<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ------------------
Commission file number 0-15693
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QUEST HEALTH CARE FUND VII, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1697905
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1117 Perimeter Center West Suite E-210 Atlanta, GA 30338
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (770) 671-1014
----------------------------
Formerly: Southmark/CRCA Health Care Fund VII, L.P.
- ------------------------------------------------------------------------------
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
----- -----
There are no exhibits
TOTAL OF 15 PAGES
1
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QUEST HEALTH CARE FUND VII, L.P.
BALANCE SHEETS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 778,595 $ 1,325,321
Accounts receivable, net of allowance
for doubtful accounts of $37,843 and
$ 25,000 at June 30, 1996 and
December 31, 1995, respectively 1,406,434 914,057
Prepaid expenses 48,934 168,975
---------- ----------
Total current assets 2,233,963 2,408,353
---------- ----------
PROPERTY AND EQUIPMENT, at cost
Land 233,770 233,770
Buildings and improvements 2,388,741 2,380,901
Equipment and furnishings 766,917 755,289
---------- ---------
3,389,428 3,369,960
Less accumulated depreciation and amortization 2,337,610 2,297,709
---------- ----------
Net property and equipment 1,051,818 1,072,251
---------- ----------
OTHER ASSETS
Restricted escrow and other deposits - -
---------- ----------
TOTAL ASSETS $ 3,285,781 $ 3,480,604
========== ==========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
2
<PAGE> 3
QUEST HEALTH CARE FUND VII, L.P.
BALANCE SHEETS
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
------------- ------------
1996 1995
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 15,414 $ 14,754
Trade accounts payable 354,953 334,994
Accrued compensation 235,148 116,582
Accrued insurance - 103,962
Estimated third party settlements - 26,695
Estimated sales tax settlement (Note 4) 279,691 279,691
Other 83,365 94,036
Payable to Quest and affiliates 31,075 11,992
---------- ----------
Total current liabilities 999,646 982,706
LONG-TERM DEBT, less current maturities 1,972 9,629
---------- ----------
Total liabilities 1,001,618 992,335
---------- ----------
PARTNERS' EQUITY
Limited Partners 2,423,610 2,625,675
General Partner (139,447) (137,406)
---------- ----------
Total partners' equity 2,284,163 2,488,269
---------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 3,285,781 $ 3,480,604
========== ==========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
3
<PAGE> 4
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Operating revenue $1,789,717 $2,829,865 $ 3,522,567 $ 8,637,658
Interest income 7,290 10,330 18,733 31,047
Gain on sales - 347,943 - 548,389
--------- --------- --------- ---------
Total revenues 1,797,007 3,188,138 3,541,300 9,217,094
--------- --------- ---------- ----------
EXPENSES:
Wages & salaries 831,491 1,451,564 1,639,586 3,990,842
Payroll tax & employee benefits 150,428 281,193 308,884 864,955
Supplies 234,022 297,283 470,345 845,212
Other operating expenses 154,269 367,046 287,131 974,482
Ancillary services 254,375 304,988 526,625 794,539
Health benefits 35,300 47,665 74,490 147,855
Management fees 89,153 148,211 177,908 452,784
Management fees-affiliate 17,966 28,410 35,723 80,862
Property taxes 15,263 22,791 31,158 58,363
Interest 678 1,501 1,415 26,479
Depreciation and amortization 19,080 32,468 39,901 132,984
Partnership administration 87,901 243,757 152,240 425,453
--------- --------- --------- ---------
Total expenses 1,889,926 3,226,877 3,745,406 8,794,810
--------- --------- ---------- ----------
Net income (loss) $ (92,919) $ (38,739) $ (204,106) $ 422,284
========= ========= ========= =========
Net income (loss) per Limited
Partnership Unit $ ( .33) $ ( .14) $ ( .72) $ 1.50
========= ======== ======== =========
Weighted average Limited Partnership
Units outstanding 279,278 279,278 279,278 279,278
========= ========= ========= =========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
4
<PAGE> 5
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity
--------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 $(142,741) $7,403,755 $7,261,014
Net income 4,223 418,061 422,284
Distributions - (5,306,282) (5,306,282)
--------- ---------- ----------
Balance at June 30, 1995 $(138,518) $2,515,534 $2,377,016
======== ========= =========
Balance at December 31, 1995 $(137,406) $2,625,675 $2,488,269
Net loss (2,041) (202,065) (204,106)
--------- ---------- ----------
Balance at June 30, 1996 $(139,447) $2,423,610 $2,284,163
======== ========= =========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
5
<PAGE> 6
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from residents and
government agencies $ 3,030,190 $ 8,963,161
Cash paid to suppliers and
employees (3,512,142) (8,767,411)
Interest received 18,733 31,047
Interest paid (1,415) (26,479)
Property taxes paid (55,627) (95,626)
---------- ---------
Net cash provided (used) by operating
activities (520,261) 104,692
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property - 5,070,998
Payment for purchases of property
and equipment (19,468) (28,180)
Funding of restricted accounts - (4,495)
----------- ---------
Net cash provided (used) by investing
activities (19,468) 5,038,323
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to partners - (5,306,282)
Principal payments on long-term debt (6,997) (15,125)
---------- ---------
NET CASH USED IN FINANCING ACTIVITIES (6,997) (5,321,407)
---------- ----------
Increase (decrease) in cash and cash
equivalents (546,726) (178,392)
Cash and cash equivalents at beginning of
period 1,325,321 1,469,459
---------- ---------
Cash and cash equivalents at end of period $ 778,595 $1,291,067
========== =========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
6
<PAGE> 7
QUEST HEALTH CARE FUND VII, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1996 1995
--------- ---------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (204,106) $ 422,284
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 39,901 132,984
Gain on sale of property - (548,389)
Abandoned development costs - 92,304
Changes in assets and liabilities
Accounts receivable (492,377) 325,503
Prepaid and other current assets 120,041 (81,108)
Accounts payable and accrued
liabilities (2,803) (248,934)
Payable to Quest and affiliates 19,083 10,048
--------- ---------
Net cash provided (used) by
operating activities $ (520,261) $ 104,692
========= =========
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.
7
<PAGE> 8
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
NOTE 1
During interim periods, Quest Health Care Fund VII, L.P. (the "Partnership")
follows the accounting policies set forth in its Annual Report on Form 10-K
filed with the Securities and Exchange Commission. Users of financial
information provided for interim periods should refer to the annual financial
information and footnotes contained in the Annual Report on Form 10-K when
reviewing the interim financial results presented herein.
In the opinion of management, the accompanying unaudited interim financial
statements, prepared in accordance with the instructions for Form 10-Q, contain
all material adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial condition, results of operations,
changes in partners' equity and cash flows of the Partnership for the
respective interim periods presented. The results of operations for such
interim periods are not necessarily indicative of results of operations for a
full year.
NOTE 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
June 30, 1996, the Partnership maintained cash balances at these banks
aggregating $658,232 in excess of the $100,000 FDIC insured maximum.
Included in cash and cash equivalents is $540,100 invested in repurchase
agreements with underlying United States government backed securities, which
have original maturities of less than 30 days.
NOTE 3 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 for the six month periods ending
June 30, 1996 and 1995 were $35,723 and $80,862, 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
of the participating employers, payment of excess loss reinsurance, life
insurance and accidental death and dismemberment and claims and plan
administra-
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<PAGE> 9
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 TRANSACTIONS WITH AFFILIATES continued
tion and employee medical claims. Quest has engaged a claims pre-certification
organization to review all claims made by the Partnership's employees.
Approximately $74,490 and $147,855 was recorded under this arrangement for the
six month period ending June 30, 1996 and 1995, 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 $152,240 and $425,453
for the six month periods ending June 30, 1996 and 1995, respectively. Such
charges represent legal costs associated with litigation and SEC filings,
investor service functions and other partnership administration costs.
Partnership administration has been reduced through effective cost controls.
In 1995, significant legal and accounting expenses were incurred in conjunction
with the sale of the Partnership's interests in certain facilities.
NOTE 4 LITIGATION
In 1994, a complaint associated with a sexual harassment and wrongful
termination was filed against the Partnership. 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.
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. To date,
the State of Idaho has not responded to the Partnership. No other 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 first
two quarters of 1996.
NOTE 5 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.
9
<PAGE> 10
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 SALE OF FACILITIES continued
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 1995 and $2,513,502 or $9/unit were made in June 1995.
NOTE 6 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
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 affects of the sales have been made.
10
<PAGE> 11
QUEST HEALTH CARE FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 PRO FORMA INFORMATION (UNAUDITED) continued
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (B)
For the Six Months Ended June 30, 1995
(Unaudited in thousands)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues: $ 8,669 $ (5,301) (A) $ 3,368
----- ------ -----
Expenses:
Wages and salaries $ 3,991 $ (2,537) (A) $ 1,454
Operating expenses 3,627 (2,140) (A) 1,487
Management fees 453 (287) (A) 166
Management fees-affiliate 81 (49) (A) 32
Property taxes and interest 85 (52) (A) 33
Depreciation and amortization 133 (92) (A) 41
Partnership administration 425 - 425
----- ------ -----
8,795 (5,157) 3,638
----- ------ -----
Net income (loss) (B) $ (126) $ (144) $ (270)
====== ======= =====
</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 June 30,
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 7 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 8 ACCOUNTING POLICIES
In March 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 121 - "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which is effective for
fiscal years beginning after December 15, 1995. Since the Partnership has
already recognized impairment losses effectively adjusting the carrying value
of its long-lived assets, as of December 31, 1994, to estimated net realizable
value, no significant adjustment from net realizable value to fair value is
expected.
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.
11
<PAGE> 12
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Revenues:
Revenues for the six months ended June 30, 1996 decreased $5,115,091 when
compared to the same period in 1995. On a pro forma basis, removing the effect
of the sold facilities, revenues increased $182,926 over the comparable period
in 1995. This increase is the result of improved occupancy and Medicare
utilization.
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 significant components of accounts receivable at June 30, 1996 and December
31, 1995 are:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Medicaid 48% 47%
Private Pay 10% 10%
VA, Medicare and Other 42% 43%
----- ----
100% 100%
===== ====
</TABLE>
Payments by both the state and federal governments are normally received within
60-90 days. The sources of patient revenues for the six months ended June 30,
1996 and 1995 are:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Medicaid 46% 60%
Private Pay 11% 13%
VA, Medicare and Other 43% 27%
----- -----
100% 100%
===== =====
</TABLE>
Receivables increased $492,377 during the six months ended June 30, 1996,
primarily as a result of delayed payments by the State of California as well as
normal delays in cost report settlements from Medicare. Subsequent to June 30,
1996, a substantial portion of the increase was recovered and additional
collections are expected.
Expenses:
Expenses for the six months ended June 30, 1996 decreased $5,049,404 when
compared to the same period of 1995. On a pro forma basis, eliminating the
effect of the sold facilities and partnership administration costs, expenses at
the facilities increased $107,540. These increases are attributable to payroll
increases and increased ancillary and supplies utilization. Salary increases
were driven by market forces and a result of publication by the government of
final rules relating to OBRA 1987.
Valley Convalescent located in California has improved census and Medicare
utilization as a result, higher revenue was achieved despite the fact that the
State of California did not increase reimbursement in 1995. In 1996, for the
third year in a row, California has not increased reimbursement rates for
Medicaid despite normal expense inflation in operations. In addition, Valley
Convalescent received a $48,000 worker's compensation insurance dividend as
well as a $48,000 prior year revenue adjustment during the first quarter of
1995. No similar revenue was recognized during the same period in 1996. Given
these
12
<PAGE> 13
factors, the facility can expect to experience a continued decline in operating
margins throughout 1996, as compared to 1995. The facilities dependence on
Medicare increases the sensitivity of the facility to changes instituted by
Congress. Rate freezes, block grants and reduced funding all suggest caution
in the Partnership's expectations for this facility as well as the others.
Despite market uncertainties, every effort will be made by management of the
Partnership to maximize facility values for sale. Valley Living, in Idaho, has
improved census and controlled expenses and currently generates positive cash
flow. Mountain View continues to suffer the consequence of the new facility in
town. To protect the interests of the Partnership, the Mountain View facility
must continue operations pending a resolution of the sales tax claims and the
employee complaint. (See Item I, Note 4)
Liquidity and Capital Resources:
At June 30, 1996, the Partnership held cash and cash equivalents of $778,595.
This is a decrease of $546,726 since December 31, 1995. This is due primarily
to delayed receipt of normal reimbursements from the State of California.
Subsequent to June, the Partnership received a substantial portion of the
delayed payments and additional collections are expected. There are no major
capital improvements planned at the remaining 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.
Neither the General Partner nor its affiliates will receive any remuneration or
distributions of sales proceeds.
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 1995 and $2,513,502 or $9/unit were made in June 1995.
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.
13
<PAGE> 14
The Partnership received certain expressions of interest in acquiring two of
the Partnership's three remaining facility interests, however, the discussions
ceased as negotiations never moved forward.
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, HCFA implemented a freeze on
Medicare reimbursement, which remains in effect today, on routine cost limits,
certain Part B ancillaries and prospective payment system rates. In addition,
HCFA eliminated the return on equity component of the reimbursement rate.
Further, by the end of 1993, several states, because of federal actions and/or
budgetary difficulties, had either taken action to curtail the growth in
entitlement programs and/or had indicated that future action was possible.
Despite the fact that health care reform proposals at the federal level have
been significantly reduced, activities at the state level continue and are
encouraged by HCFA. The latest idea continues to be "block grants" to the
states. What this means to nursing facilities cannot currently be determined
by management of the Partnership.
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
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 became 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.
PART II. OTHER INFORMATION
ITEMS 1-5
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
Exhibit 27 - Financial Data Schedule (for SEC use only)
(B) Reports on Form 8-K.
None during the second quarter of 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
By: QUEST RESCUE PARTNERS - 7, L.P.
General Partner
By: QUEST RESCUE PARTNERS - 7 CORP.
Date: August 16, 1996 By:/s/ Stuart C. Berry
------------------ -----------------------------
CEO
By:/s/ Stuart C. Berry
-----------------------------
CFO
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUEST HEALTH CARE FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 778,595
<SECURITIES> 0
<RECEIVABLES> 1,431,434
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,233,963
<PP&E> 3,389,428
<DEPRECIATION> 2,337,610
<TOTAL-ASSETS> 3,285,781
<CURRENT-LIABILITIES> 999,646
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,284,163
<TOTAL-LIABILITY-AND-EQUITY> 3,285,781
<SALES> 0
<TOTAL-REVENUES> 3,541,300
<CGS> 0
<TOTAL-COSTS> 3,731,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 1,415
<INCOME-PRETAX> (204,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (204,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (204,106)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
