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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
{ X } ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to section 12(g) of the Act:
Assignee Units of Limited Partnership Interests
(Title of class)
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
As of December 31, 1998, there were 1,538,800 Units of Assignee Limited
Partnership Interests held by non-affiliates of the Registrant. Because there is
not an established public trading market for the Units, the aggregate market
value of the Units held by non-affiliates of the Registrant cannot be
calculated.
Documents Incorporated by Reference
The Annual Report for 1998 is incorporated by reference.
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
INDEX
Page (s)
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS 3
Part I.
Item 1. Business 4-5
Item 2. Properties 5-7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7-8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III.
Item 10. Directors and Executive Officers of Registrant 14-16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
Part IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 17-19
Signatures 20-21
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Cautionary Statement Regarding Forward Looking Statements
Certain statements contained herein, including certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Fund's business outlook or future economic
performances, anticipated profitability, revenues, expenses or other financial
items together with other statements that are not historical facts are
"forward-looking statements" as that term is defined under the Federal
Securities Law. Forward-looking statements are necessarily estimates reflecting
the best judgement of the party making such statements based upon correct
information and involve a number of risks, uncertainties and other factors which
could cause actual results to differ materially from those stated in such
statements. Risks, uncertainties and factors which could affect the accuracy of
such forward looking statements are identified in the Fund's Prospectus and the
Fund's Registration Statement filed by the Fund with the Securities and Exchange
Commission, and forward looking statements contained herein or in other public
statements of the Fund should be considered in light of those factors. There can
be no assurance that factors will not affect the accuracy of such forward
looking statements.
-3-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
PART I
Item 1. Business
Meridian Healthcare Growth and Income Fund Limited Partnership (the
"Fund") was organized under the laws of the State of Delaware on December 8,
1987. The Fund will continue until December 31, 2037, unless sooner terminated
under the provisions of the Partnership Agreement. The Fund was formed to
acquire 98.99% of the limited partnership interests in seven limited
partnerships, each of which owns and operates a single nursing center (the
"Facilities").
The Fund's objectives are to (i) preserve Investors' capital; (ii)
obtain capital appreciation through increases in the value of the Facilities;
and (iii) provide quarterly cash distributions to Investors from income
generated by the Facilities' operating income, the income taxation of a portion
of which is anticipated to be deferred.
The General Partners of the Fund are Brown Healthcare, Inc., a Maryland
corporation (the "Administrative General Partner") and Meridian Healthcare
Investments, Inc., a Maryland corporation (the "Development General Partner").
A maximum of 1,540,000 assignee units of limited partnership interests
("Units") were registered under the Securities and Exchange Act of 1933, as
amended. During 1988 all 1,540,000 Units were sold, and the Fund's net proceeds
available for investment aggregated $31,878,000 (gross proceeds of $38,500,000
less public offering expenses and acquisition fees of $6,622,000). The Assignor
Limited Partner also acquired 40 units of limited partnership interests in 1988.
The Fund acquired 98.99% limited partnership interests (the "Operating
Partnership Interests") in the operating limited partnerships which own and
operate seven nursing center facilities. The Facilities include four nursing
centers located in Maryland; two nursing centers located in North Carolina and
one facility in New Jersey. Each operating partnership owns the real and
personal property of its nursing center facility. (See Note 1, "Organization and
Operations", in Item 8, Financial Statements and Supplementary Data, and Item 2.
Properties, herein.)
The Fund acquired the Operating Partnership Interests with offering
proceeds and certain indebtedness.
The nursing centers owned by the operating partnerships are managed by
and purchase drugs, medical supplies and agency nursing and rehabilitation
services from affiliates of the Development General Partner. (See Note 3,
"Related Party Transactions" in Item 8. Financial Statements and Supplementary
Data, herein.)
On November 30, 1993, Genesis Health Ventures, Inc. ("Genesis") acquired
substantially all of the assets of Meridian Inc., Meridian Healthcare, Inc. and
their affiliated entities, including all of the stock of the Development General
Partner. See Item 10. Directors and Executive Officers of Registrant, herein.
The Fund's sole business is its investment in partnerships which own
and operate nursing centers that are healthcare facilities licensed by
individual states to provide long-term healthcare within guidelines established
by the appropriate state health agencies and as directed by each patient's
physician. Healthcare and related services from private pay and Medicaid and
Medicare patients accounted for approximately 99% of revenues during each of the
years in the three-year period ended December 31, 1998.
Healthcare facilities, including those owned by the operating
partnerships, are subject to extensive federal, state and in some cases, local
regulatory licensing and inspection requirements. In addition, government
revenue sources, particularly Medicaid and Medicare programs, are subject to
statutory and regulatory changes due to administrative rulings, interpretations
of policy and determination by fiscal intermediaries, and to government funding
restrictions, all of which may materially affect the rate of program payments to
nursing facilities.
-4-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 1. Business (continued)
The nursing center Facilities face competition with similar facilities
in their general locations as well as the development of other nursing centers
that are able to obtain Certificates of Need and to meet certain other
requirements.
Item 2. Properties
The Fund owns Operating Partnership Interests in operating partnerships
that own four nursing facilities in the State of Maryland, two nursing
facilities in the State of North Carolina, and one nursing facility in New
Jersey.
The Facilities are described below:
Property & Equipment Patient
(before depreciation) Revenues
at December 31, 1998 1998
Name, Location and Description (Dollars in thousands)
Facility 1. Hamilton $ 4,611 $ 4,872
6040 Harford Road
Baltimore City,
Maryland
A 104-bed nursing facility located on 1.06 acres, constructed in 1972 consisting
of a "T" shaped two-story plus partial basement masonry structure containing
22,082 square feet. The facility contains 104 comprehensive care beds of which
14 are Medicare-certified. There are two private rooms, 15 semi-private rooms, 4
three-person rooms and 15 four-person rooms.
Facility 2. Randallstown 10,682 10,138
9109 Liberty Road
Randallstown,
Maryland
A 250-bed nursing facility located on 2.83 acres, constructed in 1971 consisting
of a rectangularly-shaped two-story plus partial basement masonry structure
containing a total of 72,780 square feet. The facility contains 246
comprehensive care beds of which 38 are Medicare-certified and four domiciliary
care beds. There are 111 semi-private rooms and 28 private rooms.
Facility 3. Caton Manor 7,520 8,382
3330 Wilkens Avenue
Baltimore City,
Maryland
A 184-bed nursing facility located on 0.92 acres, constructed in 1972 consisting
of an "L" shaped four-story plus basement masonry structure containing a total
of 48,660 square feet. All 184 beds are comprehensive care beds of which 20 are
Medicare-certified. All rooms are semi-private.
-5-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 2. Properties (continued)
Property &Equipment Patient
(before depreciation) Revenues
at December 31, 1998 1998
(Dollars in Thousands)
Name, Location and Description
Facility 4. Frederick 7,172 8,345
(Collegeview)
400 North Avenue
Frederick,
Maryland
A 166-bed nursing facility located on 1.13 acres, originally constructed in 1966
consisting of a two-story plus partial basement masonry structure, the second
floor added in 1968, containing a total of 52,661 square feet. The facility
contains 156 comprehensive care beds of which 28 are Medicare- certified. There
are 10 domiciliary care beds and two non-licensed residential apartments which
are leased to persons who do not require nursing care.
Facility 5. Mooresville 5,884 6,918
550 Glenwood Road
Mooresville,
North Carolina
A 160-bed nursing facility located on 11.38 acres, originally constructed with
100 beds in 1988 with a 60-bed addition completed in 1992 consisting of a
one-story slab on grade building containing a total of 47,657 square feet. The
facility contains 130 beds for skilled care and intermediate care residents, of
which 14 are Medicare certified. There are 30 beds in the Home for the Aged (HA)
wing. There are 8 private rooms and 76 semi-private rooms.
Facility 6. Salisbury 5,709 7,430
710 Julian Road
Salisbury,
North Carolina
A 180-bed nursing facility located on 6.02 acres, originally constructed with
120 beds in 1988 with a 60-bed addition completed in 1991 consisting of a
one-story slab on grade building containing a total of 50,500 square feet. The
facility contains 160 beds for skilled care and intermediate care residents, of
which 28 are Medicare certified. There are 20 beds in the Home for the Aged (HA)
wing. There are 16 private rooms and 82 semi-private rooms.
-6-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 2. Properties (continued)
Property & Equipment Patient
(before depreciation) Revenues
at December 31, 1998 1998
(Dollars in thousands)
Name, Location and Description
Facility 7. Woodlands 8,201 7,677
1400 Woodland Avenue
Plainfield,
New Jersey
A 140-bed nursing facility located on
6.52 acres, constructed in 1989
consisting of a two-story slab on grade
building containing a total of 54,000
square feet. The facility contains 120
comprehensive nursing home beds, of
which 27 are Medicare certified, and 20
residential care beds. There are 12
private rooms, 46 semi-private rooms
and 9 four-bed rooms. The facility also
provides space for a child day-care
program.
------- -------
$49,779 $53,762
Item 3. Legal Proceedings
The Fund is a party to litigation arising in the ordinary course of
business. The Fund does not believe the results of such litigation, even if the
outcome is unfavorable to the Fund, would have a material adverse effect on its
consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the security holders for a vote
during the last quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
An established public trading market for the Units does not exist
and the Fund does not anticipate that a public market will develop. Transfer of
Units by an investor and purchase of Units by the Fund may be accommodated under
certain terms and conditions. The Partnership Agreement imposes certain
limitations on the transfer of Units and may restrict, delay or prohibit a
transfer primarily if:
o the transfer of Units would result in 50% or more of all Units
having been transferred by assignment or otherwise within a
12-month period;
o such a transfer would be a violation of any federal or state
securities laws that may cause the Fund to be classified other than
as a partnership for federal income tax purposes;
o such transfers would cause the Fund to be treated as a "publicly
traded partnership" under Sections 7704 and 469(k) of the Internal
Revenue Code; and
o the transfer of Units would cause a technical termination of the
Partnership within meaning of Section 708(b)(1)(A) of the Internal
Revenue Code.
-7-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters (continued)
As of December 31, 1998, there were 1,745 holders of Units of the
registrant, owning an aggregate of 1,540,040 Units, including 40 Units held by
the Assignor Limited Partner. The Fund made four quarterly distributions
totaling approximately $3,306,000 in each of the years in the three-year period
ended December 31, 1998. See Note 5, "Distributions to Partners and Allocation
of Net Income", in Item 8. Financial Statements and Supplementary Data, herein.
Item 6. Selected Financial Data
Years Ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands - except per Unit amounts)
Statement of Earnings Data
Net revenue $54,108 $49,568 $47,885 $45,398 $42,852
Operating earnings before capital costs** 9,594 6,286 5,735 5,937 6,834
Net earnings 5,768 2,268 1,722 1,891 2,903
Net earnings per assignee Unit-basic $ 3.71 $ 1.46 $ 1.12 $ 1.23 $ 1.88
Operating Data
Payor mix (as a percent of revenue):
Medicaid and Medicare 80% 77% 77% 75% 75%
Private 20% 23% 23% 25% 25%
Occupancy percentage 91.7% 93.2% 94.3% 94.8% 94.4%
Patient Days Available 429,000 429,000 431,000 430,000 433,000
Balance Sheet Data
Total assets $50,305 $49,707 $52,255 $51,107 $52,494
Property and equipment, net of
accumulated depreciation 33,653 34,839 35,680 36,625 37,714
Long-term debt, including loan
payable to Development General
Partner, less current portion 23,702 24,363 25,955 25,528 25,797
Partners' capital 18,813 16,351 17,389 18,973 20,388
Cash distributions paid per Unit:
from operations $2.12 $ 2.12 $ 2.12 $ 1.88 $ 2.12
from return of capital - - - .24 -
**Capital costs include depreciation, amortization and interest expense.
-8-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
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.
Effective February 28, 1998, the Fund refinanced all of the existing
indebtedness. Under the terms of the refinancing, the mortgages mature on
February 28, 2000 and bear interest at LIBOR plus 1.55%. The refinancing also
extended the line of credit commitment until February 28, 2000. The Fund has a
$4,000,000 line of credit which is designated for working capital needs and is
primarily secured by the accounts receivable of the Fund. At December 31, 1998,
there were no outstanding borrowings under this line of credit.
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 center's first two years of operation.
Loans outstanding under this arrangement, including interest at 9% per annum,
were $1,086,000 at December 31, 1998. 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.
Due primarily to the favorable resolution of a longstanding Maryland
Medicaid reimbursement issue (as discussed in the Results of Operations
section), Fund revenues and profitability increased markedly in 1998 when
compared to prior years. Since the Fund's distribution level remained unchanged,
reserves increased by approximately $3.3 million at December 31, 1998 when
compared to December 31, 1997.
On December 15, 1998 the Fund signed a letter of intent with Genesis Health
Ventures, Inc. ("Genesis"), an affiliate of the Development General Partner, for
the purchase by Genesis of all the limited and general partnership interests of
the operating partnerships (the "Proposed Sale") for approximately $70 million.
The Fund agreed to operate the facilities in the ordinary course of business and
agreed not to make distributions to the partners through the closing date or
upon termination of the Proposed Sale. On March 30, 1999, Genesis informed the
Fund that it terminated the letter of intent. In light of the termination of the
Proposed Sale, the Fund expects to make its deferred fourth quarter 1998
distribution (normally made in February) and to resume its quarterly
distribution policy.
The major challenge to the Fund in the foreseeable future is to control
operating expenses while maximizing revenues through strategic admissions
policies.
Results of Operations
December 31, 1998 vs. December 31, 1997
Patient revenues for the Fund's seven operating partnerships increased by
approximately $4,540,000 (or 9.2%) for the year ended December 31, 1998 as
compared to the year ended December 31, 1997. This was primarily the result of a
favorable outcome to a long standing Maryland Medicaid reimbursement issue. The
resolution of this issue provided increased revenues of approximately $800,000
for current year patient services and approximately $2,100,000 for prior year
patient services. A favorable Medicaid cost report settlement in the state of
North Carolina added approximately $350,000 to revenue. A favorable Medicare
settlement for the three prior years resulted in an increase in revenues of
approximately $700,000.
Census declines of approximately 6,500 days, primarily in private and
Medicare days, were only partially offset by increases in insurance days. The
decline in census days resulted in a revenue reduction of approximately
$1,300,000. Year to year price increases (exclusive of the Medicaid and Medicare
items discussed above) of approximately 2.3% for Medicaid and 6.0% for Medicare
increased revenue by approximately $1,600,000. Year to year price increases in
non-skilled and intermediate care units increased revenue by $260,000.
-9-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations (continued)
Profitability for the Fund increased approximately $3,500,000 (or 150%) to
$5,768,000 in 1998 as compared to $2,268,000 in 1997. Operating expenses as a
percentage of revenue declined to approximately 74% in 1998 versus approximately
80% in 1997 primarily due to favorable outcome of reimbursement issues described
above. Operating expenses increased approximately $719,000 (or 1.8%) during 1998
versus 1997. Cost efficiencies due to a decline in census of 1.6% were offset by
inflationary wages increases and increases in therapy, drug, and medical supply
expenses. Management and general and administrative expenses increased
approximately $519,000 principally due to increased management fees and
inflationary changes to general and administrative expenses.
Interest expense decreased approximately $176,000 (or 8.7%) in 1998 as
compared to 1997. This decrease was primarily due to the refinancing at lower
interest rates of its mortgages effective February 28, 1998.
December 31, 1997 vs. December 31, 1996
Patient revenues for the Fund's seven operating partnerships increased by
approximately $1,712,000 (or 3.6%) for the year ended December 31, 1997 as
compared to the year ended December 31, 1996. The increase is primarily
attributable to increased room rates which resulted from an effective rate
increase of 6% (or $1,767,000), of which $1,466,000 relates to Medicaid
residents. Effective July 1, 1997, the four Maryland facilities received
Medicaid increases of 5%- 6% as compared to approximately 2.5% on July 1, 1996.
Also contributing to the Medicaid increase was a shift to higher acuity Medicaid
residents at the facilities. The remaining rate increase of approximately
$296,000 was generated equally by Medicare and private payor classes. Among
Medicare patients, there has been a shift to a higher acuity resident, while
there has been a shift in the census mix of private payors to facilities with
higher base private rates. Additionally, ancillary usage increased in 1997
versus 1996. Partially offsetting these favorable variances was a decrease of
approximately $252,000 in prior year third party cost report settlements.
Profitability for the Fund increased approximately $546,000 (or 32%) to
$2,268,000 in 1997 as compared to $1,722,000 in 1996. Operating expenses as a
percentage of revenues remained consistent at 80% of revenue. Salaries, wages
and benefits increased approximately $462,000 (or 2%) during 1997 versus 1996
due to inflationary wage increases. As a result of the shortage in certified
nursing assistants in the State of Maryland, nursing agency usage increased
approximately $109,000 in 1997 as compared to the prior year.
Another factor contributing to the operating expense increase was higher
ancillary utilization in 1997 as compared to the prior year. This increase was a
result of the higher acuity residents in the facilities as well as increased
utilization by the Medicaid population. On a per patient day basis, Medicaid
ancillary utilization was $1.98 higher in 1997 than in 1996.
Interest expense decreased $113,000 in 1997 as compared to 1996. This
decrease was primarily due to line of credit borrowings that were repaid in full
in April, 1997.
Legislative and Regulatory Issues
Legislative and regulatory action has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs. The changes have limited, and are
expected to continue to limit, payment increases under these programs. Also, the
timing of payments made under the Medicare and Medicaid programs is subject to
regulatory action and governmental budgetary constraints; in recent years, the
time period between submission of claims and payment has increased. Within the
statutory framework of the Medicare and Medicaid programs, there are substantial
areas subject to administrative rulings and interpretations which may further
affect payments made under those programs. Further, the federal and state
governments may reduce the funds available under those
-10-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Legislative and Regulatory Issues (continued)
programs in the future or require more stringent utilization and quality reviews
of eldercare centers or other providers. There can be no assurances that
adjustments from Medicare or Medicaid audits will not have a material adverse
effect on the Fund.
Pursuant to the Balanced Budget Act commencing with cost reporting periods
beginning on July 1, 1998, Prospective Payment System ("PPS") began to be phased
in for skilled nursing facilities at a per diem rate for all covered Part A
skilled nursing facility services as well as many services for which payment may
be made under Part B when a beneficiary who is a resident of a skilled nursing
facility receives covered skilled nursing facility care. The consolidated per
diem rate is adjusted based upon the Resource Utilization Group ("RUG"). In
addition to covering skilled nursing facility services, this consolidated
payment will also cover rehabilitation and non-rehabilitation ancillary
services. Physician services, certain nurse practitioner and physician assistant
services, among others, are not included in the per diem rate. For the first
three cost reporting periods beginning on or after July 1, 1998, the per diem
rate will be based on a blend of a facility specific rate and a federal per diem
rate. In subsequent periods, and for facilities first receiving payments for
Medicare services on or after October 1, 1995, the federal per diem rate will be
used without any facility specific blending.
The Balanced Budget Act also required consolidated billing for skilled
nursing facilities. Under the Balanced Budget Act, the skilled nursing facility
must submit all Medicare claims for Part A and Part B services received by its
residents with the exception of physician, nursing, physician assistant and
certain related services, even if such services were provided by outside
suppliers. Medicare will pay the skilled nursing facilities directly for all
services on the consolidated bill and outside suppliers of services to residents
of the skilled nursing facilities must collect payment from the skilled nursing
facility. Although consolidated billing was scheduled to begin July 1, 1998 for
all services, it has been delayed until further notice for beneficiaries in a
Medicare Part A stay in a skilled nursing facility not yet using PPS and for the
Medicare Part B stay. There can be no assurance that the Fund will be able to
provide skilled nursing services at a cost below the established Medicare level.
Effective April 10, 1998, regulations were adopted by the Health Care
Financing Administration, which revises the methodology for determining the
reasonable cost for contract therapy services, including physical therapy,
respiratory therapy, occupational therapy and speech language pathology. Under
the regulations, the reasonable costs for the contract therapy services are
limited to geographically-adjusted salary equivalency guidelines. However, the
revised salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect.
The Balanced Budget Act also repealed the Boren Amendment federal payment
standard for Medicaid payments to Medicaid nursing facilities effective October
1, 1997. The Boren Amendment required Medicaid payments to certain health care
providers to be reasonable and adequate in order to cover the costs of
efficiently and economically operated health care facilities. States must now
use a public notice and comment period in order to determine rates and provide
interested parties a reasonable opportunity to comment on proposed rates and the
justification for and the methodology used in calculating such rates. There can
be no assurance that budget constraints or other factors will not cause states
to reduce Medicaid reimbursement to nursing facilities and pharmacies or that
payments to nursing facilities and pharmacies will be made on a timely basis.
The law also grants greater flexibility to states to establish Medicaid managed
care projects without the need to obtain a federal waiver. Although these waiver
projects generally exempt institutional care, including nursing facilities and
institutional pharmacy services, no assurances can be given that these projects
ultimately will not change the reimbursement system for long-term care,
including pharmacy services from fee-for-service to managed care negotiated or
capitated rates. The Fund anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies.
-11-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Legislative and Regulatory Issues (continued)
In July 1998, the Clinton Administration issued a new initiative to promote
the quality of care in nursing homes. This initiative includes, but is not
limited to (I) increased enforcement of nursing home safety and quality
regulations; (ii) increased federal oversight of state inspections of nursing
homes; (iii) prosecution of egregious violations of regulations governing
nursing homes; (iv) the publication of nursing home survey results on the
Internet; and (v) continuation of the development of the Minimum Data Set
("MDS"), a national automated clinical data system. Accordingly, with this new
initiative it may become more difficult for eldercare facilities to maintain
licensing and certification. The Fund may experience increased costs in
connection with maintaining its licenses and certifications as well as increased
enforcement actions. In addition, beginning January 1, 1999, outpatient therapy
services furnished by a skilled nursing facility to a resident not under a
covered Part A stay or to nonresidents who receive outpatient rehabilitation
services will be paid according to the Medicare Physician Fee Schedule.
Year 2000 Compliance
The Development General Partner ("DGP") has implemented a process to
address its Year 2000 compliance issues. The process includes (I) an inventory
and assessment of the compliance of the essential systems and equipment of the
Fund and of the Year 2000 mission critical suppliers, customers, and other third
parties, (ii) the remediation of non-compliant systems and equipment and testing
and (iii) contingency planning. The DGP is in the process of conducting its
inventory, assessment and remediation of its information technology ("IT")
systems, equipment and non-IT systems and equipment (embedded technology) and
has completed approximately 70% of its internal inventory and assessment and
approximately 30% of the systems and equipment of critical suppliers, customers
and other third parties.
With respect to the Year 2000 compliance of critical third parties, the
Fund derives a substantial portion of its revenue from the Medicare and Medicaid
programs. Congress' General Accounting Office ("GAO") recently concluded that it
is highly unlikely that all Medicare systems will be compliant on time to ensure
the delivery of uninterrupted benefits and services in the year 2000. While the
Fund does not receive payments directly from Medicare, but from intermediaries,
the GAO statement is interpreted to apply as well to these intermediaries. The
DGP intends to actively confirm the Year 2000 readiness status for each
intermediary and to work cooperatively to ensure appropriate continuing payments
for services rendered to all government insured patients.
The DGP is remediating its critical IT and non-IT systems and equipment.
The DGP has also begun contingency planning in the event that essential systems
and equipment fail to be Year 2000 compliant. The DGP is planning to be Year
2000 compliant for all of its essential systems and equipment by September 30,
1999, although there can be no assurance that it will achieve its objective by
such date or by January 1, 2000, or that such potential non-compliance will not
have a material adverse effect on the Fund's business, financial condition or
results from operations. In addition, there can be no assurance that all of the
Fund's critical suppliers and other third parties will be Year 2000 compliant by
January 1, 2000, or that such potential non-compliance will not have a material
adverse effect on the Fund's business, financial condition or results of
operations.
The DGP currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $1,000,000, of which
approximately $500,000 has been spent through September 30, 1998. The DGP's Year
2000 efforts are ongoing and its overall plan and cost estimations will continue
to evolve, as new information becomes available. The Fund's analysis of its Year
2000 issues is based on information from third party suppliers; there can be no
assurance that such information is accurate or complete.
The failure of the DGP or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business work operations. The Fund's potential risks include (I) the
inability to deliver patient care related services in the Fund's facilities,
(ii) the delayed receipt of reimbursement from the Federal or State governments,
private payors or intermediaries, (iii) the failure of security
-12-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Year 2000 Compliance (continued)
systems, elevators, heating systems or other operational systems and equipment
of the Fund's facilities and (iv) the inability to receive critical equipment
and supplies from vendors. Each of these events could have a material adverse
affect on the Fund's business, results of operations and financial condition.
Contingency plans for the DGP's Year 2000-related issues continue to be
developed and include, but are not limited to, identification of alternate
suppliers, alternate technologies and alternate manual systems. The DGP is
planning to have contingency plans completed for essential systems and equipment
by June 30, 1999; however, there can be no assurance that it will meet this
objective by such date or by January 1, 2000.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
Statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Fund or to products or services offered
by the Fund, is also intended to be "Year 2000 Disclosure" as such term is
defined in the Year 2000 Act.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The adoption of this
accounting standard in fiscal 1998 had no impact on the Fund.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. In April
1998, the Accounting Standards Executive Committee issued Statement of Position
98-5, Reporting on the Costs of Start-up Activities. The Fund does not believe
either of these statements have an impact on the 1998 financial statements.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements:
Page(s)
Annual Report
Independent Auditors' Report 3
Consolidated Balance Sheets 4
Consolidated Statements of Earnings 5
Consolidated Statements of Partners' Capital (Deficit) 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
-13-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
PART III
Item 10. Directors and Executive Officers of Registrant
The General Partners of the Fund are Meridian Healthcare Investments, Inc.,
the Development General Partner, and Brown Healthcare, Inc., the Administrative
General Partner. The Fund's principal executive offices are located at 225 East
Redwood Street, Baltimore, Maryland 21202. The General Partners had primary
responsibility for the selection and negotiation of terms concerning the
acquisition of the Operating Partnership Interests, selecting a manager for the
interim investments and the structure of the Offering and the Fund. The General
Partners have primary responsibility for overseeing the performance of those who
contract with the Fund as well as making decisions with respect to the
financing, sale and liquidation of the Fund's or the operating partnerships'
assets. The General Partners are responsible for all reports to and
communications with investors and others, all distributions and allocations to
investors, the administration of the Fund's business and all filings with the
Securities and Exchange Commission and other Federal or State regulatory
authorities. The Fund's Partnership Agreement provides certain rights for
investors, which are incorporated herein by reference.
The Development General Partner
Meridian Healthcare Investments, Inc., the Development General Partner, is
a Maryland corporation. On November 30, 1993, Genesis acquired substantially all
the assets of Meridian, Inc., Meridian Healthcare (" MHC") and their affiliated
entities, including all the stock of the Fund's Development General Partner. As
part of the acquisition, MHC, the manager of the Fund's seven nursing centers,
continues to operate the facilities pursuant to management agreements. Since
completion of the Meridian transaction, Genesis operates primarily in five
regional markets in which over 11,100,000 people over the age of 65 reside. The
networks include 326 eldercare centers with approximately 42,200 beds; nine
primary care physician clinics; approximately 85 physicians, physician
assistants and nurse practitioners; 11 medical supply distribution centers
serving over 1,000 eldercare centers with over 80,000 beds; an integrated
NeighborCareSM pharmacy operation with over $900,000,000 in annualized revenues,
including 79 long-term care pharmacies serving approximately 263,000
institutional beds; 34 community-based pharmacies; infusion therapy services;
and certified rehabilitation agencies providing services through over 600
contracts. The Company also provides diagnostic and hospitality services in
selected markets and operates a group purchasing organization. Genesis has
concentrated its eldercare networks in five geographic regions in order to
achieve operating efficiencies, economies of scale and significant market share.
The five geographic markets that Genesis principally serves are: New England
Region (Massachusetts/Connecticut/New Hampshire/Vermont/Rhode Island);
Midatlantic Region (Greater Philadelphia/Delaware Valley); Chesapeake Region
(Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington
D.C./Virginia); Southern Region (Central Florida); and Allegheny Region (West
Virginia/Western Pennsylvania/Eastern Ohio/Illinois/Wisconsin). The Company
believes that it is the largest operator of eldercare center beds in the states
of New Hampshire Massachusetts, New Jersey, Pennsylvania, Maryland and West
Virginia.
The following individuals are the directors and principal officers of
Meridian Healthcare Investments, Inc.:
Michael R. Walker, age 50, is President and a Director of the Development
General Partner and is a co-founder of Genesis and has served as Chairman and
Chief Executive Officer of Genesis since its inception in 1985. In 1998, Mr.
Walker became the Chairman of the Board of Trustees of ElderTrustsm, a
healthcare related real estate investment trust. In 1981, Mr. Walker co-founded
Health Group Care Centers ("HGCC"). At HGCC, he served as Chief Financial
Officer and, later, as President and Chief Operating Officer. Prior to its sale
in 1985, HGCC operated nursing homes with 4,500 nursing beds in 12 states. From
1978 to 1981, Mr. Walker was the Vice President and Treasurer of AID Healthcare
Centers, Inc. ("AID"). AID, which owned and operated 20 nursing centers, was
co-founded in 1977 by Mr. Walker as the nursing home division of Hospital
Affiliates International ("HAI"). Mr. Walker holds a Master of Business
Administration degree from Temple University and a Bachelor of Arts in Business
Administration from Franklin and Marshall College. Mr. Walker serves on the
Board of Directors of Renal Treatment Centers, Inc. and the Board of Trustees of
Universal Health Realty and Income Trust.
-14-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 10. Directors and Executive Officers of Registrant (continued)
The Development General Partner (continued)
Richard R. Howard, age 50, is a Director of the Development General Partner
and has served as a Director of Genesis since its inception in 1985, as
President from June 1986 to November 1998 and as Vice Chairman since November
1998. From June, 1986 through March, 1998, Mr. Howard served as President and
Chief Operating Officer of Genesis. He joined Genesis in September, 1985 as Vice
President of Development. Mr. Howard's background in healthcare includes two
years as the Chief Financial Officer of HGCC. Mr. Howard's experience also
includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania and one
year with Equibank, Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the
Wharton School, University of Pennsylvania, where he received a Bachelor of
Science degree in Economics in 1971.
George V. Hager, Jr., age 43, is Vice President and Treasurer of the
Development General Partner and is Senior Vice President and Chief Financial
Officer of Genesis. Mr. Hager was previously partner in charge of the health-
care practice for KPMG LLP in the Philadelphia office. Mr. Hager began his
career at KPMG LLP in 1979 and has over fifteen years of experience in the
healthcare industry. Mr. Hager received a Bachelor of Arts degree in Economics
from Dickinson College in 1978 and a Master of Business Administration degree
from Rutgers Graduate School of Management. He is a certified public accountant
and a member of the AICPA and PICPA.
Administrative General Partner
Brown Healthcare, Inc., the Administrative General Partner, is a Maryland
corporation, and is wholly-owned by Alex. Brown Realty, Inc. The Administrative
General Partner is responsible for administering the business of the Fund,
including providing clerical services, communications, services and reports to
investors, and making all reports and filings to securities regulatory
authorities.
The following individuals are the directors and principal officers of the
Administrative General Partner:
John M. Prugh, age 50, has been a Director and President of the
Administrative General Partner since 1988, and of Alex. Brown Realty, Inc. and
Armata Financial Corp. since 1984. Mr. Prugh graduated from Gettysburg College
in 1970, and was designated a Certified Property Manager by the Institute of
Real Estate Management in 1979. He has worked in property management for H. G.
Smithy Co., in Washington, D.C., and Dreyfuss Bros., Inc. in Bethesda, Maryland.
Since 1977, Mr. Prugh has been involved in managing, administering, developing
and selling real estate investment projects sponsored by Alex. Brown Realty,
Inc. and its subsidiaries.
Peter E. Bancroft, age 46, has been a Director and Vice President of the
Administrative General Partner since 1988 and a Senior Vice President of Alex.
Brown Realty, Inc. and Armata Financial Corp. since 1983. Mr. Bancroft graduated
from Amherst College in 1974, attended the University of Edinburgh, and received
a J.D. degree from the University of Virginia School of Law in 1979. Prior to
joining Alex. Brown Realty, Inc. in 1983, Mr. Bancroft held legal positions with
Venable, Baetjer and Howard and T. Rowe Price Associates, Inc.
Terry F. Hall, age 52, has been the Secretary of the Administrative General
Partner and a Vice President and Secretary of, and Legal Counsel for, Alex.
Brown Realty, Inc. since 1989. Mr. Hall graduated from the University of
Nebraska-Lincoln in 1968, and received a J.D. degree from the University of
Pennsylvania Law School in 1973. Prior to joining Alex. Brown Realty, Inc. in
1986, Mr. Hall was a Partner at the law firm of Venable, Baetjer and Howard from
1981 to 1986 and an associate at the same firm from 1973 to 1981.
Timothy M. Gisriel, age 42, has been the Treasurer of the Administrative
General Partner and of Alex. Brown Realty, Inc. and Armata Financial Corp. since
1990. He was Controller of Alex. Brown Realty, Inc. and Armata Financial Corp.
from 1984 through 1990. Mr. Gisriel graduated from Loyola College in 1978 and
received his Masters of Business Administration degree from the Robert G.
Merrick School of Business, University of Baltimore in 1993. Prior to joining
Alex. Brown Realty, Inc. in 1984, Mr. Gisriel was an audit supervisor in the
Baltimore office of Coopers & Lybrand. He is a Maryland Certified Public
Accountant.
-15-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Item 10. Directors and Executive Officers of Registrant (continued)
There is no family relationship among the officers and directors of the
General Partner.
Item 11. Executive Compensation
The officers and directors of the Administrative General Partner and
Development General Partner received no compensation from the Fund.
The General Partners are entitled to receive a share of cash distributions
and a share of profits and losses as described in the Agreement of Limited
Partnership. (See Note 5, "Distributions to Partners and Allocation of Net
Income" in Item 8. Financial Statements, herein.)
For a discussion of compensation and fees to which the General Partners are
entitled, see Item 13. Certain Relationships and Related Transactions, herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person is known to the Fund to own beneficially more than 5% of the
outstanding Units of the Fund.
The General Partners each have a .5% interest in the Fund as General
Partners, but do not hold any Units.
The Assignor Limited Partner, Brown Healthcare Holding Co., Inc., an
affiliate of the Administrative General Partner, owns for its benefit 40 Units.
The Units held by the Assignor Limited Partner have all rights attributable to
such Units under the Limited Partnership Agreement except that these Units are
non-voting.
On December 15, 1998 the Fund signed a letter of intent with the
Development General Partner for the proposed sale of the limited and general
partnership interests of the Fund's operating partnerships, which if consummated
would have resulted in a change of control of the registrant. On March 30, 1999
Genesis informed the Fund that it terminated the letter of intent.
Item 13. Certain Relationships and Related Transactions
The General Partners and their affiliates have and are permitted to engage
in transactions with the Fund. For a summarization of fees paid during 1998,
1997 and 1996, and to be paid to the General Partners and their affiliates at
December 31, 1998, see Note 3, "Related Party Transactions" in Item 8. Financial
Statements, herein.
-16-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: see Index to Financial Statements and
Supplementary Data in Item 8 on Page 13.
2. Financial Statement Schedules: Schedule II - Valuation and
Qualifying Accounts for the years ended December 31, 1998, 1997 and
1996. All other schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits:
(3, 4) Limited Partnership Agreement on pages 1 through 41 of
Exhibit A to the Fund's Prospectus, and the Fund's
Registration Statement on Form S-1 (File No. 33-19277)
included herein by reference.
(13) Annual Report for 1998.
(b) Reports on Form 8-K: None.
-17-
Meridian Healthcare Growth and Income Fund Limited Partnership
Independent Auditors' Report
To the Partners of Meridian Healthcare Growth and Income
Fund Limited Partnership
Under date of February 5, 1999, we reported on the consolidated balance sheets
of Meridian Healthcare Growth and Income Fund Limited Partnership as of December
31, 1998 and 1997, and the related consolidated statements of earnings,
partners' capital (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998, as contained in the annual report on
Form 10K for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule in the Form 10K. This consolidated financial
statement schedule is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits. In our opinion, such schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 5, 1999
-18-
Meridian Healthcare Growth and Income Fund Limited Partnership
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Schedule II
Balance at Beginning Charged to Balance at End
Description of Period Operations Deductions(1) of Period
Year Ended December 31, 1998 $513 252 (286) $479
Allowance for Doubtful Accounts
Year Ended December 31, 1997 $551 351 (389) $513
Allowance for Doubtful Accounts
Year Ended December 31, 1996 $440 376 (265) $551
Allowance for Doubtful Accounts
(1) - Represents amounts written off as uncollectible.
-19-
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: 3/29/99 BY: /s/ John M. Prugh
John M. Prugh
President and Director
Brown-Healthcare, Inc.
Administrative General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following in the capacities and on the dates
indicated.
DATE: 3/29/99 By: /s/ John M. Prugh
John M. Prugh
President and Director
Brown-Healthcare, Inc.
Administrative General Partner
DATE: 3/22/99 By: /s/ Peter E. Bancroft
Peter E. Bancroft
Vice President and Director
Brown-Healthcare, Inc.
Administrative General Partner
DATE: 3/22/99 By: /s/ Terry F. Hall
Terry F. Hall
Secretary
Brown-Healthcare, Inc.
Administrative General Partner
DATE: 3/18/99 By: /s/ Timothy M. Gisriel
Timothy M. Gisriel
Treasurer
Brown-Healthcare, Inc.
Administrative General Partner
-20-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
SIGNATURES (continued)
DATE: 3/25/99 BY: /s/ Michael R. Walker
Michael R. Walker
President and Director
Meridian Healthcare Investments, Inc.
Development General Partner
DATE: 3/25/99 BY: /s/ Richard R. Howard
Richard R. Howard
Director
Meridian Healthcare Investments, Inc.
Development General Partner
DATE: 3/26/99 BY: /s/ George V. Hager, Jr.
George V. Hager, Jr.
Vice President and Treasurer
Meridian Healthcare Investments, Inc.
Development General Partner
-21-