ITEM 1. BUSINESS
Consolidated Resources Health Care Fund II (the "Partnership") was organized on October 31, 1983, as a Limited Partnership under the provisions of the Georgia Uniform Limited Partnership Act.
At December 31, 1996, the Partnership had three general partners (the "General Partners"), Consolidated Associates II, ("CA-II") WelCare Consolidated Resources Corporation of America, serving as the corporate general partner ("WCRCA" or the "Corporate General Partner") and WelCare Service Corporation-II as managing general partner ("WSC-II" or the "Managing General Partner"). At December 31, 1996 WCRCA, a Nevada corporation, and WSC-II, a Georgia corporation, were both wholly-owned subsidiaries of Centennial Acquisition Corporation ("CAC"), a Georgia corporation, which is in turn a wholly-owned subsidiary of Centennial Healthcare Corporation ("Centennial"). Prior to December 1996, CAC and Centennial were known as WelCare Acquisition Corp. and WelCare International, Inc., respectively. CA-II, a Georgia general partnership, is composed of WCRCA, as the managing general partner, and individuals who were previously associated with Consolidated Resources Corporation of America ("CRCA"). On January 30, 1997, all of the stock of the Corporate General Partner and the Managing General Partner was sold to Consolidated Partners Corporation, which is wholly-owned by the president of Centennial, who is also a general partner of CA-II.
On December 7, 1983, a Registration Statement on Form S-1 was declared effective by the Securities and Exchange Commission whereby the Partnership offered for sale $15,000,000 of Limited Partnership Units. The Limited Partnership Units represent equity interests in the Partnership and entitle the holders thereof (the "Limited Partners") to participate in certain allocations and distributions of the Partnership. The sale of Limited Partnership Units closed in April 1984, with 15,000 units sold at $1,000 each, for gross proceeds of $15,000,000 to the Partnership.
The Partnership's primary business and only industry segment is to own, operate and ultimately dispose of a diversified portfolio of health care related real properties for the benefit of its Limited Partners. At December 31, 1996 and 1995, the Partnership owned and operated two health care facilities, a nursing home and a retirement center, both located in Columbus, Ohio.
Effective March 1, 1991, the Partnership's nursing home was managed by Life Care Centers of America, Inc. ("LCCA") and the retirement center was managed by American Lifestyles, Inc. ("ALI"), a division of LCCA. LCCA is a privately-owned corporation which manages congregate care facilities throughout the United States. LCCA and ALI receive a management fee equal to 5% of gross revenues of the respective facilities. An affiliate of the Corporate General Partner provides oversight management services for these facilities and receives an oversight management fee of 1% of gross revenues.
As of December 31, 1996, the Partnership employed approximately 154 persons, including administrative, nursing, dietary, social services and maintenance personnel.
The services provided at the Partnership's nursing home consist of long-term nursing care. Nursing care consists of 24 hour medical services prescribed by the resident's physician as well as assistance or supervision with daily activities such as dressing, grooming, bathing, medication and dietary needs. The retirement center owned by the Partnership provides apartment living for ambulatory senior citizens who do not require assistance in their daily activities.
The nursing home is certified to receive benefits under joint Federal and state funded programs administered by the State of Ohio to provide medical assistance to the indigent, known generally as the "Medicaid" program. Benefits under the Federal Health Insurance for the Aged Act ("Medicare") are for skilled care only in those facilities which are certified for the program.
Medicaid reimbursement formulas vary by state and are established in accordance with Federal guidelines. Typically, Medicaid provides for reimbursement for nursing home care of an all-inclusive nature up to specified limits based on historical costs, with adjustments for inflation. Federal law requires that Medicaid reimbursement rates be reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable laws, regulations and quality and safety standards. Medicaid payments are generally set prospectively for each facility. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and determinations by intermediaries, and to governmental funding restrictions. Each of these factors may materially increase or decrease program payments to long-term care facilities and could adversely affect the operations of the Partnership's nursing facility.
In the operation and sale of properties, the Partnership competes with a number of individuals and entities, including large, national nursing home chains and small, locally owned geriatric facilities. Some competing operators have greater financial resources than the Partnership or may operate on a nonprofit basis or as charitable organizations. The Partnership believes that the quality of care provided, the reputation and physical appearance of facilities and, in the case of private pay patients, charges for services, are significant competitive factors which add to the success of its facilities. There is limited, if any, competition in price with respect to Medicaid and Medicare patients since revenues for services to such patients are strictly controlled and based on fixed rates and cost reimbursement principles. In light of these factors, the Partnership seeks to meet competition by improving the appearances of and the quality of services provided at its facilities, establishing a reputation within the local medical communities for providing competent care services and continually evaluating the needs of the community and services offered by other health care providers.
The following table sets forth information regarding the average daily census and sources of patient and resident revenues at the Partnership's facilities:
Average Daily Census Revenues for for Year Ended Year Ended December 31, 1996 December 31, 1996 (1)
Medicaid 47 28.3% 30.4% Private Pay 26 15.7% 18.3% VA, Medicare and Other 20 12.1% 27.4% Retirement Center (1) 73 43.9% 23.9%
166 100.0% 100.0%
Overall Occupancy Rate 87%
(1) Retirement Center census is 100% private pay.
Because of a changing census mix (i.e. private pay vs. government reimbursed patients), the occupancy required for a nursing facility to achieve an operating break-even point cannot be determined precisely. Generally, a greater ratio of Medicaid patients will require a higher occupancy to reach a break-even point. On the other hand, a high Medicare census can drastically reduce the break-even point due to a higher reimbursement rate.
The retirement center is much like an apartment complex with additional services provided to attract the elderly including limited transportation, housekeeping and food services. The Partnership's retirement center has a net cash flow breakeven occupancy ranging from 75% to 80%. During 1996, the facility exceeded its breakeven occupancy level.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the investment portfolio of the Partnership at December 31, 1996. The buildings of the projects and the land on which they are located are beneficially owned by the Partnership in fee, subject in each case to a first deed of trust as set forth more fully in Item 8, Note 3.
Properties (dollars in 000's) ------------------------------------------------ Net Occupancy Secured Acquisition Book Rate in Date Property Debt Cost Value 1996 Acquired
Mayfair Village Nursing Care Center Columbus, OH 100 Licensed Nursing Home Beds $1,595 $4,323 $1,360(1) 93% February 1985
Mayfair Retirement Center Columbus, OH 91 Units 2,678 4,251 2,080(1) 81% February 1985
$4,273 $8,574 $3,440
(1) A provision was made prior to 1991 to write down the facility to its net realizable value or estimated fair value at the time of the write-down as determined by the Corporate General Partner (See Item 8, Note 5). The amount reflects this write-down.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to any material pending legal proceedings, other than ordinary litigation routine to the Partnership's business.
The Partnership and Southmark reached a settlement which was filed with the Bankruptcy Court in January 1994 regarding the claims filed by the Partnership against Southmark and Southmark's suit against the Partnership. Under this settlement agreement, Southmark released all claims against the Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND SECURITY HOLDER MATTERS
(A) No market for Limited Partnership Units exists nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders
Limited Partnership Units 1,596 as of March 28, 1997
(C) There was a distribution of $150,000 paid to the Limited Partners in 1996. Cumulative distributions paid to the Limited Partners as of December 31, 1996, were $2,738,103. Future distributions are dependent on the Partnership's ability to meet its ongoing obligations. There have been no distributions to the General Partners. See Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, for discussion of distributions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth a summary of selected financial data for the Partnership. This summary should be read in conjunction with the notes to the Partnership's financial statements appearing in Item 8.
Statements of Operations Years Ended December 31, (dollars in 000's, except per unit figures)
--------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----
Operating revenue ..............$7,189 $ 6,623 $ 6,091 $ 5,481 $ 4,802 Income (loss) before extraordinary gain ............. 279 175 185 312 (28) Net income (loss) .............. 279 5,827 185 312 (28) Income (loss) before extraordinary gain per weighted average Limited Partnership Unit ............... 17.84 11.21 11.85 19.96 (1.80) Net income (loss) per weighted average Limited Partnership Unit ...................... 17.84 372.93 11.85 19.96 (1.80)
Distribution paid per weighted average Limited Partnership Unit ...................... 10.00 10.00 -- -- --
At December 31, (dollars in 000's) --------------------------------------------------- Balance Sheets 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----
Property and equipment, net ....$ 3,440 $ 3,564 $ 3,825 $ 4,075 $ 4,136 Total assets ................... 5,499 5,592 5,980 6,030 5,639 Long-term debt obligations, less current maturities ............. 4,206 4,261 4,326 4,384 4,436 Partners' equity (deficit) ..... 222 93 (5,584) (5,769) (6,081)
ITEM 7.
ITEM 7. 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.
Results of Operations
Revenue:
1996 compared to 1995
Operating revenues increased $566,525 in 1996 as compared to 1995. The increase is primarily due to an increase in the nursing facility's reimbursement from Medicare pursuant to routine cost limit exception request approved during the period along with favorable changes in patient mix along with an increase in the volume of higher revenue therapy services being provided over the prior year. The Partnership's retirement center experienced a decrease in revenue over the prior year due to a decrease in occupancy, as a result of its renovation project initiated in the last calendar quarter of 1996.
1995 compared to 1994
Operating revenues increased by $531,675 in 1995 as compared to 1994. This increase is primarily due to changes in census mix from Medicaid to higher rate private pay and Medicare residents, as well as increases in rates for all payor types at the Partnership's nursing facility.
Expenses:
1996 compared to 1995
Operating expenses increased $367,510 in 1996 as compared to 1995. The increase is due primarily to inflationary increases at both facilities, higher costs associated with higher acuity patients and increased utilization of therapy services at the Partnership's nursing facility.
1995 compared to 1994
Operating expenses increased by $520,663 1995 as compared to 1994. This increase is primarily due to increased nursing and therapy cost due to increased Medicare census at the Partnership's nursing facility as compared to the prior year.
Liquidity and Capital Resources
At December 31, 1996, the Partnership held cash and cash equivalents of $1,339,758 an increase of $224,458 from the amount held at December 31, 1995. The cash balance will be necessary to meet the Partnership's current obligations and to fund capital improvements. In addition, cash balances maintained at the two Partnership facilities will have to be maintained in accordance with operating reserves established by HUD through the computation of surplus cash. At December 31, 1996, the balance of HUD reserved cash at the facilities was $388,611.
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 1997. Capital expenditures increased from $112,927 in 1995 to $265,094 in 1996 due in part to the Partnership renovation of the retirement center.
As of December 31, 1996, the Partnership was not obligated to perform any major capital expenditures or renovations other than its current project at the retirement center. 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.
Due to efforts of the Managing General Partner, the Partnership distributed $150,000 to the Limited Partners on February 10, 1995. On February 15, 1996, the Partnership distributed $150,000 to the Limited Partners. On February 15, 1997, the Partnership distributed $200,100 to the Limited Partners. The Managing General Partner anticipates the 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 both the nursing facility and retirement center level.
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. Based on information currently available, Management does not believe proposed legislation will have an adverse effect on the Partnership's operations. However, as health care reform is ongoing, the long-term effects of such changes cannot be accurately predicted at the present time.
The Partnership should produce sufficient cash flow to meet its ongoing operations obligations associated with the two facilities currently owned by the Partnership. In addition, the Partnership's cash reserves are considered adequate to meet contingent liabilities related to third party reimbursements from the operation of the Colorado facilities previously owned by the Partnership. During 1996, the Partnership did not receive any demands for payment of any actual or contingent liabilities related to these previously owned facilities. The Partnership has no existing lines of credit or assurance of financial support from the General Partners, should the need arise.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page Number
Report of Independent Certified Public Accountants 9
Consolidated Financial Statements
Balance Sheets - December 31, 1996 and 1995 10-11
Statements of Income - Years ended December 31, 1996, 1995 and 1994 12
Statements of Partners' Equity (Deficit) - Years ended December 31, 1996, 1995 and 1994 13
Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 14
Summary of Significant Accounting Policies 15-17
Notes to Consolidated Financial Statements 18-20
The following financial statement schedule for the years ended December 31, 1996, 1995 and 1994 of the Registrant are submitted herewith in response to Item 14 (a)(2):
Schedule II - Valuation and Qualifying Accounts 22
All other schedules of the Partnership for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or have been disclosed in the notes to the consolidated financial statements and, therefore, have been omitted.
Report of Independent Certified Public Accountants
The Partners Consolidated Resources Health Care Fund II and Subsidiaries
We have audited the accompanying consolidated balance sheets of Consolidated Resources Health Care Fund II and Subsidiaries (limited partnerships) (the "Partnership") as of December 31, 1996 and 1995, and the related consolidated statements of income, partners' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the schedules listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and schedule are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consolidated Resources Health Care Fund II and Subsidiaries (limited partnerships) at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules presents fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Atlanta, Georgia March 28, 1997
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Consolidated Balance Sheets
December 31, 1996 1995 ---- ----
Assets
Current Cash and cash equivalents (Note 8) ........... $ 1,339,758 $ 1,115,300 Accounts receivable, net of allowance for doubtful accounts .............................. 343,421 565,965 of $53,554 and $73,218 (Note 7) Prepaid expenses and other ................... 40,184 44,317
Total current assets ........................... 1,723,363 1,725,582
Property and equipment (Notes 3 and 5) Land ......................................... 178,609 178,609 Buildings and improvements ................... 6,333,497 6,225,690 Equipment and furnishings .................... 666,806 511,590 7,178,912 6,915,889 Less accumulated depreciation .................. (3,738,651) (3,351,815)
Net property and equipment ..................... 3,440,261 3,564,074
Other Restricted escrows and other deposits (Note 3) 315,012 280,246 Deferred loan costs, net ..................... 20,831 21,867
Total other assets ............................. 335,843 302,113
$ 5,499,467 $ 5,591,769
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
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Consolidated Balance Sheets
December 31, ................................... 1996 1995 ---- ----
Liabilities and Partners' Equity (Deficit)
Current liabilities Current maturities of long-term debt obligations (Note 3).......................... $ 67,222 $ 62,380 Accounts payable ............................. 197,950 335,240 Accrued expenses ............................. 373,500 275,532 Accrued management fees substantially all to affiliates (Note 2)........................... 254,518 394,918 Other liabilities ............................ 179,130 170,087
Total current liabilities ...................... 1,072,320 1,238,157
Long-term debt obligations, less current maturities (Note 3) .......................... 4,205,585 4,260,762
Total liabilities .............................. 5,277,905 5,498,919
Commitments and Contingencies (Notes 7 and 8)
Partners' equity (deficit) (Note 4) Limited partners ............................. 412,271 294,707 General partners ............................. (190,709) (201,857)
Total partners' equity ......................... 221,562 92,850
$ 5,499,467 $ 5,591,769
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
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Consolidated Statements of Income
Years ended December 31, 1996 1995 1994 - ------------------------ ---- ---- ----
Revenue Operating revenue (Note 7) ....... $7,189,448 $6,622,923 $6,091,248 Interest income .................. 29,115 29,356 35,023
Total revenue ...................... 7,218,563 6,652,279 6,126,271
Operating costs and expenses Operating expenses ............... 5,516,102 5,148,592 4,627,929 Depreciation and amortization .... 389,943 375,742 360,493 Interest (Note 3) ................ 323,011 327,139 331,274 Management fees (Note 2) ......... 414,379 420,899 368,364 Real estate taxes ................ 122,642 120,759 159,035 Partnership administration costs substantiall all to affiliates (Note 2) ........... 173,774 83,930 93,909
Total operating costs and expenses . 6,939,851 6,477,061 5,941,004
Income before extraordinary gain ... 278,712 175,218 185,267
Extraordinary gain on extinguishment of debt (Note 1).... -- 5,651,854 --
Net income ......................... $ 278,712 $5,827,072 $ 185,267
Income per limited partnership unit before extraordinary gain ......... $ 17.84 $ 11.21 $ 11.85
Extraordinary gain on extinguishment of debt per limited partnership unit................... $ -- $ 361.72 $ --
Net income per limited partnership unit................................ $ 17.84 $ 372.93 $ 11.85
Limited partnership units outstanding......................... 15,000 15,000 15,000
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
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Consolidated Statements of Partners' Equity (Deficit) Years Ended December 31, 1996, 1995 and 1994
Total Partners' Equity Limited General (Deficit)
Balance, at January 1, 1994 . $(5,327,139) $ (442,350) $(5,769,489)
Net income ................ 177,856 7,411 185,267
Balance, at December 31, 1994 (5,149,283) (434,939) (5,584,222)
Net income ................ 5,593,990 233,082 5,827,072
Distributions (Note 4) .... (150,000) -- (150,000)
Balance, at December 31, 1995 294,707 (201,857) 92,850
Net income ................ 267,564 11,148 278,712
Distributions (Note 4) .... (150,000) -- (150,000)
Balance, at December 31, 1996 $ 412,271 $ (190,709) $ 221,562
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Years ended December 31, 1996 1995 1994
Operating activities Net income .................... $ 278,712 $ 5,827,072 $ 185,267 Adjustments to reconcile net income to cash provided by (used in)operating activities: Depreciation and amortization 389,943 375,742 360,493 Bad debt expense ............. -- 29,582 3,786 Gain on extinguishment of debt -- (5,651,854) -- Changes in assets and liabilities: Accounts receivable ........ 222,544 (8,618) 15,781 Prepaid expenses and other . 4,133 63,912 (70,845) Accounts payable ........... (137,290) (38,546) (43,879) Accrued liabilities ........ (33,389) (313,670) (137,276)
Cash provided by operating ...... 724,653 283,620 313,327 activities
Investing activity Payments for purchases of ..... (265,094) (112,927) (110,615) property and equipment, net
Financing activities Net change in restricted ...... (34,766) (40,589) (35,779) escrows and other deposits Principal payments on long-term (50,335) (61,060) (53,850) debt obligations Distribution paid to limited .. (150,000) (150,000) partners ........................ --
Cash used in financing activities (235,101) (251,649) (89,629)
Net increase (decrease) in cash . 224,458 (80,956) 113,083 and cash equivalents
Cash and cash equivalents, ...... 1,115,300 1,196,256 1,083,173 beginning of year
Cash and cash equivalents, end of $ 1,339,758 $ 1,115,300 $ 1,196,256 year
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
Consolidated Resources Health Care Fund II and Subsidiaries (limited partnerships)
Summary Of Significant Accounting Policies
Organization
Consolidated Resources Health Care Fund II (the "Partnership") was organized on October 31, 1983 as a limited partnership under the provisions of the Georgia Uniform Limited Partnership Act for the purpose of acquiring, operating and holding for investment and future capital appreciation income producing, health care related real properties. As of December 31, 1996, the Partnership owned a nursing home and a retirement center in Ohio. During 1996, the average occupancy for the nursing home and retirement center was 93% and 81%, respectively.
The General Partners of the Partnership are WelCare Consolidated Resources Corporation of America, serving as the Corporate General Partner, ("WCRCA" or the "Corporate General Partner"), a Nevada corporation, WelCare Service Corporation-II, serving as Managing General Partner, ("WSC-II" or the "Managing General Partner"), a Georgia corporation, and Consolidated Associates II, ("CA-II"), a Georgia general partnership (collectively the "General Partners"). At December 31, 1996, WCRCA and WSC-II were wholly-owned subsidiaries of Centennial Acquisition Corporation, ("CAC"), formerly WelCare Acquisition Corp., which in turn is a subsidiary of Centennial Healthcare Corporation ("Centennial"), formerly WelCare International, Inc. CA-II is composed of WCRCA, as the Managing General Partner, and individuals who were associated with Consolidated Resources Corporation of America ("CRCA"). On January 30, 1997, all of the stock of the Corporate General Partner and Managing General Partner of the Partnership was sold to Consolidated Partners Corporation, which is wholly-owned by the president of Centennial who is also a general partner of CA-II.
Pursuant to an agreement dated October 30, 1985, CRCA, a Georgia corporation that initially was the Corporate General Partner of the Partnership, was merged into a subsidiary of Southmark Corporation ("Southmark"). The name of the surviving Southmark subsidiary was then changed to Southmark Consolidated Resources Corporation of America ("SCRCA"). Southmark emerged from Chapter 11 bankruptcy on August 10, 1990, and liquidated most of its assets pursuant to a plan of reorganization. On November 20, 1990, CAC acquired from Southmark all the stock of SCRCA whose name was then changed to WelCare Consolidated Resources Corporation of America. Effective January 13, 1992, WSC-II was added as the Managing General Partner of the Partnership.
The financial statements do not reflect assets the partners may have outside their interests in the Partnership, nor any personal obligations including income taxes, of the individual partners.
Consolidation
The consolidated financial statements include the accounts of the Partnership and the partnerships in which it holds a majority interest. All significant intercompany balances and transactions have been eliminated. The amount of minority interest is immaterial.
Property and Equipment
Property and equipment are recorded at cost less appropriate reductions for permanent declines in net realizable value. Property and equipment are not adjusted for increases in net realizable value.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset.
Depreciation and Amortization
Property and equipment are depreciated using the straight-line method over lives of 5 to 30 years. Renewals and betterments are capitalized and repairs and maintenance are charged to operations as incurred.
Deferred Loan Costs
Deferred loan costs are amortized over the terms of the respective loans using the straight-line method. Amortization of deferred loan costs is included in depreciation and amortization expense.
Operating Revenue
Operating revenue is recorded when services are rendered and includes amounts reimbursable by the Medicaid and Medicare programs. Medicaid and Medicare revenues are recorded at the applicable net reimbursement rates; therefore, no contractual adjustments are reported.
Income Taxes
No provision has been made in the consolidated financial statements for Federal income taxes because under current law, no Federal income taxes are paid directly by the Partnership. The Partnership reports certain transactions differently for tax and financial statement purposes.
Allocation of Net Income or Net Loss
The Partnership's net profits and net losses (other than net profits or net losses from a sale or refinancing of Partnership property), are allocated 96% to the Limited Partners and 4% to the General Partners. Distributions are allocated on the basis described in Note 4.
Net losses resulting from a sale or refinancing shall be allocated 99% to the Limited Partners and 1% to the General Partners. Net profits resulting from a sale or refinancing shall be allocated in the following order:
(1) First, 1% to the General Partners and 99% to the Limited Partners until the net profits allocated to the Limited Partners from such sale or refinancing equals the excess of the greater of the following items over their capital account immediately prior to such sale or refinancing:
(a) zero; or
(b) the Limited Partners' invested capital immediately prior to such sale or refinancing plus 9% per annum of the Limited Partners' average invested capital for all fiscal years to the extent not received through prior distributions of distributable cash from operations or sale or refinancing proceeds; or
(c) the amount of sale or refinancing proceeds distributable to the Limited Partners;
(2) Second, to the General Partners until the net profits allocated to the General Partners from such sale or refinancing equals the excess of the greater of the following items over their capital account immediately prior to such sale or refinancing:
(a) zero; or
(b) the amount of sale or refinancing proceeds distributable to the General Partners from such sale or refinancing;
(3) Third, any remaining net profits shall be allocated 15% to the General Partners and 85% to the Limited Partners.
Net Income Per Limited Partnership Unit
Net income per Limited Partnership Unit is computed by dividing net income allocated to the Limited Partners by the number of Limited Partnership units outstanding.
Statements of Cash Flows
For purposes of this statement, cash equivalents include U.S. government securities, commercial paper and certificates of deposit with original maturities of three months or less.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Notes to Consolidated Financial Statements
1. Transactions With Affiliates and Former Affiliates
Amounts claimed payable to former affiliates (primarily Southmark and the Corporate General Partner), totalled $5,651,854, including accrued interest, at December 31, 1994. In July 1991 Southmark filed suit demanding payment of the alleged advances. In 1991, after CAC affiliate acquired the Corporate General Partner, the Partnership challenged the validity of some of these payables through claims filed against the Southmark bankruptcy estate. In 1994, the suits were settled whereby the Partnership was released of all liabilities to Southmark (See Note 6). In 1995, the Corporate General Partner forgave all remaining amounts owed by the Partnership, resulting in a gain on debt forgiveness of $5,651,854 for the year ended December 31, 1995.
2. Management Fees and Affiliate Transations
An unrelated company manages the nursing home and retirement center for a fee of 5% of gross operating revenues. Fees totalling $358,667, $331,034 and $303,511 were paid to the management company for the years ended December 31, 1996, 1995 and 1994, respectively.
During 1996, 1995 and 1994, an affiliate of the Corporate General Partner was reimbursed for costs incurred in connection with the administration of Partnership activities in the amount of $44,364, $41,005 and $25,850, respectively. In addition, the affiliate was paid an oversight management fee of 1% of gross operating revenue totalling $55,712, $89,865 and $64,853 in 1996, 1995 and 1994, respectively, which are included in the Partnership administration costs on the accompanying Consolidated Statements of Operations.
Accrued management fees consist of amounts payable to affiliates and former affiliates and an unrelated management company and resulted from management fees incurred prior to 1992. During 1996, these amounts were reduced by amounts due from an affiliate of the Corporate General Partner.
3. Long-Term Debt Obligations
Long-term debt obligations consisted of:
1996 1995
7.5% note related to Mayfair Village Nursing Care Center, collateralized by property and equipment and insured by the U.S. Department of Housing and Urban Development; payable in $1,595,057 $1,607,502 monthly installments of principal and interest of $12,050, due January 1, 2020
7.5% note related to Mayfair Retirement Center, collateralized by property and equipment and insured by the U.S. Department of Housing and Urban Development; payable in 2,677,750 2,715,640 monthly installments of principal and interest of $20,023, due March 1, 2021
4,272,807 4,323,142 Less current maturities 62,380 67,222
$4,205,585 $4,260,762
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Amount
1997 $67,222 1998 72,441 1999 78,065 2000 84,125 2001 93,446 Thereafter 3,877,508
$4,272,807
Restricted escrows and other deposits include amounts held by lenders under various note terms.
The fair value of the Partnership's obligations are estimated on the quoted market prices for the same or similar issues or on the current rates offered to the Partnership for debt of the same remaining maturities. Current rates approximate market rates.
4. Distributions
Distributions to the partners are paid from operations of the Partnership's properties or from sales or refinancing of properties. Cash from operations is distributed 96% to the Limited Partners and 4% to the General Partners. However, no distributions of cash from operations shall be made to the General Partners in any year until the Limited Partners have received distributions for such year equal to 9% of their invested capital.
Distributions of cash from sales and refinancing are made in the following order:
(a) First, to the Limited Partners in an amount equal to their invested capital; then,
(b) to the Limited Partners in an amount necessary to provide the Limited Partners with a 9% cumulative, non-compounded return on invested capital to the extent not previously received through distributions of distributable cash from operations; then,
(c) to the General Partners in an amount up to 3% of the sale price of all properties on a cumulative basis; then,
(d) the balance of such proceeds shall be distributed 15% to the General Partners and 85% to the Limited Partners.
The Partnership distributed cash of $150,000 to the Limited Partners for the years ended December 31, 1996 and 1995, respectively. There were no distributions to the Limited Partners for the year ended December 31, 1994. Cumulative distributions paid to the Limited Partners as of December 31, 1996 are $2,738,103. No distributions have ever been made to the General Partners.
5. Loss on Write-Down of Properties
Prior to 1992, the Partnership recorded write-downs to reduce the carrying value of certain properties to their estimated net realizable value as determined by the Corporate General Partner.
The cumulative amount of these write-downs were as follows as of December 31, 1996 and 1995:
Mayfair Village Nursing Care Center $1,441,848 Mayfair Retirement Center 440,602 $1,882,450
- ------------------------------------------------------------------------ The net book value of the assets at December 31, 1996 were as follows: - ------------------------------------------------------------------------
Mayfair Village Nursing Care Center $1,359,686 Mayfair Retirement Center 2,080,575 $3,440,261
6. Southmark Litigation
In November 1990, the Partnership filed claims against Southmark in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court"). In August 1991, the Partnership was served notice that Southmark filed suit against the Partnership, the Corporate General Partner and partnerships controlled by affiliates of the Corporate General Partner. In this suit, Southmark was seeking $4,928,329, alleging a fraudulent, preferential or post-petition transfer. On October 15, 1991, the Partnership filed its response, including counterclaims against Southmark, for alleged fraud and misrepresentation and asserting that in fact Southmark owed amounts to the Partnership as represented by proof of claims filed against Southmark's bankrupt estate.
The Partnership and Southmark reached a settlement which was filed with the Bankruptcy Court in January 1994 regarding the claims filed by the Partnership against Southmark and Southmark's suit against the Partnership. Under this settlement agreement, Southmark released all claims against the Partnership.
7. Cost Reimbursements
Accounts receivable and operating revenue include amounts estimated by management to be reimbursable by Medicaid and Medicare under the provisions of cost reimbursement formulas in effect. Final determination of amounts earned is subject to audit by the intermediaries. In the opinion of management, adequate provision has been made for any adjustments that may result from such audits. Differences between estimated provisions and final settlement are reflected as charges or credits to operating revenue in the year finalized. Medicaid and Medicare programs accounted for approximately 58%, 56% and 57% of operating revenue during 1996, 1995, and 1994, respectively.
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.
Accounts receivable, recorded at net realizable value, relate principally to amounts due from both the Ohio Medicaid program and Medicare are as follows:
1996 1995
Ohio Medicaid Program $125,506 $223,504 Medicare 274,708 194,759
Amounts due from the Ohio Medicaid program are paid on an interim and final basis generally within 30 to 60 days from date of billing. Amounts due from the Medicare program are generally received within 30 to 60 days on an interim basis with final settlement occurring annually.
8. Concentrations of Credit Risk
At December 31, 1996, the Partnership had cash on deposit at three banks which exceeded the Federal Deposit Insurance Corporation limit in the aggregate by $435,289.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
SCHEDULE
- ------------------------------------------------------------------------ Consolidated Resources Health Care Fund II and Subsidiaries - ------------------------------------------------------------------------ (limited partnerships)
Schedule II - Valuation and Qualifying Accounts Years Ended December 31, 1996, 1995 and 1994
Balance at Additions Balance at beginning of charged to Deductions (1) end of year year costs and expenses
Allowance for doubtful accounts $73,218 $ - $(19,664) $53,554
Allowance for doubtful accounts $43,636 $29,582 $ - $73,218
Allowance for doubtful accounts $39,850 $ 3,786 $ - $43,636
(1) Represents direct write-offs of receivables.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------ ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTIONS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have officers or directors. At December 31, 1996, the General Partners of the Partnership were WelCare Consolidated Resources Corporation of America, Inc. ("WCRCA"), Consolidated Associates II and WelCare Service Corporation-II ("WSC-II") as Managing General Partner of the Partnership. The executive officers and director of WSC-II and WCRCA, who control the affairs of the Partnership, are as follows:
Name and Position Age Other Principal Occupations and Other Directionships During the Past 5 Years
J. Stephen Eaton 46 J. Stephen Eaton is also Chairman of the Board and President, Chief the founder of Centennial HealthCare Corporation Executive Officer and has served as its President and Chief Executive and Sole Director Officer since its inception in February 1989. Mr. Eaton has been involved in the long-term care industry since 1982. Mr. Eaton also serves as a director of Saint Joseph's Mercy Care Corporation, a non-profit corporation based in Atlanta, Georgia which provides mobile health services to the homeless and other underserved populations, and of Saint Joseph's Health System, a major tertiary care hospital and health system in Atlanta, Georgia.
Alan C. Dahl 36 Alan C. Dahl has served as Executive Vice Vice President President, Chief Financial Officer, and Chief Financial Director of Centennial HealthCare Corporation Officer since January 1996. From February 1991 to December and Treasurer 1995, he served as senior vice president. Mr. Dahl has been involved in healthcare finance for the past eleven years. Mr. Dahl was previously senior vice president of Southmark Public Syndications, Inc., a subsidiary of Southmark Corporation. Mr. Dahl, a certified public accountant, also worked in the tax department at Arthur Young & Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
No individual principal or principals as a group received any direct remuneration from the Partnership.
The General Partners are not compensated directly for their services as general partners of the Partnership. See Item 13 and Note 2 to the consolidated financial statements appearing in Item 8 for further discussion of compensation paid to affiliates of the General Partners.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security ownership of certain beneficial owners.
No individual or group as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5% of the Partnership's securities.
(B) Security ownership of management.
The General Partners and their management own less than 1%.
The General Partners are entitled to distributions of cash from operations and from "other sources" (primarily from the sale or refinancing of Partnership properties, as set forth in Item 8, Note 4).
(C) Change in control.
On January 30, 1997, all of the stock of the Corporate General Partner and Managing General Partner of the Partnership was sold to Consolidated Partners Corporation, which is wholly-owned by the president of Centennial who is also a general partner of Consolidated Associates II.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Affiliates and former affiliates of the General Partners, in accordance with the Partnership Agreement, may receive compensation for services rendered. The following is a summary of compensation paid to or accrued for the benefit of the General Partners and affiliates in 1996:
Oversight management and management fees $55,712 Administration of partnership activities (1) $44,364
(1) For reimbursement of expenses incurred by affiliates of the Corporate General Partner in performing administrative services including investor relations and accounting. See Note 2 to the accompanying consolidated financial statements appearing in Item 8.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Consolidated Financial Statements included in Part II, Item 8:
Report of Independent Certified Public Accountants
Balance Sheets - as of December 31, 1996 and 1995
Statements of Income - for the Years Ended December 31, 1996, 1995 and 1994
Statements of Partners' Equity (Deficit) - for the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows - for the Years Ended December 31, 1996, 1995 and 1994
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in Part II, Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since they are not required, are not applicable or the financial information required is included in the financial statements or notes thereto.
(3) Exhibits:
The following exhibits are incorporated by reference and are an integral part of this Form 10-K.
Exhibit Number Document Description Page Number
3.1 Agreement of Limited Partnership of N/A Consolidated Resources Health Care Fund II incorporated by reference to Exhibit A to the Registration Statement on Form S-1, as amended, Page A-1, File No. 2-87636, (now File No. 0-13415).
3.2 Amendment to Agreement of Limited N/A Partnership of Consolidated Resources Health Care Fund II incorporated by reference to Proxy Statement filed on November 19, 1991, File No. 0-13415.
21 Subsidiaries E
27 Financial Data Schedules E
E - Submitted electronically as a separate document herewith the Registrant's Form 10-K405
(b) Reports on Form 8-K:
1. None
- ------------------------------------------------------------------------ SIGNATURES - ------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED RESOURCES HEALTH CARE FUND II (Registrant)
By: WELCARE SERVICE CORPORATION-II Managing General Partner
Date: APRIL 15, 1997 By: /s/ J. STEPHEN EATON -------------- -------------------- J. Stephen Eaton, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated:
Date: APRIL 15, 1997 By: /s/ J. STEPHEN EATON -------------- -------------------- J. Stephen Eaton, Sole Director and Principal Executive Officer of the Managing General Partner
Date: APRIL 15, 1997 By: /s/ ALAN C. DAHL -------------- -------------------- Alan C. Dahl Chief Financial Officer of the Managing General Partner