<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER: 2-92396
---------------------
RWB MEDICAL INCOME PROPERTIES 1
LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
LOUISIANA 72-1007233
(State of Organization) (IRS Employer Identification Number)
</TABLE>
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 22,985.
The Prospectus of the Registrant dated October 11, 1984, 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.
================================================================================
<PAGE> 2
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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 Common Equity and Related
Stockholder Matters......................................... 2
Item 6: Selected Financial Data..................................... 2
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 4
Item 7A: Quantitative and Qualitative Disclosures about Market
Risk........................................................ 4
Item 8: Financial Statements and Supplementary Data................. 4
Item 9: Disagreements on Accounting and Financial Disclosure........ 5
PART III
Item 10: Directors and Executive Officers of the Registrant.......... 5
Item 11: Executive Compensation...................................... 5
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 6
Item 13: Certain Relationships and Related Transactions.............. 6
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 7
</TABLE>
Signatures
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
RWB Medical Income Properties 1 Limited Partnership (the "Partnership"), is
a Louisiana limited partnership organized on July 7, 1984. As of January 1,
1997, the Partnership owned and operated two nursing home properties, Southpoint
Manor in Miami Beach, Florida, and Merry Wood Lodge in Elmore, Alabama, with a
total of 354 beds, and employed approximately 300 full time 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 RWB Management Corp., 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 $17,063,375. 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 $515 per Unit.
2. Second Installment. A second distribution of $110 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 and
thereafter if no longer needed.
<PAGE> 4
3. Third Installment. A third distribution of approximately $48 per
Unit is anticipated to be made on or prior to May 31, 1998. This
distribution consist primarily of unspent reserves set aside as described
immediately above.
4. Final Installment. A final distribution consisting of remaining
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 11, 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 1,717 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.
2
<PAGE> 5
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Total Revenue.......................... $ 5,382 $15,227 $13,530 $12,364 $11,898
Operating Income (Loss)................ (1,962) 939 998 874 1,332
Income (Loss) on Discontinued
Operations.......................... (181) (308) (1,783) -- --
Gain on Sale of Properties............. 8,794 -- -- -- --
Net Income (Loss)...................... 6,893 508 (902) 843 1,179
Per Share Data:
Net Income (Loss) per Limited
Partnership Unit....................... $287.39 $ 20.64 $(40.76) $ 34.23 $ 47.91
Financial Condition:
Total Assets........................... $ 5,045 $13,104 $13,359 $17,853 $18,044
Long-term Debt......................... -- 893 989 1,071 1,163
Partner's Capital...................... 2,365 9,992 10,327 15,306 15,940
Distributions per Limited Partner Unit:
First Quarter.......................... $ 8.56 $ 8.56 $ 15.00 $ 15.00 $ 15.00
Second Quarter......................... 0 8.56 15.00 15.00 15.00
Third Quarter.......................... 0 8.56 15.00 15.00 15.00
Fourth Quarter......................... 0 8.56 15.00 15.00 15.00
Special Distribution of Sale
Proceeds............................ 625.00 -- 113.56 -- 30.44
</TABLE>
Quarterly Financial data for the period January 1, 1995 to December 31,
1997 (000's omitted):
<TABLE>
<CAPTION>
1997
-------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenue........................................ $4,073 $2,796 $(101) $(1,386)
Operating Income..................................... 173 (358) (148) (1,629)
Income (loss) on Discontinued Operations............. (73) 0 0 (108)
Gain on Sale of Properties........................... 7,481 0 0 1,313
Net Income (loss).................................... 7,541 (235) (89) (324)
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenue......................................... $3,746 $3,720 $3,845 $3,916
Operating Income...................................... 326 211 233 169
Income (loss) on Discontinued Operations.............. (24) 26 (99) (211)
Net Income (loss)..................................... 231 213 109 (45)
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenue......................................... $3,299 $3,218 $3,299 $3,714
Operating Income...................................... 299 146 107 446
Income (loss) on Discontinued Operations.............. (41) (810) (889) (43)
Net Income (loss)..................................... 214 (709) (822) 415
</TABLE>
3
<PAGE> 6
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. 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 $4,849,227 as of December 31, 1997, an
increase of $4,082,606 compared to December 31, 1996, primarily due to cash
received from the asset sale. Cash provided from operations increased from
$15,822 in 1996 to $3,158,611 in 1997. This difference primarily resulted from
collection of accounts receivable outstanding.
Payments for capital expenditures were reduced from $252,550 in 1996 to
$13,366 in 1997 primarily because limited capital expenditures were made prior
to the asset sale, and no such expenditures were made after the asset sale.
During 1997, the Partnership paid distributions to Limited Partners
totaling $633.56 per unit, which includes $625 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 $11,795,716 or $515 per unit on May 12, 1997, and
the second installment totaling $2,518,450 or $110 per unit on July 11, 1997.
The Partnership anticipates that a third distribution of $48 will be made on or
prior to May 31, 1998, along with any additional funds which may exceed
necessary reserves at that time; however, should the estimated settlement
liabilities change or a claim be asserted under the indemnification provision of
the Sale Agreement, then such claims or settlement could reduce the funds
available for future distribution.
The Partnership will make a final distribution of any remaining funds
following the expiration of the periods within which claims for breach of
representations and warranties and claims by Medicare, Medicaid or other third
parties may be made against the Partnership either by contract or under
applicable law.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to 1996
The Partnership's net income for the year ended December 31, 1997 was
$6,892,625, compared to a $508,160 in the previous year. The increase was
primarily due to the gains realized from the asset sale.
Revenues and operating expenses for 1997 were $5,382,374 and $7,344,392,
respectively, compared to $15,194,226 and $14,287,904 in 1996, the substantial
differences primarily due to the fact that the Partnership suspended all
business operations on May 31, 1997 and incurred substantial cost associated
with the asset sale. As a result of the foregoing, a net operating loss of
$1,962,018 for 1997 occurred.
Other income (expenses) reflects higher interest income in 1997 primarily
due to interest earned on proceeds from the asset sale.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
4
<PAGE> 7
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. RWB Management
Corp. ("RWBMC"), a Louisiana corporation, is the Managing General Partner of the
Partnership. The directors and executive officers of RWBMC as of December 31,
1997 are listed below. Directors serve for one year or until the next annual
meeting of stockholders of RWBMC or until their successors are elected and
qualified. RWBMC 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 RWBMC and QualiCorp, Inc. are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND RECENT PRINCIPAL OCCUPATIONS
- ---- --- ------------------------------------------
<S> <C> <C>
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.
</TABLE>
Mr. DeBlois and Mr. Stoddard are Directors of RWBMC 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 RWBMC, the Managing General Partner $238,263 in 1997 as
reimbursement for administrative expenses (primarily salaries) incurred during
the year. In addition, during 1997, the Partnership paid to Qualicorp, Inc.
$49,940 for property management fees.
5
<PAGE> 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
AMOUNT/NATURE
NAME/ADDRESS OF BENEFICIAL
TITLE OF CLASS(1) OF BENEFICIAL OWNER(2) OWNERSHIP(3) PERCENT OF CLASS(4)
- ----------------- ---------------------- ------------- -------------------
<S> <C> <C> <C>
Partnership Units.................... MacKenzie Patterson, Inc.* 2,882 Units Approximately
1640 School Street 13.3%
Suite 100
Moraga, CA 94556
</TABLE>
- ---------------
* 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
2,882 (or approximately 13.3%) 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 RWBMC owned any units in the
Partnership at December 31, 1997. RWBMC held 23 units in the Partnership at
December 31, 1997. QualiCorp, Inc., parent of RWBMC, the Partnership's Managing
General Partner, held 73 units in the Partnership at December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Qualicorp Inc., the parent of RWBMC, charged the following amounts for
property management fees and administrative expenses to the Partnership during
the periods shown:
<TABLE>
<CAPTION>
PROPERTY ADMINISTRATIVE
YEAR MANAGEMENT FEES EXPENSES
---- --------------- --------------
<S> <C> <C>
1997..................................................... $ 49,940 $238,263
1996..................................................... 141,923 175,565
1995..................................................... 121,265 166,077
</TABLE>
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 $14,751, $59,005 and $103,400, 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.
6
<PAGE> 9
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:
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-1
Financial Statements
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-20
Schedule VIII -- Valuation and Qualifying Accounts and
Reserves for Allowances for Doubtful Accounts............. F-21
Schedule X -- Consolidated Supplementary Income Statement
Information............................................... F-22
Schedule XI -- Real Estate and Accumulated Depreciation..... F-23
</TABLE>
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.
<TABLE>
<S> <C> <C>
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.
</TABLE>
(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1997.
7
<PAGE> 10
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.
RWB MEDICAL INCOME PROPERTIES 1
LIMITED PARTNERSHIP
RWB MANAGEMENT CORP.
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.
<TABLE>
<CAPTION>
NAME POSITION DATE
---- -------- ----
<C> <S> <C>
/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
</TABLE>
8
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 12
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE> 13
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
Table of Contents
<TABLE>
Page
----
<S> <C>
Independent Auditors' Report F-1
Financial Statements
Balance Sheets F-2
Statements of Operations F-3
Statements of Partners' Capital F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-8
Information Accompanying the Basic Financial Statements
Independent Auditors' Report on Information
Accompanying the Basic Financial Statements F-20
Schedule of Valuation and Qualifying Accounts
and Reserves for Allowances for Doubtful Accounts F-21
Schedule of Consolidated Supplementary Income
Statement Information F-22
Schedule of Real Estate and Accumulated Depreciation F-23
</TABLE>
<PAGE> 14
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Partners
RWB Medical Income Properties 1 Limited Partnership
We have audited the accompanying balance sheets of RWB Medical Income Properties
1 Limited Partnership 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 Partnership's management. Our
responsibility is to express an opinion on these 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
a 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 RWB Medical Income Properties 1
Limited Partnership 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
<PAGE> 15
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,849,227 $ 766,621
Patient accounts receivable, net of allowance
for doubtful accounts of $191,707 in 1997
and $930,869 in 1996 157,399 3,172,977
Interest receivable 38,136 --
Estimated third-party payor settlements -- 956,362
Prepaid expenses and other assets -- 130,423
----------- -----------
Total current assets 5,044,762 5,026,383
Property and equipment, net of accumulated
depreciation and amortization -- 8,067,068
Deferred financing costs, less accumulated
amortization of $0 in 1997 and
$36,093 in 1996 -- 10,985
----------- -----------
Total assets $ 5,044,762 $13,104,436
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities
Current maturities of long-term debt -- 80,000
Accounts payable 250,638 809,741
Accrued payroll and payroll taxes -- 294,126
Accrued vacation -- 190,526
Accrued real estate taxes -- 196
Accrued insurance 150,576 4,888
Accrued management fees -- 55,285
Patient deposits and trust liabilities -- 66,502
Other accrued expenses 268,761 23,203
Estimated third-party payor settlements 1,979,908 513,939
----------- ----------
Total current liabilities 2,649,883 2,038,406
Long-term debt, net of current maturities -- 813,333
Due to affiliates 30,362 260,679
----------- ----------
Total liabilities 2,680,245 3,112,418
----------- ----------
Partners' capital (deficit)
Limited partners 2,364,517 10,290,023
General partners -- (298,005)
----------- ----------
Total partners' capital 2,364,517 9,992,018
----------- -----------
Total liabilities and partners' capital $ 5,044,762 $13,104,436
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 16
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Net patient service revenue $ 5,246,078 $15,194,226 $13,503,777
Other revenue 136,296 32,390 25,998
----------- ----------- -----------
Total revenue 5,382,374 15,226,616 13,529,775
----------- ----------- -----------
Operating expenses
Professional care of patients 4,000,104 8,499,224 6,977,036
Dietary 445,682 1,045,674 1,022,914
Household and plant 506,882 1,165,942 1,169,583
General and administrative 1,488,444 2,345,075 2,122,280
Employee health and welfare 320,760 736,284 733,580
Depreciation and amortization 119,262 495,705 506,128
Lease 463,258 -- --
----------- ----------- -----------
Total operating expenses 7,344,392 14,287,904 12,531,521
----------- ----------- -----------
Operating income (loss) (1,962,018) 938,712 998,254
----------- ----------- -----------
Other income (expenses)
Interest income 326,293 102,804 112,432
Interest expense (32,844) (100,948) (105,564)
Provider fees (51,665) (123,995) (123,995)
----------- ----------- -----------
Total other income (expenses) 241,784 (122,139) (117,127)
----------- ----------- -----------
Income (loss) before recognition
of property sales and
discontinued operations (1,720,234) 816,573 881,127
Gain on sale of properties 8,793,924 -- --
Discontinued operations
Loss on disposal of rental
operations including the
results of operations
during phase-out period -- -- (1,575,134)
Income (loss) from discontinued
rental operations 14,174 (308,413) (207,707)
Loss from discontinued
operations (195,239) -- --
----------- ----------- -----------
Net income (loss) $ 6,892,625 $ 508,160 $ (901,714)
=========== =========== ===========
Net income (loss) attributable to
limited partners $ 6,579,869 $ 472,589 $ (933,103)
Net income (loss) attributable to
general partners 312,756 35,571 31,389
----------- ----------- -----------
$ 6,892,625 $ 508,160 $ (901,714)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 17
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) per limited
partnership unit outstanding:
Continuing operations $ (69.88) $ 33.17 $ 35.79
Sale of properties 364.62 -- --
Discontinued operations (7.35) (12.53) (76.55)
---------- ---------- ----------
Net income (loss) per unit $ 287.39 $ 20.64 $ (40.76)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 18
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Limited Partners General
Units Amount Partners Total
------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)
December 31, 1994 $22,895 $ 15,508,120 $(202,560) $ 15,305,560
Distributions to partners
($173.56 per limited partnership
unit outstanding) -- (3,973,656) (103,400) (4,077,056)
Net income before recognition
of discontinued operations -- 819,448 61,679 881,127
Loss on disposal of rental
operations including the
results of operations
during phase-out period -- (1,559,383) (15,751) (1,575,134)
Loss from discontinued
rental operations -- (193,168) (14,539) (207,707)
------- ------------ --------- ------------
Partners' capital (deficit)
December 31, 1995 22,895 10,601,361 (274,571) 10,326,790
------- ------------ --------- ------------
Distributions to partners
($34.24 per limited
partnership unit outstanding) -- (783,927) (59,005) (842,932)
Net income before recognition
of discontinued operations -- 759,413 57,160 816,573
Loss from discontinued
rental operations -- (286,824) (21,589) (308,413)
------- ------------ --------- ------------
Partners' capital (deficit)
December 31, 1996 22,895 10,290,023 (298,005) 9,992,018
------- ------------ --------- ------------
Distributions to partners
($633.56 per limited
partnership unit outstanding) -- (14,505,375) (14,751) (14,520,126)
Net income (loss) before recognition
of discontinued operations -- (1,599,818) (120,416) (1,720,234)
Gain on property sales -- 8,348,077 445,847 8,793,924
Loss from discontinued operations -- (168,390) (12,675) (181,065)
------- ------------ --------- ------------
Partners' capital (deficit)
December 31, 1997 $22,895 $ 2,364,517 $ -- $ 2,364,517
======= ============ ========= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 19
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from patient care $ 10,683,987 $ 14,147,312 $ 11,607,874
Interest received 288,157 102,804 112,432
Other operating receipts 136,296 32,390 25,998
Cash paid to suppliers and employees (7,865,320) (14,041,741) (11,417,373)
Interest paid (32,844) (100,948) (105,564)
Provider fees (51,665) (123,995) (123,995)
------------ ------------ ------------
Net cash provided (used) by
operating activities 3,158,611 15,822 99,372
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (13,366) (252,550) (501,500)
Proceeds from the sale of property 17,063,375 -- 4,000,000
Collections on notes receivable -- 1,045,102 72,600
------------ ------------ ------------
Net cash provided (used) by
investing activities 17,050,009 792,552 3,571,100
------------ ------------ ------------
Cash flows from financing activities:
Net related party transactions (1,218,199) 19,706 38,127
Principal payments on debt obligations (387,689) (95,377) (82,006)
Distributions to partners (14,520,126) (842,932) (4,077,056)
------------ ------------ ------------
Net cash provided (used) by
financing activities (16,126,014) (918,603) (4,120,935)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 4,082,606 (110,229) (450,463)
Cash and cash equivalents, beginning
of year 766,621 876,850 1,327,313
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,849,227 $ 766,621 $ 876,850
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 20
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net
cash provided by operating activities:
Net income (loss) $ 6,892,625 $ 508,160 $ (901,714)
----------- --------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 119,262 495,705 701,554
Provision for losses on accounts
receivable -- 133,858 57,397
(Gain) loss on disposal of property (8,793,924) -- 1,575,134
(Increase) decrease in:
Patient accounts receivable, net 3,015,578 (691,991) (1,736,914)
Interest receivable (38,136) -- --
Estimated third-party payor
settlements 956,362 (582,624) (373,738)
Prepaid expenses and other assets (85,966) (2,951) 56,071
Increase (decrease) in:
Accounts payable (559,103) (24,962) 406,715
Accrued expenses 229,571 98,521 171,572
Estimated third-party payor
settlements 1,465,969 96,794 157,352
Other liabilities (43,627) (14,688) (14,057)
----------- --------- -----------
Total adjustments (3,734,014) (492,338) 1,001,086
----------- --------- -----------
Net cash provided (used) by
operating activities $ 3,158,611 $ 15,822 $ 99,372
=========== ========= ===========
Supplemental schedule of noncash investing and financing activities:
Note receivable taken for property sold $ -- $ -- $ 1,000,000
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 21
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
RWB Medical Income Properties 1 Limited Partnership (the
Partnership) is a Louisiana partnership formed on July 7, 1984
to invest primarily in income-producing, health care related
properties, such as doctors' office buildings and nursing
homes. The Partnership operated and held for investment
purposes income-producing nursing homes. The Partnership
Offering (Offering) as represented by the Partnership
Prospectus (Prospectus) dated October 11, 1984, provided for
the sale of 25,000 Partnership units at a price of $1,000 per
unit. The Partnership's first closing on the sale of units was
March 20, 1985. The Offering closed on June 30, 1986.
As described in Note 14, 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, prior to giving effect to any
distributions of proceeds from the
transaction, to the general partners and the
limited partners with negative balances in
their capital accounts pro rata in
proportion to such respective negative
balances;
- Second, to the general partners in an amount
necessary to make the balances in their
respective capital accounts equal to 15% of
the sales proceeds remaining following
allocation to the limited partners of an
amount equal to their original capital
contribution; and
- Third, the balance, if any, to the limited
partners.
F-8
<PAGE> 22
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- 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. A
minimum of 1% of losses shall be allocated
to the general partner.
(c) Principles of Consolidation
The financial statements for the year ended December
31, 1997 consolidate the accounts of the Partnership
and its wholly owned subsidiary, Lakecrest Nursing
Home, Inc. since May 1, 1995 (see Note 10). All
material intercompany transactions have been
eliminated.
(d) Cash Distributions
Cash distributions shall be made quarterly within 45
days of 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 100% 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.
(e) Per Unit Information
Limited partnership information per unit is based on
the number of partnership units outstanding of 22,895
in 1997, 1996 and 1995. Federal taxable income per
unit outstanding is not necessarily reflective of a
limited partner's actual per unit amount due to
different tax allocations with respect to tax-exempt
partners.
(f) Land, Building and Related Personal Property
Land, building and related personal property are
stated at cost. Depreciation of buildings is provided
over their estimated useful lives ranging from twenty
to forty years on the straight-line method. Equipment
and other personal property are depreciated primarily
over five to seven years on the straight-line method.
F-9
<PAGE> 23
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(g) Income Taxes
Income is allocated to the individual partners and,
therefore, no income taxes have been provided for in
these financial statements.
(h) Patient Service Revenues
Patient service revenue is recorded at the nursing
homes' established rates with contractual adjustments
($6,733,479 in 1997, $11,576,458 in 1996 and
$7,184,277 in 1995) and provision for uncollectible
accounts, bad debts ($0 in 1997, $133,858 in 1996,
and $57,397 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
estimated final settlements due from or to
third-party programs currently. 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.
(i) Cash Equivalents Policy
For 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.
(j) 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. Amounts in excess of insured
limits were approximately $4,112,452 at December 31,
1997 and $242,789 at December 31, 1996.
(k) 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
F-10
<PAGE> 24
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
revenues and expenses. Actual results could vary from
the estimates that were assumed in preparing the
financial statements.
Note 2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash $4,051,627 $ 15,386
Short-term securities 797,600 751,235
---------- ----------
$4,849,227 $ 766,621
========== ==========
</TABLE>
Note 3. PROPERTY AND EQUIPMENT
On September 3, 1986, the Partnership purchased Four Freedoms Manor
Nursing Home, now known as Southpoint Manor, a 230 bed skilled nursing
home in Miami Beach, Florida, for $7,350,000 plus capitalized
acquisition costs and fees of $504,602.
On October 1, 1986, the Partnership purchased Merry Wood Nursing Home,
a 124 bed skilled nursing home in Elmore, Alabama, for $3,643,294.
Merry Wood was leased to Merrywood Nursing Home, Inc., under a ten year
lease with two five year renewal options. On January 1, 1991, the
Partnership purchased the stock of Merrywood Nursing Home, Inc. for $1.
The transaction was accounted for as a purchase. Effective July 1, 1992
Merrywood Nursing Home, Inc. was merged with the Partnership. The lease
agreement with Merrywood Nursing Home, Inc., described in the preceding
paragraph, was terminated in conjunction with the merger.
On December 17, 1985, the Partnership purchased Merrillville
Convalescent Center (Merrillville), a 180 bed skilled nursing home in
Merrillville, Indiana for $5,376,348. Until December 17, 1992,
Merrillville was leased under two twenty year leases which were
accounted for as capital leases (see Note 5). One lease was for the
building, equipment and related land, and the other was for land
adjacent to the nursing home (17.9 acres). On December 17, 1992, the
lessor was declared to be in default on the lease and the Partnership
assumed operations of the facility. The value of the net investment in
direct financing lease along with unamortized deferred lease
commissions was allocated to the cost of land, building and equipment
at the termination of this lease. No gain or loss was recognized
related to the termination of the lease. Effective January 1, 1993 the
Partnership leased the Merrillville facility under an operating lease
(see Note 5). Effective September 1, 1995, the Partnership sold the
facility (see Note 10).
F-11
<PAGE> 25
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
A summary of property, equipment and accumulated depreciation at
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ -- $ 525,000
Buildings and improvements -- 11,866,426
Furniture and equipment -- 1,309,265
----------- -----------
Total -- 13,700,691
Accumulated depreciation
and amortization -- (5,633,623)
----------- -----------
Net property and
equipment $ -- $ 8,067,068
=========== ===========
</TABLE>
Note 4. NOTES RECEIVABLE
The Articles of Limited Partnership state that no General Partner shall
have the authority to cause the Partnership to make loans other than in
connection with the purchase, sale or disposition of partnership
property. The General Partner believes the following loans were
necessary to preserve the Partnership's assets. The first loan
described was made in order to remove the bankrupt manager of the
Partnership's property. The second loan was made to finance needed
improvements and operations neglected by an insolvent lessee.
The first note is from the manager of one of the nursing homes owned by
the Partnership. The note requires monthly payments of $6,616 through
July of 1996 and bears interest at 8%. These moneys were loaned as part
of an acquisition and financing agreement dated May 23, 1991, whereby
the Partnership contracted with a replacement manager of the
Partnership's facility located in Miami Beach, Florida (Southpoint
Manor). As part of the agreement, the Partnership agreed to retain the
manager of the Southpoint Manor facility for a period of no less than
thirty-six (36) months in consideration for its agreement to manage the
facility and in consideration for its agreement to pay certain sums to
the former management company.
The outstanding receivable related to this note totaled $45,102 at
December 31, 1995. The balance was paid in full during the year ended
December 31, 1996.
The second note was from the lessee of the Merrillville, Indiana
facility. The lessee agreed to continue to operate the facility and
make the improvements necessary to meet certification requirements if
the Partnership would provide current operating capital and suspend
required lease payments (see Note 5 ). The loan, as amended, was a
$1,500,000 revolving credit agreement that was to accrue interest at
prime plus 1% with payments of principal
F-12
<PAGE> 26
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
and interest deferred until July 1, 1995. The receivable related to
this note totaled $734,346 at December 31, 1994. In May of 1995 the
Partnership purchased the stock of the lessee corporation (Note 10),
and forgave the note receivable.
A third note in the amount of $1,000,000 from the purchaser of the
Merrillville, Indiana facility was accepted by the Partnership in
September 1995 (see Note 10). This note, made in conjunction with the
sale of the facility, bore interest at 9%, and called for payments of
interest only through August 31, 1996, at which time the note was paid
in full.
Note 5. PROPERTY LEASES
Merrillville was accounted for as a capital lease until December 17,
1992 as explained in Note 3. Bad debt expense related to Merrillville's
deferred financing lease was recorded in the amount of $110,879 in 1993
in addition to $405,784 written off in prior years.
Effective January 1, 1993 the Partnership leased the Merrillville
facility under an operating lease which provided for monthly rental
payments of $55,000. The lease, however, allowed the tenant to leave
the monthly lease payments unpaid until August 15, 1993 with no
interest or penalties, to allow the tenant to correct the operating
deficiencies of the prior tenant (see Note 3).
Rental income for Merrillville's lease was $220,000 in 1995, and
$660,000 in 1994. Interest totaling $74,628 was accrued in 1994 and
interest of $15,837 and penalties of $6,600 were assessed related to
this receivable in 1993. Rental receivables totaled $1,026,210 at
December 31, 1994. Collectibility of some of this rental income and
related penalties and interest was considered doubtful and,
accordingly, reserves of $272,447 in 1994 and $341,218 in 1993 were
charged to bad debt expense. Loans for operating expenses, as explained
in Note 4, were made to the lessee. The Partnership has other
contractual agreements, as explained in Note 9, with entities that
shared common ownership with the lessee of the Merrillville facility.
Effective May 1, 1995, the Partnership purchased the stock of the
lessee of the Merrillville facility as part of a plan to discontinue
rental operations. In September 1995 the Partnership sold the
Merrillville facility and terminated the lease (Note 10).
F-13
<PAGE> 27
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 6. LONG-TERM DEBT
Long-term debt at December 31, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Prime plus 1% (9.25% at
December 31, 1996) mortgage
note payable in monthly
principal installments of $6,667
plus interest, with a final
balloon principal payment
due March 1, 1998 $ -- $ 893,333
Less amounts due in one year
or less -- 80,000
----------- ----------
$ -- $ 813,333
=========== ==========
</TABLE>
The mortgage note was secured by the Southpoint and Merry Wood real
estate owned by the Partnership. The General Partner had guaranteed the
debt, as well as pledged its stock and partnership interest. The
management companies (see Note 9) had also guaranteed the debt and
entered into a negative pledge agreement whereby they would not pledge,
transfer or encumber their stock while the loan was outstanding. All
management fees were 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.
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 its 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:
F-14
<PAGE> 28
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) as reported $ 6,892,625 $ 508,160 $ (901,714)
Adjustments:
Gain on sale 2,093,644 -- 2,343,824
(Income) loss from consolidated
C-corporation (14,174) 307,496 (142,073)
Depreciation differences (17,657) (64,124) 36,485
Insurance deductible -- -- (48,000)
Travel and entertainment 2,557 8,655 8,797
Bad debt reserve (15,417) 72,430 (582,317)
Vacation accrual (190,523) 31,307 327
----------- --------- -----------
Federal taxable income $ 8,751,055 $ 863,924 $ 715,329
=========== ========= ===========
Federal taxable income per
limited partnership unit
outstanding $ 368.57 $ 35.09 $ 29.06
=========== ========= ===========
</TABLE>
Note 8. RELATED PARTY TRANSACTIONS
QualiCorp, Inc., the parent of RWB Management Corp. (the Managing
General Partner of the Partnership), charged the Partnership property
management fees totaling $49,940 in 1997, $141,924 in 1996 and $121,265
in 1995. QualiCorp charged the Partnership administrative expenses
totaling $238,263 in 1997, $175,565 in 1996, and $166,077 in 1995.
Details of the amounts due to affiliates at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Due to QualiCorp $ 30,362 $ 260,679
========= =========
</TABLE>
See Footnote 14 for sale of affiliated assets.
Note 9. CONTRACTUAL AGREEMENTS
On June 20, 1991, the Partnership entered into a management agreement
whereby the Manager was required to perform certain services for the
Southpoint facility. The agreement had an initial three-year term and
was extended for three additional years in 1994. Fees were based on 6%
of gross collected operating revenues not to exceed 6% of the gross
collected operating revenues from July 1, 1990 to July 1, 1991 and
increased by an inflation factor in 1992 and thereafter. Management
fees charged to the Partnership were $211,470 in 1997, $480,119 in
1996, and $461,653 in 1995.
On July 1, 1992, the Partnership entered into a management agreement
whereby the Manager was required to perform certain
F-15
<PAGE> 29
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
services for the Merry Wood facility. The agreement had an initial
five-year term with one additional five-year option. Fees were based on
5% of gross collected operating revenues, excluding revenues solely
attributed to reimbursement for provider taxes. Management fees charged
to the Partnership were $78,636 in 1997, $183,297 in 1996 and $176,247
in 1995.
The management agreements were amended on January 1, 1995. The
amendment called for fixed monthly management fees of $38,471 at
Southpoint and $14,687 at Merry Wood, 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 agreements expire December 31, 1998. Both agreements contained
termination on sale clauses that were 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 14 includes
the terminating settlement.
The above agreements are with entities that are commonly owned. The
property manager who owed the Partnership the first of the notes
receivable described in Note 4 along with the lessor of the
Merrillville, Indiana property who, prior to being purchased by the
Partnership (Note 10), owed the Partnership the second note receivable
described in Note 4 and the unpaid lease payments described in Note 5,
are or were commonly owned with the above entities. Additionally, the
seller of the equipment purchased at Merrillville as described in Note
10, is commonly owned with the above entities.
Pursuant to the sales agreement described in Note 14, 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 operating expenses. The
base rental lease expense for
F-16
<PAGE> 30
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
the two months was $409,558 and gross revenue was $53,700 in excess of
operating expense for the same period. Total operating lease expense
was $463,258.
Note 10. DISCONTINUED OPERATIONS
Effective May 1, 1995, the Partnership purchased the stock of the
lessee, now known as Lakecrest Nursing Home, Inc. for $500. The
Partnership took over operations with the intent of selling the
facility and discontinuing all rental activities. The transaction is
accounted for as a purchase. In June 1995, the Partnership purchased
various items of equipment that had been leased by Lakecrest Nursing
Home, Inc. for $218,855. As explained in Note 9, the Partnership has
other contractual agreements, with entities that shared common
ownership with the lessee of the Merrillville facility. On September 1,
1995, the Partnership sold the Merrillville facility in exchange for a
total of $5,000,000, payable with $4,000,000 in cash and note
receivable of $1,000,000 (Note 4). The results of operations are
consolidated for the period from May 1, 1995 to December 31, 1995 and
for the years ended December 31, 1997 and 1996, and are included in the
loss on disposal of rental operations. Pro forma results of operations
for December 31, 1995 as though the Partnership and Lakecrest Nursing
Home, Inc. had combined at the beginning of 1995 would have been stated
as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Revenues $14,897,120
===========
Net income (loss) $(1,099,390)
===========
Net income (loss) per limited
partnership unit outstanding $ (48.79)
===========
</TABLE>
Loss on disposal of rental operations at December 31, 1995 reflects
the loss related to operations subsequent to April 30, 1995 totaling
$336,183 on revenues of $1,414,947 and loss on sale of assets totaling
$1,238,951.
Note 11. CONTINGENCIES
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.
F-17
<PAGE> 31
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 12. 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Private pay patients 17.72% 15.35% 17.87%
Medicaid 42.15% 43.50% 50.57%
Medicare 40.13% 41.15% 31.56%
------ ------ ------
Total 100.00% 100.00% 100.00%
====== ====== ======
</TABLE>
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 13. 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:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short period to maturity of the instruments.
The other financial instruments of the Company are short-term
assets and liabilities whose carrying amounts reported in the
F-18
<PAGE> 32
balance sheet approximate fair value. These items include accounts
receivable and accounts payable.
Note 14. SALE OF ASSETS
On February 3, 1997, RWB Medical Income Properties 1 Limited
Partnership entered into a purchase agreement with Omega HealthCare
Investors, Inc. to sell all of the real and personal property of the
nursing home facilities.
The purchase price was allocated among the facilities as follows:
<TABLE>
<CAPTION>
<S> <C>
Southpoint Manor (230 beds) $12,550,000
Merry Wood Lodge (124 beds) 6,050,000
-----------
Proceeds from sale $18,600,000
===========
</TABLE>
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 $2,784,000. They
included $1,248,317 for termination of the management agreement as
explained in Note 9.
The closing took place on March 31, 1997. Approximately $600,000 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 will be available to the Partnership in the
event that these obligations do not exceed the funds held in escrow.
As described in Note 9, 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-19
<PAGE> 33
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Partners
RWB Medical Income Properties 1 Limited Partnership
Our report on our audits of the basic financial statements of RWB
Medical Income Properties 1 Limited Partnership 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-20
<PAGE> 34
RWB MEDICAL INCOME PROPERTIES 1 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
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 930,869 $ 837,727 $ 1,233,671
Amounts charged to revenue (739,162) (40,716) 160,323
Bad debt expense and recording
of losses realized related to
Merrillville's operating lease -- -- (613,665)
Write-offs -- 133,858 57,398
--------- --------- -----------
Balance at end of year $ 191,707 $ 797,011 $ 780,329
========= ========= ===========
</TABLE>
F-21
<PAGE> 35
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
SCHEDULE X
CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Professional care of patients
Salaries and wages $1,764,215 $4,000,223 $3,982,347
Ancillary service expense 1,684,693 3,343,906 1,927,683
Supplies & pharmaceuticals 346,106 700,352 625,828
General and administrative
Salaries and wages 277,407 446,017 359,481
Accounting and auditing 65,295 121,760 117,375
Insurance 293,118 327,224 316,009
Property tax 57,088 134,365 133,409
Management fees 290,106 663,416 637,900
Property management fees 49,940 141,924 121,265
Cost reimbursement 238,263 175,565 166,077
Dietary
Food cost 192,231 444,992 433,544
Household and plant
Repairs and maintenance 41,953 63,967 107,613
Utilities 119,654 281,561 267,383
Depreciation and amortization $ 119,262 $ 495,705 $ 701,554
========== ========== ==========
</TABLE>
F-22
<PAGE> 36
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INITIAL COST COSTS CAPITALIZED
TO PARTNERSHIP(A) SUBSEQUENT TO
ACQUISITION
BUILDING AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST
- ------------------ ------------ ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
SOUTHPOINT MANOR -- $ 500,000 $ 7,354,602 $1,671,208 $ --
MERRYWOOD -- 25,000 3,743,335 419,912 --
------------ ----------- ------------ ---------- ---------
-- $ 525,000 $11,097,937 $2,091,120 $ --
============ =========== ============ ========== =========
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
GROSS AMOUNT AT WHICH CARRIED DEPRECIATION
AS OF DISPOSITION DATE(B) IN LATEST
STATEMENT OF
BUILDING AND ACCUMULATED DATE OF DATE OPERATION IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ------------------ ----------- ------------ ----------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SOUTHPOINT MANOR $ 500,000 $ 9,025,810 $ 9,525,810 $4,200,716 1984 09/03/86 30 YEARS
MERRYWOOD 25,000 4,163,247 4,188,247 1,549,816 1965/1975 10/01/86 30 YEARS
----------- ------------ ----------- ------------ ------------ -------- ------------
$ 525,000 $13,189,057 $13,714,057 $5,750,532
=========== ============ =========== ============
</TABLE>
(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 disposition date for
Federal Income tax purposes was approximately $13,714,057.
(C) Reconciliation of real estate owned at December 31, 1997, 1996, and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 13,700,691 $13,454,968 $ 18,884,656
Additions 13,366 245,723 501,500
Reductions -- -- (142,335)
Sale of properties (13,714,057) -- --
Sale of Merrillville facility -- -- (5,788,853)
------------ ----------- ------------
Balance at end of period -- $13,700,691 $ 13,454,968
============ =========== ============
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 5,633,623 $ 5,074,404 $ 5,386,058
Depreciation expense 116,909 559,219 701,554
Reductions -- -- (142,335)
Sale of properties (5,750,532)
Sale of Merrillville facility -- -- (870,873)
------------ ----------- ------------
Balance at end of period -- $ 5,633,623 $ 5,074,404
============ =========== ============
</TABLE>
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP FOR
THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,849,227
<SECURITIES> 0
<RECEIVABLES> 349,106
<ALLOWANCES> 191,707
<INVENTORY> 0
<CURRENT-ASSETS> 5,044,762
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,044,762
<CURRENT-LIABILITIES> 2,649,883
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,364,517<F1>
<TOTAL-LIABILITY-AND-EQUITY> 5,044,762
<SALES> 0
<TOTAL-REVENUES> 5,382,374
<CGS> 0
<TOTAL-COSTS> 7,344,392
<OTHER-EXPENSES> (274,628)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,844
<INCOME-PRETAX> (1,720,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,720,234)
<DISCONTINUED> (181,065)
<EXTRAORDINARY> 8,793,924
<CHANGES> 0
<NET-INCOME> 6,892,675
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>REPRESENT TOTAL PARTNERSHIP CAPITAL INCLUDING NET INCOME NET OF
DISTRIBUTIONS.
</FN>
</TABLE>
