-----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, RLLX0U14lMO235WrUn9foX4YnWsdmmJ/qmvckGh4SVimHXmgBpLYtCkRqphxiMQZ 8SfkluwiGwNxwYWuiekpuQ== 0000950144-98-003966.txt : 19980401 0000950144-98-003966.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003966 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 033-06122-02 FILM NUMBER: 98584055 BUSINESS ADDRESS: STREET 1: 7000 CENTRAL PKWY 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-K405 1 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER DECEMBER 31, 1997 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)
1100 ABERNATHY ROAD, BUILDING 500, SUITE 715 ATLANTA, GA 30328 (Address of Principal Executive Office) (770) 668-1080 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS ---------------- Limited Partnership Units 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by nonaffiliates of the Registrant is not applicable. The number of limited partnership units outstanding as of March 23, 1998 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 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE ---- PART I Item 1: Business.................................................... 1 Item 2: Properties.................................................. 2 Item 3: Legal Proceedings........................................... 2 Item 4: Submission of Matters to a Vote of Security Holders......... 2 PART II Item 5: Market for the Registrant's Partnership Units and Related Security Holder Matters..................................... 2 Item 6: Selected Financial Data..................................... 2 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 3 Item 8: Financial Statements and Supplementary Data................. 4 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 4 PART III Item 10: Directors and Executive Officers of the Registrant.......... 4 Item 11: Executive Compensation...................................... 5 Item 12: Security Ownership of Certain Beneficial Owners and Management.................................................. 5 Item 13: Certain Relationships and Related Transactions.............. 5 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................... 6 Signatures............................................................ 7
i 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. 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 and employed approximately 88 employees. The Partnership sold all of its operating assets on March 31, 1997. For the remainder of 1997, the Partnership was in the process of winding up its business and liquidating (the "Liquidation"). The Liquidation is anticipated to continue until approximately May 31, 2000, due to certain reimbursement policies of Medicaid and Medicare. BUSINESS STRATEGY The Partnership was formed for the purpose of investing primarily in existing, improved, medically related, income-producing commercial properties, such as medical office buildings and nursing homes. The Partnership's business strategy was to hold real property investments, primarily health care related, until such time as a sale or other disposition appears to be advantageous to the Partnership's limited partners (the "Limited Partners") based on such factors as potential capital appreciation, industry trends, cash flow and federal income tax consequences to the Limited Partners. SALE AGREEMENT Effective on February 3, 1997, the Partnership entered into a Purchase and Sale Agreement (the "Sale Agreement") with Qualicorp Management, Inc., the managing general partner of the Partnership, and Omega Healthcare Investors, Inc. (the "Purchaser") regarding the sale to the Purchaser of the Partnership's interests in its facilities and the personal property and intangible assets related to the operation of those facilities. The description of the Sale Agreement set forth herein does not purport to be complete and is qualified in its entirety 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. The closing of the asset sale was contingent upon, among other factors, consent to the transaction by the Limited Partners. The Partnership solicited the consent of the Limited Partners in the Partnership's Consent Solicitation Statement dated March 12, 1997, and the Limited Partners consented to the Sale Agreement on March 28, 1997. The Partnership closed the transactions contemplated by the asset sale on March 31, 1997. Because the Purchaser had not obtained all of the necessary state approvals for the transfer of operation of the Partnership's facilities, the Partnership entered into an interim leasing arrangement with the Purchaser to provide management and operation of the facilities for Omega until such approvals were received. The interim leasing arrangements terminated on May 31, 1997, after the Purchaser obtained the required approvals. Accordingly, effective as of May 31, 1997, the Partnership no longer owns any real property and has no employees. Pursuant to the Sale Agreement, the Partnership received aggregate net proceeds of $8,974,614. Proceeds from the Sale Agreement are being distributed to the Limited Partners in installments as described below: 1. First Installment. The Limited Partners were asked to surrender their partnership certificates in order to obtain the first installment check on May 13, 1997. Limited Partners who returned their certificates received a check in the amount of $725 per Unit. 2. Second Installment. A second distribution of $153 per Unit was made on July 11, 1997. This distribution was primarily attributable to the collection of accounts receivable in the period subsequent to the closing less the payment of accounts payable and other liabilities, including reserves set aside for contingencies that will be distributed in 1998 if no longer needed. 4 3. Final Installment. A final distribution consisting of unspent reserves is anticipated to be made following the expiration of the Partnership's representations and warranties to the Purchaser and any additional period required to finally resolve any claims for indemnification against the Partnership brought prior to the termination of such period. ITEM 2. PROPERTIES At December 31, 1997, the Partnership did not own or lease any property. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal actions against the Partnership. As noted in the financial statements Note 9, however, the Partnership does have certain contingent liabilities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Limited Partners during the fourth quarter of the fiscal year covered by this Report. 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 897 Limited Partners as of March 23, 1998. Distributions paid per Unit for each quarter in the last five years are incorporated by reference from Item 6 below. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the period January 1, 1993 to December 31, 1997 is shown below (000's omitted except for per share data and distributions):
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Summary of Operations: Total Revenue........................... $ 1,675 $ 3,448 $ 3,433 $ 3,059 $ 2,989 Operating Income (Loss)................. (425) (222) (216) 36 264 Loss from Discontinued Operations....... (130) -- -- -- -- Gain on Sale of Properties.............. 2,475 -- -- -- -- Net Income.............................. 2,134 582 331 459 615 Per Share Data: Net Income per Limited Partnership Unit................................. $190.88 $ 49.62 $ 28.23 $ 39.14 $ 52.44 Financial Condition: Total Assets............................ $11,398 $11,087 $11,206 $10,954 $10,597 Notes Payable........................... -- 704 763 816 879 Partner's Capital....................... 1,390 8,949 8,836 8,974 8,954 Distributions per Limited Partner Unit: First Quarter........................... $ 10.00 $ 10.00 $ 10.00 $ 7.50 $ 7.50 Second Quarter.......................... 0.00 10.00 10.00 10.00 7.50 Third Quarter........................... 0.00 10.00 10.00 10.00 7.50 Fourth Quarter.......................... 0.00 10.00 10.00 10.00 7.50 Special Distribution of the Sale Proceeds............................. 878.00 -- -- -- --
2 5 Quarterly Financial data for the period January 1, 1995 to December 31, 1997 (000's omitted):
1997 ------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total Revenue......................................... $1,038 $ 736 $ -- $ (99) Operating Income...................................... (63) (19) (51) (292) Gain on Sale of Properties............................ 2,343 (110) -- 242 Net Income (loss)..................................... 2,447 (75) (8) (230)
1996 ------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total Revenue.......................................... $909 $880 $824 $835 Income (Loss) from Operations.......................... (6) (6) (29) (181) Net Income............................................. 177 151 216 38
1995 ------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total Revenue.......................................... $883 $828 $821 $901 Income from Operations................................. (12) (82) (82) (40) Net Income (Loss)...................................... 138 38 31 124
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Partnership discontinued its operations on May 31, 1997, following the closing of the sale of substantially all of its assets and the termination of the interim operating arrangements, and the Managing General Partner is in the process of winding up the business and liquidating the Partnership. The discussion of the Sale Agreement and the Liquidation is incorporated by reference to Item 1. The Partnership is presently collecting its remaining accounts receivable, paying vendors the remaining balances owed, and filing terminating Medicare and Medicaid cost reports. LIQUIDITY AND CAPITAL RESERVES Cash and equivalent balances totaled $1,014,047 as of December 31, 1997, an increase of $744,798 compared to December 31, 1996, primarily due to cash received from the asset sale. Cash provided from operations increased from $189,488 in 1996 to $324,165 in 1997. This difference primarily resulted from collection of accounts receivable outstanding. Payments for capital expenditures were reduced from $12,408 in 1996 to $0 in 1997 because no capital expenditures were made in 1997 due to the asset sale. During 1997, the Partnership paid distributions to Limited Partners totaling $888 per unit, which includes $878 return of capital from sale proceeds returned to Limited Partners in the first two distributions of liquidation proceeds. The Partnership made the first installment of the liquidation proceeds totaling $7,909,791 or $725 per unit on May 12, 1997, and the second installment totaling $1,668,771 or $153 per unit on July 11, 1997. The Partnership will make a final distribution of remaining funds following the expiration of the periods within which claims for breach of representations and warranties, or other claims by Medicare, Medicaid or other third parties may be made against the Partnership either by contract or under applicable law. 3 6 RESULTS OF OPERATIONS Fiscal Year 1997 Compared to 1996 The Partnership's net income for the year ended December 31, 1997 was $2,134,254, compared to $581,970 in the previous year. The increase was primarily due to the gains realized from the asset sale. Revenues and operating expenses for 1997 were $1,675,043 and $2,100,296, respectively, compared to $3,448,070 and $3,670,369 in 1996, the substantial differences primarily due to the fact that the Partnership suspended all business operations on May 31, 1997 and incurred substantial costs associated with the asset sale. As a result of the foregoing, a net operating income loss of $425,253 for 1997. Other income (expenses) reflects higher interest income in 1997 primarily due to interest earned on the proceeds from the asset sale. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data 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 During the Partnership's two most recent fiscal years, the Partnership did not change accountants and had no disagreement with its accountants on any matters of accounting principles or practices or financial statement disclosure. 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, 1997 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" at pages 28 through 30 of the Prospectus, which pages are specifically incorporated by reference herein. The executive officers of QMI and QualiCorp, Inc. are as follows:
NAME AGE POSITIONS AND RECENT PRINCIPAL OCCUPATIONS - ---- --- ------------------------------------------- John M. DeBlois............................ 61 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........................... 55 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.
4 7 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, 1997. The Partnership paid to Qualicorp, Inc., the parent of QMI, the Managing General Partner $114,771 in 1997 as reimbursement for administrative expenses (primarily salaries) incurred during the year. In addition, during 1997, the Partnership paid to Qualicorp, Inc. $55,539 for property management fees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AMOUNT/NATURE NAME/ADDRESS OF BENEFICIAL TITLE OF CLASS(1) OF BENEFICIAL OWNER(2) OWNERSHIP(3) PERCENT OF CLASS(4) - ----------------------------- --------------------------- ------------- ------------------- Partnership Units............ MacKenzie Patterson, Inc.* 1,205 Units Approximately 1640 School Street 11.04% Suite 100 Moraga, CA 94556
- --------------- * JDF and Associates, LLC, Previously Owned Partnerships Income Fund II, L.P., Mackenzie Patterson Special Fund, L.P. Mackenzie Fund VI, Morago Gold, LLC, and certain of the foregoing parties' affiliates are entities commonly controlled by MacKenzie Patterson, Inc., which as of December 31, 1997, owned 1,205 (or approximately 11.04%) of the Partnership's outstanding units. No other person or group is known by the Partnership to own beneficially more than 5% of the outstanding units of the Partnership. SECURITY OWNERSHIP OF MANAGEMENT No executive officers and directors of QMI owned any units in the Partnership at December 31, 1997. QualiCorp, Inc., parent of QMI, the Partnership's Managing General Partner, held 44 units in the Partnership at December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Qualicorp Inc., the parent of QMI, charged the following amounts for property management fees and administrative expenses to the Partnership during the periods shown:
PROPERTY ADMINISTRATIVE YEAR MANAGEMENT FEES EXPENSES ---- --------------- -------------- 1997 $ 55,539 $114,771 1996 132,974 84,896 1995 0 80,278
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 24 through 26 of the Prospectus. Cash distributions of $8,210, $32,838 and $32,839, were made to the General Partners during 1997, 1996 and 1995, respectively. The General Partners also share in the Partnership's net profits and net losses. 5 8 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. The Partnership's financial statements and supplementary information appear in a separate section of this Form 10-K commencing on pages referenced below: Independent Auditor's Report Financial Statements........... F-1 Balance Sheets............................................ F-2 Statements of Operations.................................. F-3 Statements of Partners' Capital........................... F-5 Statements of Cash Flow................................... F-6 Notes to Financial Statements............................. F-8 Independent Auditor's Report on Information Accompanying the Basic Financial Statements................................ F-19 Schedule VIII -- Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts............. F-20 Schedule X -- Consolidated Supplementary Income Statement Information............................................... F-21 Schedule XI -- Real Estate and Accumulated Depreciation..... F-22
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. 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 Registrant dated October 11, 1984 as supplemented August 8, 1985, August 14, 1985, October 2, 1985 and November 21, 1985 and filed pursuant to Rule 424(b) under the Securities Act of 1933 and Preliminary Supplement and Amendment Number 5 dated November 29, 1985 is hereby incorporated herein by reference. 3-B. -- Amended and Restated Articles of Limited Partnership set forth as Exhibit A to the Prospectus, incorporated herein by reference. (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997. 6 9 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 in the City of Atlanta, State of Georgia. MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP QUALICORP MANAGEMENT, INC. Managing General Partner By: /s/ JOHN H. STODDARD ------------------------------------ John H. Stoddard President, Director, Chief Financial Officer and Principal Accounting Officer Date: March 30, 1998 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 30, 1998 - ----------------------------------------------------- John M. DeBlois /s/ JOHN H. STODDARD President, Director, Chief March 30, 1998 - ----------------------------------------------------- Financial Officer and John H. Stoddard Principal Accounting Officer
7 10 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 -- Financial Data Schedule (for SEC use only)
11 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 12 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP TABLE OF CONTENTS
Page ---- Independent Auditors' Report................................. F-1 Financial Statements Balance Sheets............................................. F-2 Statements of Operations................................... F-3 - F-4 Statements of Partners' Capital............................ F-5 Statements of Cash Flows................................... F-6 - F-7 Notes to Financial Statements.............................. F-8 - F-18 Information Accompanying the Basic Financial Statements Independent Auditors' Report on Information................ F-19 Accompanying the Basic Financial Statements Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts........ F-20 Schedule of Consolidated Supplementary Income Statement Information.................................... F-21 Schedule of Real Estate and Accumulated Depreciation....... F-22
13 [SELF, MAPLES & COPELAND, P.C. 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, 1997 and 1996 and the related statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Self, Maples & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-1 14 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ------------ ASSETS Current assets Cash and cash equivalents $ 1,014,047 $ 269,249 Patient accounts receivable, net of allowance for doubtful accounts of $0 in 1997 and $102,349 in 1996 -- 616,404 Estimated third-party payor settlements 29,964 203,628 Prepaid expense and other assets 4,472 54,122 ----------- ------------ Total current assets 1,048,483 1,143,403 Investment in joint ventures 10,349,719 7,087,148 Property and equipment, net of accumulated depreciation -- 2,855,196 Deferred financing costs, net of accumulated amortization of $0 in 1997 and $1,743 in 1996 -- 1,744 ----------- ------------ Total assets $11,398,202 $ 11,087,491 =========== ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt $ -- $ 63,388 Accounts payable 82,003 334,901 Accrued payroll and payroll taxes -- 73,433 Accrued vacation -- 32,722 Accrued insurance 120,000 10,657 Accrued real estate taxes -- 75,096 Accrued management fees -- 13,906 Patient deposits and trust liabilities -- 48,244 Other accrued expenses 147,821 4,949 Estimated third-party payor settlements 58,292 -- Due to affiliates 9,600,409 840,835 ----------- ------------ Total current liabilities 10,008,525 1,498,131 Long-term debt, net of current maturities -- 640,309 ----------- ------------ Total liabilities 10,008,525 2,138,440 ----------- ------------ Partners' capital (deficit) Limited partners 1,389,677 8,993,158 General partners -- (44,107) ----------- ------------ Total partners' capital 1,389,677 8,949,051 ----------- ------------ Total liabilities and partners' capital $11,398,202 $ 11,087,491 =========== ============
See accompanying notes to financial statements. F-2 15 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Revenues Net patient service revenue $ 1,672,843 $ 3,443,725 $ 3,428,541 Other revenue 2,200 4,345 4,147 ----------- ----------- ----------- Total revenue 1,675,043 3,448,070 3,432,688 ----------- ----------- ----------- Operating expenses Professional care of patients 1,015,967 1,888,947 1,981,961 Dietary 117,725 276,675 265,966 Household and plant 151,734 323,317 342,433 General and administrative 636,377 853,203 716,748 Employee health and welfare 80,778 182,010 190,721 Depreciation and amortization 36,077 146,217 150,534 Lease 61,638 -- -- ----------- ----------- ----------- Total operating expenses 2,100,296 3,670,369 3,648,363 ----------- ----------- ----------- Operating income (loss) (425,253) (222,299) (215,675) ----------- ----------- ----------- Other income (expenses) Interest income 113,621 -- -- Interest expense (15,886) (58,603) (92,668) Provider fees (27,120) (65,880) (65,700) Partnership share of joint venture income 143,690 928,752 705,096 ----------- ----------- ----------- Total other income (expenses) 214,305 804,269 546,728 ----------- ----------- ----------- Income (loss) before recognition of property sales and loss on discontinued operations (210,948) 581,970 331,053 Gain on sale of properties 2,475,123 -- -- Loss from discontinued operations (129,921) -- -- ----------- ----------- ----------- Net income $ 2,134,254 $ 581,970 $ 331,053 =========== =========== ===========
See accompanying notes to financial statements. F-3 16 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- -------- -------- Net income attributable to limited partners $2,081,937 $541,232 $307,879 Net income attributable to general partners 52,317 40,738 23,174 ---------- -------- -------- $2,134,254 $581,970 $331,053 ========== ======== ======== Net income (loss) per limited partnership unit outstanding: Continuing operations $ (17.99) $ 49.62 $ 28.23 Sale of properties 219.95 -- -- Discontinued operations (11.08) -- -- ---------- -------- -------- Net income (loss) per unit $ 190.88 $ 49.62 $ 28.23 ========== ======== ========
See accompanying notes to financial statements. F-4 17 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Limited Partners General Units Amount Partners Total ------- ----------- -------- ----------- 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 partnership 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 Distributions to partners ($888.00 per limited partnership unit outstanding) -- (9,685,418) (8,210) (9,693,628) Net income (loss) before recognition of property sales and loss on discontinued operations -- (196,182) (14,766) (210,948) Loss from discontinued operations -- (120,827) (9,094) (129,921) Gain on property sales -- 2,398,946 76,177 2,475,123 ------- ----------- -------- ----------- Partners' capital at December 31, 1997 $10,907 $ 1,389,677 $ -- $ 1,389,677 ======= =========== ======== ===========
See accompanying notes to financial statements. F-5 18 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Cash received from patient care $ 2,521,203 $ 3,708,915 $ 3,186,524 Interest and dividends received 113,621 -- -- Other operating receipts 2,200 4,345 4,147 Cash paid to suppliers and employees (2,269,853) (3,399,289) (3,516,545) Interest paid (15,886) (58,603) (92,668) Provider fees (27,120) (65,880) (65,700) ----------- ----------- ----------- Net cash provided (used) by operations 324,165 189,488 (484,242) ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures -- (12,408) (52,424) Capital contributions to joint ventures (105,000) -- -- Cash proceeds from the sale of property 8,974,614 -- -- Distributions from joint ventures 287,277 876,302 330,905 ----------- ----------- ----------- Net cash provided (used) by investing activities 9,156,891 863,894 278,481 ----------- ----------- ----------- Cash flows from financing activities: Principal payments on long-term obligations (5,759) (59,300) (53,492) Distributions to partners (9,693,628) (469,118) (469,120) Net related party transactions 963,129 (297,078) 644,286 ----------- ----------- ----------- Net cash provided (used) by financing activities (8,736,258) (825,496) 121,674 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 744,798 227,886 (84,087) Cash and cash equivalents, beginning of year 269,249 41,363 125,450 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 1,014,047 $ 269,249 $ 41,363 =========== =========== ===========
See accompanying notes to financial statements. F-6 19 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- --------- --------- Reconciliation of net income to net cash provided by operating activities: Net income $ 2,134,254 $ 581,970 $ 331,053 ----------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36,077 146,217 150,534 Partnership share of joint venture income (143,690) (928,752) (705,096) Provision for losses on accounts receivable 106,747 15,177 7,625 (Gain) loss on disposal of property (2,475,123) -- -- (Increase) decrease in: Patient accounts receivable, net 509,657 148,657 130,735 Estimated third-party payor settlements 173,664 113,334 (258,259) Prepaid expenses and other assets 9,770 (11,978) 23,537 Increase (decrease) in: Accounts payable (253,608) 99,749 26,905 Accrued expenses 195,803 13,880 (74,560) Estimated third-party payor settlements 58,292 -- (122,118) Other liabilities (27,678) 11,234 5,402 ----------- --------- --------- Total adjustments (1,810,089) (392,482) (815,295) ----------- --------- --------- Net cash provided (used) by operating activities $ 324,165 $ 189,488 $(484,242) =========== ========= =========
See accompanying notes to financial statements. F-7 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. As described in Note 12, the Partnership has sold all its fixed and operating assets and is in the process of liquidating the remainder of its assets for distribution to the partners and subsequent dissolution. (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 F-8 21 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS limited partner is equal to his capital investment; and - 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 1997, 1996, and 1995. (e) Patient Service Revenue Patient service revenue is recorded at the nursing homes' established rates with contractual adjustments ($1,222,156 in 1997, $1,888,312 in 1996, and $1,832,743 in 1995), provision for uncollectible accounts, (bad debt expense of $106,747 in 1997, $15,177 in 1996, and $7,625 in 1995) 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 F-9 22 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 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) 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 $1,058,170 (inclusive of unconsolidated joint ventures) at December 31, 1997. (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-10 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, 1997 and 1996 and operating statement information for each of the years in the three-year period ending December 31, 1997 is as follows:
Katy 1997 1996 - ---- ---------- ---------- Current assets $ 905,555 $2,501,874 Long-term assets 7,017,221 4,771,630 ---------- ---------- Total assets $7,922,776 $7,273,504 ========== ========== Current liabilities 192,769 860,008 Equity 7,730,007 6,413,496 ---------- ---------- Total liabilities and equity $7,922,776 $7,273,504 ========== ========== Partnership's investment at December 31, 1997 and 1996 $3,865,004 $3,206,748 ========== ==========
F-11 24 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
Katy (con't.) - ---- 1997 1996 1995 ---------- ---------- ---------- Revenues $2,301,862 $5,039,616 $4,985,129 Gain on sale 1,056,481 -- -- Expenses 2,227,982 4,385,765 4,362,005 ---------- ---------- ---------- Net income $1,130,361 $ 653,851 $ 623,124 ========== ========== ========== Humble 1997 1996 - ------ ---------- ---------- Current assets $ 894,188 $1,498,372 Long-term assets 4,250,593 3,377,314 ---------- ---------- Total assets $5,144,781 $4,875,686 ========== ========== Current liabilities 264,265 677,478 Long-term liabilities -- 631,250 Equity 4,880,516 3,566,958 ---------- ---------- Total liabilities and equity $5,144,781 $4,875,686 ========== ========== Partnership's investment at December 31, 1997 and 1996 $2,440,258 $1,783,479 ========== ========== 1997 1996 1995 ---------- ---------- ---------- Revenues $1,861,707 $4,415,307 $3,664,088 Gain on sale 1,195,281 -- -- Expenses 1,719,582 3,954,042 3,526,809 ---------- ---------- ---------- Net income $1,337,406 $ 461,265 $ 137,279 ========== ========== ========== Medical Park 1997 1996 - ------------ ---------- ---------- Current assets $ 246,970 $1,699,553 Long-term assets 9,029,540 5,369,994 ---------- ---------- Total assets $9,276,510 $7,069,547 ========== ========== Current liabilities $ 372,943 $ 743,586 Long-term liabilities -- 1,704,860 Equity 8,903,567 4,621,101 ---------- ---------- Total liabilities and equity $9,276,510 $7,069,547 ========== ==========
F-12 25 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
Medical Park (con't.) - --------------------- Partnership's investment at December 31, 1997 and 1996 $4,047,063 $2,100,682 ========== ========== 1997 1996 1995 ---------- ---------- ---------- Revenues $2,770,379 $6,396,385 $5,907,763 Gain on sale 4,786,089 -- -- Expenses 2,691,860 5,579,678 5,192,923 ---------- ---------- ---------- Net income $4,864,608 $ 816,707 $ 714,840 ========== ========== ==========
See Note 9 for contingency. Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1997 1996 ------- ----------- Land $ -- $ 90,000 Buildings and improvements -- 3,812,869 Furniture and equipment -- 302,317 ------- ----------- Total -- 4,205,186 Accumulated depreciation and amortization -- (1,349,990) ------- ----------- Net property and equipment $ -- $ 2,855,196 ======= ===========
Note 5. LONG-TERM DEBT Long-term debt consisted of the following at December 31:
1997 1996 ---- ---- Industrial Revenue Bonds payable at a variable rate of interest (7.755% at December 31, 1996) with monthly principal and interest payments of $9,645. The interest rate is adjusted every May 1 and November 1, secured by real estate. $ -- $703,697 Less amounts due in one year or less -- 63,388 ------- -------- $ -- $640,309 ======= ========
F-13 26 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Note 6. RELATED PARTY TRANSACTIONS QualiCorp, Inc. charged the Partnership $114,771 in 1997, $84,896 in 1996, and $80,278 in 1995 for administrative expenses (primarily salaries). QualiCorp, Inc. also charged the Partnership $55,539 in 1997 and $132,974 in 1996 for property management fees. Details of the amounts due to affiliates at December 31 are as follows:
1997 1996 ---------- -------- Due to QualiCorp, Inc. $ 14,468 $156,787 Due to The Texas Joint Venture - Katy 3,508,610 184,075 Humble 2,125,296 26,556 Due to The Alabama Joint Venture - Medical Park 3,665,680 473,417 Due to MIP 2A 286,355 -- ---------- -------- Due to affiliates $9,600,409 $840,835 ========== ========
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 partnerships' funds may not be commingled with any other entities' funds except as necessary for the operation of those partnerships. At December 31, 1996, the Partnership had borrowed $286,355 from the other entities. 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. F-14 27 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1997 1996 1995 ---------- -------- -------- Net income as reported $2,134,254 $581,970 $331,053 Adjustments: Depreciation differences 8,779 17,720 41,967 Gain on sale 3,116 -- -- Bad debt reserve (173,224) 33,238 46,191 Vacation accrual (124,448) 14,263 15,019 Insurance deductible -- -- (51,636) Nondeductible travel and entertainment 6,507 14,080 16,165 ---------- -------- -------- Federal taxable income $1,854,984 $661,271 $398,759 ========== ======== ======== Federal taxable income per limited partnership unit outstanding $ 165.28 $ 56.38 $ 34.00 ========== ======== ========
Note 8. CONTRACTUAL AGREEMENTS In 1988, the Partnership 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 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 were increased by an inflation factor after 1992. The Manager had 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 called 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 F-15 28 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 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%). The sale as described in Note 12 includes the terminating settlement. Management fees charged to the partnership were $72,026 in 1997, $166,875 in 1996, and $160,456 in 1995. Pursuant to the sales agreement described in Note 12, on April 1, 1997, the Partnership entered into a triple net lease with Omega HealthCare Investors, Inc. (Omega) to lease all of the properties the Partnership had previously sold to Omega. The lease expired on December 31, 1997 subject to various extension/termination rights of the Lessor. The Lessor exercised its option to terminate the lease on May 31, 1997. The lease payment was based on a fixed amount of base rent plus the net of the remainder of gross revenue over operating expenses. The base rental lease expense for the two months was $52,476 and gross revenue was $9,162 in excess of operating expense for the same period. Total operating lease expense was $61,638. 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. 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, 1997, 1996, and 1995 is as follows: F-16 29 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1997 1996 1995 ------ ------ ------ Private pay patients 8.12% 12.05% 11.34% Medicaid 37.66% 48.03% 47.47% Medicare 54.22% 39.92% 41.19% ------ ------ ------ 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: The 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. SALE OF ASSETS 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. F-17 30 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS The purchase price was 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 were reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments approximated $3,400,000. They included $937,411 for termination of the management agreement as explained in Note 8. The closing took place on March 31, 1997. Approximately $413,350 of these proceeds were 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. As described in Note 8, the Partnership continued to operate the nursing homes until May 31, 1997. In conjunction with the above sale, Omega HealthCare Investors, Inc. 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 related to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets was $5,350,000. F-18 31 [SELF, MAPLES & COPELAND, P.C. 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 1997 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 & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-19 32 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, 1997, 1996 AND 1995
1997 1996 1995 --------- -------- ------- Balance at beginning of year $ 102,349 $ 54,188 $35,327 Charged to patient service revenues (209,096) 32,984 11,236 Write-offs 106,747 15,177 7,625 --------- -------- ------- Balance at end of year $ -- $102,349 $54,188 ========= ======== =======
F-20 33 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP SCHEDULE X CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- ---------- Professional care of patients Nursing salaries and wages $426,414 $986,150 $1,016,764 Ancillary service expense 455,646 678,357 713,913 Supplies 54,922 89,576 108,192 Temporary labor 18,838 939 8,423 General and administrative Salaries and wages 46,422 93,837 87,897 Accounting and auditing 23,470 46,552 42,807 Insurance 179,013 150,623 161,912 Property tax 30,534 73,649 76,239 Management fees 72,026 166,875 160,456 Property management fees 55,539 132,974 -- Cost reimbursement 114,771 84,896 80,278 Dietary Food cost 57,496 134,948 128,930 Household and plant Repairs and maintenance 15,110 10,212 23,852 Utilities 52,501 126,040 120,078 Depreciation $ 36,023 $145,999 $ 150,316 ======== ======== ==========
F-21 34 MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1997
INITIAL COST COSTS CAPITALIZED GROSS AMOUNT AT WHICH CARRIED TO PARTNERSHIP(A) SUBSEQUENT TO AS OF DISPOSITION DATE(B) ACQUISITION BUILDING AND CARRYING BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST LAND IMPROVEMENTS TOTAL - ------------------- ------------ ------- ------------ ------------ -------- ------- ------------ ---------- EDWARDSVILLE - EAST $ 0 $90,000 $ 3,660,000 $178,591 $276,595 $90,000 $4,115,186 $4,205,186 ============ ======= =========== ======== ======== ======= ========== ========== LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF ACCUMULATED DATE OF DATE OPERATION IS DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED - ------------------- ------------ ------------ -------- ------------- EDWARDSVILLE - EAST $ 1,386,013 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 the date of disposition for Federal Income tax purposes was approximately $4,140,355. (C) Reconciliation of real estate owned at December 31, 1997, 1996, and 1995:
1997 1996 1995 ---------- ---------- ---------- Balance at beginning of period $4,205,186 $4,192,779 $4,140,355 Additions 0 12,407 52,424 Reductions 4,205,186 0 0 ---------- ---------- ---------- Balance at end of period $ 0 $4,205,186 $4,192,779 ========== ========== ==========
(D) Reconciliation of accumulated depreciation: Balance at beginning of period $1,349,990 $1,203,992 $1,053,675 Depreciation expense 36,023 145,998 150,317 Reductions 1,386,013 0 0 ---------- ---------- ---------- Balance at end of period $ 0 $1,349,990 $1,203,992 ========== ========== ==========
F-22 35 THE ALABAMA JOINT VENTURE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 36 THE ALABAMA JOINT VENTURE TABLE OF CONTENTS
Page ---- Independent Auditors' 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 - F-6 Notes to Financial Statements.......................... F-7 - F-14 Information Accompanying the Basic Financial Statements Independent Auditors' Report on Information............ F-15 Accompanying the Basic Financial Statements Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts.... F-16 Schedule of Supplementary Income Statement Information................................ F-17 Schedule of Real Estate and Accumulated Depreciation... F-18
37 [SELF, MAPLES & COPELAND, P.C. 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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Self, Maples & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-1 38 THE ALABAMA JOINT VENTURE BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- ASSETS Current assets Cash and cash equivalents $ 91,297 $ 491,979 Marketable securities -- 250,100 Patient accounts receivable, net of allowance for doubtful accounts of $0 in 1997 and $38,502 in 1996 -- 511,724 Interest receivable -- 1,320 Estimated third-party payor settlements 148,226 429,090 Prepaid expenses and other assets 7,447 15,340 ---------- ---------- Total current assets 246,970 1,699,553 Property and equipment, net of accumulated depreciation and amortization -- 4,383,681 Due from affiliates 9,029,540 980,471 Deferred financing costs, net of accumulated amortization of $0 in 1997 and $14,780 in 1996 -- 5,842 ---------- ---------- Total assets $9,276,510 $7,069,547 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt $ -- $ 163,667 Accounts payable -- 254,902 Accrued payroll and payroll taxes -- 86,000 Accrued vacation -- 86,243 Accrued insurance -- 8,489 Accrued management fees -- 24,833 Estimated third-party payor settlements 372,943 58,291 Patient deposits and trust liabilities -- 39,668 Other accrued expenses -- 21,493 ---------- ---------- Total current liabilities 372,943 743,586 Long-term debt, net of current maturities -- 1,704,860 ---------- ---------- Total liabilities 372,943 2,448,446 ---------- ---------- Partners' capital 8,903,567 4,621,101 ---------- ---------- Total liabilities and partners' capital $9,276,510 $7,069,547 ========== ==========
See accompanying notes to financial statements. F-2 39 THE ALABAMA JOINT VENTURE STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Revenues Net patient service revenue $ 2,733,185 $ 6,393,242 $ 5,903,666 Other revenue 1,309 3,143 4,097 ----------- ----------- ----------- Total revenue 2,734,494 6,396,385 5,907,763 ----------- ----------- ----------- Operating expenses Professional care of patients 1,396,400 3,025,669 2,698,179 Dietary 214,700 517,954 479,390 Household and plant 222,241 483,065 476,219 General and administrative 267,785 753,975 727,852 Employee health and welfare 113,185 253,917 236,830 Depreciation and amortization 57,755 232,160 252,043 Lease 296,918 -- -- ----------- ----------- ----------- Total operating expenses 2,568,984 5,266,740 4,870,513 ----------- ----------- ----------- Operating income 165,510 1,129,645 1,037,250 ----------- ----------- ----------- Other income (expenses) Interest income 35,885 54,842 72,267 Interest expense (46,629) (184,787) (211,684) Provider fees (76,247) (182,993) (182,993) ----------- ----------- ----------- Total other income (expenses) (86,991) (312,938) (322,410) ----------- ----------- ----------- Income before recognition of property sales 78,519 816,707 714,840 Gain on sale of properties 4,786,089 -- -- ----------- ----------- ----------- Net income $ 4,864,608 $ 816,707 $ 714,840 =========== =========== ===========
See accompanying notes to financial statements. F-3 40 THE ALABAMA JOINT VENTURE STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
MEDICAL INCOME PROPERTIES LIMITED PARTNERSHIPS ----------------------------- 2A 2B TOTAL ----------- ----------- ----------- 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 Distributions to partners (317,790) (264,776) (582,566) Income before recognition of property sales 42,832 35,687 78,519 Gain on sale of properties 2,610,812 2,175,277 4,786,089 Unrealized gain on marketable securities available for sale 231 193 424 ----------- ----------- ----------- Partners' capital at December 31, 1997 $ 4,856,504 $ 4,047,063 $ 8,903,567 =========== =========== ===========
See accompanying notes to financial statements. F-4 41 THE ALABAMA JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Cash received from patient care $ 3,840,425 $ 6,600,341 $ 5,201,651 Interest received 37,729 58,042 69,594 Other operating receipts 1,309 3,143 4,097 Cash paid to suppliers and employees (2,961,694) (5,052,207) (4,479,328) Interest paid (46,629) (184,787) (211,684) Provider fees (76,247) (182,993) (182,993) ----------- ----------- ----------- Net cash provided (used) by operations 794,893 1,241,539 401,337 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (11,441) (238,835) (130,636) Purchases of marketable securities -- -- (252,099) Maturities of marketable securities 250,000 700,000 293,993 ----------- ----------- ----------- Net cash provided (used) by investing activities 238,559 461,165 (88,742) ----------- ----------- ----------- Cash flows from financing activities: Payments on long-term debt and lease obligations (12,255) (163,667) (165,037) Distributions to partners (582,566) (1,290,000) (90,000) Net related party transactions (839,313) (54,679) (160,872) ----------- ----------- ----------- Net cash provided (used) by financing activities (1,434,134) (1,508,346) (415,909) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (400,682) 194,358 (103,314) Cash and cash equivalents, beginning of year 491,979 297,621 400,935 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 91,297 $ 491,979 $ 297,621 =========== =========== ===========
See accompanying notes to financial statements. F-5 42 THE ALABAMA JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- ----------- --------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 4,864,608 $ 816,707 $ 714,840 ----------- ----------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,755 232,160 252,043 Provision for losses on accounts receivable (6,996) 33,872 32,956 (Gain) loss on disposal of property (4,786,089) -- -- (Increase) decrease in: Patient accounts receivable, net 518,720 98,202 (253,138) Interest receivable, securities premium amortization, and securities discount accretion 1,844 3,200 54 Estimated third-party payor settlements 280,864 16,734 (413,954) Prepaid expenses and other assets (82,522) 10,310 29,869 Increase (decrease) in: Accounts payable (254,902) (62,979) 158,732 Accrued expenses (88,916) 27,161 (56,318) Estimated third-party payor settlements 314,652 58,291 (70,606) Other liabilities (24,125) 7,881 6,859 ----------- ----------- --------- Total adjustments (4,069,715) 424,832 (313,503) ----------- ----------- --------- Net cash provided (used) by operations $ 794,893 $ 1,241,539 $ 401,337 =========== =========== ========= Supplemental schedule of noncash investing and financing activities: Unrealized (gain) loss on marketable securities available for sale $ (424) $ 3,108 $ (20,063) =========== =========== =========
See accompanying notes to financial statements. F-6 43 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 owned and operated one nursing home in Alabama. As described in Note 11, the Partnership has sold all its fixed and operating assets and is in the process of liquidating the remainder of its assets for distribution to the partners and subsequent dissolution. (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 ($931,191 in 1997, $1,615,337 in 1996 and $1,536,130 in 1995), provision for uncollectible accounts, (bad debt expense (recovery) of ($6,996) in 1997, $33,872 in 1996 and $32,956 in 1995) 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 F-7 44 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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 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. The amount in excess of insured limits was approximately $359,216 at December 31, 1996. (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 F-8 45 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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. (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 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, 1997 and 1996.
1997 1996 --------- --------- Beginning balance, at amortized cost $ 250,524 $ 952,829 Redemption of investments (250,000) (700,000) Net amortization of premiums and accretion of discounts (524) (2,305) --------- --------- Amortized cost -- 250,524 Gross unrealized gain (loss) -- (424) --------- --------- Fair value $ -- $ 250,100 ========= =========
F-9 46 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1997 1996 ------- ----------- Land $ -- $ 400,000 Buildings and improvements -- 5,473,692 Furniture and equipment -- 585,827 Total -- 6,459,519 Accumulated depreciation and amortization -- (2,075,838) ------- ----------- Net property and equipment $ -- $ 4,383,681 ======= ===========
Note 5. LONG-TERM DEBT Long-term at debt December 31 was as follows:
1997 1996 ------- ---------- Mortgage notes with interest at prime plus 1% (9.25% at December 31, 1996) payable in 60 payments of $13,639 plus interest $ -- $1,868,527 Less amounts due in one year or less -- 163,667 ------- ---------- $ -- $1,704,860 ======= ==========
The mortgage note was 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 had guaranteed the debt, as well as pledged its stock and partnership interest. The management company (See Note 6) had also guaranteed the debt and entered into a negative pledge agreement whereby it would not pledge, transfer or encumber its stock while the loan was outstanding. All management fees are subordinate to the debt. The loan document contained restrictive covenants associated with ratio and earnings requirements. Management is not aware of any conditions that existed that would have caused them to be in noncompliance with these requirements. F-10 47 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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 were subordinated to the outstanding mortgage debt (See Note 5). The Manager had 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%). The sale, as described in Note 11, includes the terminating settlement. Management fees charged to the Joint Venture were $122,816 in 1997, $297,990 in 1996, and $286,529 in 1995. Pursuant to the sales agreement described in Note 11, on April 1, 1997, the Partnership entered into a triple net lease with Omega HealthCare Investors, Inc. (Omega) to lease all of the properties the Partnership had previously sold to Omega. The lease expired on December 31, 1997 subject to various extension/termination rights of the Lessor. The lessor exercised its option to terminate the lease on May 31, 1997. The lease payment was based on a fixed amount of base rent plus the net of the remainder of gross revenue over operating expenses. The base rental lease expense for the two F-11 48 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS months was $219,112 and gross revenue was $77,806 in excess of operating expense for the same period. Total operating lease expense was $296,918. 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.
1997 1996 1995 ----------- --------- --------- Net income as reported $ 4,864,608 $ 816,707 $ 714,840 Adjustments: Gain on sale 34,953 -- -- Depreciation differences 1,009 (1,935) 27,157 Bad debt reserve (38,502) (4,182) (23,316) Nondeductible travel and entertainment 364 3,407 2,534 Accrued insurance -- -- (8,000) Vacation accrual (86,246) 14,429 1,204 ----------- --------- --------- Federal taxable income $ 4,776,186 $ 828,426 $ 714,419 =========== ========= =========
Note 8. RELATED PARTY TRANSACTIONS Amounts due from affiliates at December 31 are stated as follows:
1997 1996 ---------- -------- Due from MIP2A $5,363,860 $507,054 Due from MIP2B 3,665,680 473,417 ---------- -------- Due from affiliates $9,029,540 $980,471 ========== ========
See Footnote 11 for sale of affiliated assets. Note 9. 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 F-12 49 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS the Joint Venture's income from each of these sources for the years ended December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995 ------ ------ ------ Patients and sponsors 10.58% 10.28% 14.25% Medicaid 49.90% 55.54% 49.53% Medicare 39.52% 34.18% 36.22% ------ ------ ------ 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 10. 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: The 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 11. SALE OF ASSETS 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. F-13 50 THE ALABAMA JOINT VENTURE NOTES TO FINANCIAL STATEMENTS The purchase price allocated to Medical Park was $9,950,000. The closing took place on March 31, 1997. Approximately $362,000 of these proceeds were set aside in a joint signature account for the purpose of securing all of the seller's obligations under the purchase agreement. These funds are being held by the general partners and will be available to the Partnership in the event that these obligations do not exceed the funds held in escrow. Proceeds from the sale were reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments appoximated $2,658,000. They included $560,792 for termination of the management agreement as explained in Note 6. As described in Note 6, the Partnership continued to operate the nursing home until May 31, 1997. In conjunction with the above sale, Omega HealthCare Investors, Inc. had 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 related to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets was $5,350,000. F-14 51 [SELF, MAPLES & COPELAND, P.C. 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 1997 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 & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-15 52 THE ALABAMA JOINT VENTURE SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- Balance at beginning of year $ 38,502 $ 42,684 $ 66,000 Charged to patient service revenue (31,506) (38,054) (56,272) Write-offs and (recoveries) (6,996) 33,872 32,956 -------- -------- -------- Balance at end of year $ -- $ 38,502 $ 42,684 ======== ======== ========
F-16 53 THE ALABAMA JOINT VENTURE SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 --------- ---------- ---------- Professional care of patients Salaries and wages $ 783,014 $1,808,353 $1,657,908 Ancillary service expense 466,673 851,387 629,505 Supplies 41,222 109,716 123,550 General and administrative Salaries and wages 83,169 121,619 118,380 Accounting and auditing 33,040 58,340 49,491 Insurance (20,713) 180,348 155,990 Property tax 11,110 25,496 25,491 Management fees 122,816 297,990 286,529 Dietary Food cost 96,623 252,802 228,560 Household and plant Repairs and maintenance 16,426 30,625 52,658 Utilities 54,233 128,941 112,945 Depreciation $ 56,724 $ 228,035 $ 247,918 ========= ========== ==========
F-17 54 THE ALABAMA JOINT VENTURE SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1997
INITIAL COST COSTS CAPITALIZED GROSS AMOUNT AT WHICH CARRIED TO PARTNERSHIP(A) SUBSEQUENT TO AS OF DISPOSITION DATE(B) ACQUISITION BUILDING AND CARRYING BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST LAND IMPROVEMENTS TOTAL - --------------- ------------ -------- ------------ ------------ -------- -------- ----------- ---------- MEDICAL PARK $0 $400,000 $4,700,000 $991,688 $379,272 $400,000 $6,070,960 $6,470,960 LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF ACCUMULATED DATE OF DATE OPERATION IS DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED - --------------- ------------ ------------ -------- ------------- MEDICAL PARK $2,132,562 1967 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 the date of disposition for Federal Income tax purposes was approximately $6,452,659. (C) Reconciliation of real estate owned at December 31, 1997, 1996, and 1995:
1997 1996 1995 ---------- ---------- ---------- Balance at beginning of period $6,459,519 $6,220,684 $6,090,048 Additions 11,441 238,835 130,636 Reductions 6,470,960 0 0 ---------- ---------- ---------- Balance at end of period $ 0 $6,459,519 $6,220,684 ========== ========== ==========
(D) Reconciliation of accumulated depreciation: Balance at beginning of period $2,075,838 $1,847,803 $1,594,024 Depreciation expense 56,724 228,035 253,779 Reductions 2,132,562 0 0 ---------- ---------- ---------- Balance at end of period $ 0 $2,075,838 $1,847,803 ========== ========== ==========
F-18 55 THE TEXAS JOINT VENTURE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 56 THE TEXAS JOINT VENTURE TABLE OF CONTENTS
Page ---- Independent Auditors' 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 - F-6 Notes to Financial Statements.......................... F-7 - F-14 Information Accompanying the Basic Financial Statements Independent Auditors' Report on Information Accompanying the Basic Financial Statements.......... F-15 Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts.... F-16 Schedule of Consolidated Supplementary Income Statement Information................................ F-17 Schedule of Real Estate and Accumulated Depreciation... F-18
57 [SELF, MAPLES & COPELAND, P.C. 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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Self, Maples & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-1 58 THE TEXAS JOINT VENTURE BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 2,158 $ 770,794 Marketable securities 1,755,480 2,190,840 Patient accounts receivable, net of allowance for doubtful accounts of $5,301 in 1997 and $106,750 in 1996 25,678 849,065 Interest receivable 14,889 16,304 Estimated third-party payor settlements -- 137,964 Prepaid expenses and other assets 1,538 35,279 ----------- ----------- Total current assets 1,799,743 4,000,246 Property and equipment, net of accumulated depreciation -- 7,718,372 Due from affiliates 11,267,814 423,087 Deferred financing costs, net of accumulated amortization of $0 in 1997 and $18,935 in 1996 -- 7,485 ----------- ----------- Total assets $13,067,557 $12,149,190 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities Current maturities of long-term debt $ -- $ 60,600 Accounts payable 20,932 697,963 Accrued payroll and payroll taxes -- 164,591 Accrued vacation -- 105,438 Accrued insurance 200,000 200,788 Accrued management fees -- 32,634 Estimated third-party payor settlements 236,102 149,694 Patient deposits and trust liabilities -- 97,367 Other accrued expenses -- 28,411 ----------- ----------- Total current liabilities 457,034 1,537,486 Long-term debt, net of current maturities -- 631,250 ----------- ----------- Total liabilities 457,034 2,168,736 ----------- ----------- Partners' capital 12,610,523 9,980,454 ----------- ----------- Total liabilities and partners' capital $13,067,557 $12,149,190 =========== ===========
See accompanying notes to financial statements. F-2 59 THE TEXAS JOINT VENTURE STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Revenues Net patient service revenue $ 4,040,739 $ 9,325,900 $ 8,647,019 Other revenue 607 2,102 2,198 ----------- ----------- ----------- Total revenue 4,041,346 9,328,002 8,649,217 ----------- ----------- ----------- Operating expenses Professional care of patients 2,290,880 4,966,189 4,812,691 Dietary 268,940 628,473 616,733 Household and plant 267,464 637,129 618,775 General and administrative 640,509 1,248,000 1,063,756 Employee health and welfare 154,428 350,952 355,508 Depreciation and amortization 111,244 440,475 450,189 Lease 193,849 -- -- ----------- ----------- ----------- Total operating expenses 3,927,314 8,271,218 7,917,652 ----------- ----------- ----------- Operating income 114,032 1,056,784 731,565 ----------- ----------- ----------- Other income (expenses) Interest income 122,223 126,921 107,160 Interest expense (20,250) (68,589) (78,322) ----------- ----------- ----------- Total other income (expense) 101,973 58,332 28,838 ----------- ----------- ----------- Income before recognition of property sales 216,005 1,115,116 760,403 Gain on sale of properties 2,251,762 -- -- ----------- ----------- ----------- Net income $ 2,467,767 $ 1,115,116 $ 760,403 =========== =========== ===========
See accompanying notes to financial statements. F-3 60 THE TEXAS JOINT VENTURE STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
MEDICAL INCOME PROPERTIES LIMITED PARTNERSHIPS -------------------- 2A 2B TOTAL ----------- ----------- ------------ 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 Capital contribution 105,000 105,000 210,000 Distributions to partners (22,500) (22,500) (45,000) Income before recognition of property sales 108,003 108,002 216,005 Gain on sale of properties 1,125,881 1,125,881 2,251,762 Unrealized loss on marketable securities available for sale (1,349) (1,349) (2,698) ----------- ----------- ------------ Partners' capital at December 31, 1997 $ 6,305,262 $ 6,305,261 $ 12,610,523 =========== =========== ============
See accompanying notes to financial statements. F-4 61 THE TEXAS JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Cash received from patient care $ 5,088,498 $ 9,416,614 $ 8,404,007 Interest received 56,300 77,586 91,364 Other operating receipts 607 2,102 2,198 Cash paid to suppliers and employees (4,682,628) (7,831,212) (7,362,426) Interest paid (20,250) (68,589) (78,322) ----------- ----------- ----------- Net cash provided (used) by operations 442,527 1,596,501 1,056,821 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (52,577) (43,430) (301,045) Purchases of marketable securities -- (1,642,784) (503,438) Maturities of marketable securities 500,000 900,000 500,000 ----------- ----------- ----------- Net cash provided (used) by investing activities 447,423 (786,214) (304,483) ----------- ----------- ----------- Cash flows from financing activities: Payments on long-term debt and lease obligations (5,073) (60,600) (65,177) Distributions to partners (45,000) (580,000) (580,000) Capital contributions from partners 210,000 -- -- Net related party transactions (1,818,513) 153,911 (410,680) ----------- ----------- ----------- Net cash provided (used) by financing activities (1,658,586) (486,689) (1,055,857) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (768,636) 323,598 (303,519) Cash and cash equivalents, beginning of year 770,794 447,196 750,715 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 2,158 $ 770,794 $ 447,196 =========== =========== ===========
See accompanying notes to financial statements. F-5 62 THE TEXAS JOINT VENTURE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ----------- ----------- ----------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 2,467,767 $ 1,115,116 $ 760,403 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 111,244 440,475 450,189 Provision for losses on accounts receivable 44,396 41,582 108,332 (Gain) loss on disposal of property (2,251,762) -- -- (Increase) decrease in: Patient accounts receivable, net 778,991 (173,095) (185,722) Interest receivable, securities premium amortization and securities discount accretion (65,923) (49,335) (4,283) Estimated third-party payor settlements 137,964 64,280 (177,135) Prepaid expenses and other assets (71,647) 8,253 4,746 Increase (decrease) in: Accounts payable (677,031) 109,738 37,306 Accrued expenses (96,789) (90,569) 66,161 Estimated third-party payor settlements 86,408 149,694 -- Other liabilities (21,091) (19,638) (3,176) ----------- ----------- ----------- Total adjustments (2,025,240) 481,385 296,418 ----------- ----------- ----------- Net cash provided (used) by operations $ 442,527 $ 1,596,501 $ 1,056,821 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on marketable securities available for sale $ (2,698) $ 529 $ 35,399 =========== =========== ===========
See accompanying notes to financial statements. F-6 63 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 owned and operated two nursing homes in Texas. As described in Note 12, the Partnership has sold all its fixed and operating assets and is in the process of liquidating the remainder of its assets for distribution to the partners and subsequent dissolution. (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 ($1,540,182 in 1997, $3,502,579 in 1996 and $4,015,882 in 1995), provision for uncollectible accounts, (bad debt expense of $44,396 in 1997, $41,632 in 1996 and $108,332 in 1995) 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. F-7 64 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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. (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. The amount in excess of insured limits was approximately $531,586 at December 31, 1996. (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-8 65 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, 1997 and 1996.
1997 1996 ---------- ---------- Beginning balance, amortized cost $2,182,927 $1,402,286 Purchase of marketable securities -- 1,642,784 Redemption of investments (500,000) (900,000) Net amortization of premiums and accretion of discounts 67,341 37,857 ---------- ---------- Amortized cost 1,750,268 2,182,927 Gross unrealized gain (loss) 5,212 7,913 ---------- ---------- Fair value $1,755,480 $2,190,840 ========== ==========
The maturities of investment securities at December 31, 1997 were as follows: Due in one year or less $1,153,405 Due in two years or less 596,863 ---------- $1,750,268 ==========
F-9 66 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1997 1996 -------- ------------ Land $ -- $ 950,000 Buildings and improvements -- 9,550,624 Furniture and equipment -- 1,136,348 Total -- 11,636,972 Accumulated depreciation -- (3,918,600) -------- ------------ Net property and equipment $ -- $ 7,718,372 ======== ============
Note 5. LONG-TERM DEBT Long-term debt at December 31 was as follows:
1997 1996 -------- -------- Mortgage note with a variable rate of interest (9.50% at December 31, 1996) with monthly principal and interest payments of $5050. $ - $691,850 Less amounts due in one year or less - 60,600 -------- -------- $ - $631,250 ======== ========
The mortgage note was 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 had guaranteed the debt, as well as pledged its stock and partnership interest. The management company (See Note 6) had also guaranteed the debt and had entered into a negative pledge agreement whereby it would not pledge, transfer or encumber its stock while the loan was outstanding. All management fees are subordinate to the debt. The loan document contained restrictive covenants associated with ratio and earnings requirements. Management is not aware of any conditions that existed that would have caused them to be in noncompliance with these requirements. F-10 67 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS Note 6. CONTRACTUAL AGREEMENTS On May 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 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 were subordinated to the outstanding mortgage debt (See Note 5). The Manager had 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 called 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%). The sale as described in Note 12 includes the terminating settlement. Management fees charged to the Joint Venture were $160,600 in 1997, $391,610 in 1996, and $376,548 in 1995. Pursuant to the sales agreement described in Note 12, on April 1, 1997, the Partnership entered into a triple net lease with Omega HealthCare Investors, Inc. (Omega) to lease all of the properties the Partnership had previously sold to Omega. The lease expired on December 31, 1997 subject to various extension/termination rights of the Lessor. The Lessor exercised its option to terminate the lease on May 31, 1997. The lease payment was based on a fixed amount of base rent plus the net of the remainder of gross revenue over operating expenses. The base rental lease expense for the two F-11 68 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS months was $240,998 and gross revenue was $47,149 less than the operating expense for the same period. Total operating lease expense was $193,849. 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. 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.
1997 1996 1995 ---------- ---------- -------- Net income as reported $2,467,768 $1,115,116 $760,403 Adjustments: Depreciation differences 17,461 37,528 56,349 Gain on sale of assets (26,634) -- -- Bad debt reserve (106,751) (26,045) 75,856 Nondeductible travel and entertainment 1,394 9,231 9,770 Accrued insurance -- -- (80,000) Vacation accrual (105,438) 12,128 23,280 ---------- ---------- -------- Federal taxable income $2,247,800 $1,147,958 $845,658 ========== ========== ========
Note 8. RELATED PARTY TRANSACTIONS Details of the amounts due from affiliates at December 31 are as follows:
1997 1996 ----------- -------- Due from MIP2A $ 5,633,907 $212,456 Due from MIP2B 5,633,907 210,631 ----------- -------- Due from affiliates $11,267,814 $423,087 =========== ========
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. F-12 69 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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. 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, 1997, 1996, and 1995 is as follows:
1997 1996 1995 ------ ------ ------ Private pay patients 14.65% 15.07% 18.05% Medicaid 38.53% 39.62% 38.99% Medicare 46.82% 45.31% 42.96% ------ ------ ------ 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 F-13 70 THE TEXAS JOINT VENTURE NOTES TO FINANCIAL STATEMENTS 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. 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. SALE OF ASSETS 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. The purchase price was 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 were reduced by expenses incurred as a result of the sale, cash offsets for liabilities assumed by the buyer and existing indebtedness. These payments approximated $1,828,000. They included $736,975 for termination of the management agreement as explained in Note 6. The closing took place on March 31, 1997. Approximately $365,000 of these proceeds were set aside in a joint signature account for the purpose of securing all of the seller's obligations under the purchase agreement. These funds are being held by the general partners and will be available to the Partnership in the event that these obligations do not exceed the funds held in escrow. As described in Note 6, the Partnership continued to operate the nursing homes until May 31, 1997. In conjunction with the above sale, Omega HealthCare Investors, Inc. 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 related to a 131 bed nursing home in Patterson, Louisiana and the purchase price for the assets was $5,350,000. F-14 71 [SELF, MAPLES & COPELAND, P.C. 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 1997 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 & Copeland, P.C. Oneonta, Alabama January 23, 1998 F-15 72 THE TEXAS JOINT VENTURE SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 --------- --------- --------- Balance at beginning of year $ 106,750 $ 132,796 $ 56,941 Charged to patient service revenues (145,845) (67,678) (32,477) Write-offs 44,396 41,632 108,332 --------- --------- --------- Balance at end of year $ 5,301 $ 106,750 $ 132,796 ========= ========= =========
F-16 73 THE TEXAS JOINT VENTURE SCHEDULE X CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ---------- ---------- Professional care of patients Nursing salaries and wages $ 971,955 $2,442,501 $2,469,846 Ancillary services expense 1,035,055 1,830,025 1,714,698 Supplies 58,615 138,992 151,705 Temporary labor -- 4,380 83,851 General and administrative Salaries and wages 166,943 236,614 207,708 Accounting and auditing 48,053 87,134 64,745 Insurance 99,507 132,282 13,436 Property tax 104,232 249,483 237,917 Management fees 160,600 391,610 376,548 Dietary Food 129,590 298,273 291,648 Household and plant Repairs and maintenance 20,351 73,771 103,388 Utilities 93,657 190,141 165,204 Depreciation $ 109,923 $ 435,191 $ 444,905 ========== ========== ==========
F-17 74 THE TEXAS JOINT VENTURE SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1997
INITIAL COST COSTS CAPITALIZED GROSS AMOUNT AT WHICH CARRIED TO PARTNERSHIP(A) SUBSEQUENT TO AS OF DISPOSITION DATE(B) ACQUISITION BUILDING AND CARRYING BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST LAND IMPROVEMENTS TOTAL - ------------------------ ------------ -------- ------------ ------------ -------- -------- ------------ ------------ RENAISSANCE PLACE-KATY $ 0 $650,000 $4,822,500 $503,346 $509,290 $650,000 $ 5,835,136 $ 6,485,136 RENAISSANCE PLACE-HUMBLE 0 300,000 4,187,500 438,824 228,812 300,000 4,855,136 5,155,136 ----- -------- ---------- -------- -------- -------- ----------- ----------- $ 0 $950,000 $9,010,000 $942,170 $738,102 $950,000 $10,690,272 $11,640,272 ===== ======== ========== ======== ======== ======== =========== =========== LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF ACCUMULATED DATE OF DATE OPERATION IS DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED - ------------------------ ------------ ------------ -------- ------------- RENAISSANCE PLACE-KATY $2,142,613 1984 05/01/88 5 TO 30 YEARS RENAISSANCE PLACE-HUMBLE 1,885,910 1987 05/01/88 5 TO 30 YEARS ---------- $4,028,523 ==========
(A) The initial cost to the Partnership represents the original purchase price of the properties. (B) The aggregate cost of real estate owned at the date of disposition for Federal Income tax purposes was approximately $11,635,801. (C) Reconciliation of real estate owned at December 31, 1997, 1996, and 1995:
1997 1996 1995 ----------- ----------- ----------- Balance at beginning of period $11,636,972 $11,593,542 $11,292,495 Additions 3,300 43,430 301,047 Reductions 11,640,272 0 0 ----------- ----------- ----------- Balance at end of period $ 0 $11,636,972 $11,593,542 =========== =========== ===========
(D) Reconciliation of accumulated depreciation: Balance at beginning of period $3,918,600 $3,479,409 $3,038,503 Depreciation expense 109,923 439,191 440,906 Reductions 4,028,523 0 0 ---------- ---------- ---------- Balance at end of period $ 0 $3,918,600 $3,479,409 ========== ========== ==========
F-18 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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,014,047 0 0 0 0 1,048,483 0 0 11,398,202 10,008,525 0 0 0 0 1,389,677 11,398,202 0 1,675,043 0 2,100,296 (86,501) 0 15,886 (210,948) 0 (210,948) (129,921) 2,475,133 0 2,134,254 0 0 REPRESENT TOTAL PARTNERSHIP CAPITAL INCLUDING NET INCOME NET OF DISTRIBUTIONS.
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