<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998
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 710, Atlanta, GA 31106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 873-1919
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 x No
<PAGE> 2
PART I. FINANCIAL INFORMATION
CONSOLIDATED RESOURCES HEALTH CARE FUND II
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,167,246 $ 257,310
Accounts receivable, net of allowance for doubtful
accounts of $6,853 and $19,035 467,646 793,554
Due from related party -- 890,000
Prepaid expenses and other 38,183 18,964
----------- -----------
Total current assets 1,673,075 1,959,828
=========== ===========
Property and equipment
Land 178,609 178,609
Buildings and improvements 6,818,064 6,733,131
Equipment and furnishings 901,029 808,245
----------- -----------
7,897,702 7,719,985
----------- -----------
Accumulated depreciation and amortization (4,488,357) (4,142,935)
----------- -----------
Net property and equipment 3,409,345 3,577,050
----------- -----------
Other
Restricted escrows and other deposits 435,673 456,922
Deferred loan costs, net of accumulated amortization of
$13,035 and $12,516 19,016 19,794
----------- -----------
Total other assets 454,689 476,786
----------- -----------
$ 5,537,109 $ 6,013,664
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 81,433 $ 75,836
Accounts payable 274,562 242,484
Accrued expenses 398,098 375,411
Accrued management fees 394,918 440,167
Other liabilities 194,676 69,931
----------- -----------
Total current liabilities 1,343,687 1,203,829
=========== ===========
Long-term obligations, less current maturities 4,041,784 4,124,298
----------- -----------
Total liabilities 5,385,471 5,328,127
----------- -----------
Partners' equity (deficit):
Limited partners 313,140 849,683
General partners (161,502) (164,146)
----------- -----------
Total partners' equity 151,638 685,537
----------- -----------
$ 5,537,109 $ 6,013,664
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED RESOURCES HEALTH CARE FUND II
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Operating revenues $ 1,941,607 $2,347,175 $5,774,086 $6,001,347
Interest income 13,025 8,145 23,995 26,583
----------- ---------- ---------- ----------
Total revenue 1,954,632 2,355,320 5,798,081 6,027,930
----------- ---------- ---------- ----------
Expenses:
Operating expenses 1,802,886 1,684,276 5,075,815 4,919,013
Depreciation & amortization 115,026 120,960 346,199 325,361
Interest 78,154 79,557 235,452 239,834
Partnership administration costs 18,204 48,345 74,514 77,260
----------- ---------- ---------- ----------
Total expenses 2,014,270 1,933,138 5,731,980 5,561,468
----------- ---------- ---------- ----------
Net income (loss) $ (59,638) $ 422,182 $ 66,101 $ 466,462
=========== ========== ========== ==========
Net income (loss) per L.P. unit $ (3.82) $ 27.02 $ 4.23 $ 29.85
=========== ========== ========== ==========
L.P. units outstanding 15,000 15,000 15,000 15,000
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED RESOURCES HEALTH CARE FUND II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Cash received from residents and government agencies $ 6,121,314 $ 5,860,259
Cash paid to suppliers and employees (4,941,584) (4,954,405)
Interest received 23,995 26,583
Interest paid (235,452) (239,834)
Property taxes paid (93,703) (62,465)
----------- -----------
Cash provided by (used in) operating activities 874,570 630,138
----------- -----------
Investing Activities:
Additions to property and equipment (177,717) (399,597)
Financing Activities:
Principal payments on long-term debt (76,917) (47,033)
Due from related party 890,000 --
Distributions (600,000) (200,100)
----------- -----------
Cash used in financing activities 213,083 (247,133)
=========== ===========
Net (decrease) in cash and cash equivalents 909,936 (16,592)
Cash and cash equivalents, beginning of period 257,310 1,339,758
----------- -----------
Cash and cash equivalents, end of period $ 1,167,246 $ 1,323,166
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED RESOURCES HEALTH CARE FUND II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Reconciliation of Net Income (Loss) to cash
Provided by Operating Activities:
Net income (loss) $ 66,101 $ 466,462
Adjustments to reconcile net income
to cash provide by (used in)
operating activities:
Depreciation and amortization 346,199 325,361
Changes in assets and liabilities:
Accounts receivable 325,909 (141,088)
Restricted escrows 21,319 (85,827)
Other current assets (19,219) 26,046
Accounts payable and
accrued liabilities 134,261 39,184
----------- -----------
Cash provided by operating activities $ 874,570 $ 630,138
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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CONSOLIDATED RESOURCES HEALTH CARE FUND II
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Partners'
Limited General Deficit
--------- --------- ---------
<S> <C> <C> <C>
Balance, at December 31, 1996 $ 412,271 $(190,709) $ 221,562
Net loss 447,804 18,658 466,462
Distribution (200,100) -- (200,100)
--------- --------- ---------
Balance, at September 30, 1997 $ 659,975 $(172,051) $ 487,924
========= ========= =========
Balance at December 31, 1997 $ 849,683 $(164,146) $ 685,537
Net income 63,457 2,644 66,101
Distribution (600,000) -- (600,000)
--------- --------- ---------
Balance, at September 30, 1998 $ 313,140 $(161,502) $ 151,638
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED RESOURCES HEALTH CARE FUND II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 nine months ended
September 30, 1998, are not necessarily indicative of the results to be expected
for the year ending December 31, 1998.
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, 1997,
as filed with the Securities and Exchange Commission, a copy of which is
available upon request by writing to WelCare Service Corporation-II (the
"Managing General Partner") 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:
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
---- ----
<S> <C> <C>
Charged to costs and expenses:
Property management and oversight
management fees .................... $54,351 $ 6,795
Financial accounting, data processing,
tax reporting, legal and compliance,
investor relations and supervision
of outside services ................ $57,115 $15,867
</TABLE>
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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, changes in healthcare
reimbursement systems and rates, the availability of capital and financing, and
other factors affecting the Partnership's business that may be beyond its
control.
At September 30, 1998, 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 revenue decreased by $405,568 for the quarter ended September 30, 1998
and by $227,261 for the nine months ended September 30, 1998, compared to the
same periods for the prior year. The decrease during the last quarter and for
the nine months ended September 30, 1998 was primarily attributable to a
decrease in occupied units and a shift in Medicare revenues. Census at the
nursing facility was stable in the current period with the prior year. There was
a continuing decline in census at the retirement facility in the current period.
Expenses:
Operating expenses increased $118,610 for the quarter ended September 30, 1998
and by $156,802 during the nine months ended September 30, 1998, as compared to
the same period for the prior year. This increase is primarily due to increased
salary, severance payments to therapists laid off during the quarter, and
equipment and other supply purchases at the nursing facility, partially offset
by reduced labor costs at the retirement facility.
Liquidity and Capital Resources:
At September 30, 1998, the Partnership held cash and cash equivalents of
$1,167,246, a decrease of $399,960 from June 30, 1998. The current cash balance
and the amounts Due from Related Party of $890,000 which is held in accounts
controlled by the General Partner of the Partnership 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 HUD.
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The Partnership's two remaining facilities produced sufficient revenues to meet
their operating and debt service obligations as well as provide additional cash
flow to supplement cash reserves. These facilities should continue to produce
positive cash flow in 1998; however, no assurance can be given if revenues were
to continue to decline.
As of September 30, 1998, 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.
The Partnership made a distribution to the Limited Partners during the quarter
ended September 30, 1998 of $300,000. The Managing General Partner anticipates
that annual distributions from operating cash flow will continue in future
periods. However, the Partnership's ability to make distributions may be limited
by HUD's requirements for surplus cash at the facility level.
YEAR 2000 INITIATIVES
As a result of computer programs which historically were written using a two
rather than four-digit convention to define the year component of dates, a
concern commonly known as the Year 2000 Issue has arisen globally. Computer
programs and equipment that use a two-digit convention may not be able to
differentiate between the 20th and 21st centuries (e.g. "00" can be read as
either 1900 or 2000). This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Life Care Centers of America, the manager of the Partnership, has instituted a
number of Year 2000 information technology initiatives designed to insure
readiness and compliance with Year 2000 issues for all facilities operated by
Life Care Centers of America for the Partnership in a timely manner. Acquisition
and testing have begun to replace or upgrade facility patient accounting and
clinical applications. A committee has also been formed to determine Year 2000
compliance for major equipment and mechanical systems in each facility. It is
intended that the committee will assist the facilities with developing
contingency plans to deal with any Year 2000 issues not addressed in a timely
manner. Finally, full testing of all computing platforms is scheduled for early
1999 at the Partnership's facilities.
Life Care Centers of America has also verified compliance of all third-party
applications used by the Partnership with Year 2000 issues. Based on this
verification, the Partnership believes that all third-party applications will be
compliant on a timely basis. However, there can be no guarantee that the
software replacement projects undertaken by the Partnership upon completion of
the above reviews will be successful or that vendors supplying third-party
applications to the Partnership will be in compliance as of the end of 1999.
In addition, there can be no assurance that there will not be problems
identified when screening the Partnership's computing platforms and that such
problems will not have a material effect on the
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operating results. However, the Partnership believes that the most likely
adverse effect for the Partnership in the event of the failure of any of its
systems with respect to the Year 2000 issues would be minor delays in billing
for a few days following January 1, 2000, until identified problems can be
corrected. Contingency plans instituted by the Partnership currently call for
any facility experiencing billing delays to complete manual billing in the event
extended problems are encountered.
Costs associated with the Partnership's Year 2000 review and compliance have
been estimated to be approximately $49,500 per facility. The majority of this
cost will be incurred at implementation of corrections to the facilities'
equipment.
HEALTH CARE REFORM
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 for skilled
services. The Medicare prospective payment rate, which reimburses for routine
service, ancillary and capital costs, will initially 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 to remove geographic, wage-related, inflationary and case mix
differences between facilities. The blended rate will be further adjusted by a
facility-specific case mix (acuity) index. The exact amount of these adjustments
has not yet been released by the Secretary of the Department of Health and Human
Services.
The Partnership believes that, due to the cost structure at its skilled nursing
facility in 1995 and its facility's costs as compared to other facilities in its
market, the overall reimbursement rate should not be lower than its current rate
and could possibly be higher. However, until the rate is ultimately determined
under the prospective payment system, the Partnership will not be able to
determine the exact nature or long term financial impact of the legislative
changes. The Partnership 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 Partnership. During the first quarter of 1998, the Partnership
derived 13% of its revenues from Medicare at its nursing facility.
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Part II - OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8-K
Exhibit 27 Financial Data Schedule (for SEC use only)
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: November 16, 1998 By: /s/ John F. McMullan
-----------------------
John F. McMullan
Chief Financial Officer
Date: November 16, 1998 By: /s/ Marilyn M. McMullan
-----------------------
Assistant Secretary
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SEPTEMBER 30, 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,167,246
<SECURITIES> 0
<RECEIVABLES> 467,646
<ALLOWANCES> 6,853
<INVENTORY> 0
<CURRENT-ASSETS> 1,673,075
<PP&E> 7,897,702
<DEPRECIATION> 4,488,357
<TOTAL-ASSETS> 5,537,109
<CURRENT-LIABILITIES> 1,343,687
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 151,638
<TOTAL-LIABILITY-AND-EQUITY> 5,537,109
<SALES> 5,774,086
<TOTAL-REVENUES> 5,798,081
<CGS> 5,422,014
<TOTAL-COSTS> 5,731,980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235,452
<INCOME-PRETAX> 66,101
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,101
<EPS-PRIMARY> 4.23
<EPS-DILUTED> 4.23
</TABLE>
