UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission file number 2-89185
GULLEDGE REALTY INVESTORS II, L.P.
State of Organization: VIRGINIA I.R.S. Employer Identification No. 54-1191237
ONE NORTH JEFFERSON AVENUE
ST. LOUIS, MISSOURI 63103
Registrant's telephone number, including area code: (314) 955-3006
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 (or of such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
GULLEDGE REALTY INVESTORS II, L.P.
(A LIMITED PARTNERSHIP)
INDEX
PART I. FINANCIAL INFORMATION:
Balance Sheets
Statements of Operations
Statements of Changes in Partners' Capital
Statements of Cash Flows
Notes to Financial Statements
Management's Financial Discussion
PART II. OTHER INFORMATION
SIGNATURES
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
ASSETS 1998 1997
Cash and cash equivalents $ 453,182 $ 490,764
Advances to Project Partnerships 15,619 31,097
Investment in Project
Partnership Note B) 519,347 976,602
Total Assets $ 988,148 $ 1,498,463
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 39,000 $ 7,000
Payable to affiliates 1,247,705 1,278,104
Note payable (including
accrued and unpaid interest of
$152,474 and $44,368) (Note B) 3,646,070 3,793,055
Capital contributions payable 50,000 50,000
Total Liabilities 4,982,775 5,128,159
Partners' Capital (Deficit) (3,994,627) (3,629,696)
Total Liabilities and
Partners' Capital
(Deficit) $ 988,148 $ 1,498,463
See Notes to Financial Statements.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenue:
Interest income $ 5,596 $ 5,149 $ 17,373 $ 14,477
Distributions 32,183 52,702
5,596 5,149 49,556 67,179
Expenses:
Asset mgnt. fee 28,645 28,645 85,935 85,935
Professional fees 13,000 4,124 84,000 11,553
Amortization 1,532 4,597
Operating expenses 3,312 41,403 3,342 41,184
Interest expense
(Note B) 79,252 241,210
124,209 75,704 414,487 143,269
Net loss $ (118,613) $(70,555) $ (364,931) $(76,090)
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Special
Total General Limited Limited
<S> <C> <C> <C> <C>
Balances at Jan. 1, 1997 $ (758,881) $ (16,939) $ (30,430) $ (711,512)
Net loss for
nine months ended
September 30, 1997 (76,090) (837) (1,446) (73,807)
Balances at
September 30, 1997 $ (834,971) $ (17,776) $ (31,876) $ (785,319)
Balances at
January 1, 1998 $ (3,629,696) $ (48,518) $ (84,975) $ (3,496,203)
Net loss for
nine months ended
September 30, 1998 (364,931) (4,014) (6,934) (353,983)
Balances at
September 30, 1998 $ (3,994,627) $ (52,532) $ (91,909) $ (3,850,186)
Number of
ownership units 11,814 131 225 11,458
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
Cash Flows From Operating Activities:
Net loss $(364,931) $ (76,090)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Distributions from zero basis
Project Partnerships (32,183) (52,702)
Amortization 4,597
Change in assets and liabilities:
Decrease in advances to
Project Partnerships 15,478 622
Increase (decrease) in accts payable 32,000 (4,000)
(Decrease) increase in
payable to affiliates (30,399) 106,428
Increase in interest payable 108,106
Net Cash Used In Operating Activities (271,929) (21,145)
Cash Flows From Investing Activities:
Distributions from all
Project Partnerships 489,438 52,702
Cash Flows From Financing Activities:
Payment on note payable (255,091)
(Decrease) Increase In Cash (37,582) 31,557
Cash Beginning of Period 490,764 366,271
Cash End of Period $ 453,182 $ 397,828
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Note A Summary of Significant Accounting Policies
Partnership Organization
Gulledge Realty Investors II, L.P. (the Registrant) is a limited partnership
organized in December 1983 under the laws of the Commonwealth of Virginia for
the purpose of acquiring limited partner interests in real estate limited
partnerships (Project Partnerships). These Project Partnerships are known as
Colony Place Associates, Ltd., Country Oaks Apartments Limited Partnership,
Florence Housing Limited Partnership, Greentree Housing Limited Partnership,
Hawthorn Housing Limited Partnership, Olympic Housing Limited Partnership, Pine
West Ltd., and Rancho Vista Associates. Each of the Project Partnerships owns
an operating real estate project which receives mortgage interest subsidies
and/or rental assistance from the United States Department of Housing and Urban
Development (HUD) or Farmer's Home Administration. The Registrant commenced
operations in March 1984.
The financial statements include only those assets, liabilities, and results of
operations which relate to the business of the Registrant and do not include any
assets, liabilities, or operating results attributable to the partners'
individual activities. These financial statements should be read in conjunction
with the Registrant's annual report on Form 10-K for the year ended December 31,
1997. All adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of operations for the interim period have been
reflected. All such adjustments consist of normal recurring accruals, unless
otherwise disclosed in these interim financial statements. The results of
operations, for the nine months ended September 30, 1998, are not necessarily
indicative of the results for the year ending December 31, 1998.
Investments in Project Partnerships
Investments in Project Partnerships are accounted for using the equity method of
accounting. Under the equity method, investments are reflected at cost,
adjusted for the Registrant's share of the Project Partnerships' income or loss
and distributions, if any. The Registrant is under no obligation to contribute
additional capital or to lend monies necessary to fund cash flow deficiencies of
the Project Partnerships because the Registrant is a limited partner in such
partnerships. As a result, the investment accounts are not reduced below zero.
Except for the investment in Hawthorn (see Note B), all the investment accounts
have a zero balance. Losses in subsequent years will be maintained separately
for tax purposes. These losses are available to be applied toward any possible
future income from these partnerships. Any distributions from the Project
Partnerships will be recognized as income in the year received.
Cash and Cash Equivalents
Cash equivalents consist of interest bearing money market account balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 significantly from those estimated.
Income Taxes
No provision has been made for income taxes as they are the responsibility of
each partner. Profits (or gains) and losses of the Registrant are allocated to
the partners in accordance with the partnership agreement.
Note B Investment in Project Partnership and Note Payable
The Hawthorn project partnership refinanced its mortgage during 1997. Proceeds
from the refinancing were used to make a partial payment on the promissory note
which had come due December 31, 1996. The remaining balance of the promissory
note was renegotiated. The mortgage was refinanced under HUD regulations which
limit the amount of debt that can be collateralized by the project.
Accordingly, HUD would not approve the mortgage refinance unless the promissory
note was no longer a liability of the project. Therefore, the general partner
of the Registrant and the noteholder agreed to have the promissory note assumed
by the Registrant. The promissory note is now collateralized by the partners'
interests in the Hawthorn project partnership. Principal and interest due on
the promissory note are only payable from surplus cash received by the
Registrant from the Hawthorn project partnership. The Registrant is not
required to make any payments from surplus cash it receives from any other
project. The promissory note bears simple interest at a rate of 9%. Any
principal and interest remaining unpaid on June 30, 2002, will be due in full.
In conjunction with assuming the liability for the promissory note, the
Registrant also recorded a corresponding investment in Hawthorn. The investment
account was then reduced by previously unrecorded losses of Hawthorn in
accordance with the equity method of accounting. The investment account will be
reduced in current and future years by the Registrant's share of any additional
losses from Hawthorn as reported on Hawthorn's annual audited financial
statements. This investment account will also be reduced whenever the
Registrant receives a distribution from Hawthorn. Therefore, until the
investment account is reduced to zero, the Registrant will not recognize
distribution income in future years from the Hawthorn project partnership.
In April 1998, the Registrant received a distribution of $457,255 from Hawthorn
and, following the equity method of accounting, recorded the distribution as a
reduction of the investment in Hawthorn. From these funds, the Registrant made
principal and interest payments on the promissory note of $255,091 and $133,104,
respectively. The funds were also used to pay consulting fees to an affiliate
of the noteholder and to the general partner of the Registrant, as required by
the promissory note. The annual, cumulative fees are $25,000 and $19,000,
respectively. The remaining funds were retained by the Registrant.
MANAGEMENT'S FINANCIAL DISCUSSION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Registrant is a limited partnership formed to acquire limited partner
interests in real estate limited partnerships (Project Partnerships). The
Registrant's investments in the Project Partnerships are recorded using the
equity method of accounting (see Note A).
The Registrant assumed a promissory note that had previously been held by the
Hawthorn Project Partnership (see Note B). Interest expense on the assumed
promissory note and consulting fees associated with the promissory note are the
primary reasons for the increase in net loss for the nine months and three
months ended September 30, 1998 compared to the nine months and three months
ended September 30, 1997.
The decrease in distribution income for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 is primarily due to the
fact that distributions from the Hawthorn project partnership are now recorded
as a reduction of the investment account. The increase in professional fees
expense for the nine months and three months ended September 30, 1998 compared
to the nine months and three months ended September 30, 1997 is primarily due to
the consulting fees described in Note B. The decrease in operating expenses for
the nine months and three months ended September 30, 1998 compared to the nine
months and three months ended September 30, 1997 is primarily due to a
negotiated payment made in 1997 to the prior general partner for prior years'
fees that were not accrued due to uncertainty surrounding the timing and amount.
The Registrant's ownership interest in four other Project Partnerships (Colony
Place, Florence Housing, Greentree Housing and Olympic Housing) is pledged as
collateral in connection with promissory notes issued by the respective Project
Partnerships. The Colony Place promissory note was due June 30, 1997. To date,
the noteholder has not responded to the general partner's attempts at
renegotiation. Although this promissory note is technically in default, the
noteholder has not yet made demand of payment. The impact of a foreclosure by
the noteholder will be minimal to the Registrant since the investment in Colony
Place was reduced to zero several years ago and Colony Place has never paid cash
distributions. However, there could be significant adverse tax consequences to
investors if the general partner is unsuccessful in extending the maturity date
of the promissory note.
The three remaining promissory notes have various maturity dates ranging from
December 31, 1998 to December 31, 2000. Although the general partner has
successfully extended the maturity dates of these notes in the past, there can
be no guarantee that it will be successful in future negotiations. If the
general partner is unsuccessful in renegotiating these promissory notes when
due, the Registrant could lose its ownership interest in the Project
Partnerships. The impact on the Registrant's operations could be significant as
these Project Partnerships frequently pay cash distributions to the Registrant.
As in the case of Colony Place discussed above, the adverse tax consequences to
investors could be significant.
YEAR 2000
The "Year 2000" issue arises because many computer hardware and software systems
use only two digits to represent the year. As a result, these systems and
programs may not accurately calculate dates beyond 1999, causing system
failures. The Registrant's use of computers involves maintaining its accounting
records and creating quarterly and annual reports. The worst case scenario
would require that the accounting records and reports be created manually. The
Registrant's efforts to remediate the Year 2000 issues are proceeding according
to plan. The Registrant expects to complete its efforts before the end of 1999.
The costs of these efforts will be paid by the General Partner of the
Registrant. The Project Partnerships are all proceeding with their remediation
efforts and expect to be fully compliant by the year 2000.
PART II OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K - There were no reports filed on Form 8-K for
the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GULLEDGE REALTY INVESTORS II, L.P.
By:GULL-AGE Properties, Inc.
Managing General Partner
Date: November 12, 1998 By:/S/Robert L. Proost
Robert L. Proost
President and Treasurer
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 453,182
<SECURITIES> 0
<RECEIVABLES> 15,619
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 468,801
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 988,148
<CURRENT-LIABILITIES> 1,286,705
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (3,994,627)
<TOTAL-LIABILITY-AND-EQUITY> 988,148
<SALES> 0
<TOTAL-REVENUES> 5,596
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,957
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,252
<INCOME-PRETAX> (118,613)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118,613)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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