ITEM 1. BUSINESS
RWB Medical Income Properties 1 Limited Partnership (the Partnership), is a Louisiana limited partnership organized on July 7, 1984. A Registration Statement filed with the Securities and Exchange Commission became effective on October 11, 1984 and the offering of $25,000,000 units of limited partnership interests (the Units) commenced on or about that date. The offering period was terminated on June 30, 1986, upon the sale of 22,895 Units for an aggregate purchase price of $22,895,000.
The purpose of the Partnership is to invest primarily in existing, improved, medically related, income-producing commercial properties, such as medical office buildings and nursing homes. As of December 31, 1995, the Partnership owned two nursing home properties, with a total of 354 beds, which it operated. The Partnership employed approximately 300 full time employees at March 5, 1996. During the year ended December 31, 1995, the Partnership sold a 180 bed nursing home. The property had been leased to another operator through April 30, 1995 when the Partnership acquired the operator's interest in a stock purchase. On September 1, 1995 the nursing home real estate was sold. The operating results of this facility for 1995 are reflected as a discontinued rental operation.
Business Strategy
The Partnership owns real property investments, primarily healthcare related, and operates the properties until such time as a sale or other disposition appears to be advantageous to the Limited Partners. Factors such as potential capital appreciation, industry trends, cash flow and federal income tax consequences to the Limited Partners will be considered before Partnership property dispositions are made.
Long Term Care Industry
The long term care industry is composed of many facilities offering services to subacute, skilled, assisted living, and personal care residents. The Partnership's nursing homes are considered to be in the skilled segment of the industry, although several of its homes offer subacute services. Subacute services have allowed many providers to expand their services and at the same time become more profitable. In addition, providers have taken advantage of these higher returns to consolidate their operations either through initial public offerings or through merging with one another. Subacute care, however, cannot be offered in all nursing homes. Many companies have established different criteria, including minimum population levels, in order to operate a subacute program in a profitable manner. This is necessary due to the shorter lengths of stay of patients and the need to obtain more and more admissions to fill the shorter stay beds. Even with higher costs in the nursing and service departments, nursing home industry subacute care is considered to be more cost effective in caring for patients than hospital care.
Historically, nursing homes have derived their revenues from Medicare, Medicaid and private pay patients. In the past few years, the industry has seen an increase in private insurance patients and to a greater extent, contractual services from Health Maintenance Organizations (HMO's) and Preferred Provider Organizations (PPO's).
The industry has always faced an increasing challenge in staffing its facilities. This is particularly true with regard to Registered Nurses, Licensed Practical Nurses and Certified Nurse Aides. Depending upon the geographic area, the Partnership competes with hotels, motels and restaurants for other employees, including dietary and housekeeping workers. Approximately fifty percent of Partnership operating costs are composed of employee salaries and benefits. From time to time, the Federal government has proposed increasing the minimum wage. Any increase in the minimum wage would adversely impact nursing home providers and would have to be supported by increases in Medicare and Medicaid reimbursement rates.
The Federal government has been discussing these very programs as it looks for ways to down size government. The Medicaid program could be impacted through block grant programs. Such a change would cap the federal funding of the program. If this were the case, and the State wished to retain the current level of services, significant additional funding would have to be found. This is particularly true if the OBRA regulations were not
repealed. The Medicare program is being examined for possible changes including implementing cost limits on ancillary services (such as therapy programs, equipment and diagnostic services), capital cost reductions, a continued freeze of the routine cost limits and perhaps a prospective payment system. The potential impact of such changes, either alone or in combination, cannot be determined at this time.
The Partnership owns nursing facilities in the States of Florida and Alabama. At present, each of these states' reimbursement programs reimburse the nursing facilities based upon historical costs. Each state has developed a wait and see attitude toward program changes until such time as the Federal government acts.
Information regarding industry segments is not applicable for the Partnership business.
Seasonality
The Partnership's revenue and operating income fluctuates from quarter to quarter and tend to be higher in the third and fourth quarter of each fiscal year. This seasonality is due primarily to the state Medicaid programs in which the Partnership operates, rate increases which tend to take effect in such quarters and census levels.
SERVICES PROVIDED
Routine Services
All of the nursing homes operated by the Partnership are licensed as skilled care facilities by the appropriate state regulatory agencies. Routine services include the provision of skilled care services and assistance with activities of daily living, depending upon the needs of each resident. Subacute care, including ventilator and therapy services, may also be provided as specified by each resident's physician. Skilled nursing care is rendered 24 hours per day by registered or licensed nurses and certified nurses aides.
Ancillary Services
The Partnership provides a variety of rehabilitative services at its facilities for its residents. These services include physical, speech, occupational, and respiratory therapies. The Partnership continues to expand these services as warranted by the needs of the residents and the requirements of third-party payor programs.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership originally purchased five medically related commercial properties. At December 31, 1995, two properties were owned by the Partnership. They are:
The Partnership has sold the following properties:
(1) The facility was leased to an outside organization through December 16, 1992, as indicated in Footnote 2 of the financial statements. On December 17, 1992, the lessee was declared in default and the Partnership assumed operations. Effective January 1, 1993, the Partnership leased the Merrillville facility to another lessee (as indicated in notes 2 and 4 of the financial statements). On May 1995, the Partnership purchased the stock of Atrium Living Centers of Indiana, Inc. and canceled the 1993 lease. The Partnership operated the facility as Lakecrest Nursing Home until the real estate was sold on September 1, 1995.
A description of the Partnership's purchase and sale of the properties is disclosed in Notes 1(f), 2, 3, 4, 5 and 9 of Notes to Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal actions against the Partnership. As noted in the financial statements note 10, however, the Partnership does have certain contingent liabilities.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
There is no established public trading market for the Partnership Units. There were 2,027 limited partners as of March 4, 1996. Distributions paid per limited partner unit for each quarter in the last five years are incorporated by reference from Item 6
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the period January 1, 1991 to December 31, 1995 is shown below:
(000's omitted except for per share data and distributions)
Quarterly Financial data for the period January 1, 1993 to December 31, 1995 (000's omitted)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Reserves
Cash and equivalent balances totaled $876,850 at December 31, 1995, a decrease of $450,463 from the previous year. Cash provided from operations decreased to $99,372 during the year from $2,327,655 from 1994. This decrease was primarily due to lower collections on resident accounts receivable, particularly Medicaid and managed care and the effect of the Lakecrest Nursing Home operations. With the sale of the Lakecrest facility completed, it is anticipated that cash from operations will improve in future periods.
Payments for capital expenditures were $501,500 including approximately $250,000 for the Lakecrest facility. In 1996, the Partnership expects to incur costs of approximately $350,000 for similar expenditures. The cash flow from operations will determine when these expenditures are made.
During 1995, the Partnership paid regular distributions to its limited partners totaling $60.00 per unit and equaling a 6% return on the initial investment of $1,000 per unit. In addition, the Partnership distributed $113.56 per unit which represented a portion of the sale proceeds of the Lakecrest Nursing Home. Although the Partnership expects to make distributions to its limited partners based upon cash flow generated from operations after considering cash required for debt obligations, necessary improvements to its properties and working capital reserves, no assurances can be given that distributions will be made in the future.
The Partnership has a $500,000 line of credit available to it should the need arise. At the present time, the Managing General Partner believes the Partnership has adequate working capital and does not believe it will be necessary to borrow additional funds.
Results of Operations
Fiscal Year 1995 Compared to 1994
The Partnership's net loss for the year ended December 31, 1995 was $901,714, compared to a profit of $842,577 in the previous year. The loss included a loss on disposal of the rental operation of the Lakecrest Nursing Home of $1,575,134. Operating income for the twelve months ended December 31, 1995 was $998,254, as compared to $874,261 for the previous year. Total revenue increased to $13,529,775 in 1995, an increase of $1,166,000 over 1994. This increase of 9.4% was due to improved routine services rates as well as substantially higher ancillary services provided to residents.
Operating expenses increased $1,041,895 over 1994 due to increased wages paid to employees, increased cost of supplies for nursing care and higher contracted services, primarily for ancillary services.
Other income (expenses) reflects higher interest expense due to the fluctuation of the prime rate during the year.
Fiscal Year 1994 Compared to 1993
Net income for the year ended December 31, 1994 was $842,577 as compared to $1,179,398 for the year ended December 31, 1993. The decrease in earnings was due to lower than expected margins in the Southpoint Manor operation caused primarily by the increase in labor costs and ancillary service expenses. It is expected much of this expense will benefit ongoing operations as the facility builds its reputation to treat more acute patients.
Revenues increased $466,216 while expenses increased $924,117 between years. As stated previously, labor costs and ancillary service expenses increased substantially during the year. In addition, plant operation repairs and maintenance costs increased $73,232 over 1993 due to exterior painting and sealing of the structure. General and Administrative costs were $89,489 under the 1993 level due to excellent results from the workers compensation program at Southpoint Manor, partially offset by higher administrative salary costs. Employee health and welfare costs in 1993 included vacation pay accruals which have been allocated in 1994 to the various departments. Providers fees declined during 1994 due to changes implemented by the state.
Fiscal Year 1993 Compared to 1992
Net income increased in 1993 to $1,179,398 from $869,156 in the previous year. The 1992 results included a loss of $208,889 on the sale of two of the Partnership's properties.
Net patient service revenues during 1993 increased $824,341 over the prior year primarily due to higher subacute revenues billed from its Southpoint Manor ventilator program. Rental Income for 1993 was $330,000 while 1992 Rental Income and Direct Financing lease income totaled $623,167. The decrease is attributed to lower rental income recorded from the Partnership's Merrillville lease and the sale of two properties in 1992.
Total operating expenses increased $544,829 due to higher ancillary expense connected with the operation of the subacute program at Southpoint Manor, and higher salaries paid to nursing personnel. Cost of rental expense declined $140,363 due to the sale of two properties in 1992. The decrease in general and administrative expense is attributed to cost associated with the 1992 operation of the Merrillville property offset by higher insurance charges, and cost reimbursements.
Depreciation and amortization expense was $156,274 higher in 1993 than 1992 due to depreciation taken on the Merrillville Indiana property for the full year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X are included in this Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes of auditors for the Partnership during the fiscal year 1995 and 1994.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. RWB Management Corp. (RWBMC), a Louisiana corporation , is the Managing General Partner of the Partnership. The directors and executive officers of RWBMC as of December 31, 1995 are listed below. Directors serve for one year or until the next annual meeting of stockholders of RWBMC or until their successors are elected and qualified. RWBMC is a wholly-owned subsidiary of QualiCorp, Inc., a Louisiana corporation. The directors and executive officers of QualiCorp, Inc. are also listed
below. The relationship of the Managing General Partner to its Affiliates is described under the caption "Conflicts of Interest" at pages 28 through 30 of the Prospectus, which pages are specifically incorporated by reference herein.
The executive officers of RWBMC and QualiCorp, Inc. are as follows:
Mr. DeBlois and Mr. Stoddard are Directors of RWBMC and Qualicorp, Inc. There are no family relationships among any of the above officers and/or directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers or directors. No director or officer of the Managing General Partner received any remuneration from the Partnership for the three years ended December 31, 1995. The Partnership paid to Qualicorp, Inc., the parent of RWBMC, the Managing General Partner $166,077 in 1995 as reimbursement for administrative expenses (primarily salaries) incurred during the year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or group is known by the Partnership to own beneficially more than 5% of the outstanding units of the Partnership.
No executive officers and directors of RWBMC owned any units in the Partnership at December 31, 1993. RWBMC held 23 units in the Partnership at December 31, 1995. QualiCorp, Inc., parent of RWBMC, the Partnership's Managing General Partner, held 73 units in the Partnership at December 31, 1995.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Qualicorp Inc., the parent of RWBMC, charged the following amounts for management fees and administrative expenses to the Partnership during the periods shown:
Under the Partnership Agreement, the General Partners are entitled to participate in distributions of the Partnership's Cash Flow as described under the caption "Management Compensation" at pages 24 through 26 of the Prospectus. Cash distributions of $103,400, $103,397, and $103,400, were made to the General Partners during 1995, 1994, and 1993 respectively. The General Partners also share in the Partnership's net profits and net losses.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. The Partnership's financial statements and supplementary information appear in a separate section of this Form 10-K commencing on pages referenced below:
2. Exhibits:
3-A. The Prospectus of the Registrant dated October 11, 1984 as supplemented August 8, 1985, August 14, 1985, October 2, 1985 and November 21, 1985 and filed pursuant to Rule 424(b) under the Securities Act of 1933 and Preliminary Supplement and Amendment Number 5 dated November 29, 1985 is hereby incorporated herein by reference.
3-B. Amended and Restated Articles of Limited Partnership set forth as Exhibit A to the Prospectus, incorporated herein by reference.
(b) No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Atlanta, state of Georgia.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
RWB MANAGEMENT CORP. Managing General Partner
By: /s/ John H. Stoddard Date: March 15, 1996 -------------------- John H. Stoddard President, Director, Chief Financial Officer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name ---- Position Date -------- ---- [S] [C] [C] /s/ John M. DeBlois Chairman of the Board March 15, 1996 - ------------------- John M. DeBlois
/s/ John H. Stoddard President, Director, March 15, 1996 - -------------------- Chief Financial Officer John H. Stoddard and Principal Accounting Officer
SELF & MAPLES, P.A.
Certified Public Accountants
Oneonta, Alabama 35121
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Partners RWB Medical Income Properties 1 Limited Partnership
We have audited the accompanying balance sheets of RWB Medical Income Properties 1 Limited Partnership as of December 31, 1995 and 1994 and the related statements of operations, partners' capital and cash flows for each of the three years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain a reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RWB Medical Income Properties 1 Limited Partnership as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Self & Maples, P.A.
January 26, 1996 Oneonta, Alabama
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
BALANCE SHEETS DECEMBER 31, 1995 AND 1994
The accompanying notes are an integral part of these statements.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
The accompanying notes are an integral part of these statements.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
The accompanying notes are an integral part of these statements.
Supplemental schedule of noncash investing and financing activities:
The accompanying notes are an integral part of these statements.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these statements.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
RWB Medical Income Properties 1 Limited Partnership (the Partnership) is a Louisiana partnership formed on July 7, 1984 to invest primarily in income-producing, health care related properties, such as doctors' office buildings and nursing homes. The Partnership currently is operating and holding for investment purposes income-producing nursing homes. The Partnership Offering (Offering) as represented by the Partnership Prospectus (Prospectus) dated October 11, 1984, provided for the sale of 25,000 Partnership units at a price of $1,000 per unit. The Partnership's first closing on the sale of units was March 20, 1985. The Offering closed on June 30, 1986.
(b) Allocation of Net Profits and Net Losses
Net profits and net losses shall be determined and allocated as of December 31 of each year as follows:
- Net profits (losses) (exclusive of net profits (losses) attributable to the sale or disposition of Partnership properties) are allocated 93% to the limited partners and 7% to the general partners.
- Net profits attributable to the sale or disposition of a Partnership property shall be allocated as follows:
- First, prior to giving effect to any distributions of proceeds from the transaction, to the general partners and the limited partners with negative balances in their capital accounts pro rata in proportion to such respective negative balances;
- Second, to the general partners in an amount necessary to make the balances in their respective capital accounts equal to 15% of the sales proceeds remaining following allocation to the limited partners of an amount equal to their original capital contribution; and
- Third, the balance, if any, to the limited partners.
- Net losses attributable to the sale or disposition of a Partnership property shall be allocated in a manner similar to above, except that limited and general partner
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
accounts would be reduced pro rata to the amount of their respective capital investments, then, pro rata to zero, and for any remaining loss, 93% to the limited partners and 7% to the general partners. A minimum of 1% of losses shall be allocated to the general partner.
(c) Principles of Consolidation
The financial statements for the year ended December 31, 1995 consolidate the accounts of the Partnership and its wholly owned subsidiary, Lakecrest Nursing Home, Inc. from May 1, 1995 (see Note 9). All material intercompany transactions have been eliminated.
(d) Cash Distributions
Cash distributions shall be made quarterly within 45 days of the end of the quarter. Cash flow shall be distributed 93% to the limited partners and 7% to the general partners. Sale or financing proceeds shall be distributed 100% to the limited partners to the extent of their original capital contribution and then the remainder shall be distributed 85% to the limited partners and 15% to the general partners.
(e) Per Unit Information
Limited partnership information per unit is based on the number of partnership units outstanding of 22,895 in 1995, 1994 and 1993. Federal taxable income per unit outstanding is not necessarily reflective of a limited partner's actual per unit amount due to different tax allocations with respect to tax-exempt partners.
(f) Land, Building and Related Personal Property
Land, building and related personal property are stated at cost. Depreciation of buildings is provided over their estimated useful lives ranging from twenty to forty years on the straight- line method. Equipment and other personal property are depreciated primarily over five to seven years on the straight-line method.
(g) Amortization
Deferred financing costs are amortized over the life of the loan using the straight-line method. Deferred lease commission costs were amortized over the lives of the leases through the dates the properties were sold (see Note 2).
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(h) Income Taxes
Income is allocated to the individual partners and, therefore, no income taxes have been provided for in these financial statements.
(i) Patient Service Revenues
Patient service revenue is recorded at the nursing homes' established rates with contractual adjustments ($7,184,277 in 1995, $5,391,261 in 1994 and $4,157,574 in 1993) and provision for uncollectible accounts, bad debts ($217,721 in 1995, $(40,657) in 1994, and $57,896 in 1993) and other discounts deducted to arrive at net patient service revenue.
Net patient revenue includes amounts estimated by management to be reimbursable by Medicare, Medicaid and other third-party programs under the provisions of cost and prospective payment reimbursement formulas in effect. Amounts received under these programs are generally less than the established billing rates of the nursing homes and the difference is reported as a contractual adjustment and deducted from gross revenue. The nursing homes recognize estimated final settlements due from or to third-party programs currently. Final determination of amounts earned is subject to audit by the intermediaries. Differences between estimated provisions and final settlement will be reflected as charges or credits to operating revenues in the year the cost reports are finalized.
(j) Cash Equivalents Policy
For purposes of the statement of cash flows, the Partnership considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.
(k) Uninsured Cash Balances
The Partnership maintains cash balances in several banks. Cash accounts at banks are insured by the FDIC for up to $100,000. Amounts in excess of insured limits were approximately $291,859 at December 31, 1995 and $1,071,820 at December 31, 1994. A portion of commingled funds discussed in Note 7., may be at risk, but the amount in excess of FDIC limits related to the Partnership is not determinable.
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(l) Uses of Estimates
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
Note 2. PROPERTY, PLANT AND EQUIPMENT
On September 3, 1986, the Partnership purchased Four Freedoms Manor Nursing Home, now known as Southpoint Manor, a 230 bed skilled nursing home in Miami Beach, Florida, for $7,350,000 plus capitalized acquisition costs and fees of $504,602.
On October 1, 1986, the Partnership purchased Merry Wood Nursing Home, a 124 bed skilled nursing home in Elmore, Alabama, for $3,643,294. Merry Wood was leased to Merrywood Nursing Home, Inc., under a ten year lease with two five year renewal options. On January 1, 1991, the Partnership purchased the stock of Merrywood Nursing Home, Inc. for $1. The transaction was accounted for as a purchase. Effective July 1, 1992 Merrywood Nursing Home, Inc. was merged with the Partnership. The lease agreement with Merrywood Nursing Home, Inc., described in the preceding paragraph, was terminated in conjunction with the merger.
On December 17, 1985, the Partnership purchased Merrillville Convalescent Center (Merrillville), a 180 bed skilled nursing home in Merrillville, Indiana for $5,376,348. Until December 17, 1992, Merrillville was leased under two twenty year leases which were accounted for as capital leases (see Note 4). One lease was for the building, equipment and related land, and the other was for land adjacent to the nursing home (17.9 acres). On December 17, 1992, the lessor was declared to be in default on the lease and the Partnership assumed operations of the facility. The value of the net investment in direct financing lease along with unamortized deferred lease commissions was allocated to the cost of land, building and equipment at the termination of this lease. No gain or loss was recognized related to the termination of the lease. Effective January 1, 1993 the Partnership leased the Merrillville facility under an operating lease (see Note 4). Effective September 1, 1995, the Partnership sold the facility (see Note 9).
A summary of property, plant, equipment and accumulated depreciation at December 31, 1995 and 1994 is as follows:
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 3. NOTES RECEIVABLE
The Articles of Limited Partnership state that no General Partner shall have the authority to cause the Partnership to make loans other than in connection with the purchase, sale or disposition of partnership property. The General Partner believes the following loans were necessary to preserve the Partnership's assets. The first loan described was made in order to remove the bankrupt manager of the Partnership's property. The second loan was made to finance needed improvements and operations neglected by an insolvent lessee.
The first note is from the manager of one of the nursing homes owned by the Partnership. The note requires monthly payments of $6,616 through July of 1996 and bears interest at 8%. These moneys were loaned as part of an acquisition and financing agreement dated May 23, 1991, whereby the Partnership contracted with a replacement manager of the Partnership's facility located in Miami Beach, Florida (Southpoint Manor). As part of the agreement, the Partnership agreed to retain the manager of the Southpoint Manor facility for a period of no less than thirty-six (36) months in consideration for its agreement to manage the facility and in consideration for its agreement to pay certain sums to the former management company.
Outstanding receivables related to this note totaled $45,102 and $117,701 at December 31, 1995 and 1994, respectively.
The second note was from the lessee of the Merrillville, Indiana facility. The lessee agreed to continue to operate the facility and make the improvements necessary to meet certification requirements if the Partnership would provide current operating capital and suspend required lease payments (see Note 4). The loan, as amended, was a $1,500,000 revolving credit agreement that was to accrue interest at prime plus 1% with payments of principal and interest deferred until July 1, 1995. The receivable related to this note totaled $734,346 at December 31, 1994. In May of 1995
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
the Partnership purchased the stock of the lessee corporation (Note 9), and forgave the note receivable.
A third note in the amount of $1,000,000 from the purchaser of the Merrillville, Indiana facility was accepted by the Partnership in September 1995 (see Note 9). This note, made in conjunction with the sale of the facility, bears interest at 9%, and calls for payments of interest only through August 31, 1996, at which time the note is due and payable.
Note 4. PROPERTY LEASES
Merrillville was accounted for as a capital lease until December 17, 1992 as explained in Note 2. Bad debt expense related to Merrillville's deferred financing lease was recorded in the amount of $110,879 in 1993 in addition to $405,784 written off in prior years.
Effective January 1, 1993 the Partnership leased the Merrillville facility under an operating lease which provided for monthly rental payments of $55,000. The lease, however, allowed the tenant to leave the monthly lease payments unpaid until August 15, 1993 with no interest or penalties, to allow the tenant to correct the operating deficiencies of the prior tenant (see Note 2).
Rental income for Merrillville's lease was $220,000 in 1995, and $660,000 in 1994 and 1993. Interest totaling $74,628 was accrued in 1994 and interest of $15,837 and penalties of $6,600 were assessed related to this receivable in 1993. Rental receivables totaled $1,026,210 at December 31, 1994. Collectibility of some of this rental income and related penalties and interest was considered doubtful and, accordingly, reserves of $272,447 in 1994 and $341,218 in 1993 were charged to bad debt expense. Loans for operating expenses, as explained in Note 3., were made to the Lessee. The Partnership has other contractual agreements, as explained in Note 8, with entities that shared common ownership with the lessee of the Merrillville facility.
Effective May 1, 1995, the Partnership purchased the stock of the lessee of the Merrillville facility as part of a plan to discontinue rental operations. In September 1995 the Partnership sold the Merrillville facility and terminated the lease (Note 9).
Note 5. MORTGAGE NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Mortgage notes and capitalized leases at December 31, 1995, and 1994 are summarized as follows:
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
The mortgage note is secured by the Southpoint and Merry Wood real estate owned by the Partnership. The General Partner has guaranteed the debt, as well as pledged its stock and partnership interest. The management companies (see Note 8) have also guaranteed the debt and entered into a negative pledge agreement whereby they will not pledge, transfer or encumber their stock while the loan is outstanding. All management fees are subordinate to the debt.
The aggregate annual maturities of mortgage notes payable and capital lease obligations are as follows:
Note 6. INCOME TAXES
No provision for income taxes is made in the financial statements since taxable income is reported in the income tax returns of its partners. Differences between the net income as reported in the financial statements and Federal taxable income arise from the nature and timing of certain revenue and expense items. The
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
following is a reconciliation of reported net income and Federal taxable income:
Note 7. RELATED PARTY TRANSACTIONS
QualiCorp, Inc., the parent of RWB Management Corp. (the Managing General Partner of the Partnership), charged the Partnership property management fees totaling $121,266 in 1995, $132,776 in 1994 and $116,624 in 1993. QualiCorp charged the Partnership administrative expenses totaling $166,077 in 1995, $179,086 in 1994, and $166,880 in 1993.
Details of the amounts due to affiliates at December 31 are as follows:
During the year, the General Partners established a pooled investment account in which the General Partners and the partnerships in which they act as general partners could participate. This account was used by those entities to invest overnight cash balances, and borrow funds when an entity needed temporary access to funds. Each entity received its share of interest earned monthly, and was charged interest on any funds borrowed.
The Articles of Limited Partnership of the partnerships involved state that no General Partner shall have the authority to cause those partnerships to make loans other than in connection with the
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
purchase, sale or disposition of partnership property. The Articles of Limited Partnership of those partnerships also state that the partnerships' funds may not be commingled with any other entities' funds except as necessary for the operation of those partnerships.
At December 31, 1995, the Partnership had borrowed $51,783 from the other entities, and had earned net interest of $14,967 from this arrangement.
Note 8. CONTRACTUAL AGREEMENTS
On June 20, 1991, the Partnership entered into a management agreement whereby the Manager is required to perform certain services for the Southpoint facility. The agreement had an initial three-year term and was extended for three additional years in 1994. Fees were based on 6% of gross collected operating revenues not to exceed 6% of the gross collected operating revenues from July 1, 1990 to July 1, 1991 and increased by an inflation factor in 1992 and thereafter. Management fees charged to the Partnership were $461,653 in 1995, $443,897 in 1994, and $430,968 in 1993.
On July 1, 1992, the Partnership entered into a management agreement whereby the Manager is required to perform certain services for the Merry Wood facility. The agreement had an initial five-year term with one additional five-year option. Fees were based on 5% of gross collected operating revenues, excluding revenues solely attributed to reimbursement for provider taxes. Management fees charged to the Partnership were $176,247 in 1995 and $172,603 in 1994.
The management agreements were amended on January 1, 1995. The amendment calls for a fixed monthly management fees of $38,471 at Southpoint and $14,687 at Merry Wood, with a cost of living factor equal to the greater of 4% per annum or the increase in the Consumer Price Index or such other measure mutually agreeable to the parties. The agreements expire December 31, 1998. Both agreements contained termination on sale clauses that were amended to base the fee on a sum equal to the discounted present value of the monthly management fee as of the date of termination of the agreement times the number of months remaining in the management agreement discounted to the date of termination at an annual interest rate of ten percent (10%).
The above agreements are with entities that are commonly owned. The property manager who owes the Partnership the first of the notes receivable described in Note 3 along with the lessor of the Merrillville, Indiana property who, prior to being purchased by the Partnership (Note 9), owed the Partnership the second note receivable described in Note 3 and the unpaid lease payments
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
described in Note 4, are or were commonly owned with the above entities. Additionally, the seller of the equipment purchased at Merrillville as described in Note 9, is commonly owned with the above entities.
Note 9. DISCONTINUED OPERATIONS
Effective May 1, 1995, the Partnership purchased the stock of the lessee, now known as Lakecrest Nursing Home, Inc. for $500. The Partnership took over operations with the intent of selling the facility and discontinuing all rental activities. The transaction is accounted for as a purchase. In June 1995, the Partnership purchased various items of equipment that had been leased by Lakecrest Nursing Home, Inc. for $218,855. As explained in Note 8, the Partnership has other contractual agreements, with entities that shared common ownership with the lessee of the Merrillville facility. On September 1, 1995, the Partnership sold the Merrillville facility in exchange for a total of $5,000,000, payable with $4,000,000 in cash and note receivable of $1,000,000 (Note 3). The results of operations are consolidated for the period from May 1, 1995 to December 31, 1995, and are included in the loss on disposal of rental operations. Pro forma results of operations for December 31, 1995 and 1994 as though the Partnership and Lakecrest Nursing Home, Inc. had combined at the beginning of 1994 would have been stated as follows:
Loss on disposal of rental operations reflects the loss related to operations subsequent to April 30, 1995 totaling $336,183 on revenues of 1,414,947 and loss on sale of assets totaling $1,238,951.
Note 10. CONTINGENCIES
The Partnership maintains insurance or reserves which it believes are adequate to meet the needs of the Partnership. While the Partnership has been named as a defendant in several lawsuits, nothing has come to the attention of the Partnership which leads it to believe that it is exposed to a risk of material loss not covered by insurance or reserves.
The on-site waste water treatment plant at the Merry Wood Lodge facility has had numerous operational difficulties since it was installed, which has caused the effluent to exceed the limits of
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
the facility's permit. The Partnership is evaluating proposals to build a new waste water treatment plant to avoid liability associated with provisions of the Federal Clean Water Act. The expected cost of constructing the new plant is estimated to be about $92,000.
Note 11. MAJOR SOURCES OF REVENUE
The Partnership provides patient care services under various third party agreements. The principal sources of revenue under these contracts are derived primarily through the Medicaid and Medicare programs, as well as contracts with private pay patients who do not qualify for assistance from the other programs. The percentage of the Joint Venture's income from each of these sources for the years ended December 31, 1995, 1994, and 1993 is as follows:
The percentage attributable to private pay patients includes only amounts due for services where the primary payer is a private source. The Medicaid and Medicare percentages include amounts due from those programs as well as the patient's financial responsibility incurred under these contracts.
SELF & MAPLES, P.A. CERTIFIED PUBLIC ACCOUNTANTS
ONEONTA, ALABAMA 35121
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS THOMAS E. SELF, C.P.A. DON MAPLES, C.P.A. ALABAMA SOCIETY B. MARTIN COPELAND, C.P.A. OF CERTIFIED PUBLIC ACCOUNTANTS ------------- ------------ CONNIE T. HARVEY, C.P.A. 1601 2ND AVENUE EAST RANDY M. JOHNSTON, C.P.A. P.O. BOX 489 ROGER D. LOGGINS, C.P.A. ONEONTA, ALABAMA 35121 MARK S. SIMS, C.P.A. ------------ LINDA ROMBERG YORK, C.P.A. TELEPHONE: (205) 625-3472 GWIN E. DAVIS, P.A. TELECOPIER: (205) 274-0182 ROYCE E. GARGUS, P.A.
INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION
To the Partners RWB Medical Income Properties 1 Limited Partnership
Our report on our audits of the basic financial statements of RWB Medical Income Properties 1 Limited Partnership for 1995 appears on page 1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts and Reserves for Allowances for Doubtful Accounts, Schedule of Consolidated Supplementary Income Statement Information, and Schedule of Real Estate and Accumulated Depreciation are presented for purposes of additional analysis and are not required parts of the basic financial statements. Such information has been subjected to the auditing procedures applied to the audits of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
/s/ Self & Maples, P.A.
January 26, 1996 Oneonta, Alabama
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP SCHEDULE X CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
RWB MEDICAL INCOME PROPERTIES 1 LIMITED PARTNERSHIP SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1995
(A) The initial cost to the Partnership represents the original purchase price of the properties. (B) The aggregate cost of real estate owned at December 31, 1995 for Federal Income tax purposes was approximately $13,454,968 (C) Reconciliation of real estate owned at December 31, 1995, 1994, and 1993:
(D) Reconciliation of accumulated depreciation: