<PAGE> 1
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
For the fiscal year ended December 31, 1995
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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 0-15693
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QUEST HEALTH CARE FUND VII, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 58-1697905
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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 Fund VII, L.P.
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of exchange on which registered
<S> <C>
None None
------------------- ------------------------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
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 279,278 limited partnership interests are held by
non-affiliates. The aggregate market value of interests held by non-affiliates
is not determinable since there is no public trading market for the limited
partnership interests and transfers of the limited partnership interests are
subject to certain restrictions.
Documents Incorporated by Reference: See Page 39
Exhibit Index: See Page 39-41
TOTAL OF 42 PAGES
1
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Part I
ITEM 1 BUSINESS
Quest Health Care Fund VII, L.P. (the Partnership), formerly Southmark/CRCA
Health Care Fund VII, L.P., was organized on July 23, 1986, as a limited
partnership under the provisions of the Delaware Revised Uniform Limited
Partnership Act. On September 12, 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 offering of the Units closed in June 1987, with 279,278
Units sold at $100 each, or gross proceeds of $27,927,800 to the Partnership.
The General Partner of the Partnership is Quest Rescue Partners - 7, L.P.
(Quest) whose sole limited partner is Quest Financial Corp. and whose sole
general partner is Quest Rescue Partners - 7 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 health care
related real properties for the benefit of its Partners. At December 31, 1995,
the Partnership held interests in three nursing home properties as described in
Item 2 below and the Partnership employed approximately 209 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 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 new 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, resident
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 new
requirements. There is, however, no requirement that the rate adjustments
actually cover all new costs nor are there any assurances that state budgetary
constraints will sustain the costs associated with federal mandates.
2
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In addition, 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. The expenses of the
facilities have 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, Medicaid formulas 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 Partnership's Medicaid rates
are calculated, 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
revenue for services to such patients is 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 and the quality of
services provided at its facilities, establishing a reputation within the local
medical communities for providing competent care services, and by responding
appropriately to regional variations in demographics and tastes.
During 1995, the Partnership's interest in five of the Partnership's facilities
were sold. Please refer to Part II, Item 7 for further discussion.
3
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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 Ended Year Ended
December 31, December 31,
---------------------------- --------------------
1993 1994 1995 1993 1994 1995
-------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medicaid 514 72% 551 77% 112 53% 65% 65% 58%
Private Pay 117 16% 112 16% 32 15% 14% 14% 13%
VA, Medicare and Other 86 12% 50 7% 68 32% 21% 21% 29%
717 100% 713 100% 212 100% 100% 100% 100%
=== === === === === === === === ===
Overall Occupancy Rate 86% 85% 84%
=== === ===
</TABLE>
Because of a changing census mix, the occupancy required for a facility to
achieve an operating break-even point cannot be determined precisely.
Generally, a greater ratio of Medicaid patients will require a higher occupancy
to reach a break-even point. However, a high Medicare census changes the
break-even point due to a higher reimbursement rate even though expenses
associated with Medicare qualified residents are significantly higher than
Medicaid.
All licensed beds in the Partnership's facilities are being utilized, except
that in some instances, semi-private rooms have been converted to private
rooms to accommodate demand or a small number of rooms have been taken out of
service to be utilized for office space and ancillary support areas.
ITEM 2 PROPERTIES
The following table sets forth the investment portfolio of the Partnership at
December 31, 1995. The buildings and the land on which they are located are
owned by the Partnership through 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
facility 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.
4
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ITEM 2 PROPERTIES continued
<TABLE>
<CAPTION>
Properties Occupancy
at net Rate Date
Property Description book value for 1995 Acquired
- -------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C>
Mountain View Skilled Care
Care Center Nursing Home
Kimberly, ID 64 Licensed Beds $ 106,098 50% June 1987
Valley Living Center Personal Care
Idaho Falls, ID Nursing Home
65 Licensed Beds $ 208,517 95% June 1987
Valley Convalescent Skilled/Personal
Hospital Care Nursing Home
El Centro, CA 123 Licensed Beds $ 757,636 96% June 1987
----------
$1,072,251
==========
</TABLE>
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TOTAL: 3 Nursing Homes 252 Licensed Beds
ITEM 3 LEGAL PROCEEDINGS
The State of Idaho sought a deficiency lien against the Partnership's
facilities for sales and use taxes for periods prior to ownership by the
Partnership. The total amount claimed by the state is $372,921. Management of
the Partnership is discussing a settlement of this matter and has recorded a
provision of $279,691 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 itself against these claims. No legal actions,
other than ordinary routine litigation incidental to business, were filed
against the Partnership.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1995.
5
<PAGE> 6
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.
(B) Title of Class Number of Record Unit Holders
-------------- -----------------------------
Limited Partnership Interests 3,619 as of February 27, 1996
(C) No cash distributions were made to the Limited Partners in 1990, 1991,
1993 or 1994. The Limited Partners received cash distributions of
$488,736, $139,639 and $5,306,282 for the years ended December 31,
1989, 1992 and 1995, respectively. Cumulative distributions to the
Limited Partners from the Partnership from its inception to December
31, 1995 were $8,567,428. No distributions have been made to either
SIG or Quest. 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. The comparability of net losses between years 1991 and 1992 was
materially impacted by the significant increases in nursing costs, worker's
compensation insurance and in ancillary usage. The settlement of litigation,
the foreclosure of one property and the write down of other properties
significantly impacted the 1993 and 1994 financial information. The sale of
five properties in 1995 resulted in the significant improvement in net income.
This summary should be read in conjunction with the Partnership's financial
statements and the related notes appearing in Item 8.
<TABLE>
<CAPTION>
Years ended December 31,
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Statements of Operations 1995 1994 1993 1992 1991
- ------------------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenue $11,951,586 $23,341,171 $24,067,958 $22,315,509 $20,265,106
Net income (loss) 533,537 (7,146,189) 95,883 (1,199,519) (762,151)
Net income (loss) per (1) (2) (3)
weighted average Unit 1.89 (25.33) .34 (4.25) (2.70)
Distributions paid per (1) (2) (3)
weighted average Unit 19.00 -0- -0- .50 -0-
</TABLE>
(1) Includes gain on sale of five facilities of $548,389 or $1.94 per
unit.
(2) Includes extraordinary gain of $64,012 or $.23 per unit from
settlement of Healthcare Services Group payables and loss from
writedown of properties of $7,180,571 or $(25.45) per unit.
(3) Includes loss from write down of properties of $3,352,459 or $(11.88)
per unit, loss from transfer of property of $1,510,559 or $(5.35) per
unit, and extraordinary gain of $4,869,365 or $17.26 per unit from
extinguishment of debt and settlement of Southmark payables.
6
<PAGE> 7
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------
Balance Sheets 1995 1994 1993 1992 1991
- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Property & Equipment,net $ 1,072,251 $ 6,980,953 $14,397,029 $18,113,000 $18,714,130
Assets in receivership - - - 3,404,875 3,559,962
Total Assets 3,480,604 12,238,692 18,887,317 25,464,388 26,313,054
Long-term obligations,
less current maturities 9,629 1,843,803 1,946,293 1,938,586 1,985,000
Long-term debt related to
assets in receivership - - - 3,634,009 3,830,899
Partners' equity 2,488,269 7,261,014 14,407,203 14,311,320 15,650,478
</TABLE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In February 1995, the Partnership sold its interest in one facility for a gain
of $200,446. The Partnership was relieved of mortgage obligations secured by
the facility exceeding $1,830,000, and received cash of $1,700,000. As a
result of the sale of the facility and cash on hand; the Partnership
distributed $2,792,780 or $10/unit to the limited partners in March 1995.
On April 30, 1995, the Partnership sold its interests in four of its facilities
to another unaffiliated third party. The Partnership reflected an estimated
loss on the sale of these facilities of $4,898,869 at December 31, 1994 and
recognized a gain of $347,943 upon closing of the sale on April 30, 1995. A
distribution from this sale of $2,513,502 or $9/unit was made to the limited
partners in June 1995.
Neither the General Partner nor its affiliates received any remuneration nor
distributions from the sale of facilities.
Revenues:
Operating revenues for the twelve month period ended December 31, 1995
decreased $11,389,585 when compared to the prior period. This is primarily the
result of the sale of the Partnership's interests in five facilities. On a
proforma basis, removing the effect of the sales, revenues increased $514,997
in 1995 as compared to the same period in 1994. The primary source of the
increase was from occupancy and rate increases at Valley Living Center and
Valley Convalescent Center, as well as increased Medicare utilization. Revenue
in 1995 included $ 5,300,332 related to the five sold facilities.
Operating revenues for the twelve month period ended December 31, 1994
decreased $726,787 when compared to the prior period. This is primarily the
result of the abandonment of the Valley Care Center in September 1993. On a
pro forma basis, removing the effect of the abandonment, revenues increased
$955,716 in 1994 when compared to 1993. The primary source of the increase is
due to private, Medicare and Medicaid rate increases. Heritage Park saw a
shift in patient mix to more
7
<PAGE> 8
private pay and Medicare. Valley Convalescent's census has recovered from the
survey problems in 1992-1993. In addition to its census increase, Valley
Convalescent experienced a significant increase in Medicare Part B ancillary
utilization. Operating revenue for 1994 and 1993 included $17,218,022 and
$18,364,420, respectfully, of revenues generated by the five sold facilities.
Receivables do not present a credit risk as the Medicaid/Medicare system is
federally financed. Receivables are, however, subject to disallowance by
Medicare and Medicaid upon audit. Such governmental audits are typically one or
two years in arrears. Inflation is not a material factor due to the fact that
reimbursement rates are set by governmental agencies, however, such agencies
are not obliged to increase the reimbursement rate at the rate of inflation.
The significant components of accounts receivable at December 31, 1995 and 1994
were:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Medicaid 47% 50%
Private Pay 10% 14%
VA, Medicare & Other 43% 36%
--- ---
100% 100%
=== ===
</TABLE>
Payments by both the state and federal governments are normally received within
60-90 days. The receivables of the Partnership represent less than 28 days
revenue.
Expenses:
For the twelve month period ending December 31, 1995, total expenses decreased
$18,578,430 compared to the prior period. On a pro forma basis, eliminating
the effect of the five sold facility interests and the writedowns that occurred
in 1994, operating expenses decreased $53,461. This is primarily related to
increased labor costs associated with complying with the final regulations
issued in 1995 relating to OBRA 87 and wage inflation offset by aggressive
expense control and staff reductions at Mountain View in line with its reduced
occupancy. Supplies and Ancillary expense increased $316,320 at Valley
Convalescent as a result of increased occupancy and Medicare utilization.
Total expenses in 1995 included $5,156,944 relating to the five sold facility
interests.
For the twelve month period ending December 31, 1994, total expenses increased
$1,730,066 when compared to the same period in 1993. This increase was due
primarily to the $7,180,571 loss from writedown of properties in 1994, as
compared to writedown loss of $3,352,459 and loss on transfer of property
related to Valley Care, of $1,510,559 in 1993. Removing the impact of the
losses from writedowns and transfer of property and the expense impact of the
September 1993 abandonment of Valley Care Center of $1,946,321, the remaining
properties showed an increase in total operating expenses of $1,358,834 in 1994
when compared to 1993. The majority of the increase was for additional nursing
payroll and employee benefit costs due in part to the increase in census at
Valley Convalescent. Payroll tax and employee benefits decreased in 1994 as
compared to 1993 due to workers compensation premium refunds of $85,915
attributable to a prior year. Supplies and ancillary costs increased due to
the increased ancillary utilization at Valley Convalescent and Heritage Park in
particular. Other operating costs increased $328,416 in 1994 as compared to
1993 due to the
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<PAGE> 9
provision recorded for Idaho sales tax as discussed in the Financial
Statements. Employee health benefits decreased $144,045 due to an
extraordinarily low claims year in 1993 and those savings resulted in lower
than expected expense for the facilities in 1994. The decrease in interest and
depreciation in 1994 is due to the abandonment of Valley Care Center in 1993.
Operating expense in 1994 and 1993 included $16,320,849 and $17,675,033,
respectively, generated by the five sold facilities. Partnership
administration expense increased during 1994 when compared to the prior year
primarily as a result of additional third party accounting, legal and tax
professional fees and legal and accounting costs relating to preliminary proxy
materials filed by the Partnership in 1994 which was subsequently withdrawn
from the Securities and Exchange Commission review process.
As set forth in the 1994 preliminary proxy materials, should the preliminary
proxy not be completed, it was the Partnership's intent to sell its assets to
generate cash proceeds for distribution to the limited partners.
Accordingly, consistent with the Partnership's accounting policy as described
in Note A, the Partnership reflected 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. Additional writedowns of $762,797 and $1,518,905 were
applied to Valley Living Center and Valley Convalescent Center, respectively,
to recognize estimated net realizable value as determined by management of the
Partnership (Note G).
As of December 31, 1995, management estimates that fair value exceeds the
carrying value and, accordingly, does not expect any further material
adjustments upon the adoption of Statement of Accounting Standard No. 121 in
1996 unless warranted by a change in market conditions or other relevant
factors.
Based on the carrying value of the Partnership's interests in the four
facilities sold in May 1995, the Partnership expected to incur a loss on the
sale and, accordingly, recognized this loss at December 31, 1994 in the
accompanying statements of operations of $4,898,869 consisting of a writedown
of property and equipment of $4,466,946 for the Partnership's interests
contracted to be sold and $431,923 for the 25% discount of accounts receivable.
Ancillary Revenue and Expense is a term that describes specialized services
provided by third party unaffiliated vendors. These services include speech,
occupational, physical and occasionally intravenous therapies. These revenues
and expenses are subject to certain cost limitations and do not materially
effect the profitability of a facility. However, the ability to provide these
services enables a facility to accept residents reimbursed under the federal
Medicare system instead of the state Medicaid system. 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. The pursuit of high 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.
9
<PAGE> 10
Additional challenges confronting the Partnership are market competition and
state budgetary restraints. In Idaho, the Mountain View facility lost $94,205
in direct cash flow in 1993 as the result of a new 120 bed facility with
assisted living housing in a "campus" environment that opened in Twin Falls.
In 1994, the Mountain View facility basically broke even. Although the
competing facility is filled up, Mountain View, which was built in 1964, cannot
compete directly with the new facility. Mountain View is located in a rural
area of Idaho with a limited market for alternative use. Since the
Partnership's facilities are primarily occupied by residents supported by
payments from Medicaid and Medicare, price competition is not possible.
Mountain View fought to maintain occupancy throughout 1993 and stayed within 4%
of where it started the year. It was apparent to management that the carrying
value of the facility would not be fully recovered through estimated
undiscounted future operations. The Financial Statements recognize a write
down of the carrying value of the property of $1,155,099, at December 31, 1993,
consistent with the Partnership's accounting policy, as discussed in the
Financial Statements.
The Port Angeles facility, which was sold in May 1995, is located on the upper
peninsula of Washington, across the bay from Victoria, British Columbia, in
1993, it achieved increased reimbursement from the State. However, Washington
had, in 1993, been reclassifying residents to disqualify them for nursing home
care and in fact the state moved five residents to other settings. Washington
also mandated employee health benefits, effective in 1996, paid principally by
the employer and announced its intent not to comply with the scheduled July
1994 rate increase. Washington has not yet announced how, or if, it will
compensate providers for the new mandated employee health benefits but has
postponed the enactment of the mandate. Based on management's estimate of
future cash flows, given the then current operating and regulatory environment,
it was determined that it was probable that the Partnership would not fully
recover the carrying value of the property. The Financial Statements recognize
a write down of carrying value of $1,186,779 at December 31, 1993, consistent
with the Partnership's accounting policy, as discussed in the Financial
Statements.
The Valley Convalescent facility located in the desert town of El Centro,
California, just across the border from Mexicali, Mexico, had made recent gains
in occupancy, compared to prior years. However, the State of California had
experienced an erosion of its tax base as a result of businesses leaving the
State and reductions in the defense industry. During 1992, California
experienced budgetary problems. This resulted in a period of over 120 days
whereby the state had no fiscal authority to pay its Medicaid and other welfare
obligations and instead issued "warrants" or I.O.U's. The Partnership was
fortunate in that its bank honored the "warrants" as if they were cash. In
1993, California continued to experience budgetary problems and again
considered issuing "warrants" instead of cash payments. The banks warned the
public that they would not accept warrants. Nursing facilities in California
are reimbursed using a modified flat rate system. "Flat rate" means that the
rate is determined based on a certain percentile of the costs incurred by all
of the facilities in a given peer group and not specifically based on a given
facility's costs. The Valley Convalescent facility is located in the desert
two hours east of San Diego. To attract qualified personnel requires a wage
rate greater than might be experienced in other areas within California.
Because of the budgetary problems of California, the Partnership does not
expect to experience any real improvement in its reimbursement rates over the
long term. The expected future
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<PAGE> 11
undiscounted cash flows of the facility were less than the carrying value of
the property, accordingly, the Financial Statements recognize a write down of
carrying value of $1,010,581, at December 31, 1993.
For the 1995 period, and again in 1996, the State of California has announced
the state will not increase the reimbursement rate over 1994, despite
inflationary increases in operating expense. However, ancillary and Medicare
utilization at the facility increased significantly in 1994 and 1995. It is
possible that the increased activity in the Medicare area could help offset the
effects of the lack of Medicaid rate increases on revenues.
Liquidity and Capital Resources
In February 1995, the Partnership sold its interest in one facility for a gain
of $200,446. The Partnership was relieved of mortgage obligations secured by
the facility exceeding $1,830,000, and received cash of $1,700,000. As a
result of the sale of the facility and cash on hand; the Partnership
distributed $2,792,780 or $10/unit to the limited partners in March 1995.
At April 30, 1995 the Partnership sold its interests in four of its facilities
to another unaffiliated third party. A distribution from this sale of
$2,513,502 or $9/unit was made to the limited partners in June 1995.
At December 31, 1995, the Partnership held cash and cash equivalents of
$1,325,321, a decrease of $144,138 over 1994. The decrease is due to the
distributions to limited partners which exceeded the cash provided by the sales
and the positive cash flow from operations.
At December 31, 1994, the Partnership held cash and cash equivalents of
$1,469,459, an increase of $311,548 over 1993. The source of this increase was
an improvement in operations and a reduction in the amount of capital
improvements to the facilites.
Neither the General Partner nor its affiliates received any remuneration or
distributions from the sale of facilities.
A significant event in the fourth quarter of 1994 affecting the value of the
Partnership was the State of Idaho seeking a $470,135 deficiency lien against
the Partnership's Idaho properties for periods from 1976 through 1988, under a
theory of successor liability. Of this amount, $372,921 relates to the
remaining two facilities owned as of December 31, 1995, located in Idaho. The
Partnership acquired its interests in these properties in June 1987. Although
the Partnership believes it has a number of meritorious defenses to the claims
of the State of Idaho, an expense was accrued in the fourth quarter of 1994 in
the amount of $352,602. The liability reflected as of December 31, 1995 is
$279,691 for the remaining two facilities. Any settlement with the state for
an amount less than this accrual will result in a gain to the Partnership.
Conversely any settlement in excess of this accrual will result in an
additional loss to the Partnership.
11
<PAGE> 12
In February 1995, the limited partners of the Partnership received hostile
tender offer materials offering to purchase the units of certain limited
partners of the Partnership. After a thorough analysis of the tender offer
materials, the General Partner recommended that the Limited Partners vote
against the tender offer, as such tender offer was not in the best interests of
the limited partners of the Partnership. The unfriendly bidder amended its
tender offer materials three times requiring the Partnership to respond to the
offer at a cost to the Partnership. The expense of the printed materials and
legal advice necessary to represent the Partnership's belief exceeded $160,000.
The Partnership's Balance Sheet, at December 31, 1994, reflected the lower of
costs or net realizable value of property and equipment. The significant
writedown of property and equipment in 1994 is 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 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 and 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
$6,748,648 and is reflected in the Financial Statements.
If these assets had been sold as of December 31, 1994, for the estimated net
realizable value set out in the Financial Statements, the proceeds from the
sales would have been less than management's prior expectations of $30-35 per
unit for the sale of these properties, as set out in the Partnership's
materials responding to the hostile tender offer, described earlier. Should the
properties
12
<PAGE> 13
have been sold for an amount equal to estimated net realizable value, as of
December 31, 1994 proceeds would approximate $26 per unit, however, such
amounts do not reflect the unrecorded gain from the sale of the Church Hill
facility; cash flow from operations subsequent to December 31, 1994; the cost
of winding down the Partnership; funding cash flow, if necessary, of any
remaining properties pending their final disposal; calculation of the post
closing adjustments related to the four properties under contract for sale;
gain or loss from the disposition of the litigation described in Note E to the
Financial Statements; expense associated with material litigation or state or
federal actions effecting the licensing or reimbursement of the Partnership's
facilities, if any; differences between the carrying value at December 31, 1994
of the properties and the price received at the disposal of the properties not
sold, changes in partnership administration expense; and the difference in
recorded assets and liabilities and ultimate settlement (e.g. sales tax, cost
report and other contingencies). However, management of the Partnership
believes that, based on the recent circumstances described herein pertaining to
Valley Convalescent, there is a possibility that should the Partnership sell
Valley Convalescent in the near future, the sales price would exceed the net
realizable value for the facility described in the Financial Statements.
Ultimately, the final distribution to the limited partners upon termination of
the Partnership could be greater or less than that which is presented in the
Financial Statements. Further, distributions will be affected by any reserves
to be established and by the Partnership's ability to reduce or control
expenses until the Partnership is terminated.
Subsequent to year end 1995, the Partnership has received certain expressions
of interest in acquiring two of the Partnership's three remaining facility
interests. The Partnership is currently assessing the adequacy of these
offers.
Effective October 1, 1990, federal legislation, OBRA, eliminated the
distinction between skilled nursing and intermediate care facilities and
imposed a variety of quality of care requirements on all long-term care
facilities, with resulting increases in operating costs. The legislation also
imposes more stringent requirements regarding staff, screening and assessment
of residents, resident rights and survey and certification requirements. 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 new requirements. There is,
however, no requirement that the rate adjustments actually cover all costs nor
are there any assurances that state budgetary constraints will sustain the cost
of future federal mandates.
Medicare is a federal entitlement program and Medicaid (the source of the
majority of the Partnership's revenues) 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
13
<PAGE> 14
budgetary difficulties, had either taken action to curtail the growth in
entitlement programs and/or had indicated that future action was possible.
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. In
1995, the latest idea appears to be "block grants" to the states and
significant Medicare budgetary reductions. What this means to nursing
facilities cannot currently be determined by management of the Partnership.
Private pay sources accounted for 13% of the Partnership's total revenue in
1995, 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 agreed to settle its disputes with Southmark, which was
approved by the court governing Southmark's Bankruptcy Plan. As a result of
the settlement, the Partnership paid Southmark $60,700 and the Partnership
avoided payment of $2,400,476 in amounts payable to Southmark and it
affiliates. The amount of $2,339,776 was recognized as non-cash income for
1993.
During the third quarter of 1994, the Partnership settled its litigation with
Healthcare Services Group, Inc. resulting in $64,012 being recognized as
non-cash income.
The Partnership has no established credit lines with outside lending sources
and relies solely on cash flow and cash resources to conduct Partnership
business. There are no material commitments for capital improvements at the
three remaining facilities.
The Partnership's continued existence is dependent upon its ability to: (i)
generate sufficient cash flow to meet its obligations on a timely basis; and
(ii) obtain additional sources of funding as may be required. As stated above,
the Partnership will entertain offers to sell any or all of its three remaining
facilities and, if accepted and closed, plans to liquidate in an orderly
fashion.
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 and the losses were discussed in the 1993 and 1994
Annual Reports on Form 10-K, effectively adjusting the carrying value of its
long-lived assets to estimated net realizable value, no significant adjustment
from net realizable value to fair value is expected.
14
<PAGE> 15
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
QUEST HEALTH CARE FUND VII, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 16
BALANCE SHEETS
as of December 31, 1995 and 1994 17-18
STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993 19
STATEMENTS OF PARTNERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993 20
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993 21-22
NOTES TO FINANCIAL STATEMENTS 23
SCHEDULE V - PROPERTY AND EQUIPMENT
for the years ended December 31, 1995, 1994 and 1993 34
SCHEDULE VI - ACCUMULATED DEPRECIATION
for the years ended December 31, 1995, 1994 and 1993 35
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1995, 1994 and 1993 36
</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.
15
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners
Quest Health Care
Fund VII, L.P.
We have audited the financial statements and financial statement schedules of
Quest Health Care Fund VII, L.P. listed in the index of this Form 10-K. These
financial statements and financial statement schedules are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quest Health Care Fund VII,
L.P. as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules 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 G 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 an estimated net realizable value as determined
by management through a charge to earnings of $7,180,571 in 1994. Because of
the sale of a significant portion of the Partnership's operating assets, future
results of operations may differ significantly from historical results of
operations. See Notes A, G, H, I and J to the accompanying financial
statements.
Coopers & Lybrand LLP
Raleigh, North Carolina
April 5, 1996
16
<PAGE> 17
QUEST HEALTH CARE FUND VII, L.P.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,325,321 $ 1,469,459
Accounts receivable, net of allowance for
doubtful accounts of $25,000 and $262,636 in
1995 and 1994, respectively (Note H) 914,057 2,623,217
Prepaid expenses 168,975 772,199
----------- -----------
Total current assets 2,408,353 4,864,875
----------- -----------
PROPERTY AND EQUIPMENT, (Notes A,C,G and H)
Land 233,770 800,577
Buildings and improvements 2,380,901 10,651,257
Equipment and furnishings 755,289 1,978,261
----------- -----------
3,369,960 13,430,095
Less accumulated depreciation and amortization 2,297,709 6,449,142
----------- -----------
Net property and equipment 1,072,251 6,980,953
----------- -----------
OTHER ASSETS:
Restricted escrow and other deposits - 392,864
----------- -----------
TOTAL ASSETS $ 3,480,604 $12,238,692
=========== ===========
</TABLE>
See notes to financial statements.
17
<PAGE> 18
QUEST HEALTH CARE FUND VII, L.P.
BALANCE SHEETS - CONTINUED
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations
(Note C) $ 14,754 $ 103,468
Trade accounts payable 334,994 988,831
Accrued compensation 116,582 631,748
Accrued insurance 103,962 399,807
Accrued interest - 41,587
Estimated third party settlements 26,695 287,013
Estimated sales tax settlement (Note E) 279,691 352,602
Other 94,036 299,643
Payable to Quest and affiliates (Note B) 11,992 29,176
----------- -----------
Total current liabilities 982,706 3,133,875
LONG-TERM OBLIGATIONS, less current maturities
(Note C) 9,629 1,843,803
----------- -----------
Total liabilities 992,335 4,977,678
----------- -----------
PARTNERS' EQUITY (DEFICIT):
Limited Partners 2,625,675 7,403,755
General Partner (137,406) (142,741)
----------- -----------
Total partners' equity 2,488,269 7,261,014
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 3,480,604 $12,238,692
=========== ===========
</TABLE>
See notes to financial statements.
18
<PAGE> 19
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Operating revenue $11,951,586 $23,341,171 $24,067,958
Interest income 60,802 54,298 34,164
Gain on sales 548,389 - -
----------- ----------- -----------
Total revenues 12,560,777 23,395,469 24,102,122
----------- ----------- -----------
EXPENSES:
Wages and salaries 5,517,823 10,648,385 11,318,271
Payroll tax & employee benefits 1,025,189 2,093,889 2,204,117
Supplies 1,266,143 2,233,580 2,044,318
Other operating costs 1,207,134 3,154,364 2,825,948
Ancillary services 1,216,170 1,887,981 1,710,055
Health benefits (Note B) 198,210 249,065 393,110
Management fees 618,306 1,280,662 1,342,855
Management fees-affiliate (Note B) 113,966 191,258 179,390
Property taxes 82,333 163,305 170,669
Interest 28,179 193,055 452,814
Depreciation & amortization 174,379 698,568 936,504
Partnership administration (Note B) 579,408 630,987 434,535
Loss on transfer of property (Note F) - - 1,510,559
Loss from write down of
properties (Notes G and H) - 7,180,571 3,352,459
----------- ----------- -----------
Total expenses 12,027,240 30,605,670 28,875,604
----------- ----------- -----------
Net income (loss) before
extraordinary gain $ 533,537 $(7,210,201) $(4,773,482)
Extraordinary items
Gain from extinguishment
of debt (Note F) - - 2,529,589
Gain from settlement-HSG or Southmark
payables (Note E) - 64,012 2,339,776
----------- ----------- -----------
Net income (loss) $ 533,537 $(7,146,189) $ 95,883
=========== =========== ===========
Net income (loss) per limited
partnership unit
Income (loss) before
extraordinary gain $ 1.89 (25.56) (16.92)
Extraordinary items - .23 17.26
----------- ----------- -----------
Net income (loss) per limited
partnership unit $ 1.89 $ (25.33) $ .34
=========== ============ ===========
Distributions paid per limited
partnership unit $ 19.00 $ - $ -
=========== ============ ===========
Weighted average limited partnership
units outstanding 279,278 279,278 279,278
=========== ============ ===========
</TABLE>
See notes to financial statements.
19
<PAGE> 20
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF PARTNERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity
---------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1992 (72,238) 14,383,558 14,311,320
Net income 959 94,924 95,883
--------- ----------- -----------
Balance at December 31, 1993 (71,279) 14,478,482 14,407,203
Net loss (71,462) (7,074,727) (7,146,189)
--------- ----------- -----------
Balance at December 31, 1994 (142,741) 7,403,755 7,261,014
Net income 5,335 528,202 533,537
Distributions - (5,306,282) (5,306,282)
--------- ----------- -----------
Balance at December 31, 1995 $(137,406) $ 2,625,675 $ 2,488,269
========= =========== ===========
</TABLE>
See notes to financial statements.
20
<PAGE> 21
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from residents and
government agencies $ 12,361,404 $ 23,042,388 $ 23,378,254
Cash paid to suppliers and employees (12,117,721) (22,326,602) (22,188,492)
Interest received 60,802 54,298 34,164
Interest paid (28,179) (193,860) (211,826)
Real estate taxes paid (119,120) (148,473) (177,546)
------------ ------------ ------------
Net cash provided by
operating activities 157,186 427,751 834,554
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of property
and equipment (39,434) (68,819) (383,175)
Proceeds from sale of property 5,070,998 40,326 -
Reduction of restricted escrow and other - 71,486 85,121
Funding of restricted accounts (4,495) (7,262) (12,937)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 5,027,069 35,731 (310,991)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bond refinancing costs - (55,409) -
Bond or loan proceeds - 1,830,000 19,747
Bond paid off - (1,830,000) -
Principal payments on debt
obligations (22,111) (96,525) (237,857)
Distributions to Partners (5,306,282) - -
------------ ------------ ------------
Net cash used in
financing activities (5,328,393) (151,934) (218,110)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (144,138) 311,548 305,453
Cash and cash equivalents at the
beginning of the year 1,469,459 1,157,911 852,458
------------ ------------ ------------
Cash and cash equivalents at the
end of the year $ 1,325,321 $ 1,469,459 $ 1,157,911
============ ============ ============
</TABLE>
See notes to financial statements.
21
<PAGE> 22
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income (loss) $ 533,537 $(7,146,189) $ 95,883
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 174,379 698,568 936,504
Gain on sale of facilities (548,389) - -
Charge off of abandoned development
costs or deferred loan costs 92,303 - 14,000
Loss from write down of properties - 7,180,571 3,352,459
Loss on transfer of property - 2,174 1,510,559
Extraordinary gain from
extinguishment of debt - - (2,529,589)
Settlement HSG or Southmark payables - (64,012) (2,339,776)
Changes net of effect of sold or
foreclosed facilities:
Accounts receivable 409,818 (300,957) (689,704)
Prepaid expenses and
other current assets (186,104) (598,147) (60,170)
Accounts payable and accrued
liabilities (301,174) 643,791 579,281
Payable to Quest (17,184) 11,952 (34,893)
----------- ----------- -----------
Net cash provided by
operating activities $ 157,186 $ 427,751 $ 834,554
=========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Acquisition of equipment and vehicles
Cost of equipment and vehicles $ - $ - $ 109,911
Loan $ - $ - (99,347)
-----------
Cash paid $ - $ - $ 10,564
===========
Debt assumed by purchaser in sale $ 63,300 $ - $ -
</TABLE>
During 1993, the Partnership abandoned a facility (See Note F). In conjunction
with the abandonment, assets and liabilities were removed from the Partnership
accounts as follows:
<TABLE>
<S> <C>
Current Assets $ 425,368
Equipment 22,291
Assets in receivership 3,292,114
Current liabilities (1,280,793)
Long-term debt (3,478,010)
------------
$ (1,019,030)
============
</TABLE>
See notes to financial statements.
22
<PAGE> 23
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.Organization
Quest Health Care Fund VII, L.P. (the Partnership) formerly Southmark/CRCA
Health Care Fund VII, L.P., was organized on July 23, 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 - 7, L.P. (Quest) became the general
partner of the Partnership. Quest's sole general partner is Quest Rescue
Partners - 7 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
inter-partnership 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, 1995, the Partnership maintained cash balances at these banks
aggregating $1,211,469 in excess of the $100,000 FDIC insured maximum.
Included in cash and cash equivalents is $970,000 invested in repurchase
agreements with underlying United States government backed securities, which
have original maturities of less than 30 days.
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, 1995 and 1994, respectively.
23
<PAGE> 24
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
3. Operating Revenue continued
Accounts receivable consist primarily of amounts due from residents funded
through Medicare, Medicaid, commercial insurance and private resources.
Accounts receivable includes approximately 42% due from Medicare, 38% due from
California Medicaid and 9% due from Idaho Medicaid.
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.
The sources of patient revenues for years ended December 31, 1995, 1994 and
1993 are:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Medicaid 58% 65% 65%
Private Pay 13% 14% 14%
VA, Medicare and Other 29% 21% 21%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The significant components of accounts receivable at December 31, 1995 and 1994
are:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Medicaid 47% 50%
Private Pay 10% 14%
VA, Medicare & Other 43% 36%
--- ---
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.
The Partnership recognizes an impairment loss on operating property and
equipment of its long-term care facilities if it becomes probable that the
carrying amount of the facility may not be recoverable through future
operations. Write downs are 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 estimated net realizable value, if less than carrying value,
through a charge to operations. Since impairment losses of operating property
and equipment are measured against estimated undiscounted future cash flows,
the proceeds from a sale of the assets could be less than the carrying value.
See Note H.
24
<PAGE> 25
QUEST HEALTH CARE FUND VII, 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 (7% through April 1,
1990, and 9% thereafter in compliance with the Quest Proxy and the
Amendment to the Partnership Agreement) 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,
25
<PAGE> 26
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
6. Allocation of Net Income or Net Loss and Distributions continued
(d) to the General Partner until it has received distributions equal to 1%
of the distributions to the Limited Partners other than in a return of
the Limited Partners' original capital investment or in the payment of
distribution advances to the General Partner; then,
(e) 85% to the Limited Partners and 15% to the General Partner.
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. Future Operations
Distribution will be made to the limited partners after establishing adequate
reserves for future operations (Note J).
9. 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.
10. 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, accounts receivable, accounts
payable and accrued expenses 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 property
operating revenue relating to services provided directly to the facilities.
Total payments to QASLP under these contracts in 1995, 1994 and 1993 and were
$113,966, $191,258, and $179,390, respectively.
Quest, in an effort to continue certain health benefits for 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
26
<PAGE> 27
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE B Transactions with affiliates continued
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 $198,210, $249,065, and $393,110 was recorded under
this arrangement in 1995, 1994 and 1993, respectively. The Trust is
administered by an affiliate of Quest, however, no profits accrue to the
benefit of either the affiliate or Quest.
Partnership administration costs paid through QASLP were $579,408, $630,987,
and $434,535 in 1995, 1994 and 1993, respectively. Such charges represent
legal costs associated with litigation and SEC filings, investor service
functions and other partnership administration costs.
NOTE C LONG-TERM OBLIGATIONS
A summary of the long-term obligations of the Partnership at December 31, 1995
and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
First mortgage revenue bonds, related to
Life Care Center of Church Hill (a) - 1,830,000
13.75% installment notes related to four
vans in 1994 and to one in 1995 collateralized
by the vehicles. Monthly payments of principal
and interest of $398. Notes are due
May, 1997. 18,267 39,092
9.5% installment notes related to five vans in
1994 and to two in 1995, collateralized by the
vehicles. Monthly payments of principal and
interest of $998. Notes are due August, 1997 6,116 70,311
Other - 7,868
---------- ----------
24,383 1,947,271
Less current maturities 14,754 103,468
---------- ----------
Long-term portion $ 9,629 $1,843,803
========== ==========
</TABLE>
(a) This facility was leased from The Health and Education Facilities
Board of the County of Hawkins, Tennessee (Lessor), pursuant to a
lease dated as of April 1, 1979, for a basic term of 30 years.
27
<PAGE> 28
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE C LONG-TERM OBLIGATIONS (continued)
The bonds on the Church Hill facility were reissued April 1, 1994.
Among other things, the bonds were restated at the principal amount of
$1,830,000 and a fixed rate of interest of 9.09%. Debt service funds
of $305,050 at December 31, 1994 are included in restricted escrow and
other deposits. On February 16, 1995, the Partnership sold its
interest in the Church Hill facility. The Partnership was, as of
February 1995, no longer obligated by the mortgage revenue bonds
referenced above.
The foregoing lease has been accounted for, at December 31, 1994, as a capital
lease with the related debt recorded as a liability of the Partnership. The
carrying amounts of the related assets as of December 31, 1994 are summarized
as follows:
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Land $ 85,000
Buildings and improvements 3,158,477
Equipment and furnishings 288,771
-----------
3,532,248
Less accumulated amortization 799,993
-----------
$ 2,732,255
===========
</TABLE>
As of December 31, 1995, principal maturities for the next five years for
long-term debt were as follows:
<TABLE>
<S> <C>
1996 $ 14,754
1997 9,629
1998 -
1999 -
2000 -
2001 and after -
-----------
$ 24,383
===========
</TABLE>
28
<PAGE> 29
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE D TAXABLE LOSS
A reconciliation between the net income (loss) for financial reporting purposes
and the taxable income (loss) for income tax purposes follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Financial statement net income (loss) $ 533,537 $ (7,146,189) $ 95,883
Add:
Bad debts - 61,747 -
Write down of properties - 7,180,571 3,352,459
Jobs tax credit - 72,134 78,387
Prior year expense accrual (369,512) 369,512 -
Current year expense accrual 11,203
Deduct:
Minority interest 2,171 (8,631) (12,160)
Excess of tax over book depreciation (248,609) (184,847) (72,699)
Excess of tax over book basis
of disposed facilities (6,653,391) - -
Bad debts (121,298) - (73,053)
Tax basis difference on foreclosure - - (319,067)
Other 2,023 - (21,049)
------------ ------------ -----------
Taxable income (loss) $ (6,843,876) $ 344,297 $(3,028,701)
============ ============ ===========
</TABLE>
NOTE E LITIGATION
During 1993, the Partnership settled its litigation with Southmark. As a
result of the settlement, the Partnership agreed to pay Southmark $60,700 and
the Partnership avoided payment of $2,400,476 in amounts payable to Southmark
and it affiliates. The amount of $2,339,776 was recognized as a non-cash
extraordinary gain for 1993.
During the third quarter of 1994, the Partnership settled its litigation with
Healthcare Services Group, Inc., with $64,012 being recognized as a non-cash
extraordinary gain for 1994.
In November 1994, a default judgement was entered into against the Partnership
for approximately $580,000. The Partnership filed a motion seeking relief from
the entry of default and the default judgement was set aside. The claim
associated with the default judgement relates to a sexual harassment and
wrongful termination lawsuit. The plaintiff is seeking an unspecified amount
of damages. The Partnership's liability, if any, is not determinable at this
time and no provision has been made in the accompanying Financial Statements.
It is the opinion of management that the ultimate resolution will not have a
material effect on the Partnership's financial position.
29
<PAGE> 30
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE E Litigation continued
In December 1994, the Partnership received a Notice and Demand for Payment from
the Idaho State Tax Commission resulting from sales tax audits for the years
1976 through 1988 under a theory of successor liability for approximately
$470,000. Management of the Partnership is discussing a settlement of this
matter and has recorded a provision in the Financial Statements for $352,602,
at December 31, 1994. As a result of selling certain facility interests in
1995, this successor liability was reduced to $373,000 and reserves reduced to
$279,691. Management is of the opinion that the final resolution will not have
a material adverse effect on the Partnership's financial position. No legal
actions, other than ordinary routine litigation incidental to business, were
filed against the Partnership. There has been no change in the status of
on-going litigation during the fourth quarter of 1995.
NOTE F ASSETS HELD IN RECEIVERSHIP AND FORECLOSURE GAIN
Due to deficits from operations, debt service payments on Valley Care Center
were stopped by the prior general partner in January 1990. On May 1, 1990, a
receiver was appointed to operate the facility. Valley Care Center filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in May 1991. The Plan of Reorganization which had been filed
by the Partnership in United States Bankruptcy Court, District of Idaho, was
determined to be not confirmable by the judge in the case. Rather than expend
additional Partnership assets pursuing the case in this venue, the Partnership
chose to allow the case to be dismissed. It was management's belief that the
cost of continuing litigation in state court would have rapidly exceeded the
economic value of the equity in the property. Therefore, the foreclosure
proceeding was not contested and the property was abandoned by the Partnership
in September of 1993. An allowance of $162,725 was provided in 1989 to reduce
the carrying value of the property to its net realizable value. An additional
loss of $1,510,559 was recognized in 1993 to write the carrying value of the
property to its fair value. As the adjusted carrying value of the property was
less than the debt extinguished, the Partnership realized an extraordinary gain
of $2,529,589 upon the debt extinguishment. The debt on the facility was
non-recourse and thus there will be no impact on future operations.
30
<PAGE> 31
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE F ASSETS HELD IN RECEIVERSHIP AND FORECLOSURE GAIN continued
The amounts are determined as follows:
<TABLE>
<S> <C>
Estimated fair value of property $ 1,805,000
Carrying value of property, exclusive
of allowance (3,478,284)
Loss from foreclosure (1,673,284)
Less loss provided in 1989 162,725
Loss recognized in 1993 $(1,510,559)
===========
Amount of mortgage and accrued interest
extinguished $ 4,334,589
Estimated fair value of properties
(adjusted carrying value) (1,805,000)
-----------
Extraordinary gain from extinguishment
of debt $ 2,529,589
===========
</TABLE>
The condensed financial information related to the foreclosed property is as
follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1993
-----------
<S> <C>
Revenue $ 1,682,503
===========
Operating expenses $ 1,946,321
===========
</TABLE>
NOTE G IMPAIRMENT LOSS
Fourth quarter results for 1993 include a non-cash charge related to property
and equipment write down for the Valley Convalescent, Port Angeles and Mountain
View facilities in the amount of $1,010,581, $1,186,779 and $1,155,099,
respectively. These write downs resulted from the Partnership's reassessment
of projected undiscounted future cash flows over the life of the property in
light of the economic and regulatory environment in which these facilities
operate and the related impact on future estimated revenue and expense levels.
In the case of Mountain View only, the carrying value, after the before
mentioned writedown, approximates estimated net realizable value.
During 1994, the Partnership filed preliminary proxy materials with the
Securities and Exchange Commission (the "SEC") describing a proposed sale of
its interests in its eight facilities and related operating assets including
working capital (collectively, the "Partnership Interests"), to an affiliate of
the General Partner. In December 1994, it became apparent the proxy could not
be completed on a timely basis and all negotiations with the affiliate were
terminated. Subsequently, the preliminary proxy materials were withdrawn from
the SEC review process.
As set forth in the preliminary proxy materials, should the preliminary proxy
not be completed, it was the Partnerships intent to sell its assets to generate
cash proceeds for distribution to the limited partners. Accordingly,
consistent with the Partnership's accounting policy as described in Note A, the
Partnership reflected the property and equipment as of December 31, 1994 at the
lower of cost
31
<PAGE> 32
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE G IMPAIRMENT LOSS continued
(as previously adjusted for writedowns if applicable) or estimated net
realizable value, determined on an individual nursing home basis.
At December 31, 1994, in accordance with the Partnership's accounting policy,
described in Note A, additional writedowns of $762,797 and $1,518,905 were
applied to Valley Living Center and Valley Convalescent Center, respectively,
to recognize estimated net realizable value as determined by management of the
Partnership. The remaining facilities were also adjusted to estimated net
realizable value, except the Church Hill facility which was sold for a gain, of
$200,446 (Note H).
NOTE H SALE OF FACILITIES
In February 1995, the Partnership sold its partnership interest in one facility
to an unaffiliated third party and recognized a gain of $200,446. The
Partnership was relieved of the mortgage obligations secured by the facility of
$1,830,000, received cash of $1,700,000 and was relieved of any obligations
relating to Medicaid or Medicare settlements, audit adjustments and prior
reimbursement recapture by Medicare.
In addition the Partnership sold its interests in four of its facilities in
1995 to a different unaffiliated third party. The Partnership reflected an
estimated loss on the sale of these facilities of $4,898,869 at December 31,
1994 and recognized a gain of $347,943 upon closing of the sale on April 30,
1995. The contract provided 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 for the sale of the
Partnership interests in the four facilities. The contract also 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. The Partnership
made a final determination of adjusted working capital when the Partnership's
accountants completed certain agreed upon procedures. Total cash received by
the Partnership was $3,370,998, and the purchaser assumed debt related to
equipment of approximately $63,000.
The balance sheet of the Partnership reflects the effects of the sale of the
Partnership's interests in the five facilities. The Partnership is seeking to
liquidate the Partnership's interests in its three remaining facilities.
Distributions of $2,792,780 or $10/unit were made to the limited partners in
March of 1995 and $2,513,502 or $9/unit were made in June 1995.
NOTE I PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the Partnership selling its interests in five of its
facilities during 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 pro forma condensed financial information does not purport to present what
actual results of operations would have been if the transactions previously
32
<PAGE> 33
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE I PRO FORMA INFORMATION continued
described had occurred on such dates or to project results for any future
period. It is management of the Partnership's belief that all adjustments
necessary to reflect the effects of the sales, described in Note H 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: $ 12,012 $ (5,300) (A) $ 6,712
Expenses:
Wages and salaries $ 5,518 $ (2,537) (A) $ 2,981
Operating expenses 4,913 (2,140) (A) 2,773
Management fees 618 (287) (A) 331
Management fees-affiliate 114 (48) (A) 66
Property taxes and interest 111 (52) (A) 59
Depreciation and amortization 174 (92) (A) 82
Partnership administration 579 579
--------- --------- ---------
12,027 (5,156) 6,871
--------- --------- ---------
Net income (loss) (B) $ (15) $ 144 $ (159)
========= ========= =========
</TABLE>
(A) The pro forma adjustments remove the revenues and expenses directly
related to the five nursing homes sold.
(B) The historical statement of operations for the period ended December
31, 1995 includes a gain of $548, in thousands, from the sale of five
facilities. This amount is not included in the above pro forma
condensed statement of operations due to the non recurring nature.
NOTE J 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 five nursing homes 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 facility and
Partnership expenses and establishing adequate reserves from the sales of
facilities should enable the Partnership to meet its obligations and upon the
final sale of its assets, liquidate in an orderly fashion.
NOTE K
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 in Notes G and H, effectively
adjusting the carrying value of its long-lived assets to estimated net
realizable value, no significant adjustment from net realizable value to fair
value is expected.
33
<PAGE> 34
QUEST HEALTH CARE FUND VII, L.P.
SCHEDULE V - PROPERTY AND EQUIPMENT
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Balance at
Beginning Additions Write Balance at
Classification of Year at Cost Retirements Downs End of Year
- -------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1995
Land $ 800,577 $ - $ (566,807) $ - $ 233,770
Buildings and
improvements 10,651,257 6,153 (8,276,509) - 2,380,901
Equipment and
furnishings 1,978,261 33,281 (1,256,253) - 755,289
----------- ---------- ------------ ----------- -----------
$13,430,095 $ 39,434 $(10,099,569) $ - $ 3,369,960
=========== ========== ============ =========== ===========
FOR THE YEAR ENDED
DECEMBER 31, 1994
Land $ 808,746 $ - $ (8,169) $ - $ 800,577
Buildings and
improvements 17,439,933 2,302 (42,330) (6,748,648) 10,651,257
Equipment and
furnishings 1,909,386 68,875 - - 1,978,261
----------- ---------- ------------ ----------- -----------
$20,158,065 $ 71,177 $ (50,499) $(6,748,648) $13,430,095
=========== ========== ============ =========== ===========
FOR THE YEAR ENDED
DECEMBER 31, 1993
Land $ 783,541 $ 25,205 $ - $ - $ 808,746
Buildings and
improvements 20,568,167 148,380 - (3,276,614) 17,439,933
Equipment and
furnishings 1,698,585 308,937 (22,291) (75,845) 1,909,386
----------- ---------- ------------ ----------- -----------
$23,050,293 $ 482,522 $ (22,291) $(3,352,459) $20,158,065
=========== ========== ============ =========== ===========
</TABLE>
34
<PAGE> 35
QUEST HEALTH CARE FUND VII, L.P.
SCHEDULE VI - ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Other Balance at
Classification of Year Expenses Retirements Changes End of Year
- -------------- ---------- ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1995
Buildings and
improvements $ 4,896,215 $ 109,954 $(3,376,810) $ - $ 1,629,359
Equipment and
furnishings 1,552,927 63,921 (948,498) - 668,350
----------- ----------- ----------- ---------- -----------
$ 6,449,142 $ 173,875 $(4,325,308) $ - $ 2,297,709
=========== =========== =========== ========== ===========
FOR THE YEAR ENDED
DECEMBER 31, 1994
Buildings and
improvements $ 4,360,229 $ 543,985 $ (7,999) $ - $ 4,896,215
Equipment and
furnishings 1,400,807 152,120 - - 1,552,927
----------- ----------- ----------- ---------- -----------
$ 5,761,036 $ 696,105 $ (7,999) $ - $ 6,449,142
=========== =========== =========== ========== ===========
FOR THE YEAR ENDED
DECEMBER 31, 1993
Buildings and
improvements $ 3,661,159 $ 699,070 $ - $ - $ 4,360,229
Equipment and
furnishings 1,276,134 124,673 - - 1,400,807
----------- ----------- ----------- ---------- -----------
$ 4,937,293 $ 823,743 $ - $ - $ 5,761,036
=========== =========== =========== ========== ===========
</TABLE>
35
<PAGE> 36
QUEST HEALTH CARE FUND VII, L.P.
SCHEDULE VIII - VALUATION AND QUALIFYING
ACCOUNTS For the Years Ended December 31,
1995, 1994 and 1993
<TABLE>
<CAPTION>
Additions Receivables Write-off of
Balance at Charged to Charged Allowance
Beginning Costs and Against for Sold Balance at
Description of Period Expenses Allowances Facilities End of Period
- ----------- ---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for
doubtful accounts $ 262,636 $ 17,265 $ (53,570) $(201,331) $ 25,000
========= ========== ========== ========= ==========
Year ended December 31, 1994
Allowance for
doubtful accounts $ 246,153 $ 103,387 $ (86,904) $ - $ 262,636
========= ========== ========== ========= ==========
Year ended December 31, 1993
Allowance for
doubtful accounts $ 273,942 $ 62,881 $ (90,670) $ - $ 246,153
========= ========== ========== ========= ==========
</TABLE>
36
<PAGE> 37
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.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have officers or directors. Quest became the general
partner of the Partnership on August 1, 1990. The general partner of Quest is
Quest Rescue Partners - 7 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 42
Chairman
Executive Vice-President Chairman of Quest Financial Corp. and the Quest Affiliates, and has been since
their inception in 1989. Mr. Berry received a B.S. degree in Finance from
Babson College, Wellesley, Massachusetts in l976.
Michael G. Hunter 38
President & Director President of Quest Financial Corp. and the Quest Affiliates. From 1988 and
prior to starting Quest, Mr. Hunter was Senior Vice President and Chief
Financial Officer of Healthcare Concepts, Inc., Atlanta, Georgia, a consulting
and investment advisor to long term care providers, lenders and capital
markets from 1985 to 1988, Mr. Hunter was employed by Southmark Public
Syndications, Inc. Mr. Hunter received a B.S. degree in Finance from the
University of Arkansas in 1982. He is both a general securities principal and
a financial operations principal.
</TABLE>
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 SIG and Quest.
37
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security ownership of certain beneficial owners.
No person or groups, 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.
The wife of the President of the General Partner owns 50 units of the
Registrant. No officer or director of the corporate general partner
of Quest possesses a right to acquire beneficial ownership of any
Units.
Quest 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 6, 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.
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 independent 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 proscribed
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 1995 were $113,966. Quest created an
employee benefit trust in compliance with the guidelines promulgated by VEBA
and ERISA. Approximately $198,210 was recorded under this arrangement in 1995.
The trust is administered by an affiliate of Quest, however, no profits accrue
to the benefit of either the affiliate or Quest. See Note B to the
accompanying consolidated financial statements appearing in Item 8.
(C) No management persons are indebted to the Partnership.
(D) There have been no significant transactions with promoters.
38
<PAGE> 39
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, 1995 and 1994
Consolidated Statements of Operations
for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Partners' Equity
for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules V - Property and Equipment
for the Years Ended December 31, 1995, 1994 and 1993
Schedule VI - Accumulated Depreciation
for the Years Ended December 31, 1995, 1994 and 1993
Schedule VIII - Valuation and Qualifying Accounts
for the Years Ended December 31, 1995, 1994 and 1993
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.
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 between 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.
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C>
2 Assignment of Purchase and Sale Agreement between 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 Agreement for the Purchase and Sale of General Partner and Limited Partner Interest by and
among Southmark Consolidated Resources Corporation of America, Rogersville Associates Limited
Partnership and Southmark/CRCA Health Care Fund VII, L.P. dated June 1, 1988 incorporated by
reference to Form 8-K dated June 30, 1987.
2 Agreement for the Purchase and Sale of General Partner and Limited Partner Interest by and
among Southmark Consolidated Resources Corporation of America, Church Hill Limited Partnership
and Southmark/CRCA Health Care Fund VII, L.P. dated June 1, 1988 incorporated by reference to
Form 8-K dated June 30, 1987.
3 Agreement of Limited Partnership of Southmark/CRCA Health Care Fund VII, L.P., incorporated by
reference to Form S-1, Page A-1, File No. 33-7443
3 Amendment to Agreement of Limited Partnership of Southmark/CRCA Health care Fund VII, L.P.,
dated August 1, 1990.
3 Second Amendment to Agreement of Limited Partnership of Southmark/CRCA Health Care Fund VII,
L.P., dated August 1, 1990.
3 Form of Fourth Amendment to Agreement of Limited Partnership Southmark/CRCA Health Care Fund
VII, L.P., dated June 1, 1992.
10 Health Care Center Consultant and Management Services Agreement between National Heritage
Management, Inc. and Nampa Canyon associates Limited Partnership d/b/a Midland Care Center
incorporated by reference to amended form 10-K fiscal year ended December 31, 1988.
10 Agreement for laundry and housekeeping services between American Services Company and Port
Angeles Associates, L.P. d/b/a Port Angeles 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 Fund VII, L.P. and LTCS,
L.P. d/b/a VHA Long Term Care dated January 14, 1991, effective November 28, 1989.
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
10 Form of Amendment, effective March 1, 1992, to the
Nursing Home Management Agreement between
Southmark/CRCA Health Care Fund VII, L.P. and LTCS,
L. P. dba VHA Long Term Care.
10 Assignment of Limited Partnership Interest Agreement
for the Church Hill facility between Quest Health
Care Fund VII, L.P. and International Health Corp.
Contract for sale of four facilities between Quest
Health Care Fund VII, L.P. and Millenium Foundation,
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 1995.
(C) An annual report for the fiscal year 1995 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.
41
<PAGE> 42
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
FUND VII, L.P.
By: QUEST RESCUE PARTNERS - 7, L.P.
General Partner
By: QUEST RESCUE PARTNERS - 7 CORP,
General Partner
Date: April 12, 1996 By:/s/ Stuart C. Berry
---------------- --------------------
Stuart C. Berry
Executive Vice-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: April 12, 1996 /s/ Stuart C. Berry
---------------- --------------------------------
Stuart C. Berry
Chairman, Executive Vice-President
and Chief Financial Officer of the General
Partner of the General Partner.
Date: April 12, 1996 /s/ Michael G. Hunter
---------------- --------------------------------
Michael G. Hunter
President and Director of the General Partner
of the General Partner.
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUEST HEALTH CARE FUND VII, L.P. FOR THE YEAR ENDED
DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,325,321
<SECURITIES> 0
<RECEIVABLES> 939,057
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,408,353
<PP&E> 3,369,960
<DEPRECIATION> 2,297,709
<TOTAL-ASSETS> 3,480,604
<CURRENT-LIABILITIES> 982,706
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,488,269
<TOTAL-LIABILITY-AND-EQUITY> 3,480,604
<SALES> 0
<TOTAL-REVENUES> 12,560,777
<CGS> 0
<TOTAL-COSTS> 11,981,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,265
<INTEREST-EXPENSE> 28,179
<INCOME-PRETAX> 533,537
<INCOME-TAX> 0
<INCOME-CONTINUING> 533,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533,537
<EPS-PRIMARY> 0
<EPS-DILUTED> 1.89
</TABLE>
