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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 JUNE 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 the registrant is an accelerated filer (as
defined in rule 126-2 of the Exchange Act). Yes No x
---- ----
Part I. Financial Information
Consolidated Resources Health Care Fund II
Condensed Consolidated Balance Sheets
June 30,
2002 December 31,
(Unaudited) 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $2,016,734 $1,496,189
Accounts receivable, net of allowance for doubtful
accounts of $11,947 and $8,934, respectively 367,159 468,264
Prepaid expenses and other 7,663 22,577
--------------- ---------------
Total current assets 2,391,556 1,987,030
Property and equipment
Land 178,609 178,609
Buildings and improvements 7,205,665 7,192,829
Equipment and furnishings 1,348,063 1,259,391
--------------- ---------------
8,732,337 8,630,829
Accumulated depreciation and amortization (6,251,496) (6,005,933)
--------------- ---------------
Net property and equipment 2,480,841 2,624,896
--------------- ---------------
Other
Restricted escrows and other deposits 648,298 621,000
Deferred loan costs, net of accumulated amortization
of $16,682 and $17,460, respectively 15,128 15,646
--------------- ---------------
Total other assets 663,426 636,646
--------------- ---------------
$5,535,823 $5,248,572
=============== ===============
See accompanying notes to condensed consolidated financial statements.
Page 2
June 30,
2002 December 31,
(Unaudited) 2001
-------------- ---------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 92,283 $ 90,464
Accounts payable 186,482 119,524
Accrued expenses 545,708 499,553
Accrued management fees --- ---
Due to related party 78,591 52,631
Deposit liabilities 102,467 173,500
-------------- ---------------
1,005,531 935,672
Total current liabilities
-------------- ---------------
Long-term obligations, less current maturities 3,724,893 3,774,945
-------------- ---------------
Total liabilities 4,730,424 4,410,617
-------------- ---------------
Partners' equity (deficit):
Limited partners 940,751 684,005
General partners (135,352) (146,050)
-------------- ---------------
Total partners' equity 805,399 537,955
-------------- ---------------
$ 5,535,823 $5,248,572
============== ===============
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 Six months ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenue:
Operating revenues $2,143,275 $2,051,073 $4,337,515 $3,970,921
Interest income 19,871 12,165 39,925 26,690
------------- ------------- ------------- -------------
Total revenue 2,163,146 2,063,238 4,377,440 3,997,611
------------- ------------- ------------- -------------
Expenses:
Operating expenses 1,817,065 1,710,065 3,622,140 3,401,505
Depreciation &
amortization 123,041 125,821 246,082 244,883
Interest 73,485 73,598 146,053 147,751
Partnership
administration costs 33,975 19,675 95,721 52,794
------------- ------------- ------------- -------------
Total expenses 2,047,566 1,929,159 4,109,996 3,846,933
------------- ------------- ------------- -------------
Net income $115,580 $134,079 $267,444 $ 150,678
============= ============= ============= =============
Net income per L.P. unit $ 7.40 $ 8.58 $ 17.12 $ 9.64
============= ============= ============= =============
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)
Six months ended June 30,
2002 2001
------------- ------------
Operating Activities:
Cash received from residents and government
agencies 4,438,620 4,046,538
Cash paid to suppliers and employees (3,652,893) (3,384,741)
Property Taxes Paid (35,272)
Interest received 39,925 26,690
Interest paid (146,053) (147,751)
------------- ------------
Cash provided by operating activities 644,327 540,736
Investing Activities:
Additions to property and equipment (101,509) (133,440)
Financing Activities:
Principal payments on long-term debt (48,233) (44,723)
Increase (decrease) in amount due to related party 25,960 (15,913)
------------- ------------
Cash used in financing activities (22,273) (60,636)
------------- ------------
Net increase in cash and cash equivalents 520,545 346,660
Cash and cash equivalents, beginning of period 1,496,189 1,105,822
------------- ------------
Cash and cash equivalents, end of period $2,016,734 $1,452,482
============= ============
See accompanying notes to condensed consolidated financial statements.
Page 5
Consolidated Resources Health Care Fund II
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
2002 2001
---------------- ------------
Reconciliation of net income to cash
provided by (used in) operating activities:
Net income $ 267,444 $ 150,678
Depreciation and amortization 246,082 244,883
Changes in assets and liabilities:
Accounts receivable 101,105 75,616
Restricted escrows (27,298) (8,111)
Prepaid expense and other assets 14,914 6,046
Accounts payable and accrued liabilities 42,080 71,623
---------------- ------------
Cash provided by operating activities $ 644,327 $ 540,736
================ ============
See accompanying notes to condensed consolidated financial statements.
Page 6
CONSOLIDATED RESOURCES HEALTH CARE FUND II
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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:
Six months ended June 30,
2002 2001
---- ----
Charged to operating expenses:
Property management and oversight
management fees......................... $44,038 $39,675
Financial accounting, data processing,
tax reporting, legal and compliance,
investor relations and supervision
of outside services.................... $95,721 $52,794
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 June 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 $92,202 for the quarter ended June 30, 2002, as
compared to the same period for the prior year, and by $366,594 for the six
months ended June 30, 2002, as compared to the prior six month period. Occupancy
levels at the retirement facility remained stable, as compared to the prior year
period, but declined at the nursing facility. At June 30, 2002, the occupancy
rate at the retirement facility was 89.9%, compared to 89.7% at June 30, 2001,
and the occupancy rate of the nursing facility was 92.7%, compared to 95.1% at
June 30, 2001. Notwithstanding these variances in occupancy rates, operating
revenues increased due to 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, and, with respect to the six
month period, occupancy increases during the first quarter of the fiscal year at
both facilities.
Expenses:
- ---------
Operating expenses increased by $187,000 for the quarter ended June 30, 2002 as
compared to the same period for the prior year, and increased by $220,635 for
the six months ended June 30, 2002, as compared to the prior six month period.
The increase during the quarter is primarily due to increased labor expenses due
to increased staffing levels and hourly wage increases at the retirement
facility due to the provision of additional assisted living services, partially
offset by reductions in labor, contract services costs, and workers'
compensation expenses at the nursing center. The increase during the six month
period is also due to increased management fees for the nursing facility due to
revenue increases in the first quarter and increased plant contact services at
the nursing facility.
Net Income:
- -----------
Net income for the three months ended June 30, 2001 declined as compared to the
same period of the prior fiscal year by $18,499. Net income for the six month
period ended June 30, 2002 exceeded net income for the prior six month period by
$116,766. The decrease in net income for the three month period is primarily
attributable to increases in operating expenses, offset in part by increases in
revenues, and increases in partnership administrative costs. The increase for
the six month period was attributable primarily to increases in operating
revenues, offset in part by increases in operating expenses.
Page 9
Liquidity and Capital Resources:
- --------------------------------
At June 30, 2002, the Partnership held cash and cash equivalents of $2,016,734,
an increase of $520,545 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 June 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 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
Page 10
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 June 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 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
Page 11
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 5 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