FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
--------------------------------------------
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- ---------------------
For Quarter Ended September 30, 2002 Commission file number 000-17596
-------------------- -------------
Meridian Healthcare Growth and Income Fund Limited Partnership
----- ---------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-1549486
--------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
225 East Redwood Street, Baltimore, Maryland 21202
- -------------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (410) 727-4083
--------------
N/A
-------------
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----------- -----------
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
INDEX
Page No.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS 2
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 4
Condensed Consolidated Statements of Partners' Capital 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures14
Part II. Other Information
Item 1. through Item 6. 14-15
Signatures 16
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Cautionary Statement Regarding Forward Looking Statements
Statements made in this report, and in our other public filings, which are not
historical facts contain "forward-looking" statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risks and uncertainties
and are subject to change at any time. These forward-looking statements may
include, but are not limited to:
o certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," such as our ability to
meet our liquidity needs, scheduled debt and interest payments and
expected future capital expenditure requirements; and
o certain statements in the Notes to Condensed Consolidated Financial
Statements (Unaudited).
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are
cautioned that these statements are not guarantees of future performance and
that actual results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
o changes in the reimbursement rates or methods of payment from Medicare
and Medicaid, or the implementation of other measures to reduce the
reimbursement for our services;
o the expiration of enactments providing for additional governmental funding;
o efforts of third party payors to control costs;
o the impact of federal and state regulations;
o changes in payor mix and payment methodologies;
o further consolidation of managed care organizations and other third party
payors;
o competition in our business;
o an increase in insurance costs and potential liability for losses not
covered by, or in excess of, our insurance;
o competition for qualified staff in the healthcare industry;
o our ability to control operating costs, and generate sufficient cash flow
to meet operational and financial requirements; and
o an economic downturn or changes in the laws affecting our business in those
markets in which we operate.
These risks are described in more detail in our Annual Report on Form 10-K.
-2-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30,
2002 December 31,
(Unaudited) 2001
--------------- ---------------
Assets
Current Assets
Cash and cash equivalents $ 805 $ 2,066
Accounts receivable, net 7,937 9,140
Estimated third-party payor settlements 784 561
Prepaid expenses and other current assets 897 548
--------------- ---------------
Total current assets 10,423 12,315
--------------- ---------------
Property and equipment, net of accumulated depreciation 31,474 31,927
--------------- ---------------
Other assets
Goodwill, net 4,237 4,237
Loan acquisition costs, net 237 298
--------------- ---------------
4,474 4,535
--------------- ---------------
Total assets $ 46,371 $ 48,777
=============== ===============
Liabilities and Partners' Capital
Current liabilities
Current portion of long-term debt $ 504 $ 435
Accrued compensation and related costs 277 475
Accounts payable and other accrued expenses 2,919 4,605
Estimated third party payor settlements 2,268 1,898
--------------- ---------------
Total current liabilities 5,968 7,413
--------------- ---------------
Deferred management fee payable 1,011 978
Loan payable to the Development General Partner 1,279 1,240
Long-term debt 22,490 22,913
--------------- ---------------
24,780 25,131
--------------- ---------------
Partners' capital
General partners (159) (153)
Assignee limited partners; 1,540,040
units issued and outstanding 15,782 16,386
--------------- ---------------
Total partners' capital 15,623 16,233
--------------- ---------------
Total liabilities and
partners' capital $ 46,371 $ 48,777
=============== ===============
See accompanying notes to condensed consolidated financial statements.
-3-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Condensed Consolidated Statements of Earnings
(Unaudited)
(Dollars in thousands except per unit amounts)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Revenues
Medicaid and Medicare patients $ 13,270 $ 12,681 $ 38,908 $ 35,948
Private patients 2,301 2,559 7,103 7,744
Investment and other income 42 48 96 138
--------------- --------------- --------------- ---------------
15,613 15,288 46,107 43,830
--------------- --------------- --------------- ---------------
Expenses
Operating, including $2,452, $2,529, $7,733
and $7,163 to related parties, respectively 12,807 12,039 37,564 35,474
Management and administration fees
to related parties 861 838 2,543 2,408
General and administrative 288 280 830 752
Depreciation and amortization 507 558 1,515 1,681
Interest expense 599 610 1,786 1,817
--------------- --------------- --------------- ---------------
15,062 14,325 44,238 42,132
--------------- --------------- --------------- ---------------
Net earnings $ 551 $ 963 $ 1,869 $ 1,698
=============== =============== =============== ===============
Net earnings per unit of assignee
limited partnership interest
(computed based on 1,540,040
units) $ 0.35 $ 0.62 $ 1.20 $ 1.09
=============== =============== =============== ===============
See accompanying notes to condensed consolidated financial statements
-4-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Condensed Consolidated Statements of Partners' Capital
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in thousands)
Assignee
General Limited
Partners Partners Total
--------------- --------------- ---------------
Balance at December 31, 2001 (153) 16,386 $ 16,233
Net earnings 19 1,850 1,869
Distributions to partners (25) (2,454) (2,479)
--------------- --------------- ---------------
Balance at September 30, 2002 (159) 15,782 $ 15,623
=============== =============== ===============
Balance at December 31, 2000 (142) 17,490 $ 17,348
Net earnings 17 1,681 1,698
Distributions to partners (25) (2,454) (2,479)
--------------- --------------- ---------------
Balance at September 30, 2001 (150) 16,717 $ 16,567
=============== =============== ===============
See accompanying notes to condensed consolidated financial statements
-5-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMTIED PARTNERSHIP
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
(Dollars in thousands)
2002 2001
--------------- ---------------
Cash flows from operating activities
Net earnings $ 1,869 $ 1,698
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 1,515 1,681
Minority interest in net earnings of operating partnerships 21 20
Increase in loan payable to Development General Partner 39 39
Increase in deferred management fee payable 33 32
Change in other assets and liabilities
Accounts receivable 1,182 (495)
Estimated third-party payor settlements 147 1,016
Prepaid expenses and other current assets (349) 73
Accrued compensation and related costs (198) (680)
Accounts payable and other accrued expenses (1,686) 922
--------------- ---------------
Net cash provided by operating activities 2,573 4,306
--------------- ---------------
Cash flows from investing activities -
additions to property and equipment (1,001) (638)
--------------- ---------------
Cash flows from financing activities
Repayment of long-term debt (354) (321)
Distributions to partners (2,479) (2,479)
--------------- ---------------
Net cash used in financing activities (2,833) (2,800)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,261) 868
Cash and cash equivalents
Beginning of period 2,066 1,108
--------------- ---------------
End of period $ 805 $ 1,976
=============== ===============
See accompanying notes to condensed consolidated financial statements.
-6-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)
NOTE 1 - THE FUND AND BASIS OF PREPARATION
Meridian Healthcare Growth and Income Fund Limited Partnership (the Fund) was
organized under the laws of the State of Delaware and will continue to operate
through December 31, 2037, unless terminated sooner under the provisions of the
Partnership Agreement. The Fund's Administrative General Partner is Brown
Healthcare, Inc. and the Fund's Development General Partner is Meridian
Healthcare Investments, Inc. Brown Healthcare Holding Co., Inc. is the Fund's
Assignor Limited Partner. Meridian Healthcare Investments, Inc. is a subsidiary
of Genesis Health Ventures, Inc. (Genesis).
The Fund owns 98.99% limited partnership interests in each of the seven
operating partnerships. The Fund, through its seven operating partnerships,
derives substantially all of its revenue from extended healthcare provided to
nursing center residents including room and board, nursing care, drugs and other
medical services.
The accompanying condensed consolidated financial statements of Meridian
Healthcare Growth and Income Fund Limited Partnership (the "Fund") do not
include all of the information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America. The unaudited interim condensed
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. The unaudited interim financial information contained in the
consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the 2001 Annual Report.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Fund is obligated to pay Brown-Healthcare, Inc. (Administrative General
Partner) an annual administration fee of the greater of $75,000 per year or 1/2
of 1% of the Fund's annual revenues. The nursing centers owned by the operating
partnerships are managed by Meridian Healthcare, Inc., an affiliate of Meridian
Healthcare Investments, Inc. (Development General Partner), under the terms of
existing management agreements which provide for management fees equal to 5% of
the annual revenues of each nursing center. Certain of the operating
partnerships also purchase drugs and medical supplies and other services from
affiliates of the Development General Partner. Such purchases are in turn billed
to patients or third party payors at prices which on average approximate the
nursing center's cost.
Transactions with these related parties for the three and nine months ended
September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
Management and administration fees $ 861,000 $ 838,000 $2,543,000 $2,408,000
Drug and medical supplies purchases 913,000 1,095,000 2,910,000 3,191,000
Nursing and rehabilitation services 1,539,000 1,434,000 4,823,000 3,972,000
Interest expense on borrowings 24,000 24,000 68,000 67,000
The Development General Partner loaned the Fund $597,000, as required by the
Cash Flow Deficit Guaranty Agreement, to support the operating deficits
generated by the Mooresville, Salisbury and Woodlands nursing centers during
each center's first two years of operations subsequent to the Fund's acquisition
of partnership interests. Loans outstanding under an arrangement, including
accumulated interest from inception of the loan at 9% per annum, were $1,279,000
at September 30, 2002 and $1,240,000 at December 31, 2001. The Fund is obligated
to repay these loans when certain specified financial criteria are met, the most
significant of which is the payment of a preferred return to the assignee
limited partners as defined in the Fund's partnership agreement.
-7-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)
NOTE 3 - DEBT
The Fund closed its mortgage loan refinancing with a new bank for loans totaling
$24,000,000 on June 12, 2000. The renewal terms became effective on June 12,
2000 and provide for a term of five years at an interest rate of 9.75%. Monthly
payments of $229,886 are based on a 20-year amortization schedule with a balloon
payment due at the end of the 5-year term.
The Fund established a $4,000,000 revolving credit facility with the same
lender. Borrowings under the credit facility will bear interest at a floating
rate, which shall equal the announced commercial prime rate. The bank shall
renew the credit facility each year for a one-year extention. There were no
borrowings under the revolving credit facility at September 30, 2002 or December
31, 2001.
NOTE 4 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Fund receives revenues from Medicare, Medicaid, private insurance, and
self-pay residents. The healthcare industry is experiencing the effects of the
federal and state governments' trend toward cost containment, as government and
other third party payors seek to impose lower reimbursement and utilization
rates and negotiate reduced payment schedules with providers. These cost
containment measures, combined with the increasing influence of managed care
payors and competition for patients, have resulted in reduced rates of
reimbursement for services provided by the Fund. The Fund receives approximately
84% of its patient service revenues from Medicare and Medicaid.
Effective October 1, 2002, the Fund's revenues are adversely affected by
expiring Medicare provisions. A number of provisions of the Balanced Budget
Refinement Act and the Benefits Improvement and Protection Act enactments
providing additional funding for Medicare participating skilled nursing
facilities expired on September 30, 2002. The expiration of these provisions is
estimated to reduce per diems per beneficiary by $34.
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Fund's business. Accordingly, there can be no assurance that
the impact of these changes or any future healthcare legislation will not
adversely affect the Fund's business. There can be no assurance that payments
under governmental and private third party payor programs will be timely, will
remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. The Fund's financial condition and results of
operations may be affected by the reimbursement process, which in the Fund's
industry is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled.
-8-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Fund closed its mortgage loan refinancing with a new bank for loans
totaling $24,000,000 on June 12, 2000. The renewal terms became effective on
June 12, 2000 and provide for a term of five years at an interest rate of 9.75%.
Monthly payments are based on a 20-year amortization schedule with a balloon
payment due at the end of the 5-year term.
The Fund also replaced its $4,000,000 revolving credit facility with the
same lender. There are no borrowings under this credit facility at this time.
The Fund's working capital (excluding the current portion of long-term
debt) decreased $378,000 to $4,959,000 at September 30, 2002 as compared to
$5,337,000 at December 31, 2001. The Fund has sufficient liquid assets and other
available credit resources to satisfy its operating expenditures and anticipated
routine capital improvements at each of the seven nursing home facilities.
Cash flow from operating activities was $2,573,000 for the nine-month
period ended September 30, 2002 as compared to $4,306,000 for the same period of
2001. This significant decrease in cash flow was due primarily to a decrease in
accounts payable and accrued expenses resulting from timing of payments.
Cash used in investing activities for the nine-month period ended September
30, 2002 was $1,001,000 and included improvements to the Fund's seven operating
facilities. Similar improvements made during the first nine months of 2001 were
$638,000.
The Fund believes that the short-term liquidity needs will be met through
expected cash flow from operations and available working capital from the
existing revolving credit facility.
Between 1988 and 1989 the Development General Partner loaned the Fund
$597,000 to support operating deficits generated by the Mooresville, Salisbury
and Woodlands nursing centers during each centers' first two years of operation.
Loans outstanding under this arrangement, including interest at 9% per annum,
were $1,279,000 at September 30, 2002 and $1,240,000 at December 31, 2001.
On November 15, 2002 the Fund will make its third quarter 2002 distribution
to partners of $826,000. This distribution will be funded by third quarter
operations and working capital of approximately $145,000. Through the first nine
months of the year, working capital of approximately $447,000 has been utilized
to make the scheduled distributions to the partners. While the Fund expects a
decrease in Medicare revenues due to the impact of the "Medicare SNF Cliff"
legislation that took effect on October 1, 2002 (see Revenue Sources, herein),
we expect to make a similar distribution to partners at year-end. The General
Partners will review the 2003 operating budgets and capital requirements at the
seven facilities while monitoring the progress of legislation as it affects
Medicare and Medicaid reimbursements when determining future distributions to
partners.
The major challenge to the Fund in the foreseeable future is to control
operating expenses, to maintain a quality mix of patients and to increase the
overall census at each of the facilities.
Revenue Sources
The Fund receives revenues from Medicare, Medicaid, private insurance, and
self-pay residents. The healthcare industry is experiencing the effects of the
federal and state governments' trend toward cost containment, as government and
other third party payors seek to impose lower reimbursement and utilization
rates and negotiate reduced payment schedules with providers. These cost
containment measures, combined with the increasing influence of managed care
payors and competition for patients, have resulted in reduced rates of
reimbursement for services provided by the Fund.
-9-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Revenue Sources (continued)
A number of provisions of the Balance Budget Act and the Benefits
Improvements Protection Act enactments providing additional funding from
Medicare participating skilled nursing facilities expired on September 30, 2002.
Expiring provisions reduce, on average, per beneficiary per diems by $34. On
April 23, 2002, the Centers for Medicare and Medicaid Services (CMS) issued a
press statement announcing the Agency would not proceed with the previously
announced changes in the skilled nursing facility case-mix classification
system. In its announcement, CMS made it clear that case-mix refinements would
be postponed for a full year. CMS issued notice of fiscal year 2003 rates in the
federal register, July 31, 2002. Rates effective October 1, 2002 were increased
by a 2.6% annual market basket adjustment. CMS estimates that even with this
upward adjustment, average rates will be 8.8% lower than the current year
because of the reduced payment caused by the expiring statutory add-ons.
With regard to Congressional consideration, the House of Representatives
passed a package of Medicare amendments in late June 2002. Under the House
Passed Measure, portions of the expiring provisions would be retained. The BBRA
increase of 4% would expire, and the BIPA 16.6% add-on to the nursing portion of
the SNF PPS rates would be reduced to 12% in 2003, 10% in 2004, and 8% in 2005.
Under this proposal, fiscal year 2003 rates would be 5.2% lower than the current
year. On October 1, 2002, key leaders of the Senate Finance Committee introduced
a bi-partisan "Beneficiary Access to Care and Medicare Equity Act of 2002". This
measure offers moderately more rate assistance than the House Passed Measure
altering the nursing portion of the Skilled Nursing Facility Prospective Payment
System to 15% in 2003, 13% in 2004, and 11% in 2005. The BBRA 4% market-basket
adjustment would expire. Under this proposal fiscal year 2003 rates would be
4.3% lower than those of the current year.
A Medicare provider relief package is expected to be considered by early
2003. It is premature to forecast the outcome of the Congressional action.
The Fund's estimate factoring in the administrative decision of the
"Medicare SNF Cliff" exposes the facility sector to a 10% reduction. For the
Fund, this could have an adverse revenue impact in excess of $1.6 million on an
annual basis.
It is not possible to fully quantify the effect of recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Fund's business. Accordingly, there can be no assurance that
the impact of these changes or any future healthcare legislation will not
adversely affect the Fund's business. There can be no assurance that payments
under governmental and private third party payor programs will be timely, will
remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. The Fund's financial condition and results of
operations may be affected by the reimbursement process, which in the Fund's
industry is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled.
Results of Operations
Three Months Ended September 30,2002 versus Three Months Ended September 30,2001
Net earnings for the Fund were $551,000 for the three months ended
September 30, 2002 as compared to $963,000 for the same period in fiscal year
2001. The decrease in earnings is primarily due to an increase in operating
costs, partially offset by an increase in Medicaid revenues.
Overall revenues of $15,613,000 increased $325,000 or 2.1% for the three
months ended September 30, 2002 compared to $15,288,000 for the same period in
fiscal year 2001. The increase in revenue is primarily due to an increase in
revenues from Medicaid and Medicare patients of $589,000. Medicaid revenue of
$9,159,000 increased $834,000 for the three months ended September 30, 2002
compared to the same period in the prior year. The growth in revenue is
primarily due to an overall Medicaid rate increase of approximately 6.1% driven
primarily by the four Maryland centers, which received their annual Medicaid
rate adjustment in July 2002. Also the Medicaid
-10-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations (continued)
average daily census for the third quarter ended September 30, 2002 increased
4.6% or 31 customers compared to the third quarter of fiscal year 2001. Medicare
revenue of $4,111,000 decreased $245,000 for the three month period ended
September 30, 2002 compared to the same period in fiscal year 2001. This
decrease is primarily due to a decrease in the average daily Medicare census of
10 customers or 7.1% for the three months ended September 30, 2002 as compared
to the same period in the prior year. Partially offsetting the increase in
Medicaid and Medicare patients revenue is a decrease in the Private patients
revenue of $ 258,000. This decrease is primarily due to a decrease in the
Private and Insurance census. Private average daily census decreased 7 customers
or 7.2%, and Insurance average daily census decreased 4 customers or 16.1%.
Investment and other income decreased $6,000 due to lower income interest
earned.
Third quarter 2002 expenses of $15,062,000 increased $737,000 or 5.1% from
$14,325,000 for the three months ended September 30, 2001.
Operating expenses increased $768,000 or 6.4% in the third quarter of 2002
as compared to the same period in fiscal year 2001. This increase is primarily
due to the increased cost of nursing services. Nursing costs increased $643,000
for the three months ended September 30, 2002 as compared to the same period in
fiscal year 2001. This increase is primarily due to increases in salary, wages,
employee benefits, and an increase in the utilization of temporary nurse
staffing, which is being driven by the strong market demand for nursing
personnel. Salary, wage, and benefits expense for nurses increased $337,000 and
temporary nurse staffing expense increased $306,000 for the three months ended
September 30, 2002 compared to the same period in fiscal year 2001. The
remaining increase in operating costs is due to general inflationary cost
increases.
Management and administrative fees of $861,000 increased $23,000 or
approximately 2.7% for the third quarter 2002 compared to the same period in
fiscal year 2001. This increase is due to an increase in the management fee
expense, which is calculated at 5% of the Fund's net revenues.
Depreciation and amortization expense decreased $51,000 to $507,000 for the
third quarter 2002 compared to the same period in fiscal year 2001. This
decrease is due to the adoption of SFAS 142, which does not recognize the
amortization of goodwill.
Nine Months Ended September 30, 2002 versus Nine Months Ended September 30, 2001
Net earnings for the Fund were $1,869,000 for the nine months ended
September 30, 2002 as compared to $1,698,000 for the same period in fiscal year
2001, representing an increase of $171,000 or 10.1 %.
Overall revenues of $46,107,000 increased $2,277,000 or 5.2 % for the nine
months ended September 30, 2002 as compared to the same period in fiscal year
2001. This increase in revenue is primarily due to increases in revenue from
Medicaid and Medicare patients. Medicaid and Medicare revenue increased
$2,960,000 to $38,908,000 for the nine month period ended September 30, 2002
compared to the same period in 2001. Medicaid revenue for the nine months ended
September 30, 2002 increased $2,860,000 compared to the same period in the prior
year. This increase is primarily due to an overall Medicaid rate increase of
approximately 8.2% driven primarily by the four Maryland centers, which received
their annual Medicaid rate adjustment in July 2002. Also the Medicaid average
daily census for the nine months ended September 30, 2002 increased 4.2% or 28
customers compared to the same period in fiscal year 2001. Medicare revenue
increased $100,000 or 8.1% for the nine month period ended September 30, 2002
compared to the same period in fiscal year 2001. This increase is primarily due
to an increase in the Medicare rate of approximately 4.6% and the increased
utilization of Medicare Part B services. Medicare Part B revenue increased
$85,000 or 12.6% due to an increase in Part B utilization.
-11-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations (continued)
Overall expenses increased $2,106,000 or 5.0% to $44,238,000 for the nine
months ended September 30, 2002 as compared to $42,132,000 for the same period
in fiscal year 2001.
Operating expenses increased $2,090,000 or 5.9% to $37,564,000 for the nine
months ended September 30, 2002 as compared to the same period in fiscal year
2001. This increase is primarily due to the increased cost of nursing services
and bad debt expense, which is being partially offset by decreased ancillary
costs. Nursing costs increased $1,753,000 for the nine months ended September
30, 2002 as compared to the same period in fiscal year 2001. This increase is
primarily due to increases in salary, wages, employee benefits, and an increase
in the utilization of temporary nurse staffing, which is being driven by the
strong market demand for nursing personnel. Salary, wage, and benefits expense
for nurses increased $696,000 and temporary nurse staffing expense increased
$1,057,000 for the nine months ended September 30, 2002 compared to the same
period in fiscal year 2001. Bad debt expense of $993,000 increased $359,000 for
the nine months ended September 30, 2002 compared to the same period in fiscal
year 2001. Ancillary expenses for the nine months ended September 30, 2002
decreased $59,000 or 14.9 % compared to the same period in fiscal 2001. The
remaining increase in operating costs is due to general inflationary cost
increases.
Management and administrative fees of $2,543,000 increased $135,000 or
approximately 5.6% for the nine months ended September 30, 2002 compared to the
same period in fiscal year 2001. This increase is due to an increase in the
management fee expense, which is calculated at 5% of the Fund's net revenues.
Depreciation and amortization expense decreased $166,000 to $1,515.000 for
the nine months ended compared to the same period in fiscal year 2001. This
decrease is due to the adoption of SFAS 142, which does not recognize the
amortization of goodwill.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment.
The Fund adopted the provisions of Statement 142 effective January 1, 2002.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement requires the Fund to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Fund was required to identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Fund is considered to have one
reporting unit. The Fund had up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the carrying
amount of the reporting unit. To the extent the carrying amount of a reporting
unit exceeds the fair value of the reporting unit, an indication exists that the
reporting unit goodwill may be impaired and the Fund must perform the second
step of the transitional impairment test. In the second step, the Fund must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation. The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. This second step is required
to be completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Fund's statement of earnings.
-12-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Recently Issued Accounting Pronouncements (continued)
The Fund performed the first step of the transitional goodwill impairment
evaluation as of January 1, 2002 and no impairment was indicated.
The following table reconciles the prior year's reported net earnings to
its respective pro forma balances adjusted to exclude goodwill amortization
expense which is no longer amortized under the provisions of Statement 142.
Current period results are presented for comparative purposes.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net earnings $ 551 $ 963 $ 1,869 $ 1,698
Add back: goodwill amortization
- 64 - 190
--------------------- ----------------------
Adjusted net earnings $ 551 $ 1,027 $ 1,869 $ 1,888
===================== ======================
-13-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Fund has exposure to changing interest rates and is currently not
engaged in hedging activities. Interest on the Fund's $22.9 million mortgage is
at a fixed rate of 9.75%.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of the quarterly report, an
evaluation was carried out under the supervision and with the participation of
the Fund's management, including the Chief Executive Officer (or CEO) and Chief
Financial Officer (or CFO), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Fund's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Fund in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Fund's internal controls or in other
factors that could significantly affect the disclosure controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable
Item 2. Changes in Securities and Use of Proceeds
Inapplicable
Item 3. Defaults upon Senior Securities
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
Item 5. Other Information
Inapplicable
-14-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.5 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.6 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.7 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.8 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K: None
-15-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
DATE: 11/13/02 By: /s/ John M. Prugh
----------------- -----------------------------
John M. Prugh
President and Director
Brown-Healthcare, Inc.
Administrative General Partner
DATE: 11/12/02 By: /s/ Timothy M. Gisriel
----------------- -------------------------------
Timothy M. Gisriel
Treasurer
Brown-Healthcare, Inc.
Administrative General Partner
-16-