UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.  20549  FORM 10-Q (Mark one) ý
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 OR o
        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
(State or other jurisdiction
of incorporation or organization)
        
        58-1542125
(I.R.S. Employer
Identification No.)
  1175 Peachtree Street, Suite 1230, Atlanta, GA
(Address of principal executive offices)
        
        30361
(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.oYesýNo Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one).  Large Accelerated filero
        Accelerated filero
        Non-accelerated filerý
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)oYesýNo


Part I - Financial Information Consolidated Resources Health Care Fund II Condensed Consolidated Balance Sheets  September 30,
2006
(Unaudited)
        
        December 31, 2005ASSETSCurrent assets:Cash and cash equivalents
        $4,207,499
        
        $3,370,837Accounts receivable, net of allowance for doubtful accounts of $109,453 and $92,588, respectively
        1,144,179
        
        1,358,073Due from related party
        23,014
        
        -Prepaid expenses and other
        3,163
        
        47,251Total current assets
        5,377,855
        
        4,776,161Property and equipmentLand
        189,833
        
        189,833Buildings and improvements
        7,290,067
        
        7,256,598Equipment and furnishings
        1,214,419
        
        1,131,7238,694,319
        
        8,578,154Accumulated depreciation and amortization
        (7,805,832)
        
        (7,444,737)Net property and equipment
        888,487
        
        1,133,417Other assetsRestricted escrows and other deposits
        578,837
        
        439,709Deferred loan costs, net of accumulated amortization of $22,385 and $21,608, respectively
        10,721
        
        11,498Other
        -
        
        33,000Total other assets
        589,558
        
        484,207$6,855,900
        
        $6,393,785
  See accompanying notes to condensed consolidated financial statements.  2


September 30,
2006
(Unaudited)
        
        December 31, 2005LIABILITIES AND PARTNERS EQUITY(DEFICIT)Current liabilities:Current maturities of long-term debt
        $           131,751
        
        $          131,751Accounts payable
        211,404
        
        234,787Accrued expenses
        795,459
        
        674,977Deferred revenue
        53,181
        
        82,693Deposit liabilities
        65,521
        
        75,715Total current liabilities
        1,257,316
        
        1,199,923Long-term debt, less current maturities
        3,182,997
        
        3,302,841Other
        66,331
        
        105,368Total liabilities
        4,506,644
        
        4,608,132Partners equity (deficit):Limited partners
        2,422,854
        
        1,881,795General partners
        (73,598)
        
        (96,142)Total partners equity
        2,349,256
        
        1,785,653$   6,855,900
        
        $   6,393,785
   See accompanying notes to condensed consolidated financial statements.  3


Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Operations (Unaudited)  Three months ended September 30,2006
        
        2005Revenue:Operating revenues
        
        $2,762,124
        
        $2,444,100Interest income
        
        34,854
        
        13,185Total revenue
        
        2,796,978
        
        2,457,285Expenses:Operating expenses
        
        2,052,218
        
        1,837,319Depreciation & amortization
        
        122,836
        
        123,676Interest
        
        88,115
        
        66,172Management and oversight fees
        
        169,680
        
        157,816Real estate tax
        
        55,060
        
        31,191Partnership administration costs
        
        72,529
        
        144,636Total expenses
        
        2,560,438
        
        2,360,810Net income
        
        $         236,540
        
        $         96,475Net income per L.P. unit
        
        $                 15.14
        
        $                 6.17L.P. units outstanding
        
        15,000
        
        15,000
   See accompanying notes to condensed consolidated financial statements.  4


Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Operations (Unaudited)  Nine months ended September 30,2006
        
        2005Revenue:Operating revenues
        
        $8,195,544
        
        $7,403,421Interest income
        
        84,149
        
        25,031Total revenue
        
        8,279,693
        
        7,428,452Expenses:Operating expenses
        
        6,172,980
        
        5,444,999Depreciation & amortization
        
        360,975
        
        370,551Interest
        
        214,072
        
        203,723Management and oversight fees
        
        496,951
        
        466,676Real estate tax
        
        141,083
        
        103,161Partnership administration costs
        
        330,029
        
        284,482Total expenses
        
        7,716,090
        
        6,873,592Net income
        
        $           563,603
        
        $           554,860Net income per L.P. unit
        
        $                   36.07
        
        $                 35.51L.P. units outstanding
        
        15,000
        
        15,000
   See accompanying notes to condensed consolidated financial statements.  5


Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September 30,2006
        
        2005Cash Flows From Operating Activities:Net income
        $      563,603
        
        $      554,860Depreciation and amortization
        360,975
        
        370,551Changes in operating assets and liabilities:Accounts receivable
        213,894
        
        (13,256)Other current assets
        77,088
        
        (15,502)Accounts payable
        (23,383)
        
        129,892Accrued expenses and deposit liabilities
        80,776
        
        15,540Other liabilities
        (39,037)
        
        (159,683)Cash provided by operating activities
        1,233,916
        
        882,402Cash Flows From Investing Activities:Additions to property and equipment
        (115,268)
        
        (72,557)Net change in restricted escrows
        (139,128)
        
        28,498Cash used in investing activities
        (254,396)
        
        (44,059)Cash Flows From Financing Activities:Principal payments on long-term debt
        (119,844)
        
        (91,348)Change in amount due to/from related party
        (23,014)
        
        (171,444)Cash used in financing activities
        (142,858)
        
        (262,792)Net increase in cash and cash equivalents
        836,662
        
        575,551Cash and cash equivalents, beginning of period
        3,370,837
        
        2,601,918Cash and cash equivalents, end of period
        $4,207,499
        
        $3,177,469
   See accompanying notes to condensed consolidated financial statements.  6


Consolidated Resources Health Care Fund II Notes To Condensed Consolidated Financial Statements  September 30, 2005 NOTE 1. The financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of Consolidated Resources Health Care Fund II (the Partnership) for the interim periods.  The results of operations for the three and nine months ended September 30, 2006, are not necessarily indicative of the results to be expected for the year ending December 31, 2006. 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, 2005, as filed with the Securities and Exchange Commission, a copy of which is available upon request by writing to WelCare Service Corporation-II at 1175 Peachtree Street, Suite 1230, Atlanta, Georgia  30361. 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: Three months ended September 30,2006
        2005Charged to operating expenses:
Property management and oversight management  fees
        $141,816
        $132,705Financial accounting, data processing,
tax reporting, legal and compliance,
investor relations and supervision
of outside services
        $27,864
        $169,747
   7


Nine months ended September 30,2006
        2005Charged to operating expenses:
Property management and oversight management fees
        $415,056
        $390,596Financial accounting, data processing,
tax reporting, legal and compliance,
investor relations and supervision
of outside services
        $81,895
        $360,562
  NOTE 4. Net income or loss per limited partnership (L.P.) unit represents that portion of net income or net loss 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.  8


ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Notice Regarding Forward-Looking Statements Certain of the statements made in this Report and in documents incorporated by reference herein, including matters discussed in this section captioned Managements Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  Such forward-looking statements are based on managements beliefs, current expectations, estimates and projections about the nursing home or other healthcare provider industry, the economy and about the Partnership in general.  The words expect, anticipate, intend, plan, believe, seek, estimate and similar expressions are intended to identify such forward-looking statements.  Such
forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Partnership to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Partnership cautions readers that the following important factors, among others, could cause the Partnerships actual results to differ materially from the forward-looking statements contained in this Report: 
        changes in healthcare reimbursement systems and rates;
 
        the availability of capital and financing;
 
        changes to amounts recorded as revenues due to final resolution of amounts due to and from third-party payors; and
 
        other factors affecting the Partnerships business that may be beyond its control.
 At September 30, 2006, 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). Critical Accounting Policies and Estimates 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 of America. 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 and include amounts reimbursable by the Medicaid and Medicare programs.  We record gross service charges in our accounting records on an accrual basis using our established rates for the type of service provided to the patient.  We recognize an estimated contractual allowance to reduce gross patient charges receivable to an amount that we estimate we will actually realize for the service rendered based upon previously agreed to rates with a payor, and adjust such amounts in future periods as final settlements are determined.  Payors include Federal and state agencies, including Medicare and Medicaid.  Laws and regulations governing  9


the Medicare and Medicaid programs are complex and subject to interpretation.  Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations. Property, equipment and long-lived assets Property and equipment are recorded at cost less accumulated depreciation and 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. 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. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).  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 144, 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. Results of Operations  Three months ended September 30, 2006 compared to September 30, 2005 Revenues: Operating revenues increased by $318.0 thousand (13.0%) for the quarter ended September 30, 2006 as compared to the same period for the prior year. This increase is primarily attributable to an increase in occupancy, rate increases and a positive Medicare rate and mix variance at the nursing facility and periodic rate increases at the retirement facility, as offset by a decline in occupancy at the retirement facility.  At September 30, 2006, the occupancy rate at the nursing facility was 93.4% compared to 91.7% for the same period of 2005, and the occupancy rate of the retirement facility was 96.3% compared to 97.7% for the same period of 2005. Expenses: Total expenses increased by $199.6 thousand (8.5%) for the quarter ended September 30, 2006 as compared to the same period for the prior year.  This increase is primarily due to increases in operating expenses of $214.9 thousand (11.7%), increases in management and oversight fees of $11.9 thousand (7.5%) offset by a decrease in Partnership administration costs of $72.1 thousand (49.9%).  Management and oversight fees are based on revenues at the facilities and thus increase as revenues increase.  The operating expense increases were due to increased labor expenses for increased services to residents as a result of the occupancy increases referenced above.  The Partnership administration cost decreases were due in large part to increased legal and accounting fees related to the Partnerships efforts to bring its SEC filings current and to respond to multiple tender offers filed in
the prior period that were not applicable to the same extent during the third quarter of fiscal 2006. Net Income: Net income increased $140.1 thousand (145.2%) for the three months ended September 30, 2006 as compared to the same period of fiscal 2005.  This increase in net income was due in part to the increased revenues described above, offset in part by the increased expenses described above.  10


Results of Operations - Nine months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005 Revenues: Operating revenues increased by $792.1 thousand (10.7%) for the nine months ended September 30, 2006 as compared to the same period for the prior year. This increase is primarily attributable to an increase in occupancy, rate increases and a positive Medicare rate and mix variance at the nursing facility and periodic rate increases at the retirement facility, as offset by a decline in occupancy at the retirement facility.  At September 30, 2006, the occupancy rate at the nursing facility was 95.0% compared to 94.0% for the same period of 2005, and the occupancy rate of the retirement facility was 93.6% compared to 97.7% for the same period of 2005. Expenses: Total expenses increased by $842.5 thousand (12.3%) for the nine months ended September 30, 2006 as compared to the same period for the prior year.  This increase is primarily due to increases in operating expenses of $728.0 thousand (13.4%) as well as increases in management and oversight fees of $30.3 thousand (6.5%) and increases in Partnership administration costs of $45.5 thousand (16.0%).  Management and oversight fees are based on revenues at the facilities and thus increase as revenues increase.  The operating expense increases were due to increased labor expenses for increased services to residents as a result of the occupancy increases referenced above.  The Partnership administration cost increases were due in large part to increased legal and accounting fees related to the Partnerships efforts to bring its SEC filings current and to respond to a single tender offer
filed in this period. Net Income: Net income increased $8.7 thousand (1.6%) for the nine months ended September 30, 2006 as compared to the same period of fiscal 2005.  This increase in net income was due in part to the increased revenues described above, offset in part by the increased expenses described above. Liquidity and Capital Resources: At September 30, 2006, the Partnership held cash and cash equivalents of $4.2 million, an increase of $836.7 thousand (24.8%) from December 31, 2005.  The current cash balance will be necessary to meet the Partnerships current obligations and for operating reserves.  In addition, cash balances retained 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.  While management believes that these facilities will continue to produce positive cash flow in the future, a decline in revenues due to declining occupancy or otherwise would have a negative effect on cash flow and could effect the Partnerships ability to meet the facilities cash requirements. As of September 30, 2006, 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.  11


ITEM 3
        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 4
        CONTROLS AND PROCEDURES
 Evaluation of 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 reporting functions for the Partnership, has evaluated the effectiveness of the design and operation of the Partnerships disclosure controls and procedures as of the end of the period reflected in this Report with respect to their adequacy in ensuring that information required to be disclosed in the reports that the Partnership files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and timely reported as required by the rules and forms of the Securities and Exchange Commission.  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.  The Partnership currently has outsourced the preparation of its financial statements for inclusion in its SEC reports to a consultant. Our Relationship with Life Care
 Life Care Centers of America, Inc. (Life Care) has provided management services with respect to the Partnerships two facilities for over 15 years pursuant to the terms of management agreements originally put in place in 1991.  Under these agreements, Life Care is responsible for maintaining books and records for the Partnerships facilities and providing financial statements, prepared in accordance with GAAP, relating to the business operations of the two facilities.  Due to this relationship, the Partnership necessarily relies on Life Care to provide accurate, timely and sufficient data and information to properly record all revenues, expenses and accounts receivables of the two Partnership facilities, which underlie a substantial portion of the Partnerships periodic financial statements and other financial disclosures. Our Disclosure Controls and Procedures  Fiscal 2005
 Because of the Partnerships reliance on Life Care for financial information, the Managing General Partner relies on Life Care to design adequate internal controls with respect to the processes established to provide this data and information to the Partnership.  In May of 2006, in the course of preparing the reports the Partnership is required to file with the Department of Housing and Urban Development each year, it became apparent that certain cash reconciliations were not performed by Life Care in a timely and correct manner.  To address these issues, we conducted a lengthy inquiry into the causes of the cash reconciliation issues.  Among other things, we had numerous discussions with Life Cares accounting staff.  Life Care ultimately came to the conclusion that one senior individual in the accounting department who had been given overall responsibility for the financial
reporting did not prove to have the competencies necessary to adequately perform the roles expected of a senior financial officer  12


at Life Care.  Consequently, Life Care effected a staffing change and replaced that individual with a senior-level officer who had the required expertise.  The failure to properly perform these cash reconciliations was determined to be a material weakness in the Partnerships internal controls.   A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of the inquiries of Life Care, the changes in the procedures at Life Care and the changes made to the accounting staff, the Managing General Partner concluded that the material weakness in internal controls discovered during the course of preparing the 2005 reports to be filed with the SEC were corrected in 2006 and did not impact the preparation of the 2006 reports. Changes in Internal Control over Financial Reporting We refer you to the information discussed above in Evaluation of Disclosure Controls and Procedures.  13


Part II - Other Information ITEM 1
        LEGAL PROCEEDINGS
 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 as of September 30, 2005 or as of the date of this Report.  The Partnership may, from time to time, be a party to litigation or administrative proceedings which arise in the normal course of business. ITEM 1A.
        RISK FACTORS
  There  have  been  no  material  changes  to  the  risk  factors  affecting  the
Partnership  from those set forth in its Annual  Report on Form 10-K for the
fiscal year ended December 31, 2005.  ITEM 5
        OTHER INFORMATION
 On November 16, 2006, the Partnership filed its definitive proxy statement on Schedule 14A relating to a special meeting of the Limited Partners that was held on January 11, 2007.  At the special meeting, the Limited Partners voted on two proposals:  (1) a proposal submitted by Kodiak Partners III, Prizm Investors and Baseline Investors to authorize a sale of the Partnerships assets, liquidation and dissolution through a proposed amendment to the Partnership Agreement and (2) a proposal to amend certain provisions of the Partnership Agreement that pertain to distributions to partners and allocation of profits and losses with respect to a sale or refinancing.  As reported by the Partnership in its Form 8-K filed on January 11, 2007, both of the proposals received sufficient affirmative votes from the Limited Partners at the special meeting to be formally adopted. ITEM 6
        EXHIBITS
 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.
  14


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 PartnerDate: January 29, 2007
        By:                            /s/ John F. McMullan                                                _
John F. McMullan, Chief Financial Officer
   15