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 MARCH 31, 2005 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
(State or other jurisdiction
of incorporation or organization)
        
        58-1542125
(I.R.S. Employer
Identification No.)  1175 Peachtree Street, Suite 850, Atlanta, GA
(Address of principal executive offices)
        
        31106
(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   |X|  No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) |_|Yes    |X|  No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange  Act) |_|Yes    |X|  No


Part I - Financial Information Consolidated Resources Health Care Fund II Condensed Consolidated Balance Sheets  March 31,
2005
(Unaudited)
        
        December 31, 2004ASSETSCurrent assets:Cash and cash equivalents
        $ 3,115,082
        
        $ 2,601,918Accounts receivable, net of allowance for doubtful accounts of $35,577 and $41,654, respectively
        1,001,659
        
        1,094,888Prepaid expenses and other
        44,458
        
        12,691Total current assets
        4,161,199
        
        3,709,497Property and equipmentLand
        174,133
        
        174,133Buildings and improvements
        7,259,973
        
        7,250,342Equipment and furnishings
        1,109,695
        
        1,074,4958,543,801
        
        8,498,970Accumulated depreciation and amortization
        (7,074,202)
        
        (6,953,752)Net property and equipment
        1,469,599
        
        1,545,218OtherRestricted escrows and other deposits
        493,167
        
        463,596Deferred loan costs, net of accumulated amortization of $20,830 and $20,570, respectively
        12,276
        
        12,536Total other assets
        505,443
        
        476,132$6,136,241
        
        $5,730,847  See accompanying notes to condensed consolidated financial statements.    2


March 31,
2005
(Unaudited)
        
        December 31, 2004LIABILITIES AND PARTNERS EQUITY(DEFICIT)Current liabilities:Current maturities of long-term debt
        $             118,819
        
        $             118,819Accounts payable
        139,089
        
        140,936Accrued expenses
        797,919
        
        526,144Deferred revenue
        74,934
        
        56,813Due to related party
        4,771
        
        94,523Deposit liabilities
        77,972
        
        82,928Total current liabilities
        1,213,504
        
        1,020,163Long-term debt, less current maturities
        3,398,327
        
        3,428,188Other
        182,091
        
        207,662Total liabilities
        4,793,922
        
        4,656,013Partners equity (deficit):Limited partners
        1,456,195
        
        1,199,409General partners
        (113,876)
        
        (124,575)Total partners equity
        1,342,319
        
        1,074,834$      6,136,241
        
        $      5,730,847   See accompanying notes to condensed consolidated financial statements.    3


Consolidated Resources Health Care Fund II Condensed Consolidated Statements of Operations (Unaudited)  Three months ended March 31,2005
        
        2004Revenue:Operating revenues
        
        $2,449,932
        
        $2,076,689Interest income
        
        5,693
        
        3,933Total revenue
        
        2,455,625
        
        2,080,622Expenses:Operating expenses
        
        1,758,385
        
        1,670,957Depreciation & amortization
        
        120,457
        
        119,162Interest
        
        66,821
        
        67,737Management and oversight fees
        
        151,742
        
        124,538Real estate tax
        
        36,378
        
        34,941Partnership administration costs
        
        54,357
        
        64,753Total expenses
        
        2,188,140
        
        2,082,088Net income (loss)
        
        $           267,485
        
        $           (1,466)Net income (loss) per L.P. unit
        
        $                   17.12
        
        $               (0.09)L.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 Cash Flows (Unaudited)  Three months ended March 31,2005
        
        2004Cash Flows From Operating Activities:Net income (loss)
        $  267,485
        
        $    (1,466)Depreciation and amortization
        120,457
        
        119,162Changes in operating assets and liabilities:Accounts receivable
        93,229
        
        (117,481)Other current assets
        (31,767)
        
        10,263Accounts payable
        (1,848)
        
        (85,660)Accrued expenses and deposit liabilities
        284,940
        
        203,178Other liabilities
        (25,571)
        
        10,612Cash provided by operating activities
        706,925
        
        138,608Cash Flows From Investing Activities:Additions to property and equipment
        (44,577)
        
        (38,401)Net change in restricted escrows
        (29,571)
        
        (8,389)Cash used in investing activities
        (74,148)
        
        (46,790)Cash Flows From Financing Activities:Principal payments on long-term debt
        (29,861)
        
        (27,746)Increase (decrease) in amount due to related party
        (89,752)
        
        (1,875)Cash used in financing activities
        (119,613)
        
        (29,621)Net increase in cash and cash equivalents
        513,164
        
        62,197Cash and cash equivalents, beginning of period
        2,601,918
        
        2,319,257Cash and cash equivalents, end of period
        $3,115,082
        
        $2,381,454   See accompanying notes to condensed consolidated financial statements.    5


Consolidated Resources Health Care Fund II Notes To Condensed Consolidated Financial Statements  March 31, 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 months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005. 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, 2004, 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 850, 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: Three months ended March 31,2005
        2004Charged to operating expenses:
Property management and oversight management  fees
        $127,462
        $103,861Financial accounting, data processing,
tax reporting, legal and compliance,
investor relations and supervision  of outside services
        $78,637
        $85,430  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.    6


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 March 31, 2005, 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    7


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 Revenues: Operating revenues increased by $373 thousand (18.0%) for the quarter ended March 31, 2005 as compared to the same period for the prior year. This increase is primarily attributable to an increase in occupancy and a positive Medicare rate and mix variance at the nursing facility and an increase in occupancy and periodic rate increases at the retirement facility.  At March 31, 2005, the occupancy rate at the nursing facility was 95.7% compared to 87.6% for the same period of 2004, and the occupancy rate of the retirement facility was 98.1% compared to 75.6% for the same period of 2004. Expenses: Total expenses increased by $106 thousand (5.1%) for the quarter ended March 31, 2005 as compared to the same period for the prior year.  This increase was primarily due to increases in operating expenses of $87 thousand (5.2%) as well as increases in management and oversight fees of $27 thousand (21.8%) for the two facilities.  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. Net Income: Net income for the three months ended March 31, 2005 increased $269 thousand to $267 thousand, as compared to a net loss of $1,466 for the same period of fiscal 2004.  This increase in net income was due primarily to the increased revenues described above, offset in part by the increased expenses described above. Liquidity and Capital Resources:    8


At March 31, 2005, the Partnership held cash and cash equivalents of $3.12 million, an increase of $514 thousand (19.7%) from December 31, 2004.  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 March 31, 2005, 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. 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    9


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 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 has concluded that the material weakness in internal controls discovered during the course of preparing the 2005 reports to be filed with the SEC has been corrected in 2006. Changes in Internal Control over Financial Reporting We refer you to the information discussed above in Evaluation of Disclosure Controls and Procedures.    10


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 March 31, 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 5
        OTHER INFORMATION As previously disclosed, on June 17, 2005, the Managing General Partner received a written notice from Kodiak Partners III, Prizm Investments and Baseline Investments (the Prizm Group) who collectively hold in excess of 10% of the Partnerships Units.  In its notice, the Prizm Group indicated an intent to exercise their rights under the Partnership Agreement to call for a special meeting of the limited partners in order to approve a proposal by the Prizm Group that all of the Partnerships assets be sold, that the Partnership be dissolved, and that the proceeds from a sale be distributed to the partners in connection with the dissolution.  The Managing General Partner intends to fulfill its obligations under the Partnership Agreement relating to the requested special meeting, subject only to compliance with the proxy solicitation rules of the SEC.  The date of any
such special meeting has not yet been determined and will depend on a number of factors, including the filing by the Partnership of a proxy statement relating to the special meeting, and the expiration of the SECs review period, or if the SEC should comment on any portion of the proxy statement, the resolution of any such comments.  In accordance with its discussions with the SEC, the Partnership will not be in a position to file the proxy statement for this special meeting until, in addition to the filing of this Report, all further Quarterly Reports on Form 10-Q and its Annual Report on Form 10-K relating to its 2005 fiscal year have been filed. 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.    11


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: August 2, 2006
        By:/s/ John F. McMullan
John F. McMullan, Chief Financial Officer     12