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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
-------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-13415
CONSOLIDATED RESOURCES HEALTH CARE FUND II
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(Exact name of registrant as specified in its charter)
Georgia 58-1542125
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
1175 Peachtree Street, Suite 850, Atlanta, Georgia 31106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 404-873-1919
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership
Units
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 if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No x
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Of the registrant's 15,000 Limited Partnership Units, 14,975 are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for Limited Partnership
Units and transfers of units are subject to certain restrictions.
Documents Incorporated by Reference: None
PART I
ITEM 1. BUSINESS
Consolidated Resources Health Care Fund II (the "Partnership") was organized on
October 31, 1983, as a Limited Partnership under the provisions of the Georgia
Uniform Limited Partnership Act.
At December 31, 2000, 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").
On December 7, 1983, the Partnership offered for sale 15,000 of Limited
Partnership Units. The Limited Partnership Units represent equity interests in
the Partnership and entitle the holders thereof (the "Limited Partners") to
participate in certain allocations and distributions of the Partnership.
The Partnership's primary business is to own, operate and ultimately dispose of
a portfolio of health care related real properties for the benefit of its
Limited Partners. At December 31, 2000, 1999 and 1998, the Partnership owned and
operated two health care facilities, a nursing home and a retirement center,
both located in Columbus, Ohio. Each of the health care facilities is treated as
a separate reportable segment of the Partnership.
The Partnership's nursing home is managed by Life Care Centers of America, Inc.
("LCCA") and the retirement center is managed by American Lifestyles, Inc.
("ALI"), a division of LCCA. LCCA is a privately-owned corporation which manages
congregate care facilities throughout the United States. LCCA and ALI receive a
management fee equal to 5% of net operating revenues of the respective
facilities. An affiliate of the Managing General Partner provides oversight
management services for these facilities and receives an oversight management
fee of 1% of gross revenues.
As of December 31, 2000, the Partnership employed approximately 158 employees,
including administrative, nursing, dietary, social services and maintenance
personnel.
The nursing home consists of four private rooms with one bed per room and 48
semi-private rooms with two beds per room. The services provided at the
Partnership's nursing home consist of long-term nursing care. Nursing care
consists of 24-hour medical services prescribed by the resident's physician as
well as assistance or supervision with daily activities, such as dressing,
grooming, bathing, medication and dietary needs. The retirement center owned by
the Partnership provides apartment living for ambulatory senior citizens who do
not require assistance in their daily activities.
The nursing home is certified to receive benefits under joint federal and state
funded programs administered by the State of Ohio to provide medical assistance
to the indigent, known generally as the "Medicaid" program. Benefits under the
Federal Health Insurance for the Aged Act ("Medicare") are for skilled care only
in those facilities which are certified for the program. The nursing home is
certified under the Medicare program.
Medicaid reimbursement formulas vary by state and are established in accordance
with Federal guidelines. Typically, Medicaid provides for reimbursement for
nursing home care of an all-inclusive nature up to specified limits based on
historical costs, with adjustments for inflation. Federal law requires that
Medicaid reimbursement rates be reasonable and adequate to meet the costs that
must be incurred by efficiently and economically operated facilities in order to
provide care and services in conformity with applicable laws, regulations and
quality and safety standards. Medicaid payments generally are set prospectively
for each facility.
-2-
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, administrative rulings, interpretations of policy and determinations by
intermediaries, and to governmental funding restrictions. Each of these factors
may materially increase or decrease program payments to long-term care
facilities and could adversely affect the operations of the Partnership's
nursing facility. In the operation and sale of properties, the Partnership
competes with a number of individuals and entities, including large, national
nursing home chains and small, locally owned geriatric facilities. Some
competing operators have greater financial resources than the Partnership or may
operate on a nonprofit basis or as charitable organizations. The Partnership
believes that the quality of care provided, the reputation and physical
appearance of its facilities and, in the case of private pay patients, charges
for services, are significant competitive factors which add to the success of a
facility. There is limited, if any, competition in price with respect to
Medicaid and Medicare patients since revenues for services to such patients are
strictly controlled and based on fixed rates and cost reimbursement principles.
In light of these factors, the Partnership seeks to meet competition by
continually improving the appearance of and the quality of services provided at
its facilities, establishing a reputation within the local medical communities
for providing competent care services and continually evaluating the needs of
the community and services offered by other health care providers.
All patient and resident revenue derived by the retirement facility is received
from private sources. The nursing facility, however, receives patient revenue
from both the public and private sector. The following table sets forth
information regarding the average daily census and sources of patient and
resident revenues for the last two years at the Partnership's nursing facility:
Average Daily Census for
Year Ended
December 31, 2000 Revenues for
-------------------------------------------------- Year Ended Percentages
Number of Percent of Total December 31, of Total
Patients/Residents Patients/Residents 2000 Revenues
- ---------------------------------------------------------------------------------------------------
Medicaid 51.92 58% $2,595,980 44%
Private Pay 23.89 27% 1,414,604 24%
Medicare 10.14 11% 1,251,906 21%
HMO/Other 3.67 4% 609,798 11%
---- -- ------- ---
Total 89.62 100.0% $5,872,288 100.0%
Average Daily Census for
Year Ended
December 31, 1999 Revenues for
-------------------------------------------------- Year Ended Percentages
Number of Percent of Total December 31, of Total
Patients/Residents Patients/Residents 1999 Revenues
- ---------------------------------------------------------------------------------------------------
Medicaid 53.4 57% $2,452,526 44%
Private Pay 30.0 32% 1,697,051 31%
Medicare 7.2 8% 1,103,451 20%
HMO/Other 3.2 3% 259,943 5%
Miscellaneous 0.0 0% (5,045) 0%
--- -- ------- --
Total 93.8 100% $5,507,926 100%
Because of regular changes in the census mix (i.e. private pay vs. government
reimbursed patients), the occupancy required for a nursing facility to achieve
an operating break-even point cannot be determined precisely. Generally, a
greater ratio of Medicaid patients will require a higher occupancy to reach a
break-even point. On the other hand, a high Medicare census can significantly
reduce the break-even point due to a higher reimbursement rate. The overall
occupancy rate for the nursing facility in 2000 was 90%. The 2000 break-even
occupancy figure for the nursing facility after depreciation and amortization is
estimated to be approximately 90%. Thus, the nursing facility met its estimated
break-even occupancy for 2000.
-3-
The retirement center is much like an apartment complex with additional services
provided to attract the elderly including limited transportation, housekeeping
and food services. The retirement center has 10 studio apartments and 81
one-bedroom apartments. The Partnership's retirement center has a net cash flow
break-even occupancy ranging from 75% to 80%. During 2000, the retirement center
had an occupancy rate of 72%. Therefore, it did not meet its break-even
occupancy level.
ITEM 2. PROPERTIES
The following table sets forth the investment portfolio of the Partnership at
December 31, 2000. The buildings and the land on which they are located are
beneficially owned by the Partnership in fee, subject in each case to a first
deed of trust as set forth more fully in Note 2 to the consolidated financial
statements included herein.
Properties (dollars in 000's)
-----------------------------
Net Occupancy
Property Secured Acquisition Book Rate in Date
Debt Cost Value(1) 2000 Acquired
Mayfair Village $1,462 $4,774 $931 90% February 1985
Nursing Care Center
Columbus, OH
100 Licensed
Nursing Home
Beds
Mayfair Retirement Center $2,494 $4,824 $1,801 72% February 1985
Columbus, OH ------ ------ ------
91 Units
Total $3,956 $9,598 $2,732
====== ====== ======
(1) A provision was made prior to 1991 to write down each facility to its
estimated net realizable value or estimated fair value at the time of
the write-down as determined by WelCare Consolidated Resources
Corporation of America, the corporate general partner at the time of
this write-down. These values reflect this write-down.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2000, the Partnership did not have any pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Partnership. The Partnership may, from
time to time, be a party to litigation or administrative proceedings which arise
in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND SECURITY
HOLDER MATTERS
(A) No market for Limited Partnership Units exists nor is one expected to
develop.
-4-
(B) Title of Class Number of Record Unit Holders
-------------- -----------------------------
Limited Partner Units 1,258 as of 12/31/00
(C) No cash was distributed to the Limited Partners during 2000. There have
been no distributions to the General Partners. There were total
distributions of $600,000 paid to the Limited Partners in 1998.
Cumulative distributions paid to the Limited Partners as of December
31, 2000 were $3,538,203. Future distributions are dependent on the
Partnership's ability to meet its ongoing obligations. See Liquidity
and Capital Resources section of Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for a
discussion of distributions.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth a summary of selected financial data for the
Partnership. This summary should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Partnership and
notes thereto appearing in Item 8.
Years Ended December 31,
(dollars in 000's, except per unit figures)
-----------------------------------------------------------------------------
---
Statements of Operations
------------------- 2000 1999 1998 1997 1996
---------- ---------- ----------- ---------- ----------
Operating revenue $7,236 $6,700 $7,495 $8,304 $7,189
Net income (Loss) 90 (245) (168) 664 279
Net income (Loss)
allocable to Limited 86 (235) (161) 638 267
Partners
Weighted average Limited 15,000 15,000 15,000 15,000 15,000
Partnership Units
outstanding
Basic and diluted net $5.75 $(15.66) $(10.74) $42.50 $17.84
income (loss) per
weighted average
Limited Partnership Unit
Distribution paid per - - $40.00 $13.34 $10.00
Limited Partnership Unit
-5-
At December 31,
(dollars in 000's)
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------
Balance Sheet 2000 1999 1998 1997 1996
-------------------- --------- --------- -------- -------- --------
Property and equipment, $2,732 $2,994 $3,315 $3,577 $3,440
net
Total assets 4,775 4,890 5,228 6,014 5,499
Long-term debt 3,866 3,957 4,045 4,124 4,206
obligations, less current
maturities
Partners' equity (deficit) (237) (327) (82) 686 222
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Certain statements contained in this Management's 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 prove ultimately to
be inaccurate. Actual events and results may differ materially 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, 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.
Results of Operations
The following is a discussion of the major factors that materially affected the
Partnership's operations during the three years ending December 31, 2000 and the
comparability of operations between those years.
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 Balanced Budget Act of 1997 (the "Act"), enacted in
August, 1997, has targeted the Medicare program for reductions in spending
growth of approximately $9.5 billion for skilled nursing facilities over four or
five years, primarily through the implementation of the Medicare prospective
payment system (the "Medicare PPS") for skilled services. The Medicare PPS per
diem, which would cover routine service, ancillary and capital-related costs,
initially will be a blended rate based on (i) a facility-specific payment rate
derived from each facility's 1995 cost report, adjusted by an inflation factor
and (ii) a federal per diem rate derived from all hospital-based and
freestanding (skilled nursing facility) 1995 cost reports, adjusted for case mix
and geographic variations in labor costs. The blended rate will be further
adjusted by a facility-specific case mix (acuity) index.
The Partnership's nursing home facility changed to the Medicare PPS on January
1, 1999. Implementation of the Medicare PPS contributed to the decrease in
revenues in 1999, even though the facility-specific Medicare rate for 1999 of
$379.77 provided the facility with approximately $260,000 in additional revenue
compared to payments based on the full federal rates. Effective October 1, 2000,
all facilities in our industry received a 4% increase in Medicare per diem
payment, and additionally, effective April 1, 2000, 15 Resource Utilization
Group ("RUG") categories, including our nursing home facility, received a 20%
increase. The 20% per diem add-on to 15 RUG categories and the 4% across the
board increase in payment, another of which will be effective on October 1,
2001, are expected to lessen the impact of the transition to the Medicare PPS.
However, these rate increases expired in October 2002, and the Partnership
expects a decrease in revenue as a result of the expiration of the Medicare rate
increases.
-6-
During 2000, the nursing home facility adjusted the methodology used to compute
Medicare cost per day under Medicare PPS. Under the methodology used in 1999,
nurses' salary sign-in sheets were used to allocate nursing salaries between the
Medicare and non-Medicare units of the nursing home facility. In order to
improve the efficiency of calculating Medicare cost per day, in 2000 the nursing
home facility began to allocate nursing salaries between the Medicare and
non-Medicare units on the basis of patient days (the "Adjusted Calculation"),
rather than on the basis of salary sign-in sheets. The numbers in the following
table are computed using the Adjusted Calculation and compare Medicare cost per
day for 2000 to the Medicare cost per day for 1999, the first year of Medicare
PPS for the categories shown below:
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Category 1999 Medicare Cost 2000 Medicare Cost Cost Increase
Per Day Per Day (Decrease)
- -----------------------------------------------------------------------------------------------------------
Routine Nursing $125.46 $134.47 $9.01
- -----------------------------------------------------------------------------------------------------------
Inpatient Rehabilitation $93.19 $46.76 $(46.43)
- -----------------------------------------------------------------------------------------------------------
Other Inpatient $29.07 $20.89 $(8.18)
- -----------------------------------------------------------------------------------------------------------
Total $247.72 $202.12 $(45.60)
- -----------------------------------------------------------------------------------------------------------
The 18% decrease in total Medicare cost per day was primarily attributable to a
28% reduction in the overhead allocated to the rehabilitation area as a result
of a decrease in the square footage of the rehabilitation area. The overhead
allocated to inpatient rehabilitation was $194,324 and $138,967 in 1999 and
2000, respectively. Also contributing to the decrease in total Medicare cost per
day was a 12% reduction in other inpatient costs from $168,062 in 1999 to
$148,248 in 2000. This decrease was attributable to a reduction in medical
supplies expense. These decreases in other inpatient costs and inpatient
rehabilitation were partially offset by a 16% increase in nursing salaries from
$1,356,479 in 1999 to $1,578,223 in 2000. The increase in nursing salaries was
primarily attributable to an increase in the number of nurses employed, as well
as an increase in the number of hours worked by each nurse.
Management believes that revenues will continue to be lower under the Medicare
PPS; however, management believes that reductions in therapy costs, use of
general purchasing agents and other expense reduction measures should in part
offset the effect of any rate reductions. 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. Any decreases in the level of payments could
have a material adverse effect on the Partnership.
Revenue:
2000 compared to 1999
Operating revenues increased $536,149 (8%) in 2000 as compared to 1999. The
increase was attributable to several factors. First, there was a 41% increase in
the average daily census of Medicare patients at the nursing facility, as well
as a 15% increase in the average daily census of managed care patients at the
nursing facility. Furthermore, there was an increase in the Medicare
reimbursement rate the nursing facility. Also contributing to the increase in
operating revenues was a 12% increase in average daily census at the retirement
facility.
1999 compared to 1998
Operating revenues decreased $794,757 in 1999 as compared to 1998. The decrease
was attributable primarily to a decrease in occupied units and a reduction in
Medicare and Medicaid revenues. Although the occupancy levels at the retirement
facility decreased from 1998 to 1999 due to increased competition in the area,
the average monthly rental rate at the retirement facility increased from $1,370
in 1998 to $1,400 in 1999. Accounts receivable, recorded at net realizable
value, due from the Ohio Medicaid Program and Medicare fell from $38,371 in 1998
to $16,769 in 1999 and from $182,739 in 1998 to $110,326 in 1999, respectively.
Medicaid and Medicare programs accounted for a lower percentage of operating
revenues
-7-
during 1999 than in 1998 due to significant changes in government reimbursement
programs and continued competition from a new rehabilitation/subacute facility.
Expenses:
2000 compared to 1999
Operating costs and expenses increased $235,599 in 2000 as compared to 1999. The
increase was attributable primarily to additional staffing needs at the
retirement center resulting from the increased occupancy rate.
1999 compared to 1998
Operating costs and expenses decreased $563,699 in 1999 as compared to 1998. The
significant decrease was attributable primarily to reductions in staffing at the
nursing center resulting from the implementation of the Medicare PPS and in
continuing response to the lower Medicare census.
Net Income (Loss):
2000 compared to 1999
For the fiscal year ended December 31, 2000, the Partnership had net income of
$89,880, and for the fiscal year ended December 31, 1999, the Partnership had a
net loss of $244,752. The net gain in 2000 was attributable primarily to the
increase in operating revenue in 2000 of $536,149 and a decrease in management
and oversight fees in 2000 from 1999, partially offset by an increase of
$235,599 in other operating costs and expenses in 2000 from 1999. The increase
in operating costs and expenses was primarily due to additional staffing needs
at the retirement center as result of the increased census.
1999 compared to 1998
For the fiscal year ended December 31, 1999, the Partnership suffered a net loss
of $244,752, and for the fiscal year ended December 31, 1998, the Partnership
had a net loss of $167,821. The net loss in 1999 was attributable primarily to a
substantial decrease in operating revenue in 1999 of $794,757 despite a
significant decrease of $714,493 in operating costs and expenses from $7,697,784
as of December 31, 1998 to $6,983,291 as of December 31, 1999. This significant
decrease in operating costs and expenses was due primarily to decreases in
staffing as described above, management and oversight fees and real estate
taxes.
Liquidity and Capital Resources
At December 31, 2000, the Partnership held cash and cash equivalents of
$1,105,822, a decrease of $56,112 from the amount held at December 31, 1999. The
cash balance will be necessary to meet the Partnership's current obligations and
for operating reserves. In addition, cash balances maintained at the two
Partnership facilities will have to be maintained in accordance with operating
reserves established by the U.S. Department of Housing and Urban Development
("HUD"). At December 31, 2000, the balance of HUD reserved cash at the
facilities was $466,280, which is equal to the mortgage escrow and reserve for
replacement accounts.
As the Partnership continues to adjust to Medicare PPS, it believes that it will
produce sufficient cash flow to meet its ongoing operations needs associated
with the two facilities currently owned by the Partnership. In addition, the
Partnership's cash reserves are considered adequate to meet contingent
liabilities related to third-party reimbursements from the operation of
facilities previously owned by the Partnership in Colorado. During 2000, the
Partnership did not receive any demands for payment of any actual or contingent
liabilities related to these previously-owned facilities. The Partnership has no
existing lines of credit or assurance of financial support from the General
Partners, should the need arise. Therefore, there can be no assurance that
sufficient funds will be available.
As discussed in "Results of Operations," the nursing facility benefited from
temporary increases in the rates paid by Medicare. Following the expiration of
these temporary rate increases in October 2002, the
-8-
Partnership expects that it will continue to generate sufficient cash flow from
its operations to meet its operating needs. In order to offset some of the
impact of the expiration of the rate increases, the Partnership plans to
evaluate steps to reduce expenses and to increase census at the nursing
facility.
As of December 31, 2000, the Partnership was not obligated to perform any major
capital expenditures. 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.
No cash was distributed to the General Partners or the Limited Partners during
the year ended December 31, 2000. On February 15, 1998, the Partnership
distributed $300,000 to the Limited Partners. On September 30, 1998, the
Partnership distributed $300,000 to the Limited Partners. No funds were
distributed during 1999. Cumulative distributions paid to the Limited Partners
as of December 31, 2000 were $3,538,203. The Managing General Partner desires to
make annual distributions from operating cash flow in future periods. However,
the Partnership's ability to make distributions may be limited by HUD's
requirements for surplus cash at both the nursing facility and retirement center
level.
Critical Accounting Policies
The Partnership's discussion and analysis of the financial condition and results
of operations are based upon the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the use of
estimates and judgments that affect the reported amounts and related disclosures
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ materially from
these estimates. The Partnership believes the following critical accounting
policies, among others, affect the more significant judgments and estimates used
in the preparation of the consolidated financial statements.
Operating revenue
Operating revenue consists of rental income, long-term nursing revenues, and
other ancillary services revenues. Operating revenues are recognized as services
are provided. Revenues are recorded net of provisions for contractual allowances
with third-party payors, primarily Medicare and Medicaid. Net revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment. Estimated third-party payor settlements
are recorded in the period the related services are rendered. The methods of
making such estimates are reviewed periodically, and differences between the net
amounts accrued and subsequent settlements or estimates of expected settlements
are reflected in current results of operations. See "Results of Operations"
above for further discussion of recent changes to third-party payor
reimbursement rates.
Property, equipment and long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
Partnership evaluates the carrying value of long-lived assets in relation to the
future projected undiscounted cash flows of the underlying properties to assess
recoverability in accordance with Statement of Financial Accounting Standards
No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of (SFAS 121). Those projected future undiscounted cash
flows require significant assumptions about future operations, such as
reimbursement rates for Medicaid and Medicare patients, occupancy rates, wage
rates, workers compensation costs and professional liability costs. Under SFAS
121, an impairment loss is recognized if the sum of the future net expected cash
flows is less than the carrying amount of the long-lived assets being evaluated.
The difference between the carrying amount of the long-lived assets being
evaluated, and the estimated fair market value of the assets represents the
impairment loss. The Partnership determines estimated fair value for the
long-lived assets that it intends to retain based on anticipated future cash
flows discounted at rates commensurate with the risks involved.
Funding Obligations
We have various contractual commitments that we must fund in 2001 and future
years as part of our normal operations. Summary information about these matters
is set forth in the following table.
-9-
The following table discloses aggregate information, as of December 31, 2000,
about our contractual obligations and the periods in which payments are due:
Payments Due By Period (in thousands)
----------------------------------------------------------------------
Total Payments
Due 2001 2002-2003 2004-2005 After 2005
----------------------------------------------------------------------------------------
Long-Term
Debt $3,957 $ 90 $ 203 $ 236 $3,428
----------------------------------------------------------------------------------------
Total
Contractual
Cash
Obligations $3,957 $ 90 $ 203 $ 236 $3,428
========================================================================================
The subsidiaries of the Partnership are obligated to pay management fees to a
related party in an amount equal to 5% of net operating revenues. This agreement
may be terminated by either party upon 60 days notice to the other party.
There are no other significant commercial commitments that we could be obligated
to pay in the future that are not included in our consolidated balance sheet.
Impact of the Year 2000 ("Y2K") Issue
Although much contingency planning was done for any possible Y2K issues, no
problems materialized. Therefore, there were no material costs associated with
addressing any Y2K issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not engage in any transactions exposing the Partnership to
material market risk. The Partnership has no variable rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data begin on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have officers or directors. At December 31, 2000, the
General Partners of the Partnership were Consolidated Associates II and WelCare
Service Corporation-II ("WSC-II") as Managing General Partner of the
Partnership. The executive officer and director of WSC-II who control the
affairs of the Partnership, are as follows:
Name and Position Age at Principal Occupations and Other Directorships During the Past 5 Years
- ----------------- ------ ---------------------------------------------------------------------
12/31/00
--------
John F. McMullan, 64 John F. McMullan has served as President, Secretary and Director of WSC-
-10-
President, Secretary and II since July, 1998. For more than five years prior to the date hereof, Mr.
Director McMullan has served as a consultant to Life Care Centers of America, the
Manager of the Partnership, and numerous other healthcare facilities. Mr.
McMullan is also a certified public accountant. Mr. McMullan serves on
the Board of Directors of Small Town Radio, Inc.
ITEM 11. EXECUTIVE COMPENSATION
No individual principal or principals as a group received any direct
remuneration from the Partnership.
The General Partners are not compensated directly for their services as general
partners of the Partnership. See Item 13 and Note 1 to the consolidated
financial statements appearing in Item 8 for further discussion of compensation
paid to affiliates of the General Partners.
The General Partners are entitled to distributions of cash from operations and
from "other sources" (primarily from the sale or refinancing of Partnership
properties, as set forth in Note 3 to the consolidated financial statements
included herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security ownership of certain beneficial owners.
No individual or group as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, known to the Partnership, is the beneficial owner
of more than 5% of the Partnership's securities.
(B) Security ownership of management.
The General Partners do not own any Limited Partnership Units. The
management of the General Partners are the beneficial owners of less
than 1% of the outstanding Limited Partnership Units individually and
in the aggregate.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Affiliates and former affiliates of the General Partners, in accordance with the
Partnership Agreement, may receive compensation for services rendered. The
following is a summary of compensation paid to or accrued for the benefit of the
General Partners and affiliates:
2000 1999 1998
---- ---- ----
Oversight management and management fees:
Paid at the Fund II level (1) $70,237 $68,876 $75,423
Paid by the facilities (1) $363,518 $334,891 $414,401
Administration of partnership activities (1) $105,465 $130,617 $129,500
Partnership administration costs for each of 1998, 1999 and 2000 include $72,813
paid annually to affiliates, with the remainder paid to non-affiliates.
(1) For reimbursement of expenses incurred by affiliates of the Managing
General Partner in performing administrative services including
investor relations and accounting. See Note 1 to the accompanying
consolidated financial statements included herein.
-11-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
(1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - as of December 31, 2000 and 1999
Consolidated Statements of Operations - for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Partners' Equity (Deficit) - for
the Years Ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows - for the Years Ended
December 31, 2000, 1999 and 1998
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in this
Form 10-K Report:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2000, 1999 and 1998
All other schedules are omitted since they are not required,
are not applicable, or the financial information required is
included in the consolidated financial statements or notes
thereto.
(3) The following exhibits are incorporated by reference and are
an integral part of this Form 10-K:
Exhibit Number Page
(as per Exhibit Document Description Number
Table)
3.1 Agreement of Limited Partnership of Consolidated Resources Health Care Fund N/A
II, incorporated by reference to Exhibit A to the Registration Statement on
Form S-1, as amended, Page A-1, File No. 2-87636, (now File No. 0-13415).
3.2 Amendment to Agreement of Limited Partnership of Consolidated Resources N/A
Health Care Fund II, incorporated by reference to Proxy
Statement filed on November 19, 1991, File No. 0-13415.
3.3 Amendment to Amended and Restated Agreement and Certificate of Limited N/A
Partnership of Consolidated Resources Health Care Fund II, incorporated by
reference to Form 10-Q filed on August 19, 1998, File No. 0-13415.
21 Subsidiaries E
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to E
Section 906 of the Sarbanes-Oxley Act of 2002.
-12-
E - Submitted electronically as a separate document herewith the
Registrant's Form 10-K
(b) Reports on Form 8-K: None.
-13-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CONSOLIDATED RESOURCES HEALTH CARE FUND II
(Registrant)
By: WELCARE SERVICE CORPORATION-II
Managing General Partner
Date: February 10, 2003 By: /s/ John F. McMullan
-----------------------------------------
John F. McMullan, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: February 10, 2003 By: /s/ John F. McMullan
-----------------------------------------
John F. McMullan
Director and Principal Executive Officer
of the Managing General Partner
Date: February 10, 2003 By: /s/ John F. McMullan
-----------------------------------------
John F. McMullan
Chief Financial Officer of the Managing
General Partner
-14-
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John F. McMullan, Principal Executive Officer and Chief Financial Officer of
Consolidated Resources Health Care Fund II, certify that:
1. I have reviewed this annual report on Form 10-K of Consolidated Resources
Health Care Fund II;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: February 10, 2003 By: /s/ John F. McMullan
-------------------------------------
John F. McMullan
Chief Financial Officer (chief
executive and chief financial officer
of the Partnership)
-15-
The Partners
Consolidated Resources Health Care Fund II and Subsidiaries
We have audited the accompanying consolidated balance sheets of Consolidated
Resources Health Care Fund II and Subsidiaries (the "Partnership") as of
December 31, 2000 and 1999 and the related consolidated statements of
operations, partners' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2000. We have also audited the schedule
listed in the accompanying index. These consolidated financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements and schedule are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements and schedule. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the
consolidated financial statements and schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Consolidated Resources Health Care Fund II and Subsidiaries at December 31, 2000
and 1999, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Atlanta, Georgia
November 19, 2002
-16-
Consolidated Resources Health Care Fund II and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 1999
Assets
Current
Cash and cash equivalents (Note 5) $1,105,822 $ 1,161,934
Accounts receivable, net of allowance for doubtful accounts
of $6,304 and $7,153, respectively (Note 4) 356,586 175,980
Prepaid expenses and other 6,046 13,400
---------- -----------
Total current assets 1,468,454 1,351,314
---------- -----------
Property and equipment (Note 2)
Land 178,609 178,609
Buildings and improvements 6,976,479 6,870,960
Equipment and furnishings 1,086,550 973,896
---------- -----------
8,241,638 8,023,465
Less: accumulated depreciation (5,509,461) (5,029,530)
---------- -----------
Net property and equipment 2,732,177 2,993,935
---------- -----------
Other
Restricted escrows and other deposits (Note 2) 557,302 526,931
Deferred loan costs, net of accumulated amortization
of $16,423 and $14,593, respectively 16,683 17,720
---------- -----------
Total other assets 573,985 544,651
---------- -----------
$4,774,616 $ 4,889,900
========== ===========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-1
December 31, 2000 1999
Liabilities and Partners' Equity (Deficit)
Current liabilities
Current maturities of long-term debt obligations (Note 2) $ 90,464 $ 83,938
Accounts payable 67,735 116,302
Accrued expenses (Note 6) 340,287 260,637
Accrued management fees substantially all to affiliates (Note 1) 394,918 394,918
Deposit liabilities 88,261 68,321
Deferred revenue 80,058 93,635
Due to Medicare 67,968 231,455
Due to related party (Note 1) 15,913 10,385
---------- ----------
Total current liabilities 1,145,604 1,259,591
Long-term debt obligations, less current
maturities (Note 2) 3,866,168 3,957,345
---------- ----------
Total liabilities 5,011,772 5,216,936
---------- ----------
Commitments and Contingencies (Notes 1, 4 and 5)
Partners' equity (deficit) (Notes 2 and 3)
Limited partners (60,102) (146,387)
General partners (177,054) (180,649)
---------- ----------
Total partners' equity (deficit) (237,156) (327,036)
---------- ----------
$4,774,616 $4,889,900
---------- ----------
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-2
Consolidated Resources Health Care Fund II and Subsidiaries
Consolidated Statement of Operations
Years ended December 31, 2000 1999 1998
---- ---- ----
Revenue
Operating revenue (Note 4) $ 7,236,032 $ 6,699,883 $7,494,640
Interest income 48,771 38,656 35,323
----------- ----------- -----------
Total revenue 7,284,803 6,738,539 7,529,963
----------- ----------- -----------
Operating costs and expenses
Operating expenses 5,735,183 5,539,955 6,153,313
Depreciation and amortization 480,968 474,908 466,400
Interest (Note 2) 304,832 307,150 313,126
Management and oversight fees (Note 1) 433,755 403,767 489,824
Real estate taxes 134,720 126,894 145,621
Partnership administration costs including amounts 105,465 130,617 129,500
paid to affiliates (Note 1) ----------- ----------- -----------
Total operating costs and expenses 7,194,923 6,983,291 7,697,784
----------- ----------- -----------
Net income/(loss) $ 89,880 $ (244,752) $ (167,821)
----------- ----------- -----------
Basic and diluted net income/(loss) per limited $ 5.75 $ (15.66) $ (10.74)
partnership unit ----------- ----------- -----------
Limited partnership units outstanding 15,000 15,000 15,000
----------- ----------- -----------
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-3
Consolidated Resources Health Care Fund II and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit)
Years Ended December 31, 2000, 1999 and 1998
Limited General Total
Partners'
Equity
(Deficit)
------- ------- ---------
Partners' equity (deficit), at January 1, 1998 $ 849,683 $ (164,146) $ 685,537
Net loss (161,108) (6,713) (167,821)
Distributions (Note 3) (600,000) - (600,000)
----------- ----------- -----------
Partners' equity (deficit), at December 31, 1998 88,575 (170,859) (82,284)
Net loss (234,962) (9,790) (244,752)
----------- ----------- -----------
Partners' equity (deficit), at December 31, 1999 (146,387) (180,649) (327,036)
Net income 86,285 3,595 89,880
----------- ----------- -----------
Partners' equity (deficit), at December 31, 2000 $ (60,102) $ (177,054) $ (237,156)
----------- ----------- -----------
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
Consolidated Resources Health Care Fund II and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2000 1999 1998
---- ---- ----
Operating activities
Net income/(loss) $ 89,880 $ (244,752) $ (167,821)
Adjustments to reconcile net income/(loss) to cash
provided by operating activities:
Depreciation and amortization 480,968 474,908 466,400
Bad debt expense 8,658 37,165 9,856
Changes in operating assets and liabilities:
Accounts receivable (189,265) 135,314 (36,778)
Prepaid expenses and other 7,354 22,777 (17,213)
Accounts payable (48,567) (106,941) (19,241)
Accrued liabilities and deposit liabilities (77,474) 85,806 77,651
Third-party payor settlement receivable - 97,501 374,516
---------- ----------- ----------
Net cash provided by operating activities 271,555 501,778 687,370
---------- ----------- ----------
Investing activities
Payments for purchases of property and equipment, (218,173) (152,952) (203,167)
Net change in restricted escrows and other deposits (30,371) (45,843) (24,096)
---------- ----------- ----------
Net cash used in investing activities (248,544) (198,795) (227,263)
---------- ----------- ----------
Financing activities
Principal payments on long-term debt obligations (84,651) (82,513) (76,338)
Due from related party 5,528 10,385 890,000
Distributions paid to limited partners - - (600,000)
---------- ----------- ----------
Net cash provided by (used in) financing activities (79,123) (72,128) 213,662
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (56,112) 230,855 673,769
Cash and cash equivalents, beginning of year 1,161,934 931,079 257,310
---------- ----------- ----------
Cash and cash equivalents, end of year $1,105,822 $ 1,161,934 $ 931,079
========== =========== ==========
Supplemental Disclosure:
Cash paid during the year for interest $ 304,832 $ 307,150 $ 313,126
========== =========== ==========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-5
Consolidated Resources Health Care Fund II and Subsidiaries
Summary of Significant Accounting Policies
Organization
Consolidated Resources Health Care Fund II (the "Partnership") was organized on
October 31, 1983 as a limited partnership under the provisions of the Georgia
Uniform Limited Partnership Act for the purpose of acquiring, operating and
holding for investment and future capital appreciation income producing, health
care related real properties. Investments in healthcare real property consist of
a nursing home and a retirement center in Ohio. During 2000, the average
occupancy for the nursing home and retirement center was 90% and 72%,
respectively.
Prior to July 16, 1998, the General Partners of the Partnership were WelCare
Consolidated Resources Corporation of America, serving as the Corporate General
Partner, ("WCRCA" or the "Corporate General Partner"), a Nevada corporation,
WelCare Service Corporation-II, serving as Managing General Partner, ("WSC-II"
or the "Managing General Partner"), a Georgia corporation, and Consolidated
Associates II, ("CA-II"), a Georgia general partnership (collectively the
"General Partners"). On January 30, 1997, all of the stock of the Corporate
General Partner and the Managing General Partner was sold to Consolidated
Partners Corporation, which is wholly-owned by a general partner of CA-II. The
General Partners collectively hold a 4% ownership interest in the Partnership.
The limited partners hold 15,000 partnership units which comprise 96% ownership
in the Partnership.
On July 16, 1998, WCRCA assigned all of its right, title and interest in and to
its general partner interest in the Partnership to WSCII. On July 22, 1998, an
amendment to Amended and Restated Agreement and Certificate of Limited
Partnership was filed reflecting the withdrawal of WCRCA from the partnership
and certain other matters. On July 23, 1998 the sole shareholder of the Managing
General Partner sold all of its issued and outstanding shares to a third party.
The financial statements do not reflect assets the partners may have outside
their interests in the Partnership, nor any personal obligations including
income taxes, of the individual partners.
Consolidation
The consolidated financial statements include the accounts of the Partnership
and the accounts of the subsidiary partnerships in which it holds 99.5% of the
units. All significant intercompany balances and transactions have been
eliminated. The amount of minority interest is immaterial.
Property, Equipment and Long-lived Assets
Property and equipment are recorded at cost less appropriate reductions for
permanent declines in net realizable value. Property and equipment are not
adjusted for increases in net realizable value.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
Prior to 1992, the Partnership recorded write-downs to reduce the carrying value
of certain properties to their estimated net realizable value as determined by
the Managing General Partner.
F-6
Consolidated Resources Health Care Fund II and Subsidiaries
Summary of Significant Accounting Policies
The balance of these write-downs and the carrying values of the property and
equipment were as follows as of December 31, 2000.
Write Down Carrying Values
---------- ---------------
Mayfair Village Nursing Care Center $ 1,441,848 $ 930,511
Mayfair Retirement Center 440,602 1,801,666
------------ ------------
$ 1,882,450 $ 2,732,177
============ ============
Depreciation and Amortization
Property and equipment are depreciated using the straight-line method over lives
of 24 to 30 years for buildings and 5 to 10 years for equipment and furnishings.
Depreciation expense for 2000, 1999 and 1998 was $479,932, $473,872 and
$465,364, respectively. Renewals and betterments are capitalized and repairs and
maintenance are charged to operations as incurred.
Deferred Loan Costs
Deferred loan costs are amortized over the terms of the respective loans using
the straight-line method which approximates the effective interest method.
Amortization of deferred loan costs is included in depreciation and amortization
expense.
Operating Revenue
Operating revenue is recorded when services are rendered and includes amounts
reimbursable by the Medicaid and Medicare programs. Revenues are recorded at the
estimated net realizable amounts from patients, third-party payors, and others
for services rendered including estimated retroactive adjustments under
reimbursement agreements with Medicare and Medicaid. Retroactive adjustments are
accrued in the period related services are rendered and adjusted in future
periods as final settlements are determined.
The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth of approximately
$9.5 billion for skilled nursing facilities over the next five years, primarily
through the implementation of a Medicare prospective payment system ("PPS") for
skilled services. The PPS per diem, which covers routine service, ancillary and
capital related costs, is initially a blended rate based on (i) a
facility-specific payment rate derived from each facility's 1995 cost report,
adjusted by an inflation factor and (ii) a federal per diem rate derived from
all hospital-based and freestanding (skilled nursing facility) 1995 cost
reports, adjusted for case mix and geographic variations in labor costs. The
blended rate will be further adjusted by a facility-specific case mix (acuity)
index.
The Partnership's nursing home changed to the PPS reimbursement system on
January 1, 1999. Management believes that revenues will continue to be lower
under PPS; however, reductions in therapy costs, use of general purchasing
agents and other expense reduction measures should in part offset the effect of
any rate reductions. During 2000, temporary increases in Medicare reimbursement
rates were granted. These temporary increases expired on October 31, 2002. The
Company can give no assurance that payments under such programs 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
Company.
F-7
Income Taxes
No provision has been made in the consolidated financial statements for Federal
income taxes because under current law, no Federal income taxes are paid
directly by the Partnership. The Partnership reports certain transactions
differently for tax and financial statement purposes.
F-8
Consolidated Resources Health Care Fund II and Subsidiaries
Summary of Significant Accounting Policies
Allocation of Net Income and Loss
The Partnership's net profits and net losses (other than net profits or net
losses from a sale or refinancing of Partnership property), are allocated 96% to
the Limited Partners and 4% to the General Partners. Distributions are computed
as described in Note 4.
Net losses resulting from a sale or refinancing shall be allocated 99% to the
Limited Partners and 1% to the General Partners. Net profits resulting from a
sale or refinancing shall be allocated in the following order:
(1) First, 1% to the General Partners and 99% to the Limited Partners until
the net profits allocated to the Limited Partners from such sale or
refinancing equals the excess of the greater of the following items
over their capital account immediately prior to such sale or
refinancing:
(a) zero; or
(b) the Limited Partners' invested capital immediately prior to
such sale or refinancing plus 9% per annum of the Limited
Partners' average invested capital for all fiscal years to the
extent not received through prior distributions of
distributable cash from operations or sale or refinancing
proceeds; or
(c) the amount of sale or refinancing proceeds distributable to
the Limited Partners;
(2) Second, to the General Partners until the net profits allocated to the
General Partners from such sale or refinancing equals the excess of the
greater of the following items over their capital account immediately
prior to such sale or refinancing:
(a) zero; or
(b) the amount of sale or refinancing proceeds distributable to
the General Partners from such sale or refinancing;
(3) Third, any remaining net profits shall be allocated 15% to the General
Partners and 85% to the Limited Partners.
Net Income (Loss) Per Limited Partnership Unit
Net income (loss) per Limited Partnership Unit is computed by dividing net
income (loss) allocated to the Limited Partners by the number of Limited
Partnership units outstanding.
Statements of Cash Flows
For purposes of this statement, cash equivalents include U.S. government
securities, commercial paper and certificates of deposit with original
maturities of three months or less.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
Consolidated Resources Health Care Fund II and Subsidiaries
Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires an entity to measure all derivatives at fair value
and to recognize them in the balance sheet as an asset or liability, depending
on the entity's rights or obligations under the applicable derivative contract.
The recognition of changes in the fair value of a derivative that affects the
income statement will depend on the intended use of the derivative. If the
derivative does not qualify as a hedging instrument, the gain or loss on the
derivative will be recognized currently in earnings. If the derivative qualifies
for special hedge accounting, the gain or loss on the derivative will either (i)
be recognized in income along with an offsetting adjustment to the basis of the
item being hedged or (ii) be deferred in other comprehensive income and
reclassified to earnings in the same period or periods which the hedged
transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, Amendment of SFAS
133,"liberalized the application of SFAS 133 in a number of areas. The
Partnership adopted the new standards on January 1, 2001 with no significant
impact on its results of operations or financial position.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," the Partnership
has reviewed its accounting policies for the recognition of revenue. SAB No. 101
was required to be implemented in fourth quarter 2000. SAB No. 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition in financial statements. The Partnership's policies for revenue
recognition are consistent with the views expressed within SAB No. 101.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation," an
interpretation of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Interpretation No. 44 clarifies the application
of APB No. 25 to the definition of an employee for purposes of applying APB No.
25, the criteria for determining whether a plan qualifies as a noncompensatory
plan, the accounting consequences of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange of
stock compensation awards in a business combination. This interpretation did not
have a material impact on the Partnership's consolidated financial statements.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Partnership recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Partnership reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
141.
F-10
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Partnership identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Partnership to complete a
transitional goodwill impairment test six months from the date of adoption. The
Partnership is also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS 142.
The Partnership expects that the effect of the adoption of SFAS 141 and SFAS 142
will not be material to its financial position or results of operations.
In June 2001 the FASB approved the issuance of Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
SFAS 143 establishes accounting standards for the recognition and measurement of
legal obligations associated with the retirement of tangible long-lived assets.
SFAS 143 will become effective for the Partnership on January 1, 2003 and
requires recognition of a liability for an asset retirement obligation in the
period in which it is incurred. Management is in the process of evaluating the
impact this standard will have on the Partnership's financial statements.
In October 2001 the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001. Management is in the process of evaluating the impact this standard will
have on the Partnership's financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 4, which was amended by SFAS 64, required all
gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result of SFAS 145, the criteria in Accounting Principles Board Opinion 30
will now be used to classify those gains and losses. SFAS 13 was amended to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
adoption of SFAS 145 will not have a current impact on the Company's
consolidated financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
Generally, SFAS 146 provides that defined exit costs (including restructuring
and employee termination costs) are to be recorded on an incurred basis rather
than on a commitment basis as is presently required. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The Company
currently anticipates that adoption of this statement will not have a material
impact on its financial statements.
1. Management Fees and Affiliate Transactions
Two companies related to the Partnership and the minority interest holder manage
the nursing home and retirement center for a fee of 5% of net operating
revenues. Fees totaling $363,518, $334,891 and $414,401 were paid to the
management company for the years ended December 31, 2000, 1999 and 1998,
respectively. In addition, an affiliate of the Managing General Partner was paid
an oversight management fee of 1% of gross operating revenue totaling $70,237,
$68,876 and $75,423 in 2000, 1999 and 1998, respectively.
During 2000, 1999 and 1998, the affiliate of the Managing General Partner was
reimbursed for costs incurred in connection with the administration of
Partnership activities in the amount of $72,813 each year. These expenses are
included in Partnership administration costs on the accompanying Consolidated
Statement of Operations.
Accrued management fees consist of management's estimates of amounts payable to
affiliates and former affiliates and an unrelated management company resulting
from management fees incurred.
F-11
Consolidated Resources Health Care Fund II and Subsidiaries
2. Long-Term Debt Obligations
Long-term debt obligations consisted of:
2000 1999
- -------------------------------------------------------------------------------------------------------
7.5% note related to Mayfair Village Nursing Care
Center, collateralized by a first trust deed on land,
buildings and furnishings and insured by the U.S.
Department of Housing and Urban Development; payable in
monthly installments of principal and interest of
$12,050, due January 1, 2020 $1,462,227 $1,495,780
7.5% note related to Mayfair Retirement Center,
collateralized by a first trust deed on land, buildings
and furnishings and insured by the U.S. Department of
Housing and Urban Development; payable in monthly
installments of principal and interest of $20,023, due
March 1, 2021 2,494,405 2,545,503
- -------------------------------------------------------------------------------------------------------
3,956,632 4,041,283
Less current maturities 90,464 83,938
- -------------------------------------------------------------------------------------------------------
$3,866,168 $3,957,345
- -------------------------------------------------------------------------------------------------------
Future maturities of long-term debt obligations at December 31, 2000 are as
follows:
Amount
- -------------------------------------------------------------------------------------------------------
2001 $ 90,464
2002 97,739
2003 105,338
2004 113,527
2005 122,381
Thereafter 3,427,183
- -------------------------------------------------------------------------------------------------------
$3,956,632
- -------------------------------------------------------------------------------------------------------
Restricted escrows and other deposits include amounts held in trust for payment
of property taxes and insurance and for repairs and replacements of the property
as approved by HUD. Under covenants contained in the Regulatory Agreement with
HUD, the subsidiary partnerships are limited as to the amount of distributions
they may make to the Partnership to the extent of surplus cash, as defined in
the Regulatory Agreement with HUD. The Regulatory Agreement also imposes
restrictions regarding cash receipts and disbursements and compliance with the
Fair Housing Act.
The fair value of the Partnership's obligations are estimated on the quoted
market prices for the same or similar issues or on the current rates offered to
the Partnership for debt of the same remaining maturities. Carrying values of
the Partnerships' financial instruments approximate their fair values at
December 31, 2000.
F-12
Consolidated Resources Health Care Fund II and Subsidiaries
3. Distributions
Distributions to the partners are paid from operations of the Partnership's
properties or from sales or refinancing of properties. Cash from operations is
distributed 96% to the Limited Partners and 4% to the General Partners. However,
no distributions of cash from operations shall be made to the General Partners
in any year until the Limited Partners have received distributions for such year
equal to 9% of their invested capital.
Distributions of cash from sales and refinancing are made in the following
order:
(a) First, to the Limited Partners in an amount equal to their invested
capital; then,
(b) to the Limited Partners in an amount necessary to provide the Limited
Partners with a 9% cumulative, non-compounded return on invested
capital to the extent not previously received through distributions of
distributable cash from operations; then,
(c) to the General Partners in an amount up to 3% of the sale price of all
properties on a cumulative basis; then,
(d) the balance of such proceeds shall be distributed 15% to the General
Partners and 85% to the Limited Partners.
The Partnership distributed cash of $600,000 to the Limited Partners for the
year ended December 31, 1998. No cash was distributed to Limited Partners during
2000 or 1999. Cumulative distributions paid to the Limited Partners as of
December 31, 2000 are $3,538,203. No distributions have been made to the General
Partners.
4. Cost Reimbursements
Accounts receivable and operating revenue include amounts estimated by
management to be reimbursable by Medicaid and Medicare under the provisions of
cost reimbursement formulas in effect. Final determination of amounts earned is
subject to audit by the intermediaries. In the opinion of management, adequate
provision has been made for any adjustments that may result from such audits.
Differences between estimated provisions and final settlement are reflected as
charges or credits to operating revenue in the year finalized. 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.
Medicaid and Medicare programs accounted for approximately 53%, 46% and 63% of
operating revenue during 2000, 1999 and 1998, respectively.
Accounts receivable, recorded at net realizable value, include amounts due from
both the Ohio Medicaid program and Medicare are as follows:
December 31, 2000 1999
- --------------------------------------------------------------------------------
Ohio Medicaid Program $ 81,725 $ 16,769
Medicare $126,573 $ 110,326
Amounts due from the Ohio Medicaid program are paid on an interim and final
basis generally within 30 to 60 days from date of billing. Amounts due from the
Medicare program are generally received within 30 days.
F-13
Consolidated Resources Health Care Fund II and Subsidiaries
5. Concentrations of Credit Risk
At December 31, 2000, the Partnership had cash on deposit at three banks which
exceeded the Federal Deposit Insurance Corporation limit in the aggregate by
approximately $806,000.
6. Accrued Expenses
Accrued expenses consisted of the following:
December 31, 2000 1999
- --------------------------------------------------------------------------------
Accrued salaries and wages $ 148,963 $ 98,746
Accrued property taxes 120,800 123,463
Other 70,524 38,428
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$ 340,287 260,637
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7. Segment Information
During 1998, the Partnership adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing the performance. The
Company's chief operating decision makers aggregate operating segments based on
the facility type. Based on the quantitative thresholds specified in SFAS 131,
the Partnership has determined that it has two reportable segments, a nursing
home operation and a retirement center operation.
The accounting policies of the operating segments are the same as those
described in the Summary of Significant Accounting Policies. Segment amounts
disclosed are prior to any elimination entries made in the consolidation. The
chief operating decision-makers evaluate performance of the segments based on
operating results.
F-14
Consolidated Resources Health Care Fund II and Subsidiaries
Summary information by segment follows:
Corporate and
Retirement Nursing Eliminations Total
2000
Revenues $1,420,168 $5,841,374 $ 23,261 $7,284,803
Operating income (loss) (269,211) 548,345 (189,254) 89,880
Depreciation and amortization 254,202 226,766 - 480,968
Total segment assets $2,238,820 $2,395,406 $ 140,390 $4,774,616
1999
Revenues $1,206,401 $5,507,925 $ 24,213 $6,738,539
Operating income (loss) (296,959) 320,459 (268,252) (244,752)
Depreciation and amortization 249,006 225,902 - 474,908
Total segment assets $2,217,125 $2,233,106 $ 439,669 $4,889,900
1998
Revenues $1,416,486 $6,272,280 $ (158,803) $7,529,963
Operating income (loss) (157,744) 271,898 (281,975) (167,821)
Depreciation and amortization 243,742 222,658 - 466,400
Total segment assets $2,329,447 $2,080,200 $ 818,268 $5,227,915
8. Quarterly Data and Share Information (Unaudited)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data.
Fiscal Year Ended 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
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Total Revenue $1,794,589 $1,745,981 $1,877,909 $1,866,324
Net Income (loss) 80,270 (59,281) 15,672 53,219
Basic and diluted net income (loss) per L.P. unit $5.14 $ (3.79) $1.00 $3.41
Fiscal Year Ended 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
Total Revenue $1,687,434 $1,704,313 $1,712,195 $1,634,597
Net Income (loss) (112,754) (38,018) 10,829 (104,809)
Basic and diluted net income (loss) per L.P. unit $(7.22) $(2.43) $0.69 $(6.71)
F-15
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 2000, 1999 and 1998
Balance at Additions charged to Deductions(1) Balance at end
beginning of year costs and expenses of year
1000
Allowance for doubtful accounts $ 7,153 $ 8,659 $ (9,508) $ 6,304
1999
Allowance for doubtful accounts $14,562 $37,165 $(44,574) $7,153
1988
Allowance for doubtful accounts $19,035 $9,856 $(14,329) $14,562
(1) Represents direct write-offs of receivables.
F-16