FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended September 30, 1999 Commission file number 000-17596
Meridian Healthcare Growth and Income Fund Limited Partnership
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-1549486
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
225 East Redwood Street, Baltimore, Maryland 21202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (410) 727-4083
N/A
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
INDEX
Page No.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS 2
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statements of Partners' Capital 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Part II. Other Information
Item 1. through Item 6. 15
Signatures 16
<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Cautionary Statement Regarding Forward Looking Statements
Certain statements contained herein, including certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Fund's business outlook or future economic
performances, anticipated profitability, revenues, expenses or other financial
items together with other statements that are not historical facts are
"forward-looking statements" as that term is defined under the Federal
Securities Law. Forward-looking statements are necessarily estimates reflecting
the best judgement of the party making such statements based upon correct
information and involve a number of risks, uncertainties and other factors which
could cause actual results to differ materially from those stated in such
statements. Risks, uncertainties and factors which could affect the accuracy of
such forward looking statements are identified in the Fund's Prospectus and the
Fund's Registration Statement filed by the Fund with the Securities and Exchange
Commission, and forward looking statements contained herein or in other public
statements of the Fund should be considered in light of those factors. There can
be no assurance that factors will not affect the accuracy of such forward
looking statements.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
Assets
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,531 $ 2,928
Accounts receivable, net 7,526 7,279
Estimated third-party payor settlements 753 882
Prepaid expenses 572 565
Total current assets 10,382 11,654
Property and equipment, net of accumulated depreciation 33,388 33,653
Other assets - goodwill, net 4,808 4,998
Total assets $ 48,578 $ 50,305
Liabilities and Partners' Capital
Current liabilities
Current portion of long-term debt $ 22,778 $ 720
Accrued compensation and related costs 460 941
Accounts payable and other accrued expenses 2,390 3,184
Estimated third party payor settlements 2,328 2,093
Total current liabilities 27,956 6,938
Deferred management fee payable 885 852
Loan payable to the Development General Partner 1,125 1,086
Long-term debt - 22,616
2,010 24,554
Partners' capital
General partners (130) (128)
Assignee limited partners; 1,540,040
units issued and outstanding 18,742 18,941
Total partners' capital 18,612 18,813
Total liabilities and
partners' capital $ 48,578 $ 50,305
</TABLE>
See accompanying notes to consolidated financial statements
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Consolidated Statements of Earnings
(Unaudited)
(Dollars in thousands except per unit amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
Revenues
<S> <C> <C> <C> <C>
Medicaid and Medicare patients $ 10,210 $ 12,030 $ 29,995 $ 31,455
Private patients 2,397 2,905 7,480 8,374
Investment and other income 38 100 103 233
12,645 15,035 37,578 40,062
Expenses
Operating, including $1,718, $1,664,
$4,563 and $5,192 to related parties 10,067 9,998 29,383 29,835
Management and administration fees
to related parties 822 963 2,442 2,586
General and administrative 232 243 720 627
Depreciation and amortization 522 497 1,506 1,466
Interest expenses 427 459 1,249 1,396
12,070 12,160 35,300 35,910
Net earnings $ 575 $ 2,875 $ 2,278 $ 4,152
Net earnings per unit of assignee
limited partnership interest-basic
(computed based on 1,540,040
units) $ 0.37 $ 1.85 $ 1.46 $ 2.67
</TABLE>
See accompanying notes to consolidated financial statements
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Consolidated Statements of Partners' Capital
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Dollars in thousands
<TABLE>
<CAPTION>
Assignee
General Limited
Partners Partners Total
<S> <C> <C> <C>
Balance at December 31, 1998 $ (128) $ 18,941 $18,813
Net earnings 23 2,255 2,278
Distributions to partners (25) (2,454) (2,479)
Balance at September 30, 1999 $ (130) $ 18,742 $18,612
Balance at December 31, 1997 $ (153) $ 16,504 $16,351
Net earnings 42 4,110 4,152
Distributions to partners (25) (2,454) (2,479)
Balance at September 30, 1998 $ (136) $ 18,160 $18,024
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 2,278 $ 4,152
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 1,506 1,466
Minority interest in net earnings of operating
partnerships 26 45
Increase in loan payable to Development General Partner 39 39
Increase in deferred management fee payable 33 31
Change in other assets and liabilities
Accounts receivable (273) (1,076)
Estimated third-party payor settlements 364 (1,887)
Prepaid expenses (7) (60)
Accrued compensation and related costs (481) (295)
Accounts payable and other accrued expenses (794) 1,097
Net cash provided by operating activities 2,691 3,512
Cash flows from investing activities-
additions to property and equipment (1,051) (395)
Cash flows from financing activities
Loan acquistion costs - (13)
Repayment of long-term debt (558) (548)
Distributions to partners (2,479) (2,479)
Net cash used in financing activities (3,037) (3,040)
Net increase (decrease) in cash and cash equivalents (1,397) 77
Cash and cash equivalents
Beginning of period 2,928 2,275
End of period $ 1,531 $ 2,352
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - THE FUND AND BASIS OF PREPARATION
The Fund owns 98.99% limited partnership interests in each of the seven
operating partnerships. The Fund through its seven operating partnerships,
derives substantially all of its revenue from extended healthcare provided to
nursing center residents including room and board, nursing care, drugs and other
medical services.
The accompanying consolidated financial statements of Meridian Healthcare Growth
and Income Fund Limited Partnership (the "Fund") do not include all of the
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. The
unaudited interim consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. All such adjustments are of a normal
recurring nature. The unaudited interim financial information contained in the
consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the 1998 Annual Report.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Fund is obligated to pay the Administrative General Partner an annual
administration fee of the greater of $75,000 per year or 1/2 of 1% of the Fund's
annual revenues. The nursing centers owned by the operating partnerships are
managed by Meridian Healthcare, Inc., an affiliate of the Development General
Partner, under the terms of ten year management agreements which provide for
management fees equal to 6% of the annual revenues of each nursing center.
Certain of the operating partnerships also purchase drugs and medical supplies
and other services from affiliates of the Development General Partner. Such
purchases are in turn billed to patients or third party payors at prices which
on average approximate the nursing center's cost.
Transactions with these related parties for the three and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
<S> <C> <C> <C> <C>
Management and administration fees $ 822,000 $ 963,000 $2,442,000 $2,586,000
Drug and medical supplies purchases 763,000 430,000 2,133,000 1,522,000
Nursing and rehabilitation services 955,000 1,234,000 2,430,000 3,670,000
Interest expense on borrowings 21,000 23,000 67,000 69,000
</TABLE>
Loans outstanding under an arrangement with the Development General Partner to
fund operating deficits generated by the Mooresville, Salisbury and Woodlands
nursing centers were $1,125,000 at September 30, 1999 and $1,086,000 at December
31, 1998.
NOTE 3 - DEBT
On March 3, 1998, the Fund entered into a renewal commitment with a bank to
refinance all of the existing indebtedness. Under the terms of the refinancing,
the mortgages will mature on February 28, 2000 and will bear interest at LIBOR
(5.34% at September 30, 1999) plus 1.55%. The refinancing also extended the
$4,000,000 line of credit commitment until February 28, 2000. There were no
borrowings outstanding under the line of credit commitment at September 30,
1999.
The Fund has classified the balance of the long-term debt as a current liability
on the September 30, 1999 balance sheet as a result of its February 28, 2000
maturity date. The Fund's managers are in discussion regarding several options
for the extension of or refinance of the existing loan balances and line of
credit.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 4 - NET EARNINGS PER UNIT OF ASSIGNEE LIMITED PARTNERSHIP INTEREST
Net earnings per unit of assignee limited partnership interest is disclosed on
the Consolidated Statements of Operations and is based upon 1,540,040 units.
-8-
<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
On March 3, 1998, the Fund entered into a renewal commitment with a bank to
refinance all of the existing indebtedness. Under the terms of the refinancing,
the mortgages will mature on February 28, 2000 and will bear interest at LIBOR
plus 1.55%. The refinancing also extended the line of credit commitment until
February 28, 2000. The Fund has a $4,000,000 line of credit which is designated
for working capital needs and is primarily secured by the accounts receivable of
the Fund. At September 30, 1999, there were no outstanding borrowings under this
line of credit.
The Fund's working capital (excluding long-term debt) decreased $232,000 to
$5,204,000 at September 30, 1999 as compared to $5,436,000 at December 31, 1998.
The Fund has classified its long-term debt as a current liability on the
September 30, 1999 balance sheet as a result of its February 28, 2000 maturity
date. The Fund's managers are pursuing a renewal commitment to refinance all
existing indebtedness including the line of credit with both the existing
mortgagor and alternative lenders prior to the existing mortgage maturity date
of February 28, 2000.
Cash flow from operating activities was approximately $2,691,000 for the
nine months ended September 30, 1999 as compared to $3,512,000 for the same
period in 1998. The decrease is primarily the result of favorable Maryland
Medicaid cost report settlements (dating back to 1994) that were recognized
during the third quarter of 1998.
Cash used in investing activities for the nine months ended September 30,
1999 was $1,051,000 and is comprised of improvements to the Fund's seven
operating facilities. Cash used in financing activities for the nine months
ended September 30, 1999 included repayment of long-term debt of $558,000 and
distributions to partners of $2,479,000.
The Fund believes that the short-term liquidity needs will be met through
expected cash flow from operations and availability of working capital under the
existing line of credit. Long-term liquidity needs will be met through expected
cash flow from operations and a refinancing of the existing long-term
indebtedness and line of credit capacity.
Between 1988 and 1989 the Development General Partner loaned the Fund
$597,000 to support operating deficits generated by the Mooresville, Salisbury
and Woodlands nursing centers during each center's first two years of operation.
Loans outstanding under this arrangement, including interest at 9% per annum,
were $1,125,000 at September 30, 1999. The Fund is obligated to repay these
loans when certain specified financial criteria are met, the most significant of
which is the payment of a preferred return to the assignee limited partners as
defined in the Fund's partnership agreement.
On or about November 15, 1999, the Fund will make its third quarter 1999
cash distribution of $826,410 to its partners. This distribution will be funded
by third quarter 1999 operations and reserves of approximately $315,000. Through
the third quarter of 1999, operations have funded 94% of the distributions to
partners while the balance was funded by reserves. Preliminary review of the
budget for the fourth quarter suggests operations from the seven nursing centers
will be sufficient to fully fund a similar distribution at year-end.
The major challenge to the Fund in the foreseeable future is to control
operating expenses in light of Medicare's conversion to the Prospective Payment
System, to maintain a favorable quality mix of patients and to increase the
overall census at each of the facilities.
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<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended September 30, 1999 vs. Three Months ended September 30, 1998
Net earnings were $575,000 for the three months ended September 30,1999 as
compared to $2,875,000 for the same period in the prior year representing a
decrease of $2,300,000.
The fund's third quarter 1999 revenues of $12,645,000 decreased $2,390,000
or 16% compared to the same period in 1998.
Medicaid and Medicare revenue decreased $1,820,000 for the three months
ended September 30, 1999 as compared to the same period in 1998. The decrease is
primarily the result of revisions to cost reimbursement settlements which
resulted in an increase to third quarter 1998 revenues of $2,408,000. The
majority of the adjustment resulted from the favorable resolution of a Maryland
Medicaid issue dating back to 1994. Maryland Medicaid had proposed an audit
adjustment reducing the amount of cost allowed for reimbursement of the fees
paid to the Fund's manager as the state auditor took the position that the
manager was a related party. Upon appeal by the Fund, the State of Maryland
determined that the Fund's manager was not a related party and that the fees
paid to the manager were reimbursable under the state Medicaid program subject
to the applicable cost center ceilings. Contributing positively to the Medicare
and Medicaid revenue for the third quarter of 1999 is the Medicare census and
Medicaid rates. Medicare revenue increased approximately $461,000 for the third
quarter of 1999 compared to the same period in the prior year as the Medicare
census increased 2,721 days or 34%. Medicaid revenues increased $127,000 as
Medicaid rates increased approximately 4.6% for the quarter ended September 30,
1999 compared to the same period in the prior year.
Private revenue of $2,397,000 for the third quarter of 1999 decreased
$508,000 or 17% when compared to the third quarter of 1998. This decrease is
primarily the result of a decrease in Veterans Administration (VA) patient days,
private assisted living days and a decrease in insurance rates. For the third
quarter of 1999 compared to the same period in 1998 the VA and private assisted
living census decreased 522 and 1077 days, respectively, resulting in decreased
revenue of approximately $287,000. The average insurance rate decreased
approximately 28% for the third quarter of 1999 compared to the third quarter of
1998. This insurance rate decline resulted in an overall revenue decrease of
approximately $202,000.
Third quarter 1999 expenses of $12,070,000 decreased $90,000 from the three
months ended September 30, 1998.
Operating expenses increased $69,000 primarily due to increased contracted
nursing service costs, salary & wages, and overall inflationary increases being
offset by a reduction in the cost of ancillary services. Contracted services for
nursing increased approximately $240,000 for the three months end September 30,
1999 compared to the same period in 1998 resulting from a tightening of the
labor market. Wages and benefits increased $135,000 for the third quarter of
1999 compared to same period in 1998, primarily due to annual salary & wage
increases. Overall inflationary increases in the operating expenses resulted in
additional cost increases of approximately $203,000 or 2% for the third quarter
of 1999 compared to the same period in the prior year. Ancillary expenses
overall decreased $509,000 for the third quarter of 1999 compared to the same
period in 1998. This decrease is primarily due to a decrease in the cost of
Physical, Speech, Occupational and Respiratory therapies. In response to
Medicare's conversion to the Prospective Payment System, the contracts with the
therapy providers were re-negotiated to reduce cost.
Management and administrative fees to related parties decreased $141,000
for the three months ended September 30, 1999 compared to the same period in
1998. The decrease relates to reduced management fees which are calculated as a
percentage of revenue.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations (continued)
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
Net earnings for the nine months ended September 30, 1999 of $2,278,000
decreased $1,874,000 or 45.1% over the same period in 1998.
Fund revenues decreased $2,484,000 or 6.2% during the nine months ended
September 30, 1999 as compared to the same period in the prior year. This
decrease is principally due to revisions to cost reimbursement settlements which
resulted in increased revenues for the nine months ended September 30, 1998 of
$2,584,000, of which $528,000 related to the nine months ended September 30,
1998 and the remainder to prior years. The settlement adjustments resulted from
a resolution of a Maryland Medicaid reimbursement issue dating back to 1994.
Maryland Medicaid had proposed audit adjustments reducing the amount of cost
reimbursed for fees paid to the Fund's manager. The Fund received a favorable
settlement of this adjustment upon appeal. Additionally, overall census has
declined 11,408 days for the nine months ended September 30, 1999 compared with
the same period in 1998. Medicaid and Private reflected census declines of
14,716 and 2,400 days, respectively. Partially offsetting these declines were
census increases for Insurance of 705 and Medicare of 5,003. The decline in
census resulted in a revenue reduction of approximately $1,686,000 during the
nine months ended September 30, 1999 as compared to the same period in the prior
year. Medicare B revenue decreased approximately $392,000 due to lower
utilization and charges resulting from the January 1, 1999 transition to the
Medicare Prospective Payment System (PPS). Partially offsetting the decline in
census and Medicare Part B revenue has been an overall increase in rates which
grew approximately 4.6% resulting in increased revenue of approximately
$1,650,000 for the nine months ended September 30, 1999 as compared to the same
period in 1998.
Overall expenses decreased $610,000 or 1.7% to $35,300,000 for the nine
months ended September 30, 1999 as compared to $35,910,000 for the same period
in 1998.
Operating expenses of $29,383,000 decreased $452,000 or 1.51% for the nine
months ended September 30, 1999 as compared to the nine months ended September
30, 1998. This decrease is primarily due to a decrease in ancillary expenses.
For the nine months ended September 30, 1999 ancillary expenses decreased
$1,798,000 or 31% compared to the same period in 1998. This decrease is
primarily due to a decrease in the cost of Physical, Speech, Occupational and
Respiratory therapies. In response to Medicare's conversion to the Prospective
Payment System the contracts with the therapy providers were re-negotiated to
reduce cost. Offsetting these cost decreases has been an increase in Salary &
Wages and Benefits of $849,000 resulting from annual increases and additional
cost for contracted nursing of approximately $175,000. Additionally, overall
inflationary increases in operating costs increased expenses approximately
$322,000.
Management and administrative fees to related parties decreased $144,000 for
the nine months ended September 30, 1999 compared to the same period in 1998.
The decrease relates to reduced management fees which are calculated as a
percentage of revenue.
General and Administrative costs increased $93,000 to $720,000 for the nine
months ended September 30, 1999 as compared to the same period in the prior
year. This increase is primarily due to an increase in the cost of purchased
services in the dietary and administrative departments, an increase in the costs
for licenses and certifications and increased professional fees incurred related
to the potential sale of the Fund's nursing centers.
Interest expense decreased $147,000 for the nine months ended September
30,1999 as compared to the same period in the prior year. The decrease is the
result of refinancing the mortgage at lower interest rates. The refinancing took
effect on February 28, 1998.
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Legislative and Regulatory Issues
All of the Fund's facilities, to the extent required, are licensed under
applicable law. State and local agencies survey the facilities on a regular
basis to determine whether the facilities are in compliance with governmental
operating and health standards and conditions for participation in government
sponsored third party payer programs. On occasion and in the ordinary course of
business, the Fund's facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. In the case of the College View
facility, there have been a series of notices alleging violations. College View
has successfully achieved and maintained compliance with the cited deficiencies
and has received notice from the Department of Health and Mental Hygiene that
the center is in substantial compliance with the requirements for Long Term Care
Facilities.
Legislative and regulatory action has resulted in continuing changes in the
Medicare and Medicaid reimbursement programs. The changes have limited, and are
expected to continue to limit, payment increases under these programs. Also, the
timing of payments made under the Medicare and Medicaid programs is subject to
regulatory action and governmental budgetary constraints; in recent years, the
time period between submission of claims and payment has increased. Within the
statutory framework of the Medicare and Medicaid programs, there are substantial
areas subject to administrative rulings and interpretations which may further
affect payments made under those programs. Further, the federal and state
governments may reduce the funds available under those programs in the future or
require more stringent utilization and quality reviews of eldercare centers or
other providers. There can be no assurances that adjustments from Medicare or
Medicaid audits will not have a material adverse effect on the Fund.
Pursuant to the Balanced Budget Act commencing with cost reporting periods
beginning on July 1, 1998, PPS began to be phased in for skilled nursing
facilities at a per diem rate for all covered Part A skilled nursing facility
services as well as many services for which payment may be made under Part B
when a beneficiary who is a resident of a skilled nursing facility receives
covered skilled nursing facility care. The consolidated per diem rate is
adjusted based upon the Resource Utilization Group ("RUG"). In addition to
covering skilled nursing facility services, this consolidated payment will also
cover rehabilitation and non-rehabilitation ancillary services. Physician
services, certain nurse practitioner and physician assistant services, among
others, are not included in the per diem rate. For the first three cost
reporting periods beginning on or after July 1, 1998, the per diem rate will be
based on a blend of a facility specific rate and a federal per diem rate. In
subsequent periods, and for facilities first receiving payments for Medicare
services on or after October 1, 1995, the federal per diem rate will be used
without any facility specific blending.
The Balanced Budget Act also required consolidated billing for skilled
nursing facilities. Under the Balanced Budget Act, the skilled nursing facility
must submit all Medicare claims for Part A and Part B services received by its
residents with the exception of physician, nursing, physical assistant and
certain related services, even if such services were provided by outside
suppliers. Medicare will pay the skilled nursing facilities directly for all
services on the consolidated bill and outside suppliers of services to residents
of the skilled nursing facilities must collect payment from the skilled nursing
facility. Although consolidated billing was scheduled to begin July 1, 1998 for
all services, it has been delayed until further notice for beneficiaries in a
Medicare Part A stay in a skilled nursing facility not yet using PPS and for the
Medicare Part B stay. There can be no assurance that the Fund will be able to
provide skilled nursing services at a cost below the established Medicare level.
Under PPS, the reimbursement for certain speech, occupational, physical and
respiratory therapy services provided to nursing facility patients is a
component of the total reimbursement to the nursing facility allowed per
patient. Medicare reimburses the skilled nursing facility directly for all
rehabilitation services and the outside suppliers of such services to residents
of the skilled nursing facility must collect payment from the skilled nursing
facility. Under PPS, a per provider limit of $1,500 applies to all
rehabilitation therapy services provided under Medicare Part B ($1,500 for
physical and speech-language pathology services, and a separate $1,500 for
occupational therapy services). Additionally Medicare Part B therapy services
are no longer being reimbursed on a cost basis; rather,
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Legislative and Regulatory Issues (continued)
payment for each service provided is based on fee screen schedules published in
November 1998. As a result of the implementation of PPS, the Fund has to date
experienced a substantial reduction in Medicare B therapy revenues.
The Balanced Budget Act also repealed the Boren Amendment federal payment
standard for Medicaid payments to Medicaid nursing facilities effective October
1, 1997. The Boren Amendment required Medicaid payments to certain health care
providers to be reasonable and adequate in order to cove the costs of
efficiently and economically operated health care facilities. States must now
use a public notice and comment period in order to determine rates and provide
interested parties a reasonable opportunity to comment on proposed rates and the
justification for and the methodology used in calculating such rates. There can
be no assurance that budget constraints or other factors will not cause states
to reduce Medicaid reimbursement to nursing facilities and pharmacies or that
payments to nursing facilities and pharmacies will be made on a timely basis.
The law also grants greater flexibility to states to establish Medicaid managed
care projects without the need to obtain a federal waiver. Although these waiver
projects generally exempt institutional care, including nursing facilities and
institutional pharmacy services, no assurances can be given that these projects
ultimately will not change the reimbursement system for long-term care,
including pharmacy services from fee-for-service to managed care negotiated or
capitated rates. The Fund anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies.
In July 1998, the Clinton Administration issued a new initiative to promote
the quality of care in nursing homes. This initiative includes, but is not
limited to (I) increased enforcement of nursing home safety and quality
regulations; (ii) increased federal oversight of state inspections of nursing
homes; (iii) prosecution of egregious violations of regulations governing
nursing homes; (iv) the publication of nursing home survey results on the
Internet; and (v) continuation of the development of the Minimum Data Set
("MDS"), a national automated clinical data system. Accordingly, with this new
initiative it may become more difficult for eldercare facilities to maintain
licensing and certification. The Fund may experience increased costs in
connection with maintaining its licenses and certifications as well as increased
enforcement actions. In addition, beginning January 1, 1999, outpatient therapy
services furnished by a skilled nursing facility to a resident not under a
covered Part A stay or to nonresidents who receive outpatient rehabilitation
services will be paid according to the Medicare Physician Fee Schedule.
Year 2000 Compliance
The Development General Partner ("DGP) has implemented a process to address
its Year 2000 compliance issues. The process includes (i) an inventory and
assessment of the compliance of the essential systems and equipment of the Fund
and of Year 2000 mission critical suppliers, customers, and other third parties,
(ii) the remediation of non- compliant systems and equipment, and (iii)
contingency planning. The DGP is in the process of conducting its inventory,
assessment and remediation of its information technology ("IT") systems and
equipment and non-IT systems and equipment (embedded technology) and has
completed approximately 96% of its internal inventory and assessment and
approximately 80% of the systems and equipment of critical suppliers, customers
and other third parties.
With respect to the Year 2000 compliance of critical third parties, the Fund
derives a substantial portion of its revenues from the Medicare and Medicaid
programs. Congress' General Accounting Office ("GAO") concluded in September
1998 that it would be highly unlikely that all Medicare systems will be
compliant on time to ensure the delivery of uninterrupted benefits and services
into the Year 2000. While the Fund does not receive payments directly from
Medicare, but from intermediaries, the GAO statement is interpreted to apply as
well to these intermediaries. Recently, the HCPA Administrator asserted that all
systems necessary to make payments to fiscal intermediaries would be compliant.
The Administrator provided further assurance that intermediary systems would
also be compliant well in advance of the deadline. Additionally, most
intermediaries have reported to the Fund that they are either already
-13-
<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year 2000 Compliance (continued)
compliant or will be prior to the end of 1999. Nonetheless, the DGP intends to
actively confirm the Year 2000 readiness status for each intermediary and to
work cooperatively to ensure appropriate continuing payments for services
rendered to all government-insured patients.
The DGP is remediating its critical IT and non-IT systems and equipment. The
DGP has also begun contingency planning in the event that essential systems and
equipment fail to be Year 2000 compliant. The Fund is planning to be Year 2000
compliant for all of its essential systems and equipment by December 31, 1999,
although there can be no assurance that it will achieve its objective by such
date or by January 1, 2000, or that such potential non-compliance will not have
a material adverse effect on the Fund's business, financial condition or results
of operations. In addition there can be no assurance that all of the Fund's
critical suppliers and other third parties will be Year 2000 compliant by
January 1, 2000, or that such potential non-compliance will not have a material
adverse effect on the Fund's business, financial condition or results of
operations.
The DGP currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $2,000,000, of which
approximately $1,800,000 has been spent through September 30, 1999. The DGP's
Year 2000 efforts are ongoing and its overall plan and cost estimations will
continue to evolve, as new information becomes available. The Fund's analysis of
its Year 2000 issues is based in part on information from third party suppliers;
there can be no assurance that such information is accurate of complete.
The failure of the DGP or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in interruptions
of normal business work operations. The Fund's potential risks include (i) the
inability to deliver patient care related services in the Fund's facilities
and/or in non-affiliated facilities, (ii) the delayed receipt of reimbursement
from the Federal or State governments, private payors, or intermediaries, (iii)
the failure of security systems, elevators, heating systems or other operational
systems and equipment of the Fund's facilities and (iv) the inability to receive
critical equipment and supplies from vendors. Each of these events could have a
material adverse affect on the Fund's business, results of operations and
financial condition.
Contingency plans for the DGP's Year 2000-related issues continue to be
developed and include, but are not limited to, identification of alternate
suppliers, alternate technologies and alternate manual systems. The DGP is
planning to have contingency plans completed for essential systems and equipment
by November 30, 1999; however, there can be no assurance that it will meet this
objective by such date or by January 1, 2000.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
Statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Fund or to products or services offered
by the Fund, is also intended by be "Year 2000 Readiness Disclosure" as such
term is defined in the Year 2000 Act.
-14-
<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk associated with financial instruments and derivative
financial and commodity instruments is the risk of loss from adverse changes in
market prices or rates. The Fund's market risk arises primarily from interest
rate risk relating to its long-term borrowings which bear interest at LIBOR plus
1.55% of a designated bank. Long-term borrowings are classified as a current
liability since they have a February 28, 2000 maturity date. The Fund does not
expect that it will make borrowings under its line of credit and intends to
continue reducing the outstanding balance of its long-term borrowings in
accordance with its amortization schedule. Assuming that the outstanding balance
were to remain unchanged from that at September 30, 1999 ($22,778,000) a 1%
increase in the LIBOR rate of interest would reduce the Fund's net earnings by
approximately $229,000 on an annualized basis.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable
Item 2. Changes in Securities and Use of Proceeds
Inapplicable
Item 3. Defaults upon Senior Securities
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
Item 5. Other Information
Inapplicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: Financial Data Schedule
b) Reports on Form 8-K: None
-15-
<PAGE>
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
DATE: 11/10/99 By: /s/ John M. Prugh
John M. Prugh
President and Director
Brown-Healthcare, Inc.
Administrative General Partner
DATE: 11/10/99 By: /s/ Timothy M. Gisriel
Timothy M. Gisriel
Treasurer
Brown-Healthcare, Inc.
Administrative General Partner
-16-
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
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