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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996).
For the fiscal year ended December 31, 1996
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18158
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QUEST HEALTH CARE INCOME FUND I, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 58-1697906
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1117 Perimeter Center West Suite E-210 Atlanta, GA 30338
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (770) 671-1014
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Formerly: Southmark/CRCA Health Care Income Fund I, L.P.
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
None None
------------------------- -----------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
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Limited Partnership Interests
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, 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 (Section 229.405 of this chapter) 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 ]
All of the registrant's 262,183 limited partnership interests are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for the limited
partnership interests and transfers of interests are subject to certain
restrictions.
Documents Incorporated by Reference: See Page 32
Exhibit Index: See Page 32-34
TOTAL OF 35 PAGES
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Part I
ITEM 1 BUSINESS
Quest Health Care Income Fund I, L.P. (the Partnership), formerly
Southmark/CRCA Health Care Income Fund I, L.P., was organized on July 16, 1986,
as a limited partnership under the provisions of the Delaware Revised Uniform
Limited Partnership Act. On September 16, 1986, a Registration Statement on
Form S-1 was declared effective by the Securities and Exchange Commission
whereby the Partnership offered for sale $30,000,000 of limited partnership
interests (the Units). The Units represent equity interests in the Partnership
and entitle the holders thereof to participate in certain allocations and
distributions of the Partnership. The sale of Units closed in June 1987, with
262,183 units sold at $100 each, or gross proceeds of $26,218,300 to the
Partnership.
The general partner of the Partnership is Quest Rescue Partners I-1, L.P.
(Quest), whose sole limited partner is Quest Financial Corp. and whose sole
general partner is Quest Rescue Partners I-1 Corp. Quest became the general
partner of the Partnership on August 1, 1990.
The former General Partner of the Partnership was Southmark Investment Group
86, Inc. (SIG), a Nevada corporation and a wholly-owned subsidiary of Southmark
Corporation (Southmark).
The Partnership's primary business and only industry segment is to own, invest
in, operate and ultimately dispose of a diversified portfolio of healthcare
related real properties for the benefit of its Partners. At December 31, 1996,
the Partnership held interests in four nursing home properties as described in
Item 2 below and the Partnership employed approximately 281 full and part time
persons, including administrative, nursing, dietary, laundry, housekeeping,
social services and maintenance personnel.
The services provided at the Partnership's long-term care facilities consist of
intermediate and skilled nursing care. Intermediate care consists of providing
assistance or supervision with daily activities such as dressing, bathing, diet
or medication. Skilled nursing care consists of 24 hour a day services of
registered nurses and related medical services prescribed by the resident's
physician. Under the federal Omnibus Budget Reconciliation Act (OBRA), which
became effective October 1, 1990, the distinction between skilled nursing and
intermediate care facilities was eliminated. The legislation imposed a variety
of quality of care requirements on all long-term care facilities, with
resulting increases in operating costs. The legislation imposed more stringent
requirements regarding staff, screening and assessment of residents, residents'
rights and survey and certification requirements. It also subjects facilities
to a number of sanctions, including civil money penalties, for substandard
survey results. Under this legislation, states are required to amend their
Medicaid plans to make an appropriate adjustment in the rates at which they
reimburse long-term care facilities in order to reflect the costs of these
requirements. There is, however, no requirement that the rate adjustments
actually cover all new costs, nor are there any assurances that budgetary
constraints of individual states will sustain the increased costs associated
with these federal mandates.
2
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During 1995, the final regulations pertaining to OBRA 87 were instituted. OBRA
87 contained, among other things, new stringent survey requirements with severe
penalties for non-compliance. In 1996, the expenses of the facilities
increased as a result of increased personnel costs necessary to comply with
OBRA 87. The Partnership's facilities that provide skilled care are certified
to receive benefits under the Federal Health Insurance for the Aged Act
(Medicare) and under joint Federal and state funded programs administered by
the various states to provide medical assistance to the indigent, known
generally as Medicaid. Benefits under Medicare are for skilled care only.
However, Medicaid plans provide for different levels of reimbursement,
depending upon the level of care and services rendered.
Medicaid reimbursement formulas are established in accordance with Federal
guidelines by each state with the approval of the Federal government and vary
from state to state. Typically they provide for reimbursement for specified
services up to specified limits based on historical costs, with adjustments for
inflation. Federal law requires that Medicaid reimbursement rates be
reasonable and adequate to meet the cost which must be incurred by efficiently
and economically operated facilities in order to provide care and services in
conformity with applicable laws, regulations and quality and safety standards.
Medicaid payments are set either retrospectively, prospectively, on a flat rate
basis or a combination thereof. The Medicaid rates for the Partnership's
properties are calculated prospectively for two properties and retrospectively
for one property. The Medicare and Medicaid programs are subject to statutory
and regulatory changes, administrative rulings, political fiats,
interpretations of policy and determinations by intermediaries, and to
governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to long-term care facilities, such as
those owned by the Partnership.
In the operation of health care facilities, the Partnership competes with a
number of individuals and entities, including large, national nursing home
chains and small, locally owned nursing care facilities. Some competing
operators have greater financial resources than the Partnership or may operate
on a nonprofit basis or as charitable organizations. The degree of success
with which the Partnership's facilities compete varies from location to
location and depends on a number of factors. There is limited, if any,
competition in price with respect to Medicaid and Medicare patients, since
revenues for services to such patients are strictly controlled and based on
fixed rates and cost reimbursement principles.
In light of these factors, the Partnership will continue to seek to meet
competition in each locality by improving the appearances of the properties,
improving the quality of service provided at each facility, establishing a
reputation within the local medical communities for providing competent care
services, and by appropriately responding to regional variations in
demographics and tastes.
During 1995, the Partnership sold its interests in seven facilities to an
unaffiliated third party. See Part II, Item 7, for further discussion.
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The following table sets forth information regarding the average daily census
and sources of patient revenues at the Partnership's facilities:
<TABLE>
<CAPTION>
Average Daily Census Revenues for
for Year End Year Ended
December 31, December 31,
------------------------------------ -----------------------
1994 1995 1996 1994 1995 1996
--------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medicaid 430 70% 139 69% 142 71% 63% 59% 57%
Private Pay 146 24% 42 21% 39 19% 20% 18% 17%
VA, Medicare and Other 40 6% 20 10% 20 10% 17% 23% 26%
--- --- --- --- --- --- --- --- ----
616 100% 201 100% 201 100% 100% 100% 100%
=== === === === === === === === ====
Overall Occupancy Rate 84% 87% 88%
=== === ===
</TABLE>
Because of a changing census mix, the occupancy required for a facility to
achieve an operating break-even point cannot be precisely determined.
Generally, a greater ratio of Medicaid patients will require a higher occupancy
to reach a break-even point. However, a high Medicare census can change the
break-even point due to a high reimbursement rate, even though expenses
associated with Medicare qualified residents are significantly higher than
Medicaid.
All licensed beds at the Partnership's facilities are being utilized, except
that in some instances a small number of rooms have been taken out of service
to be utilized as office space and ancillary support areas.
ITEM 2 PROPERTIES
The following table sets forth the investment portfolio of the Partnership at
December 31, 1996. The buildings and the land on which they are located are
owned by the Partnership and its majority owned partnerships in fee.
The Partnership's majority owned partnerships were a creation of Southmark to
enable the Partnership to acquire properties from Southmark affiliates without
paying transfer taxes, or having to perform relicensing of the homes more than
once. The Southmark affiliate had already paid the tax and relicensed the
facilities prior to the acquisition by the Partnership. There appears to have
been no adverse economic impact on the Partnership by this arrangement. Quest
maintained the arrangement to avoid creating tax and relicensing problems
associated with dissolving the majority owned partnerships. Quest has not
received any financial benefit from this ownership structure.
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ITEM 2 PROPERTIES continued
<TABLE>
<CAPTION>
Properties Occupancy
at net Rate Date
Property Description book value for 1996 Acquired
- -------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Burley Care Center Skilled Care
Burley, Idaho Nursing Home
68 Licensed Beds $477,414 80% June 1987
Hearthside Care Center Intermediate Care
Coos Bay, Oregon Nursing Home
92 Licensed Beds $132,453 89% June 1987
South Salem Intermediate Care
Care Center Nursing Home
Salem, Oregon 70 Rentable Beds $53,490 93% June 1987
Comanche View Intermediate
Nursing Home Care Nursing Home
Ft. Stockton, Texas 58 Rentable Beds $75,171 Closed August 1987
$738,528
- ------------------------------------------ =======
TOTAL: 4 Nursing Homes 288 Beds
</TABLE>
ITEM 3 LEGAL PROCEEDINGS
The State of Idaho sought a deficiency lien against the Partnership's Idaho
facility for sales and use taxes for periods prior to ownership by the
Partnership. The total amount of the state claim is $36,410. Management of
the Partnership is discussing a settlement of this matter with the state and
has recorded a provision of $27,308 in the Partnership's Financial Statements.
Management is of the opinion that the final resolution will not have a material
adverse effect on the Partnership's financial position. The Partnership plans
to continue to vigorously defend against these claims. As of year end 1996,
the state was reassessing their position relative to these claims.
A wrongful termination complaint against one of the Partnership facilities is
proceeding as expected. Management believes the complaint is without merit and
other than the cost of defending against the claim, no material impact on the
Partnership is expected.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1996.
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Part II
ITEM 5 MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND RELATED
SECURITY HOLDER MATTERS
(A) No established public trading market for the Units exists nor is one
expected to develop.
<TABLE>
<S> <C> <C>
(B) Title of Class Number of Record Unit Holders
-------------- -----------------------------
Limited Partnership Interests 3,258 as of February 28, 1997
</TABLE>
(C) No cash distributions were made to the Limited Partners in 1990, 1991,
1992, 1993, 1994, or 1996. Cash distributions of $786,489 and $585,713 were
made to the Limited Partners in the years ended December 31, 1995 and 1989,
respectively. No distributions have been made to the General Partner. See
the Liquidity and Capital Resources section of Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth a summary of certain financial data for the
Partnership. Write-downs of properties, as discussed in Notes A-4 and F of the
Financial Statements have materially impacted the comparability of net losses
in 1993 and 1994. The settlement of litigation impacts 1993 and 1994 financial
information. The sale of seven facilities in 1995 resulted in a reduced net
loss. This summary should be read in conjunction with the Partnership's
financial statements and related notes appearing in Item 8.
<TABLE>
<CAPTION> Years ended December 31,
-------------------------------------------------------------------------------
Statements of Operations 1996 1995 1994 1993 1992
- ------------------------ ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenue $ 7,768,372 $ 9,806,965 $20,482,437 $19,322,743 $18,752,220
Net loss (396,451) (130,741) (5,780,917) (2,272,373) (586,809)
Net loss per (1) (2) (3)
weighted average Limited
Partnership Unit (1.50) (.49) (21.83) (8.58) (2.22)
Distributions paid per (1) (2) (3)
weighted average Limited
Partnership Unit -0- 3.00 -0- -0- -0-
</TABLE>
(1) Includes gain on sale of seven facilities of $103,988 or $ .39 per unit.
(2) Includes extraordinary gain on settlement of Healthcare Services Group
payables of $64,977 or $.24 per unit and loss from writedown of properties of
$5,517,275 or $(20.83) per unit.
(3) Includes extraordinary gain on settlement of Southmark payables of
$830,637 or $3.14 per unit and loss from write down of properties of $1,976,615
or $(7.46) per unit.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
Balance Sheet 1996 1995 1994 1993 1992
- ------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Property & Equipment,net $ 738,528 $ 753,494 $ 4,467,143 $10,122,142 $12,522,654
Total Assets 3,249,976 3,577,065 7,245,423 12,587,006 15,480,701
Long-term obligations,
less current maturities - 7,275 91,095 131,936 105,687
Partners' Equity 2,211,570 2,608,021 3,525,251 9,306,168 11,578,541
</TABLE>
6
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing
forward-looking statements may be found in this section and in the section
entitled "Business." Without limiting the foregoing, words such as
"anticipates," "expects," "intends," "plans" and similar expressions are
intended to identify forward-looking statements. These statements are subject
to a number of risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. The Partnership
undertakes no obligation to update these forward-looking statements to reflect
future events or circumstances.
Results of Operations
During 1996, the Partnership continued its efforts to sell its remaining
facilities. At year end, after extensive negotiations between competing
offerors, the Partnership reached an agreement in principal, to sell the two
Oregon facilities. Negotiations continue to sell the Idaho and Texas
facilities.
In February 1995, the Partnership sold its interests in seven of its properties
to an unaffiliated third party and recognized a gain of $103,988. In August
1995, $786,489 or $3/unit was distributed to the limited partners from sales
proceeds.
Neither the general partner nor its affiliates received any remuneration or
distributions from the sale of facilities.
Revenues:
Operating revenue for the twelve month period ended December 31, 1996 declined
$2,038,593, primarily as a result of the facilities sold in 1995. On a pro
forma basis, removing the affect of the sales, revenue increased approximately
$312,000 for the period. This increase is derived from improved Medicaid
occupancy at Hearthside and South Salem.
Operating revenue for the twelve month period ended December 31, 1995 decreased
$10,675,472 when compared to the prior period. This was primarily the result
of selling the Partnership's interests in seven facilities in May 1995. On a
pro forma basis, removing the affect of the sales, revenues increased $521,530
in 1995 as compared to the same period in 1994. The primary reason for this
was increased Medicare utilization and occupancy increases at Hearthside. The
other facilities remained static. Revenue in 1995 included $2,344,502 related
to the seven sold facility interests.
Operating revenues for 1994 included $359,075 related to Comanche View. Please
see the discussion of the closure of the facility under "Expenses". Operating
revenue in 1994 included $13,542,770 related to the seven sold properties.
Receivables from patients covered by Medicaid/Medicare do not present a
significant credit risk as the Medicaid/Medicare system is federally financed.
7
<PAGE> 8
Receivables are, however, subject to disallowance by Medicare and Medicaid upon
audit. Such governmental audits are typically one to two years in arrears.
Inflation is not a material factor due to the fact that the reimbursement rates
are set by governmental agencies, however such agencies are not obligated to
increase reimbursements at the rate of inflation.
The significant components of accounts receivable at December 31, 1995 and 1996
are:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Medicaid 34% 32%
Private Pay 15% 21%
VA, Medicare & Other 51% 47%
------ ------
100% 100%
====== ======
</TABLE>
Payments by both the state and federal governments are normally received within
60-90 days. As of December 31, 1996, the receivables of the Partnership,
represent approximately 45 days of revenue.
EXPENSES:
For the twelve month period ended December 31, 1996, total expenses decreased
$1,892,003, primarily the result of the sold facilities. On a pro forma basis,
removing the affect of sales, total expenses increased $403,809. The majority
of this increase related to increased staffing required by OBRA 87 and by wage
competition from non-health care related employers.
For the twelve month period ended December 31, 1995, total expenses decreased
$16,229,896. On a pro forma basis, eliminating the effect of the seven sold
facility interests, expenses increased $288,284 in 1995 as compared to the same
period in 1994. This is primarily the result of costs associated with
increased Medicare utilization and OBRA 87 driven personnel costs. Supply and
ancillary expense increased as a result of increased occupancy and Medicare
utilization. Total expenses in 1995 and 1994 included $2,261,731 and
$13,354,223, respectively, relating to the seven sold facility interests.
Consistent with the Partnership's accounting policy as described in Note A, the
Partnership has reflected the property and equipment as of December 31, 1994 at
the lower of cost (as previously adjusted for writedowns if applicable) or
estimated net realizable value, determined on an individual nursing home basis.
At December 31, 1994, "Loss from Writedown of Properties" was $5,517,275 which
included writedowns of Property and Equipment for the Hearthside, South Salem
and Burley facilities of $1,107,603, $355,252 and $583,557, respectively, which
represented management's opinion of the writedown necessary to adjust
facilities to estimated net realizable value (Note F and G). While occupancy
at the Hearthside facility has increased since the first quarter of 1994, the
writedown was necessary to conform to the Partnership's accounting policy. As
of December 31, 1996, management estimates that fair value exceeds the carrying
value and, accordingly, does not expect any further material adjustments under
Statement of Accounting Standard No. 121 unless warranted by a future change in
market conditions or other relevant factors.
8
<PAGE> 9
The South Salem facility, located in Oregon, continues to operate near
capacity. However, competition from the local hospital, the Oregon Managed
Care System and a competitive labor market indicate that future earnings of the
facility will be suspect. The Burley facility is located in Burley, Idaho, a
non-certificate of need state, thus there are no restrictions on the
construction of competing facilities and the facility is exposed to market
competition. In 1996, the impact of new assisted living facilities and the
conversion of the old hospital building into a nursing home has resulted in
reduced occupancy at Burley.
On February 28, 1995, the Partnership sold to an unaffiliated third party its
Partnership interests in seven facilities. The contract for the sale provided
for cash consideration adjustments based on changes in working capital
including the change in the 25% discount proportionate to changes in accounts
receivable occurring between December 31, 1994 and the date of closing of
February 28, 1995, which was calculated subsequent to the first quarter of
1995.
Based on the carrying value of the seven facilities at December 31, 1994, the
Partnership expected to incur a loss on the sale of its interests in the
facilities and, accordingly, recognized this loss in the accompanying 1994
statements of operations of $3,470,863 consisting of a writedown of property
and equipment of $3,166,590 and $304,273 for the 25% discount of accounts
receivable.
Hearthside is located in the town of Coos Bay in a remote part of Oregon. Coos
Bay was dominated by the lumber industry which has been decimated by various
government regulations. In view of the depressed occupancy at Hearthside and
the limited potential for growth in the area, the Partnership reviewed the
expected undiscounted cash flows over the remaining life of the property and
compared the same to the current carrying value. After reviewing alternative
uses, such as participating in Oregon's new, but unfunded, crisis intervention
program, management determined that it was probable that the carrying value of
Hearthside would not be fully recovered through operations over its remaining
estimated useful life. The Financial Statements recognized a write down of
carrying value of $805,733, at December 31, 1993. In 1994 and 1995, occupancy
continued to improve as has Medicare utilization. In 1996, revenue and expenses
increased at the same rate, indicating income for the facility has plateaued.
In addition, Comanche View, a facility two hours south of Odessa, located in
the far west Texas town of Fort Stockton, has confronted several serious
challenges. First, despite state controls over construction of nursing
facilities and a limited marketplace, a new 120 bed nursing facility was built
near the Comanche facility in 1993. In addition, two physicians closed their
practices and moved to Alpine 100 miles southwest leaving three physicians in
town. Alternative uses for the facility such as adult day care or a rural
health clinic are of low probability because of design constraints of the
physical plant. In light of these factors and the limited population of the
area, management considered it probable that the facility would not generate
future cash flow. The facility was written down at December 31, 1993 to its
net realizable value of $100,000. The Financial Statements recognized a write
down of carrying value of $1,170,882, at December 31, 1993. Included in
operating expenses for 1995 and 1994 were $95,817 and $553,155, respectively,
related to Comanche View.
Ancillary Revenue and Expense is a term that describes specialized services
provided by third party unaffiliated vendors. These services include speech,
9
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occupational, physical and occasionally intravenous therapies. These revenues
and expenses are subject to certain cost limitations and do not materially
affect the profitability of a facility. However, the ability to provide these
services enables a facility to accept residents reimbursed under the federal
Medicare system. Generally increases in ancillary expense will be reflected in
increased Medicare revenues. Typically, the Medicare system reimburses at a
higher daily rate than Medicaid. These Medicare residents are people, not
necessarily elderly, who, under another set of regulations, must be discharged
from hospitals before they are well enough to go home. The result is that
nursing homes that once were a final stop in life's journey have become more
like auxiliary hospitals with a substantially shortened length of stay.
However, the pursuit of higher reimbursement Medicare residents limits the
number of Medicaid beds available to the indigent elderly. These people will
be required to live with relatives or find low skilled "foster care" or
community based services.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Partnership held cash and cash equivalents of
$1,371,093, a decrease of $175,270 since December 31, 1995.
At December 31, 1995, the Partnership held cash and cash equivalents of
$1,546,363 which represents an increase of $1,275,770 since December 31, 1994
as a result of the sale of the Partnership's interests in the facilities
referenced above, less the distributions made to the limited partners.
On February 28, 1995, the Partnership sold its partnership interests in seven
of its facilities to an unaffiliated third party. The contract called for
adjusting working capital, as defined, to exclude interpartnership accounts and
the current portion of long term debt and to reflect a 25% discount on accounts
receivable at closing. The contract also provided for a cash consideration
adjustment based on changes in working capital including the change in the 25%
discount proportionate to changes in accounts receivable occurring between
December 31, 1994 and the date of closing of February 28, 1995, which was
determined and collected during the third quarter of 1995.
At closing, the Partnership received initial consideration of $2,734,651,
consisting of cash of $2,133,359 and debt retired from sales proceeds of
$601,292. Subsequently, the Partnership determined that $417,254 of additional
cash was due to the Partnership from post closing adjustments. In addition the
purchaser assumed debt related to equipment of approximately $103,000. Total
consideration was therefore $3,258,905. The Partnership made a final
determination of adjusted working capital when the Partnership's accountants
completed certain special procedures, during the third quarter. A distribution
of $786,489 to the limited partners was made during the third quarter, subject
to establishing adequate reserves for the continued operation of the
Partnership. The balance sheet of the Partnership reflects the effects of the
sale of the Partnership's interests in the seven facilities. The remaining
facilities are reflected at estimated net realizable value.
Neither the general partner of the Partnership nor its affiliates received any
remuneration or distributions of sales.
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<PAGE> 11
The Partnership is seeking to liquidate the Partnership's interests in its
remaining facilities. As stated above, an agreement in principal was reached
to sell the two Oregon facilities. Negotiations have continued for the sale of
the last two facilities. Based on discussions, to date, it is believed the
Partnership will be in a position to liquidate its interests in sufficient time
to allow the final distribution of proceeds to the limited partners on or about
June 30, 1997.
Medicare is a federal entitlement program and Medicaid (the source of the
majority of the Partnership's revenue) represents an entitlement program
administered differently by each state which is partially funded by the Federal
government. In August 1993, Congress enacted Title XIII of OBRA 93. This act,
among other things, taxed social security benefits received by the elderly and
further limited payments under state Medicaid programs for which federal
matching would be permitted. In October 1993, the Health Care Financial
Administration (HCFA) implemented a freeze on Medicare reimbursement, on
routine cost limits, certain Part B ancillaries and prospective payment system
rates. In addition, HCFA eliminated the return on equity component of the
reimbursement rate. Further, by the end of 1993, several states, because of
federal actions and/or budgetary difficulties, had either taken action to
curtail the growth in entitlement programs and/or had indicated that future
action was possible. In 1996, the latest concept continues to be "block
grants" to the states and significant Medicare budgetary reductions. What this
means to nursing facilities cannot currently be determined by management.
Despite the fact that health care reform proposals at the federal level are
dead, activities at the state level continue and are encouraged by HCFA. Some
examples of state level actions are: Oregon's plan, the location of two of the
Partnership's facilities, is to convert its Medicaid reimbursement system to a
managed care program administered by third parties such as Blue Cross/Blue
Shield; Idaho, location of the Partnership's other operating facility, is
attempting to significantly reduce Medicaid reimbursement levels. The impact
is not yet quantifiable.
The Partnership has no established credit lines with outside lending sources
and relies solely on cash flow and cash reserves to conduct Partnership
business. There are no material commitments for capital improvements at the
facilities.
Private pay sources accounted for 17% of the Partnership's total revenues in
1996, all other revenue came from federal and state entitlement programs. Any
reduction in these programs will have an immediate impact on the total revenue
and cash flow of the Partnership.
The Partnership's December 31, 1994 Balance Sheet reflected the lower of costs
or estimated net realizable value. The significant writedown of property and
equipment in 1994 was based on the Partnership's future plans for its
interests in the nursing facilities and the attendant accounting policies. At
December 31, 1993, the nursing facilities were considered operating assets
since it was the Partnership's plan to continue to operate the facilities as it
had in the past. Consistent with generally accepted accounting principals
("GAAP") and the Partnership's accounting policy for operating assets, property
and equipment were carried in the 1993 balance sheet at the lower of cost or
estimated undiscounted future cash flows expected to be generated over the
remaining estimated useful
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<PAGE> 12
life of the property and equipment. The remaining estimated useful life of the
property and equipment at December 31, 1993 was approximately 23 years.
It is not the objective of GAAP to reflect operating property and equipment at
estimated market value less costs of disposal, otherwise known as estimated net
realizable value. Instead, under GAAP most property and equipment is carried at
cost less accumulated depreciation taken over the years of prior service.
During 1994, as described in the notes to the Financial Statements, the
Partnership determined that it would market for sale its interests in the
nursing facilities. Since the future life under these circumstances is the
length of time required to dispose of the assets as opposed to the much longer
term of the assets remaining useful operating life, GAAP and the Partnership's
accounting policy require that the property and equipment under these
circumstances be carried at the lower of cost (the then existing carrying
value) or estimated net realizable value. Accordingly, under these
circumstances, the time value of money (over approximately 22 remaining years),
the risk of capital invested, local, national and industry conditions including
competition, state and federal reimbursement plans, patient mix, among many
other factors, are taken into consideration. Consequently, as a result of a
change in the Partnership's future direction, a loss on property and equipment
representing the difference in (1) the carrying value as determined based on
the lower of cost or estimated undiscounted future cash flows over the
remaining estimated useful life for operating assets, and (2) the lower of cost
or estimated net realizable value was recognized during 1994 in the amount of
$5,213,002 and is reflected in the Financial Statements.
The Partnership's December 31, 1995 Balance Sheet reflects the estimated net
realizable value of the remaining facilities. The significant writedown of
property and equipment in 1994 was based on the Partnership's future plans for
its interests in the nursing facilities and the attendant accounting policies.
In March 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 121 - "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which is effective for
fiscal years beginning after December 15, 1995. Since the Partnership has
recognized impairment losses as discussed above, effectively adjusting the
carrying value of its long-lived assets to estimated net realizable value, at
the date of writedown, and as subsequently depreciated, no material adjustment
from the current carrying value to fair value is required.
12
<PAGE> 13
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUEST HEALTH CARE INCOME FUND I, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
--------
<S> <C>
Report of Independent Accountants 14
Balance Sheets as of December 31, 1996 and 1995 15 - 16
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 17
Statements of Partners' Equity for the Years
Ended December 31, 1996, 1995 and 1994 18
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 19 - 20
Notes to Financial Statements 21 - 29
Schedule II - Valuation and Qualifying Accounts
for the Years Ended December 31, 1996, 1995 and 1994 30
</TABLE>
All other schedules are omitted since they are not required, are not applicable
or the financial information required is included in the financial statements
or the notes thereto.
13
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners
Quest Health Care
Income Fund I, L.P.
We have audited the financial statements and financial statement schedule of
Quest Health Care Income Fund I, L.P. listed in the index of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial statement schedule 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 Quest Health Care Income Fund
I, L.P. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
As discussed in Note F to the accompanying financial statements, the
Partnership decided to market for sale its operating property and equipment
during 1994. Prior to that decision, in accordance with generally accepted
accounting principles, the Partnership carried operating property and equipment
in its consolidated financial statements at the lower of cost or estimated
undiscounted future cash flows, before interest charges, on an individual
property basis. As a result of this decision, the Partnership has written down
its property and equipment to estimated net realizable value as determined by
management through a charge to earnings of $5,517,275 in 1994. As discussed in
Note I, the Partnership is currently marketing its operating assets for sale
and intends to liquidate the Partnership thereafter.
Coopers & Lybrand LLP
Raleigh, North Carolina
March 27, 1997
14
<PAGE> 15
QUEST HEALTH CARE INCOME FUND I, L.P.
BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,371,093 $1,546,363
Accounts receivable, net of allowance for
doubtful accounts of $49,980 and $21,780
in 1996 and 1995, respectively 965,025 998,120
Prepaid expenses 175,330 279,088
---------- ----------
Total current assets 2,511,448 2,823,571
---------- ----------
PROPERTY AND EQUIPMENT
Land 240,617 240,617
Buildings and improvements 1,872,215 1,872,215
Equipment and furnishings 892,278 862,217
---------- ----------
3,005,110 2,975,049
Less accumulated depreciation and amortization 2,266,582 2,221,555
---------- ----------
Net property and equipment 738,528 753,494
---------- ----------
TOTAL ASSETS $ 3,249,976 $ 3,577,065
========== ==========
</TABLE>
See notes to financial statements.
15
<PAGE> 16
QUEST HEALTH CARE INCOME FUND I, L.P.
BALANCE SHEETS - CONTINUED
December 31, 1996 and 1995
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY 1996 1995
- -------------------------------- ---------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 7,275 $ 10,086
Trade accounts payable 226,468 315,367
Accrued compensation 257,364 254,743
Accrued insurance 168,954 204,640
Estimated third party settlements 281,590 76,029
Other 89,008 90,414
Payable to Quest and affiliates 7,747 10,490
--------- ---------
Total current liabilities 1,038,406 961,769
LONG-TERM OBLIGATIONS, less current maturities - 7,275
--------- ---------
Total liabilities 1,038,406 969,044
----------- ---------
PARTNERS' EQUITY
Limited Partners 2,230,598 2,773,084
General Partner (169,028) (165,063)
---------- ----------
2,211,570 2,608,021
---------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 3,249,976 $ 3,577,065
========== ==========
</TABLE>
See notes to financial statements.
16
<PAGE> 17
QUEST HEALTH CARE INCOME FUND I, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Operating revenue $ 7,768,372 $ 9,806,965 $20,482,437
Interest income 55,886 71,018 14,277
Gain on sale - 103,988 -
---------- ---------- ----------
Total revenue 7,824,258 9,981,971 20,496,714
---------- ---------- ----------
EXPENSES:
Wages & salaries 3,907,503 5,052,492 10,672,625
Payroll tax & employee benefits 920,176 1,165,852 1,943,209
Supplies 940,989 1,012,677 1,983,993
Other operating costs 542,958 773,892 2,123,374
Ancillary services 731,299 824,530 1,172,049
Health benefits 240,060 177,596 316,003
Management fees 388,160 487,459 1,031,878
Management fees-affiliate 77,632 95,871 207,771
Property taxes 60,130 79,190 168,102
Interest 1,664 17,174 90,157
Depreciation and amortization 45,027 55,380 578,340
Partnership administration 365,111 370,599 537,832
Loss from writedown of
properties - - 5,517,275
---------- ---------- ----------
Total expenses 8,220,709 10,112,712 26,342,608
---------- ---------- ----------
Loss before extraordinary gain (396,451) (130,741) (5,845,894)
Extraordinary gain from settlement-
HSG payables - - 64,977
---------- ---------- ----------
Net loss $ (396,451) $ (130,741) $(5,780,917)
========== ========== ==========
Net loss per limited
partnership unit
Loss before extraordinary gain $ (1.50) (.49) (22.07)
Extraordinary gain from settlement - - .24
---------- ---------- ----------
Net loss per limited
partnership unit $ (1.50) $ (.49) $ (21.83)
========== ========== =========
Distributions paid per limited
partnership unit $ - $ 3.00 $ -
========== ========== =========
Weighted average Limited Partnership
Units outstanding 262,183 262,183 262,183
========== ========== =========
</TABLE>
See notes to financial statements.
17
<PAGE> 18
QUEST HEALTH CARE INCOME FUND I, L.P.
STATEMENTS OF PARTNERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
Partner Partners Equity
---------- ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993 (105,947) 9,412,115 9,306,168
Net loss (57,809) (5,723,108) (5,780,917)
-------- ---------- ----------
Balance at December 31, 1994 $(163,756) $ 3,689,007 $ 3,525,251
Net loss (1,307) (129,434) (130,741)
Distributions - (786,489) (786,489)
-------- ---------- ---------
Balance at December 31, 1995 $(165,063) $ 2,773,084 $ 2,608,021
Net loss (3,965) (392,486) (396,451)
-------- ---------- --------
Balance at December 31, 1996 $(169,028) $ 2,380,598 $ 2,211,570
======== ========== ==========
</TABLE>
See notes to financial statements.
18
<PAGE> 19
QUEST HEALTH CARE INCOME FUND I, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from residents and
government agencies $ 7,801,468 $ 9,479,672 $20,162,172
Cash paid to suppliers and employees (7,898,781) (9,853,445) (19,993,765)
Interest received 55,885 71,018 14,277
Interest paid (1,664) (17,174) (90,157)
Real estate taxes paid (92,031) (110,038) (174,510)
----------- ---------- ----------
Net cash used in
operating activities (135,123) (429,967) (81,983)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of facilities - 3,111,709 -
Additions to property
and equipment (30,061) (6,593) (136,343)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (30,061) 3,105,116 (136,343)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners - (786,489) -
Principal payments on debt (10,086) (612,890) (51,808)
---------- ---------- ----------
Net cash used in
financing activities (10,086) (1,399,379) (51,808)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS: (175,270) 1,275,770 (270,134)
Cash and cash equivalents at
the beginning of the year 1,546,363 270,593 540,727
--------- ---------- ----------
Cash and cash equivalents at
the end of the year $ 1,371,093 $ 1,546,363 $ 270,593
========== ========== ==========
</TABLE>
See notes to financial statements.
19
<PAGE> 20
QUEST HEALTH CARE INCOME FUND I, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET
CASH PROVIDED BY OPERATING
ACTIVITIES
Net loss $ (396,451) $ (130,741) $(5,780,917)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 45,027 55,380 578,340
Gain on sale of facilities - (103,988) -
Loss from write down of properties - - 5,517,275
Settlement HSG payables - - (64,977)
Changes net of effect of sold
facilities:
Accounts receivable 33,095 (327,293) (320,265)
Other current assets 103,758 255,182 (567,558)
Accounts payable and accrued
liabilities 82,191 (126,262) 508,582
Payable to Quest and affiliates (2,743) (52,245) 47,537
--------- --------- ----------
Net cash used in
operating activities $ (135,123) $ (429,967) $ (81,983)
========== ========== ==========
</TABLE>
See notes to financial statements.
20
<PAGE> 21
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE A ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.Organization
Quest Health Care Income Fund I, L.P. (the Partnership), formerly
Southmark/CRCA Health Care Income Fund I, L.P., was organized on July 16, 1986,
as a limited partnership under the provisions of the Delaware Revised Uniform
Limited Partnership Act, to acquire and operate income-producing health care
related properties.
On August 1, 1990, Quest Rescue Partners - I-1, L.P. (Quest) became the General
Partner of the Partnership. Quest's sole general partner is Quest Rescue
Partners - I-1 Corp. and its sole limited partner is Quest Financial Corp.
Southmark Investment Group 86, Inc. (SIG), a Nevada corporation and a
wholly-owned subsidiary of Southmark Corporation (Southmark), was the General
Partner of the Partnership prior to August 1, 1990.
The Partnership's primary business and only industry segment is to own, invest
in, operate and ultimately dispose of health care related facilities for the
benefit of its partners. The services provided at the Partnership's long-term
care facilities, which are primarily located in the western United States,
consist of intermediate and skilled nursing care.
The financial statements include the accounts of the Partnership and its 99%
owned partnerships which hold the individual properties. All significant
interpartnership balances and transactions have been eliminated. The amount of
minority interest attributable to affiliates of the General Partner is
immaterial.
2.Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, demand deposits, money market funds and investments in certificates of
deposit with original maturities, when purchased, of three months or less.
The Partnership maintains cash accounts with a variety of unrelated banks, all
of which are covered by the Federal Deposit Insurance Corporation (FDIC). At
December 31, 1996, the Partnership maintained cash balances at these banks
aggregating $1,141,666 in excess of the $100,000 FDIC insured maximum.
3.Operating Revenue
Operating revenue is recorded when services are rendered and includes amounts
reimbursable by the Medicaid and Medicare programs. Medicaid and Medicare
revenues are recorded at the applicable net reimbursement rates; therefore, no
contractual adjustments are reported.
The Partnership grants unsecured credit to the residents of its facilities.
Inherent in this practice is a credit risk of non-collection. Management has
provided an allowance which it believes will be sufficient to absorb all
uncollectible amounts existing at December 31, 1996 and 1995.
21
<PAGE> 22
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
3.Operating Revenue continued
All resident receivables are recorded at their original face amount and are due
and payable under "normal" market terms and conditions. In the event of
non-collection, the ultimate loss to the Partnership would be limited to the
recorded balance of the receivables as shown in the balance sheet.
Accounts receivable consist primarily of amounts due from residents funded
through Medicare, Medicaid, commercial insurance and private resources.
The sources of patient revenues for years ended December 31, 1994, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Medicaid 63% 59% 57%
Private Pay 20% 18% 17%
VA, Medicare and Other 17% 23% 26%
----- ----- -----
100% 100% 100%
======= ======= =======
</TABLE>
The significant components of accounts receivable at December 31, 1995 and 1996
are:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Medicaid 34% 32%
Private Pay 15% 21%
VA, Medicare & Other 51% 47%
----- -----
100% 100%
======= =======
</TABLE>
Payments by both the state and federal governments are normally received within
60-90 days.
4.Property and Equipment
Property and equipment are depreciated using the straight-line method over
lives of 5 to 30 years. Amortization of leased assets is included in
depreciation and amortization expense. Renewals and betterment are capitalized
and repairs and maintenance are charged to operations as incurred.
Effective January 1, 1996, the Partnership recognizes impairment losses on
property and equipment in accordance with Statement of Financial Accounting
Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long- Lived Assets to be Disposed of". Since the Partnership has recognized
impairment losses, as discussed in Notes F and G, effectively adjusting the
carrying value of its long-lived assets to estimated net realizable value as of
December 31, 1994 and as further depreciated during 1995 and 1996, no
significant adjustment of carrying value at December 31, 1996 to the lower of
carrying value or fair value is currently required. Prior to 1996, the
Partnership recognized an impairment loss on operating property and equipment
of its long-term care facilities when it became probable that the carrying
amount of the facility would not be recoverable through future operations.
Write downs were charged to operations for the difference in the net carrying
value and the estimated undiscounted future cash flows before interest charges
of the facility.
Upon the determination that a facility will be abandoned, foreclosed, placed on
the market for sale, or otherwise disposed of, the facility's carrying value is
adjusted to the fair value, if less than carrying value, through a charge to
operations.
22
<PAGE> 23
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
5.Income Taxes
No provision has been made in the financial statements for income taxes because
under current law, no income taxes are paid directly by the Partnership. The
Partnership reports certain transactions differently for tax and financial
statement purposes.
6.Allocation of Net Income or Net Loss and Distributions
The Partnership Agreement provides that net income (other than net income from
a sale or refinancing of Partnership property), will be allocated to the
Partners in proportion to cash distributions. Net losses will be allocated 99%
to the Limited Partners and 1% to the General Partner.
Net profits from a sale or refinancing of Partnership property will be
allocated first to any partners in proportion to and to the extent of their
negative adjusted capital accounts; then in accordance with distributions of
sale proceeds, refinancing proceeds and cash from other sources.
Distributions of cash from operations are made as follows:
(a) First, to the Limited Partners until they have received distributions of
cash from operations equal to a prescribed (8.5% through April 1, 1990,
and 10.5% thereafter as a result of the Quest Proxy) non-cumulative
return on their invested capital; then,
(b) to the General Partner in the amount of distribution advances, if any,
previously advanced; then,
(c) to the General Partner until it has received cash from operations equal
to 4% of the total distributions of cash from operations; then,
(d) 96% to the Limited Partners and 4% to the General Partners.
Distributions of cash from the sale or refinancing of properties will be
distributed as follows:
(a) First, to all Limited Partners until they have received distributions
from all sources equal to their priority return not previously
distributed through distributions of cash from operations; then,
(b) to the General Partner in the amount of distribution advances, if any,
previously advanced; then,
(c) to all Limited Partners until they have received distributions of cash
from property sales and refinancing and cash from other sources equal to
their original capital investment; then,
(d) to the General Partner until it has received distributions equal to 1%
of the total distributions made by the Partnership other than in return
of the Limited Partners' original capital investment or in payment of
distribution advances to the General Partner; then,
(e) 85% to the Limited Partners and 15% to the General Partner.
23
<PAGE> 24
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
7. Net Income (Loss) Per Limited Partnership Unit
Net income (loss) per Limited Partnership Unit is computed by dividing net
income (loss) allocated to the Limited Partners by the weighted average number
of Limited Partnership Units outstanding.
8. Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts in the balance sheets and
statements of operations. Actual results could differ from those estimates.
9. Fair Value of Financial Instruments
During 1995, the Company adopted Statement of Financial Accounting Standards
No. 107, "Disclosures about fair value of financial Instruments," which
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet.
The carrying value of cash and cash equivalents, approximate fair value due to
the short-term nature of these instruments. There are no off-balance sheet
financial instruments to which the Partnership is subject.
NOTE B TRANSACTIONS WITH AFFILIATES
The Partnership Agreement provides for payment of property management fees
based on 6% of gross property operating revenue. Quest Administrative
Services, L.P., (QASLP), an affiliate of Quest, receives 1% of gross operating
revenue relating to services provided directly to the facilities. Total
payments to QASLP under this contract in 1996, 1995 and 1994 and were $77,632,
$95,871 and $207,771, respectively.
Quest, in an effort to continue certain health benefits for Partnership
employees, created an employee benefit trust (the "Trust") in compliance with
the guidelines promulgated by VEBA and ERISA. Amounts contributed to the Trust
by the Partnership and Partnership employees are strictly for the benefit of
employees of the participating employers, payment of excess loss reinsurance,
life insurance and accidental death and dismemberment and claims and plan
administration and employee medical claims. Quest has engaged a claims
pre-certification organization to review all claims made by the Partnership's
employees. Approximately $240,060, $177,596 and $316,003 were recorded under
this arrangement in 1996, 1995 and 1994, respectively.
Partnership administration costs paid through QASLP were $365,111, $370,599 and
$537,832 in 1996, 1995 and 1994, respectively. Such charges represent legal
costs associated with litigation and SEC filings, investor service functions
and other partnership administration costs.
24
<PAGE> 25
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE C LONG-TERM OBLIGATIONS
A summary of the long-term obligations of the Partnership at December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
13.75% installment notes related to seven vans
in 1994 and to two vans in 1995 collateralized
by the vehicles. Monthly payments of principal
and interest of $942 in total. Notes are due
May 1997. $ 7,275 $ 17,361
--------- ---------
7,275 17,361
Less current maturities 7,275 10,086
--------- ---------
Long-term portion $ - $ 7,275
========= =========
</TABLE>
25
<PAGE> 26
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE D TAXABLE INCOME (LOSS)
A reconciliation between the net loss for financial reporting purposes and the
loss for tax purposes follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Financial statement net loss $ (396,451) $ (130,741) $(5,780,917)
Add:
Bad debts 28,200 - 6,556
Jobs tax credit - - 93,781
Minority interest 1,983 3,396 6,174
Writedown of properties - - 5,517,275
Prior year expense accrual (10,374) (67,707) 67,707
Current year expense accrual 69,926 10,374 -
Deduct:
Bad debts - (28,901) -
Excess of tax over book depreciation (224,581) (292,512) (184,224)
Excess of tax over book basis of
disposed facilities - (4,532,999) (387,760)
---------- ---------- ----------
Taxable loss $ (531,297) $(5,039,090) $ (661,408)
========== ========== ==========
</TABLE>
NOTE E LITIGATION
During the third quarter of 1994, the Partnership settled its litigation with
Healthcare Services Group, Inc. which resulted in $64,977 being recognized as
non-cash income.
In December 1994, the Partnership received a Notice and Demand for Payment from
the Idaho State Tax Commission resulting from sales tax audits for
approximately $90,000. The Partnership recorded a provision of approximately
$67,000 in the Partnership's 1994 Financial Statements. As a result of selling
facility interests in 1995, the liability and reserve were reduced to $36,410
and $27,308, respectively. As of year end 1996, the reserve has not changed
and the State was reassessing their position relative to these claims. The
Partnership is involved in certain other routine litigation incidental to
business including a claim for wrongful termination filed by a former employee
of one of the Partnership's facilities. Management does not expect
settlements, if any, to have a material adverse effect on the Partnership's
financial position.
26
<PAGE> 27
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE F IMPAIRMENT LOSS
Consistent with the Partnership's accounting policy as discussed in Note A, the
Partnership has reflected the property and equipment as of December 31, 1994 at
the lower of cost (as previously adjusted for writedowns if applicable) or
estimated net realizable value, at that date, determined on an individual
nursing home basis.
At December 31, 1994, Property and Equipment for the Hearthside, South Salem
and Burley facilities were written down by $1,107,603, $355,252 and $583,557,
respectively, which represented management's opinion of the excess carrying
value at that date, over the estimated net realizable value of these
properties. The remaining facilities were also adjusted to estimated net
realizable value resulting in an additional writedown of $3,470,863 (Note G).
NOTE G SALE OF FACILITIES
On February 28, 1995, the Partnership sold its partnership interests in seven
of its facilities to an unaffiliated third party. The Partnership reflected an
estimated loss on the sale of these facilities of $3,470,863 at December 31,
1994, and recognized a gain of $103,988 upon closing of the sale in 1995. The
contract called for adjusting working capital, as defined, to exclude
interpartnership accounts and the current portion of long term debt and to
reflect a 25% discount on accounts receivable at closing. The contract also
provided for a cash consideration adjustment based on changes in working
capital including the change in the 25% discount proportionate to changes in
accounts receivable occurring between December 31, 1994 and the date of closing
of February 28, 1995, which was determined and collected during the third
quarter of 1995.
At closing, the Partnership received initial consideration of $2,734,651,
consisting of cash of $2,133,359 and debt retired from sales proceeds of
$601,292. Subsequently, the Partnership determined that $417,254 of additional
cash was due to the Partnership from post closing adjustments of which $377,058
was received in 1995, and the balance was collected in the first quarter of
1996. In addition the purchaser assumed debt related to equipment of
approximately $102,000. Total consideration was therefore, $3,253,905. The
Partnership made a final determination of adjusted working capital when the
Partnership's accountants completed certain agreed upon procedures, during the
third quarter. A distribution of $786,489 to the limited partners was made
during the third quarter of 1995.
The balance sheet of the Partnership reflects the effects of the sale of the
Partnership's interests in the seven facilities. The remaining facilities have
been depreciated subsequent to the writedowns in 1994. The Partnership is
seeking to liquidate the Partnership's interests in its remaining facilities,
subject to the restrictions set forth in the Partnership governing documents.
27
<PAGE> 28
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE H PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the Partnership selling its interests in seven of its
facilities in 1995, historical results of operations may not be indicative of
future results of operations and net income (loss) per limited partnership
unit. The following unaudited pro forma condensed statement of operations is
presented as if the transactions previously described occurred as of January 1,
1995.
The unaudited pro forma condensed financial information does not purport to
present what actual results of operations would have been if the transactions
previously described had occurred on such dates or to project results for any
future period. In the opinion of the Partnership's management, all adjustments
necessary to reflect the effects of the sale have been made.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (B)
For the Year Ended December 31, 1995
(Unaudited in thousands)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues: $ 9,878 $ (2,346)(A) $ 7,532
------ -------- ------
Expenses:
Wages and salaries $ 5,052 $ (1,225)(A) $ 3,827
Operating expenses 3,956 (894)(A) 3,062
Management fees 487 (116)(A) 371
Management fees affiliate 96 (22)(A) 74
Property taxes and interest 96 (31)(A) 65
Depreciation and amortization 55 (1)(A) 54
Partnership administration 371 - 371
------ -------- ------
10,113 (2,289) 7,824
------ -------- ------
Net income (loss) (B) $ (235) $ (57) $ (292)
====== ===== =====
</TABLE>
(A) The pro forma adjustments remove revenues and expenses directly related to
the interests in seven nursing homes sold to an unaffiliated third party on
February 28, 1995.
(B) The historical statement of operations for the period ended December 31,
1995 includes a gain from the sale of a facility of $104, in thousands. This
amount is not included in the above pro forma condensed statement of operations
due to its non recurring nature.
28
<PAGE> 29
QUEST HEALTH CARE INCOME FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE I GOING CONCERN
The Partnership's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The sale of the
Partnership's interests in seven nursing homes in 1995 and possible future
sales of any or all of its remaining facilities will have an effect on cash
flow from operations in the future.
Management of the Partnership believes that successful control of the facility
and Partnership expenses and the established cash reserves from the sales of
facilities in 1995 should enable the Partnership to meet its obligations and
upon the final sale of its assets, liquidate in an orderly fashion.
29
<PAGE> 30
QUEST HEALTH CARE INCOME FUND I, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Receivable Write-off of
Balance at Additions Charged Allowance
Beginning Charged to Against for Sold Balance at
Description of Year Expenses Allowance Facilities End of Year
- ----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Allowance for
doubtful
accounts $ 21,780 $ 37,948 $ (9,748) $ - $ 49,980
========= ========= ========= ======== =========
Year ended December 31, 1995
- ----------------------------
Allowance for
doubtful
accounts $ 125,085 $ 28,665 $ (57,567) $ (74,403) $ 21,780
========= ========= ========== ======== =========
Year ended December 31, 1994
- ----------------------------
Allowance for
doubtful
accounts $ 118,529 $ 30,813 $ (24,257) $ - $ 125,085
========= ========= ========== ======== =========
</TABLE>
30
<PAGE> 31
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Partnership has had no disagreement with its accountants on accounting or
financial issues during the past three years.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have officers or directors. Quest Rescue Partners I-1,
L.P. is the General Partner, whose general partner is Quest Rescue Partners I-1
Corp. The principal officers and directors of the general partner of Quest are
as follows:
<TABLE>
<CAPTION>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
<S> <C> <C>
Stuart C. Berry 43
Chairman,
President & Secretary Chairman of Quest Financial Corp. and the
Quest Affiliates, and has been since their inception in 1989. Assumed
position of President in the fourth quarter of 1996. Mr. Berry received
a B.S. degree in Finance from Babson College, Wellesley, Massachusetts in
l976.
</TABLE>
Effective as of September 30, 1996, Michael G. Hunter, president and a director
of the general partner of the general partner of the Partnership, relinquished
his stock and resigned his positions with such entity and is no longer involved
in the management of the Partnership.
ITEM 11 EXECUTIVE COMPENSATION
None of the executive officers of the general partner of Quest receive any
direct remuneration from the Partnership. Quest is not compensated directly
for its services as general partner of the Partnership. See Item 13 for
further discussion of compensation paid to affiliates of Quest.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security ownership of certain beneficial owners.
No person or group, as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, known to the Partnership is the beneficial owner
of more than 5% of the Units.
(B) Security ownership of management.
None of the officers or directors of the general partner of Quest own
any Units.
The General Partner is entitled to distributions of cash from operations
and from "other sources" (primarily from the sale or refinancing of
Partnership properties, as set forth in Item 8, Note A.)
(C) Change in control.
There exists no arrangement known to the Partnership, the operation of
which may at a subsequent date, result in a change in control of the
Partnership.
31
<PAGE> 32
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) and (B) Affiliates of the General Partner, in accordance with the terms of
the Agreement, may receive compensation for services rendered to the
Partnership.
The management companies engaged by the Partnership receive a management fee of
5% of gross operating revenues. Quest Administrative Services, L.P., an
affiliate of Quest, receives a fee of 1% of gross operating revenues for
providing certain management services. These fees are prescribed in the
Partnership Agreement and the structure permits a rapid and efficient method of
termination of a facility manager, should the need ever arise. Total payments
to QASLP under this agreement in 1996 were $77,632. Quest created an employee
benefit trust in compliance with the guidelines promulgated by VEBA and ERISA.
Approximately $240,260 was contributed under this arrangement in 1996.
See Note B to the accompanying consolidated financial statements appearing in
Item 6.
(C) No management persons are indebted to the Partnership.
(D) There have been no transactions with promoters.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets
as of December 31, 1996 and 1995
Consolidated Statements of Operations
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Partners' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
for the Years Ended December 31, 1996, 1995 and 1994
Other schedules are omitted since they are not required, are not applicable or
the financial information required is included in the consolidated financial
statements or notes thereto.
32
<PAGE> 33
3. Exhibits
The following exhibits are filed or incorporated by reference and are an
integral part of this Form 10-K.
<TABLE>
<CAPTION>
Exhibit Number Document Description
-------------- --------------------
<S> <C>
2 Agreement of Purchase and Sale by and among persons and entities set
forth on Exhibit A, attached thereto, and Southmark Corporation dated
as of April 1, 1987 incorporated by reference to Form 8-K dated June
30, 1987.
2 Assignment of Purchase and Sale Agreement by and among Southmark
Corporation and the Limited Partnerships set out on Exhibit A, attached
thereto, dated June 30, 1987 incorporated by reference to Form 8-K
dated June 30, 1987.
2 Composite Contract of Sale - Multiple Properties dated June 1, 1988, by
and among Cedar Springs Care Center, Inc., Connersville Care Centers,
Inc. and Southmark/CRCA Health Care Income Fund I, L.P. incorporated by
reference to Form 8-K dated June 30, 1987.
2 Agreement of Sale and Purchase for Nursing Home by and between July
Associates V, L.P. and John A Freeman, Jr., dated April 8, 1986
incorporated by reference to Form 8-K dated June 30, 1987.
2 Assignment of Purchase and Sale Agreement by and between V.J.F., Inc.
and Fort Stockton Associates L.P., dated January 14, 1987 incorporated
by reference to Form 8-K dated June 30, 1987.
3 Agreement of Limited Partnership of Southmark/CRCA Health Care Income
Fund I, L.P., incorporated by reference to Form S- Page A-1, File No.
33-7368
3 Amendment to Agreement of Limited Partnership of Southmark/CRCA Health
Care Income Fund I, L.P., dated August 1, 1990.
3 Second Amendment to Agreement of Limited Partnership of Southmark/CRCA
Health Care Income Fund I, L.P., dated August 1, 1990.
3 Form of Fourth Amendment to Agreement of Limited Partnership
Southmark/CRCA Health Care Income Fund I, L.P., dated June 1, 1992.
10 Health Care Center Consultant and Management Services Agreement between
National Heritage Management, Inc. and Coos Bay Associates Limited
Partnership d/b/a Coos Bay Care Center incorporated by reference to
amended form 10-K for fiscal year ended December 31, 1988.
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
10 Agreement for laundry and housekeeping services between American
Services Company and Parkway North Associates, L.P. d/b/a Parkway North
Care Center incorporated by reference to amended form 10-K for fiscal
year ended December 31, 1988.
10 Nursing Home Management Agreement between Southmark/CRCA Health Care
Income Fund I, L.P. and LTCS, L.P. d/b/a VHA Long Term Care dated
November 28, l989.
10 Form of Amendment, effective March 1, 1992, to the Nursing Home
Management Agreement between Southmark/CRCA Health Care Income Fund I,
L.P. and LTCS, L.P. dba VHA Long Term Care.
10 Contract for sale of seven facilities between Quest Health Care Income
Fund I and Emile Properties, Inc.
22 List of majority owned partnerships.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) Reports on Form 8-K
None during the fourth quarter of 1996.
(C) An annual report for the fiscal year 1996 will be sent to the Limited
Partners subsequent to this filing and the Partnership will furnish
copies of such report to the Securities and Exchange Commission at that
time.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
QUEST HEALTH CARE
INCOME FUND I, L.P.
By: QUEST RESCUE PARTNERS
I-1, L.P.
General Partner
By: QUEST RESCUE PARTNERS
I-1, Corp., General
Partner
Date: March 31, 1997 By: /s/ Stuart C. Berry
---------------------- -----------------------------
Stuart C. Berry
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: March 31, 1997 /s/ Stuart C. Berry
-------------------- --------------------
CEO/CFO of the
General Partner of
the General Partner
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUEST HEALTH CARE INCOME FUND I FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,371,093
<SECURITIES> 0
<RECEIVABLES> 1,015,005
<ALLOWANCES> 49,980
<INVENTORY> 0
<CURRENT-ASSETS> 2,511,448
<PP&E> 3,005,110
<DEPRECIATION> 2,266,582
<TOTAL-ASSETS> 3,249,976
<CURRENT-LIABILITIES> 1,038,406
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,211,570
<TOTAL-LIABILITY-AND-EQUITY> 3,249,976
<SALES> 0
<TOTAL-REVENUES> 7,824,258
<CGS> 0
<TOTAL-COSTS> 8,181,097
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 37,948
<INTEREST-EXPENSE> 1,664
<INCOME-PRETAX> (396,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396,451)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
