 476,219 461,555 General and administrative 753,975 727,852 764,525 Employee health and welfare 253,917 236,830 236,575 Depreciation and amortization 232,160 252,043 262,019 ----------- ----------- ----------- Total operating expenses 5,266,740 4,870,513 4,251,982 ----------- ----------- ----------- Operating income 1,129,645 1,037,250 885,888 ----------- ----------- ----------- Other income (expenses) Interest income 54,842 72,267 28,673 Interest expense (184,787) (211,684) (188,846) Provider fees (182,993) (182,993) (182,993) ----------- ----------- ----------- Total other income (expenses) (312,938) (322,410) (343,166) ----------- ----------- ----------- Net income $ 816,707 $ 714,840 $ 542,722 =========== =========== ===========
See accompanying notes to financial statements. F-44 58 THE ALABAMA JOINT VENTURE STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
MEDICAL INCOME PROPERTIES LIMITED PARTNERSHIPS 2A 2B TOTAL ----------- ----------- ----------- Partners' capital at December 31, 1993 $ 2,245,570 $ 1,871,684 $ 4,117,254 Distributions to partners (103,645) (86,355) (190,000) Net income 296,055 246,667 542,722 Unrealized loss on marketable securities available for sale (9,479) (7,898) (17,377) ----------- ----------- ----------- Partners' capital at December 31, 1994 2,428,501 2,024,098 4,452,599 Distributions to partners (49,095) (40,905) (90,000) Net income 389,945 324,895 714,840 Unrealized gain on marketable securities available for sale 10,944 9,119 20,063 ----------- ----------- ----------- Partners' capital at December 31, 1995 2,780,295 2,317,207 5,097,502 Distributions to partners (703,695) (586,305) (1,290,000) Net Income 445,514 371,193 816,707 Unrealized loss on marketable securities available for sale (1,695) (1,413) (3,108) ----------- ----------- ----------- Partners' capital at December 31, 1996 $ 2,520,419 $ 2,100,682 $ 4,621,101 =========== =========== ===========
See accompanying notes to financial statements. F-45 59 THE ALABAMA JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Cash received from patient care $ 6,600,341 $ 5,201,651 $ 5,105,784 Interest received 58,042 69,594 19,780 Other operating receipts 3,143 4,097 5,416 Cash paid to suppliers and employees (5,052,207) (4,479,328) (3,888,461) Interest paid (184,787) (211,684) (188,846) Provider fees (182,993) (182,993) (182,993) ----------- ----------- ----------- Net cash provided (used) by operations 1,241,539 401,337 870,680 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (238,835) (130,636) (84,163) Purchases of marketable securities -- (252,099) (988,791) Maturities of marketable securities 700,000 293,993 -- ----------- ----------- ----------- Net cash provided (used) by investing activities 461,165 (88,742) (1,072,954) ----------- ----------- ----------- Cash flows from financing activities: Payments on long-term debt and lease obligations (163,667) (165,037) (169,444) Distributions to partners (1,290,000) (90,000) (190,000) Net related party transactions (54,679) (160,872) (220,513) ----------- ----------- ----------- Net cash provided (used) by financing activities (1,508,346) (415,909) (579,957) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 194,358 (103,314) (782,231) Cash and cash equivalents, beginning of year 297,621 400,935 1,183,166 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 491,979 $ 297,621 $ 400,935 =========== =========== ===========
See accompanying notes to financial statements. F-46 60 THE ALABAMA JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ----------- ----------- ----------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 816,707 $ 714,840 $ 542,722 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 232,160 252,043 262,019 Provision for losses on accounts receivable 33,872 32,956 41,660 (Increase) decrease in: Patient accounts receivable, net 98,202 (253,138) (205,764) Interest receivable, securities premium amortization, and securities discount accretion 3,200 54 (8,894) Estimated third-party payor settlements 16,734 (413,954) 137,435 Prepaid expenses and other assets 10,310 29,869 (25,571) Increase (decrease) in: Accounts payable (62,979) 158,732 71,936 Accrued expenses 27,161 (56,318) 10,303 Estimated third-party payor settlements 58,291 (70,606) 31,885 Other liabilities 7,881 6,859 12,949 ----------- ----------- ----------- Total adjustments 424,832 (313,503) 327,958 ----------- ----------- ----------- Net cash provided (used) by operations $ 1,241,539 $ 401,337 $ 870,680 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Unrealized (gain) loss on marketable securities available for sale $ 3,108 $ (20,063) $ 17,377 =========== =========== =========== Securities valuation allowance (3,108) 20,063 (17,377)
See accompanying notes to financial statements. F-47 61 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization The Alabama Joint Venture was formed on July 1, 1988, and is engaged in the business of acquiring, operating and holding for investment purposes, income-producing, health care related properties, primarily nursing homes. The joint venture partners are Medical Income Properties 2A Limited Partnership (MIP2A) and Medical Income Properties 2B Limited Partnership (MIP2B). Medical Income Properties 2A Limited Partnership owns 54.55% of the Joint Venture while Medical Income Properties 2B Limited Partnership owns 45.45% of the Joint Venture. Both partners are part of a series of three Delaware limited partnerships as represented by a Partnership Prospectus dated October 22, 1986. The Alabama Joint Venture currently owns and operates one nursing home in Alabama. (b) Allocation of Net Profits and Net Losses Net profits and net losses are shared according to the partners' ownership percentages; 54.55% to Medical Income Properties 2A and 45.45% to Medical Income Properties 2B. (c) Cash Distributions Cash distributions are made quarterly within 45 days after the end of the quarter. Cash flow is distributed to the partners according to their ownership percentages. Sale or financing proceeds will be distributed first to creditors and then to the partners according to their ownership percentages. (d) Patient Service Revenue Patient service revenue is recorded at the nursing home's established rates with contractual adjustments ($1,615,337 in 1996, $1,536,130 in 1995 and $774,913 in 1994), provision for uncollectible accounts, (bad debt expense of $33,872 in 1996, $32,956 in 1995 and $41,660 in 1994) and other discounts deducted to arrive at net patient service revenue. Net patient service revenue includes amounts estimated by management to be reimbursable by Medicare, Medicaid and other third-party programs under the provisions of cost and prospective payment reimbursement formulas in effect. Amounts received under these programs are generally less than the established billing rates of the nursing homes and the difference is reported as a contractual adjustment and deducted from gross revenue. F-48 62 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS The nursing home recognizes currently estimated final settlements due from or to third party programs. Final determination of amounts earned is subject to audit by the intermediaries. Differences between estimated provisions and final settlement are reflected as charges or credits to operating revenues in the year the cost reports are finalized. (e) Property and Equipment Property and equipment are stated at cost. Depreciation of the buildings is provided over their estimated useful lives of thirty years on the straight-line method. Equipment and other personal property are depreciated over five to seven years on the straight-line method. (f) Income Taxes Taxable income is allocated to the partners and, therefore, no income taxes have been provided for in these financial statements. (g) Cash Equivalents Policy For the purposes of the statements of cash flows, the Joint Venture considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. (h) Uninsured Cash Balances The Joint Venture maintains cash balances in several banks. Cash accounts at banks are insured by the FDIC for up to $100,000. Amounts in excess of insured limits were approximately $359,216 at December 31, 1996 and $161,873 at December 31, 1995. The 1996 and 1995 amounts do not include the total of commingled funds discussed in Note 8, since the amount in excess of FDIC limits related to these funds is not determinable. (i) Marketable Securities The classification of marketable securities is determined at the date of purchase. Gains or losses on the sale of securities are recognized on a specific identification basis. Marketable securities represent an investment of excess funds as a part of the Joint Venture's cash management policies. These securities are considered to be available for sale under Statement of Financial Accounting Standards No. 115 and are, thus, stated at fair value. Unrealized gains and losses are F-49 63 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS recognized as a component of partners' capital as is required by SFAS No. 115. (i) Uses of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. Note 2. ACQUISITIONS On July 1, 1988, the Joint Venture purchased Medical Park Nursing Home (183 beds) located in Alabama for $5,100,000 plus capitalized acquisition costs and fees of $379,272. Note 3. MARKETABLE SECURITIES Marketable securities consist of U.S. Treasury securities. The following schedule summarizes marketable securities activity for the years ended December 31, 1996 and 1995.
1996 1995 ---- ---- Beginning balance, at amortized cost $ 952,829 $ 996,509 Purchase of marketable securities - 252,095 Redemption of investments (700,000) (293,993) Net amortization of premiums and accretion of discounts (2,305) (1,782) --------- --------- Amortized cost 250,524 952,829 Gross unrealized gain (loss) (424) 2,686 --------- --------- Fair value $ 250,100 $ 955,515 ========= =========
The maturities of investment securities at December 31, 1996 were as follows: Due in one year or less $ 250,524 =========
F-50 64 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1996 1995 ---- ---- Land $ 400,000 $ 400,000 Buildings and improvements 5,473,692 5,256,767 Furniture and equipment 585,827 563,917 ---------- ---------- Total 6,459,519 6,220,684 Accumulated depreciation and amortization (2,075,838) (1,847,803) ---------- ---------- Net property and equipment $4,383,681 $4,372,881 ========== ==========
Note 5. LONG-TERM DEBT Long-term at debt December 31 was as follows: 1996 1995 Mortgage notes with interest at prime plus 1% (9.25% at December 31, 1996 and 9.5% at December 31, 1995) payable in 60 payments of $13,639 plus interest through April 26, 1998, with a balloon payment due May 26, 1998 $1,868,527 $2,032,194 Less amounts due in one year or less 163,667 163,667 ---------- ---------- $1,704,860 $1,868,527 ========== ==========
The aggregate annual maturities of long-term debts are as follows: 1997 $ 163,667 1998 1,704,860 ---------- $1,868,527 ==========
The mortgage note is secured by all real estate owned by the Joint Venture, as well as the real estate owned by The Texas Joint Venture. Both the Joint Venture and The Texas Joint Venture are jointly owned by the Medical Income Properties 2A Limited Partnership (MIP2A) and the Medical Income Properties 2B Limited Partnership (MIP2B). The General Partner of MIP2A and MIP2B has guaranteed the debt, as well as pledged its stock and partnership interest. The management company (See Note 6) has also guaranteed the debt and entered into a negative pledge agreement whereby it will not pledge, transfer or encumber its stock while the loan is F-51 65 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS outstanding. All management fees are subordinate to the debt. The loan document contains restrictive covenants associated with ratio and earnings requirements. Management is not aware of any conditions that exist that would cause them to be in noncompliance with these requirements. Note 6. CONTRACTUAL AGREEMENTS On July 1, 1988, the Joint Venture entered into a management agreement whereby the Manager was required to perform certain services. The agreement had an initial five-year term with one additional five-year option. Fees were based on 6% of gross collected operating revenues through June 30, 1993. Thereafter they were based on 5% of gross collected operating revenues, but not less than $250,000 in a calendar year and were increased by an inflation factor after 1992. These fees are subordinated to the outstanding mortgage debt (See Note 5). The Manager has a right of first refusal to match a bona fide offer made by an outside party to purchase or lease the nursing home. The management agreement, as amended, contained a termination clause. The management agreement was amended on January 1, 1995. The amendment calls for a fixed monthly management fee of $23,877 with a cost of living factor equal to the greater of 4% per annum or the increase in the Consumer Price Index or such other measure mutually agreeable to the parties. The agreement expires December 31, 1998. The termination on sale clause was amended to base the fee on a sum equal to the discounted present value of the monthly management fee as of the date of termination of the agreement times the number of months remaining in the management agreement discounted to the date of termination at an annual interest rate of ten percent (10%). In addition, the parties agreed to terminate the Manager's right of first refusal. Commencing January 1, 1996, the Management Agreement was extended for a period of up to a maximum of eighteen months by one month for every month after January 1, 1996 in which the parties are engaged in the process of attempting to sell the Facility. In the event of a sale of the Facility, the termination on sale fee described above would be discounted to the date of termination at an annual rate of ten percent (10%) and then further discounted by a factor of thirty-three and one-third percent (33 1/3%). Management fees charged to the Joint Venture were $297,990 in 1996, $286,529 in 1995, and $275,509 in 1994. F-52 66 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 7. INCOME TAXES No provision for income taxes is made in the financial statements since taxable income is reported in the income tax returns of the partners. Differences between the net income as reported in the financial statements and Federal taxable income arise from the nature and timing of certain revenue and expense items. The following is a reconciliation of reported net income and Federal taxable income.
1996 1995 1994 ---- ---- ---- Net income as reported $816,707 $714,840 $542,722 Adjustments: Depreciation differences (1,935) 27,157 49,037 Bad debt reserve (4,182) (23,316) 41,000 Nondeductible travel and entertainment 3,407 2,534 1,753 Accrued insurance - (8,000) - Vacation accrual 14,429 1,204 7,376 -------- -------- -------- Federal taxable income $828,426 $714,419 $641,888 ======== ======== ========
Note 8. RELATED PARTY TRANSACTIONS Amounts due from affiliates at December 31 are stated as follows:
1996 1995 ---- ---- Due from MIP2A $507,054 $447,954 Due from MIP2B 473,417 382,517 Due from affiliates of the general partner - 95,321 -------- -------- Due from affiliates $980,471 $925,792 ======== ========
During the year ended December 31, 1995, the General Partners established a pooled investment account in which the General Partners and the partnerships in which they act as general partners could participate. This account was used by those entities to invest overnight cash balances, and borrow funds when an entity needed temporary access to funds. Each entity received its share of interest earned monthly, and was charged interest on any funds borrowed. The Articles of Limited Partnership of the joint venture partners state that no General Partner shall have the authority to cause the joint venture partners to make loans other than in connection with the purchase, sale or disposition of partnership property. The F-53 67 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Articles of Limited Partnership also state the joint venture partners' funds may not be commingled with any other entities' funds except as necessary for the operation of the partnerships. At December 31, 1995, the Joint Venture had loaned $95,321 to the other entities, and had earned interest of $9,633 from this arrangement. See Footnote 12 for sale of affiliated assets. Note 9. CONTINGENCY The real estate owned by The Alabama Joint Venture is mortgaged as security on debt incurred by a joint venture partner Medical Income Properties 2A Limited partnership (MIP2A). This debt is also secured by all other real estate owned by MIP2A. The total outstanding debt secured by all these properties is $3,805,555. Note 10. CONCENTRATIONS IN REVENUE SOURCES The Joint Venture provides patient care services under various third party agreements. The principal sources of revenue under these contracts are derived primarily through the Medicaid and Medicare programs, as well as contracts with private pay patients who do not qualify for assistance from the other programs. The percentage of the Joint Venture's income from each of these sources for the years ended December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Patients and sponsors 10.28% 14.25% 19.54% Medicaid 55.54% 49.53% 61.49% Medicare 34.18% 36.22% 18.97% ------ ------ ------ Total 100.00% 100.00% 100.00% ====== ====== ======
The percentage attributable to private pay patients includes only amounts due for services where the primary payer is a private source. The Medicaid and Medicare percentages include amounts due from those programs as well as the patient's financial responsibility incurred under these contracts. Note 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Statement No. 107, Disclosures about Fair Value of Financial Instruments ("FAS 107") requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate the value. The assumptions used in the estimation of the fair value of the Company's financial instruments F-54 68 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represents a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Investment securities available from sale: These securities are being carried at fair market value as determined by quoted market prices. Long-term Debt: For variable rate notes, fair values are based on carrying values. The other financial instruments of the Company are short-term assets and liabilities whose carrying amounts reported in the balance sheet approximate fair value. These items include cash, accounts receivable and accounts payable. Note 12. SUBSEQUENT EVENT On February 3, 1997, Medical Income Properties 2A Limited Partnership and Medical Income Properties 2B Limited Partnership, the general partners of The Alabama Joint Venture, entered into a purchase agreement with Omega HealthCare Investors, Inc. to sell all of the real and personal property of the 183 bed nursing home known as Medical Park Convalescent Center. The purchase price allocated to Medical Park is $9,950,000. The closing could take place as early as March 31, 1997 and can be extended by the Partnership until April 30, 1997. If conditions precedent to either party's obligation to close are not satisfied or waived, the closing can be extended to a date no later than July 31, 1997. Approximately $362,000 of these proceeds will be set aside in a joint signature account for the purpose of securing all of the seller's obligations under the purchase agreement. These funds will be available to the Partnership in the event that these obligations do not exceed the funds held in escrow. In addition, a separate amount of proceeds of approximately $397,000 will also be held in reserve by the Alabama Joint Venture pending final settlement of third-party cost reports and other contingencies. F-55 69 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Proceeds from the sale will be reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments should approximate $3,516,000. This agreement can be terminated by mutual consent of the parties and other conditions precedent. In conjunction with the above sale, Omega HealthCare Investors, Inc. has agreed to a similar purchase of assets from RWB Medical Properties Limited Partnership IV, of which an officer of QualiCorp, Inc. owns either directly or indirectly a 21.53% interest. This sale relates to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets is $5,350,000. F-56 70 [SELF & MAPLES, P.A. LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION To the Partners The Alabama Joint Venture Our report on our audits of the basic financial statements of The Alabama Joint Venture for 1996 appears on page 1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts, Schedule of Consolidated Supplementary Income Statement Information, and Schedule of Real Estate and Accumulated Depreciation are presented for purposes of additional analysis and are not required parts of the basic financial statements. Such information has been subjected to the auditing procedures applied to the audits of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/ Self & Maples, P.A. Oneonta, Alabama January 24, 1997, except for Note 12, as to which the date is February 3, 1997 F-57 71 THE ALABAMA JOINT VENTURE SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- Balance at beginning of year $ 42,684 $ 66,000 $ 25,000 Charged to patient service revenue (38,054) (56,272) (660) Write-offs 33,872 32,956 41,660 ----------- ----------- ----------- Balance at end of year $ 38,502 $ 42,684 $ 66,000 =========== =========== ===========
F-58 72 THE ALABAMA JOINT VENTURE SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- Professional care of patients Salaries and wages $ 1,808,353 $ 1,657,908 $ 1,553,602 Ancillary service expense 821,795 629,505 175,645 Supplies 109,716 123,550 88,497 General and administrative Salaries and wages 121,619 118,380 122,197 Accounting and auditing 58,340 49,491 50,456 Insurance 180,348 155,990 215,447 Property tax 25,496 25,491 25,586 Management fees 297,990 286,529 275,509 Dietary Food cost 252,802 228,560 210,041 Household and plant Repairs and maintenance 30,625 52,658 54,880 Utilities 128,941 112,945 103,983 Depreciation $ 228,035 $ 247,918 $ 257,894 =========== =========== ===========
F-59 73 THE ALABAMA JOINT VENTURE SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1996
INITIAL COST COSTS CAPITALIZED TO PARTNERSHIP(A) SUBSEQUENT TO ACQUISITION BUILDING AND CARRYING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST ----------- ------------ ---------------------------- ------------------------- MEDICAL PARK $1,868,527 $400,000 $4,700,000 $980,247 $379,272 ========== ======== ========== ======== ======== LIFE ON WHICH GROSS AMOUNT AT WHICH CARRIED DEPRECIATION AS OF DECEMBER 31, 1996(B) IN LATEST STATEMENT OF BUILDING AND ACCUMULATED DATE OF DATE OPERATION IS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED ---------------------------------------- ------------ --------------------------------------- MEDICAL PARK $400,000 $6,059,519 $6,459,519 $2,075,838 1987 05/01/88 5 TO 30 YEARS ======== ========== ========== ==========
(A) The initial cost to the Partnership represents the original purchase price of the properties. (B) The aggregate cost of real estate owned at December 31, 1996 for Federal Income tax purposes was approximately $6,441,218. (C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
1996 1995 1994 ---------- ---------- ---------- Balance at beginning of period $6,220,684 $6,090,048 $6,005,887 Additions 238,835 130,636 84,161 Reductions 0 0 0 ---------- ---------- ---------- Balance at end of period $6,459,519 $6,220,684 $6,090,048 ========== ========== ========== (D) Reconciliation of accumulated depreciation: Balance at beginning of period $1,847,803 $1,594,024 $1,341,992 Depreciation expense 228,035 253,779 252,032 Reductions 0 0 0 ---------- ---------- ---------- Balance at end of period $2,075,838 $1,847,803 $1,594,024 ========== ========== ==========
F-60 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 269,249 0 718,753 102,349 0 1,143,403 4,205,186 1,349,990 11,087,491 1,498,131 640,309 0 0 0 8,949,051 11,087,491 0 3,448,070 0 3,670,369 65,880 0 58,603 581,970 0 581,970 0 0 0 581,970 0 0 5.02(31) REPRESENTS TOTAL PARTNERSHIP CAPITAL INCLUDING NET INCOME NET OF DISTRIBUTIONS PAID
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