10-Q 1 crhcfii_sept10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 0-13415 CONSOLIDATED RESOURCES HEALTH CARE FUND II (Exact name of registrant as specified in its charter) Georgia 58-1542125 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1175 Peachtree Street, Suite 850, Atlanta, GA 31106 (Address of principal executive offices) (Zip Code) (404) 873-1919 (Registrant's telephone number, including area code) 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 No x ---- ---- Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No x ---- ---- Part I. Financial Information Consolidated Resources Health Care Fund II Condensed Consolidated Balance Sheets

September 30, ~~2001~~2002 December 31, ~~2000~~ (Unaudited) 2001 ---------------~~------~~ ---------------~~-------~~ ASSETS Current assets: Cash and cash equivalents $ 12,~~525~~257,~~730~~183 $ 1,~~105~~496,~~822~~189 Accounts receivable, net of allowance for doubtful accounts of $11,947 and $68,~~304~~934, respectively ~~361~~324,~~816~~405 ~~356~~468,~~586~~264 Prepaid expenses and other ~~---~~3,738 622,~~046~~577 ---------------~~------~~ ---------------~~-------~~ Total current assets 12,~~887~~585,~~546~~326 1,~~468~~987,~~454~~030 ~~--------------------- ----------------------~~ Property and equipment Land 178,609 178,609 Buildings and improvements 7,~~117~~220,~~286~~080 67,~~976~~192,~~479~~829 Equipment and furnishings 1,~~213~~347,~~624~~651 1,~~086~~259,~~550~~391 ---------------~~------~~ ---------------~~-------~~ 8,~~509~~746,~~519~~340 8,~~241~~630,~~638~~829 Accumulated depreciation and amortization (56,~~876~~377,~~301~~896) (56,~~509~~005,~~461~~933) ---------------~~------~~ ---------------~~-------~~ Net property and equipment 2,~~633~~368,~~218~~444 2,~~732~~624,~~177~~896 ---------------~~------~~ ---------------~~-------~~ Other Restricted escrows and other deposits ~~593~~637,~~119~~595 ~~557~~621,~~302~~000 Deferred loan costs, net of accumulated amortization of $1716,~~200~~682 and $1617,~~423~~460, respectively 1514,~~906~~869 1615,~~683~~646 ---------------~~------~~ ---------------~~-------~~ Total other assets ~~609~~652,~~025~~464 ~~573~~636,~~985~~646 ---------------~~------~~ ---------------~~-------~~ $ 5,~~129~~606,~~789~~234 $ 45,~~774~~248,~~616~~572 ===============~~======~~ ===============~~=======~~

See accompanying notes to condensed consolidated financial statements. Page 2

September 3130, ~~2001~~2002 December 31, (Unaudited) ~~2000~~2001 ----------------~~-----~~ --------------~~--------~~ LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt $ 9592,~~921~~283 $ 90,464 Accounts payable 83234,~~324~~676 67119,~~735~~524 Accrued expenses ~~626~~587,~~698~~262 ~~488~~499,~~313~~553 Accrued management fees ~~394,918~~--- ~~394,918~~--- Due to related party ~~---~~84,333 1552,~~913~~631 Deposit liabilities ~~102~~103,~~486~~616 88173,~~261~~500 ----------------~~-----~~ --------------~~--------~~ Total current liabilities 1,~~303~~102,~~347~~170 1935,~~145,604~~672 ----------------~~-----~~ --------------~~--------~~ Long-term obligations, less current maturities 3,~~792~~700,~~937~~091 3,~~866~~774,~~168~~945 ----------------~~-----~~ --------------~~--------~~ Total liabilities 54,~~096~~802,~~284~~261 54,~~011~~710,~~772~~617 ----------------~~-----~~ --------------~~--------~~ Partners' equity (deficit): Limited partners ~~199~~939,~~733~~382 ~~(60~~684,~~102)~~005 General partners (~~166~~135,~~228~~409) (~~177~~146,~~054~~050) ----------------~~-----~~ --------------~~--------~~ Total partners' equity ~~(deficit) 33~~803,~~505~~973 ~~(237~~537,~~156)~~955 ----------------~~-----~~ --------------~~--------~~ $ 5,~~129~~606,~~789~~234 $ 45,~~774~~248,~~616~~572 ================~~=====~~ ==============~~======== See accompanying notes to condensed consolidated financial statements.~~

See accompanying notes to condensed consolidated financial statements. Page 3 Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Operations (Unaudited)

Three months ended Nine ~~Months~~months ~~Ended~~ended September 30, September 30, 2002 2001 ~~2000~~2002 2001 ~~2000~~ -------------~~-----~~ -------------~~----~~ -------------~~---~~ --------------- Revenue: Operating revenues $2,024,222 $2,005,608 $ 16,~~862~~361,~~138~~737 $ 5,976,529 ~~$ 5,376,542~~ Interest income 22,652 22,900 1562,~~771~~577 49,590 ~~41,937~~ -------------~~-----~~ -------------~~----~~ -------------~~---~~ --------------- Total revenue 2,046,874 2,028,508 16,~~877~~424,~~909~~314 6,026,119 ~~5,418,479~~ -------------~~-----~~ -------------~~----~~ -------------~~---~~ --------------- Expenses: Operating expenses 1,744,387 1,709,431 15,~~647~~366,~~368~~527 5,110,937 ~~4,718,136~~ Depreciation & amortization 126,659 122,735 ~~118~~372,~~797~~741 367,617 ~~358,162~~ Interest 71,371 69,073 74217,~~850~~424 216,834 ~~226,084~~ Partnership administration costs 105,883 7,286 21201,~~267~~604 60,080 ~~79,481~~ -------------~~-----~~ -------------~~----~~ -------------~~---~~ --------------- Total expenses 2,048,300 1,908,525 16,~~862~~158,~~282~~296 5,755,458 ~~5,381,863~~ -------------~~-----~~ -------------~~----~~ -------------~~---~~ --------------- Net income (loss) $(1,426) $119,983 $ 15266,~~627~~018 $ 270,661 ~~$ 36,616~~ =============~~=====~~ =============~~====~~ =============~~===~~ =============== Net income (loss) per L.P. unit $(0.09) $ 7.68 $ 117.0003 $ 17.32 ~~$ 2.34~~ =============~~=====~~ =============~~====~~ =============~~===~~ =============== L.P. units outstanding 15,000 15,000 15,000 15,000 =============~~=====~~ =============~~====~~ =============~~===~~ ===============

See accompanying notes to condensed consolidated financial statements. Page 4 Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30, 2002 2001 ~~2000~~ -------------~~--------~~ ------------~~----------~~ Operating Activities: Cash received from residents and government agencies $6,505,596 5,971,299 ~~$ 5,227,152~~ Cash paid to suppliers and ~~employers~~employees (5,378,330) (5,032,588) Property Taxes Paid (454,~~834,720~~580) --- Interest received 62,577 49,590 ~~41,937~~ Interest paid (~~216~~217,~~824~~424) (~~226~~216,~~084~~824) -------------~~--------~~ ------------~~----------~~ Cash provided by operating activities 917,839 771,477 ~~208,285 --------------------- ----------------------~~ Investing Activities: Additions to property and equipment (~~267~~115,~~881~~512) (~~103~~267,~~189~~881) ~~--------------------- ----------------------~~ Financing Activities: Principal payments on long-term debt (73,035) (67,774) Increase (~~62,892~~decrease) ~~Due~~in amount due to related party 31,702 (15,913) ~~(1,766)~~ -------------~~--------~~ ------------~~----------~~ Cash used in financing activities (8341,~~687~~333) (6483,~~658~~687) -------------~~--------~~ ------------~~----------~~ Net increase in cash and cash equivalents 760,994 419,908 ~~40,438~~ Cash and cash equivalents, beginning of period 1,~~105~~496,~~822~~189 1,~~161~~105,~~934~~822 -------------~~--------~~ ------------~~----------~~ Cash and cash equivalents, end of period $ 12,~~525~~257,~~730~~183 $ 1,~~202~~525,~~372~~730 =============~~========~~ ============~~==========~~

See accompanying notes to condensed consolidated financial statements. Page 5 Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2002 2001 -------------- ------------ Reconciliation of net income to cash provided by (used in) operating activities: Net income $ 266,018 $ 270,661 Depreciation and amortization 372,741 367,617 Changes in assets and liabilities: Accounts receivable 143,859 (5,230) Restricted escrows (16,595) (35,817) Prepaid expenses and other assets 18,839 6,045 Accounts payable and accrued liabilities 132,977 168,199 -------------- ------------ Cash provided by (used in) operating activities $ 917,839 $ 771,477 ============== ============ See accompanying notes to condensed consolidated financial statements. Page 6 CONSOLIDATED RESOURCES HEALTH CARE FUND II NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 NOTE 1. The financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of Consolidated Resources Health Care Fund II (the "Partnership") for the interim periods. The results of operations for the three months ended September 30, 2002, are not necessarily indicative of the results to be expected for the year ending December 31, 2002. NOTE 2. The consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, a copy of which is available upon request by writing to WelCare Service Corporation-II at Post Office Box 8779, Atlanta, Georgia 31106. NOTE 3. A summary of compensation paid to or accrued for the benefit of the Partnership's general partners and their affiliates and amounts reimbursed for costs incurred by these parties on the behalf of the Partnership are as follows: Nine months ended September 30, 2002 2001 ---- ---- Charged to operating expenses: Property management and oversight management fees........................................... $64,635 $60,509 Financial accounting, data processing, tax reporting, legal and compliance, investor relations and supervision of outside services............................ $201,604 $60,080 Page 7 NOTE 4. Net income or loss per limited partnership (L.P.) unit represents that portion attributable to L.P. units in each period presented, which is 96% of such income or loss. The remaining 4% is attributable to the general partners, Consolidated Associates II and WelCare Service Corporation-II. Page 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Management Discussion and Analysis are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Partnership's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, additional changes in healthcare reimbursement systems and rates, the availability of capital and financing, changes to amounts recorded as revenues due to final resolution of amounts due to and from third-party payors, and other factors affecting the Partnership's business that may be beyond its control. At September 30, 2002, the Partnership had two general partners (the "General Partners"), Consolidated Associates II ("CA-II") and WelCare Service Corporation-II, as managing general partner ("WSC-II" or the "Managing General Partner"). Results of Operations Revenues: --------- Operating revenues increased by $18,614 for the quarter ended September 30, 2002 as compared to the same period for the prior year and by $385,208 for the nine months ended September 30, 2002, as compared to the nine-month period of the prior year. At September 30, 2002 the occupancy rate at the nursing facility was 87.4%, as compared to 89.1% at September 30, 2001, and the occupancy rate of the retirement facility was 90.1%, as compared to 88% at September 30, 2002. The slight increase in operating revenues for the third quarter was primarily due to the occupancy increase at the retirement facility and increased patient service and ancillary revenues at the retirement facility, offset in part by the occupancy decline and a reduction in the quality mix variance at the nursing facility. The operating revenues increase for the nine-month period was primarily due to increased occupancy at both facilities in the first quarter and positive Medicare rate and mix variances at the nursing facility, an increase in the number of assisted living unit rentals and periodic rate increases at the retirement facility during the second quarter. Expenses: --------- Operating expenses increased by $34,956 for the quarter ended September 30, 2002 as compared to the same period for the prior year and by $255,591 for the nine months ended September 30, 2002, as compared to the same period for the prior year. The increases are primarily due to increased labor expenses due to increased services to residents, and an increase in the need for contract services and supply at the retirement facility, partially offset by reductions in labor and contract services costs at the nursing center. Net Income: ----------- The Partnership had a net loss of $1,426 during the quarter ended September 30, 2002 compared to net income of $119,983 for the same quarter of the prior year due primarily to increases in Page 9 partnership administration costs and a smaller increase in operating costs. Net income for the nine months ended September 30, 2002 decreased by $4,643 due to the same factors. Liquidity and Capital Resources: -------------------------------- At September 30, 2002, the Partnership held cash and cash equivalents of $2,257,183, an increase of $760,994 from December 31, 2001. The current cash balance will be necessary to meet the Partnership's current obligations and for operating reserves. In addition, cash balances maintained at the Partnership's two facilities must be maintained in accordance with operating reserves established by HUD. The Partnership's two facilities produced sufficient revenues to meet their operating and debt service obligations. Management believes that these facilities will produce positive cash flow for the year ending December 31, 2002; however, no assurance can be given that the facilities will produce positive cash flow if revenues decline. As of September 30, 2002, the Partnership was not obligated to perform any major capital expenditures or renovations. The Managing General Partner anticipates that any repairs, maintenance or capital expenditures will be financed with cash reserves, HUD replacement reserves and cash flow from operations. Significant changes have and will continue to be made in government reimbursement programs, and such changes could have a material impact on future reimbursement formulas. The Balance Budget Act of 1997 has targeted the Medicare program for reductions in spending growth for skilled nursing facilities over the next five years, primarily through the implementation of the prospective payment system ("PPS") reimbursement system. The Partnership's nursing facility changed to the PPS reimbursement system on January 1, 1999. Management believes that continued and increased reductions in therapy costs, the use of general purchasing agents and other expense reduction measures should in part offset the effect of any rate reductions arising from the PPS reimbursement system. The Partnership can give no assurance that payments under such program in the future will remain at a level comparable to the present level or increase, and decreases in the level of payments could have a material adverse effect on the Partnership. New Accounting Pronouncements: ------------------------------ In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement does not change the measurement or recognition aspects for pensions and other postretirement benefit plans; however, it does revise employers' disclosures to include more information about the plan assets, obligations to pay benefits and funding obligations. SFAS 132, as revised, is generally effective for financial statements with fiscal years ending after December 15, 2003. The adoption of the required provisions of SFAS 132, as revised, is not expected to have a material effect on the Partnership's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 clarifies the definition of a liability as currently defined in FASB Concepts Statement No. 6, "Elements of Financial Statements," as well as other planned revisions. This statement requires a financial instrument Page 10 that embodies an obligation of an issuer to be classified as a liability. In addition, the statement establishes standards for the initial and subsequent measurement of these financial instruments and disclosure requirements. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and for all other matters, is effective at the beginning of the first interim period beginning after June 15, 2003. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for decisions made by the FASB's Derivatives Implementation Group, other FASB projects dealing with financial instruments, and in response to implementation issues raised in relation to the application of the definition of a derivative. This statement is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 is not expected to have a material effect on the Partnership's financial position or results of operations. In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" and in December 2003, a revised interpretation was issued (FIN No. 46, as revised). In general, a variable interest entity ("VIE") is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46, as revised, requires a VIE to be consolidated by a Partnership if that Partnership is designated as the primary beneficiary. The interpretation applies to VIEs created after January 31, 2003, and for all financial statements issued after December 15, 2003 for VIEs in which an enterprise held a variable interest that it acquired before February 1, 2003. The adoption of FIN 46, as revised, is not expected to have a material effect on the Partnership's financial position or results of operations. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership has not entered into any transactions using derivative financial instruments or other market risk sensitive instruments and believes that its exposure to market risk associated with other financial instruments (such as investments and borrowings) and interest rate risk is not material. ITEM 4 CONTROLS AND PROCEDURES. This report on Form 10-Q covers the fiscal quarter ended September 30, 2002. As of the end of that period, no evaluation procedure was specified by the Securities and Exchange Commission with respect to the Partnership's disclosure controls and procedures (as now defined by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). In fact, the concept of disclosure controls and procedures had not yet been defined by the above-referenced rules. However, in light of the recently adopted requirements with respect to disclosure controls and procedures, John F. McMullan, the principal executive officer and chief financial officer of the managing general partner of the Partnership, who performs such functions for the Partnership, has evaluated the effectiveness of the design and operation of the Partnership's disclosure controls and procedures in connection with the preparation of this report Page 11 on Form 10-Q. Based on that evaluation, he has concluded that the Partnership's disclosure controls and procedures are effective at ensuring that required information is made available to him for disclosure in the Partnership's reports filed under the Exchange Act. However, the Partnership is not timely in filing its reports with the Securities and Exchange Commission. The Partnership is in the process of bringing its filings with the Securities and Exchange Commission up to date and in connection with those efforts intends to improve its disclosure controls and procedures such that material information will be made available on a timely basis for disclosure in required reports. In connection with such review, Mr. McMullan also conducted a preliminary review of the Partnership's internal control over financial reporting. While the Managing Partner (MCII) has an informal system of internal controls, given the size of the Partnership and the control structures in place at each subsidiary, management does not believe that any material weaknesses exist in the internal controls that could have a material effect on the financial reporting of the Partnership. Management intends to conduct additional reviews of the Partnership's systems of internal control, including control over financial reporting, and will seek appropriate advice from its independent auditors regarding recommendations for improving such controls. No changes were been made in internal control over financial reporting during the quarter covered by this report. Part II - Other Information ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibit 31.1 Certification Pursuant to 17 CFR 240.13a-14. Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 12 SIGNATURES Pursuant to the requirements 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. CONSOLIDATED RESOURCES HEALTH CARE FUND II By: WELCARE SERVICE CORPORATION - II Managing General Partner Date: August 5, 2004 By:/s/John F. McMullan -------------- ------------------------------------ John F. McMullan Chief Financial Officer Date: August 5, 2004 By:/s/ Marilyn McMullan -------------- ------------------------------------ Marilyn McMullan Assistant Secretary Page 13

Nine months ended September 30, 2001 2000 --------------------- ---------------------- Reconciliation of net income to cash provided by operating activities: Net income $ 270,661 $ 36,616 Depreciation and amortization 367,617 358,162 Changes in assets and liabilities: Accounts receivable (5,230) (149,390) Restricted escrows (35,817) (209,173) Prepaid expenses and other assets 6,045 12,846 Accounts payable and accrued liabilities 168,199 159,224 --------------------- ---------------------- Cash and cash equivalents, end of period $ 771,477 $ 208,285 ===================== ======================

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