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 June 30, 1999 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) 955-4188
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)
June 30, December 31,
ASSETS 1999 1998
Cash and cash equivalents $ 278,919 $ 450,473
Advances to Project Partnerships 4,472 17,634
Investment in Project
Partnership (Note B) 306,735 661,318
Total Assets $ 590,126 $ 1,129,425
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 4,500 $ 8,000
Payable to affiliates 1,113,401 1,313,202
Note payable (Note B) 3,587,505 3,725,322
Capital contributions payable 50,000 50,000
Total Liabilities 4,755,406 5,096,524
Partners' Capital (Deficit) (4,165,280) (3,967,099)
Total Liabilities and
Partners' Capital
(Deficit) $ 590,126 $ 1,129,425
See Notes to Financial Statements. STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenue:
Interest income $ 4,766 $ 6,524 $ 8,885 $ 11,777
Distributions 33,012 32,183 33,012 32,183
37,778 38,707 41,897 43,960
Expenses:
Asset management fee ` 28,645 28,645 57,290 57,290
Professional fees 2,000 69,000 4,000 71,000
Consulting fees 11,000 22,000
Operating expenses 868 30 868 30
Interest expense
(Note B) 78,391 78,768 155,920 161,958
120,904 176,443 240,078 290,278
Net loss $(83,126) $(137,736) $(198,181) $(246,318)
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Special
Total General Limited Limited
<S> <C> <C> <C> <C>
Balances at January 1, 1998 $(3,629,696) $(48,518) $ (84,975) $ (3,496,203)
Net loss for six months
ended June 30, 1998 (246,318) (2,709) (4,680) (238,929)
Balances at June 30, 1998 $(3,876,014) $(51,227) $ (89,655) $ (3,735,132)
Balances at January 1, 1999 $(3,967,099) $(52,259) $ (91,544) $ (3,823,296)
Net loss for six months
ended June 30, 1999 (198,181) (2,180) (3,765) (192,236)
Balances at June 30, 1999 $(4,165,280) $(54,439) $ (95,309) $ (4,015,532)
Number of ownership units 11,814 131 225 11,458
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1999 1998
Cash Flows From Operating Activities:
Net loss $(198,181) $(246,318)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Distributions from zero basis
Project Partnerships (33,012) (32,183)
Change in assets and liabilities:
Decrease in advances to
Project Partnerships 13,162 16,981
Increase (decrease) in
accounts payable (3,500) 19,000
(Decrease) increase in
payable to affiliates (199,801) (63,615)
(Decrease) increase in
interest payable (137,817) 28,854
Net Cash From Operating Activities (559,149) (277,281)
Cash Flows From Investing Activities:
Distributions from all
Project Partnerships 387,595 489,438
Cash Flows From Financing Activities:
Decrease in note payable (255,091)
Decrease In Cash (171,554) (42,934)
Cash Beginning of Period 450,473 490,764
Cash End of Period $ 278,919 $ 447,830
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(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,
1998. 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 six months ended June 30, 1999, are not necessarily
indicative of the results for the year ending December 31, 1999.
Investments in Project Partnerships
The investment in Project Partnerships is 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.
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.
The investment account will not be reduced below zero because the Partnership is
not liable for Project Partnership losses in excess of such investment. 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 received from the Project Partnerships,
subsequent to reducing the investment account to zero, 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 current or deferred income taxes since 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.
Segment Reporting
In fiscal year 1998, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. The Partnership's principal line of business is investing in Project
Partnerships that own and operate Projects that are financed and/or operated
under federal or state housing assistance programs. Management has considered
the requirements of SFAS 131 and believes that the partnership operates in one
business segment.
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 plus accrued interest totaled $3,587,506 at June
30, 1999, and 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
adjusted in future years by the Registrant's share of any additional income or
loss 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.
MANAGEMENT'S FINANCIAL DISCUSSION
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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). The primary reason for the decrease
in net loss for the six months and three months ended June 30, 1999 compared to
the six months and three months ended June 30, 1998 was due to the decrease in
professional fees. Professional fees decreased compared to the same period last
year, due to the fact that 1997 fees were paid and expensed during the second
quarter of 1998.
The promissory note that was assumed from Hawthorn bears simple interest at a
rate of 9%. Principal and interest payable totaled $3,587,506 at June 30, 1999.
Principal and interest can only be paid from distributions received from
Hawthorn. The Registrant is not required to use distributions from any other
Project Partnership to make payments on this promissory note.
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 and has
been extended to November 30, 1999, while the general partner attempts to locate
a buyer for the project. If the Partnership is unsuccessful in locating a buyer
for the project before November 30, 1999, the noteholder may demand payment and
the project may revert to the noteholder.
The three remaining promissory notes have various maturity dates ranging from
December 31, 1999 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.
There could be significant adverse tax consequences to investors if the general
partner is unsuccessful in extending the maturity dates of the promissory notes.
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 managers of the Project Partnerships have all been contacted regarding their
Year 2000 compliance. The managers have indicated that their information
systems are or will be compliant by year 2000. The primary risk of not being
Year 2000 compliant at a Project Partnership would be the failure of non-
information technology systems such as elevators, and utility items furnished by
third parties such as electricity, natural gas, telephone and water which in all
likelihood should be available in some form. The Registrant has not obtained
assurances from utility companies as to their Year 2000 compliance. The failure
of a non-information technology system would not have a material impact on the
operations of the Project Partnerships unless such failure would extend for a
significant period of time. Such event could lead tenants to withhold rent
which could have a material, adverse impact on the Project Partnerships'
operations and their ability to pay cash distributions to the Registrant. This,
in turn, could have a material impact on the operations of the Registrant, since
distributions from Project Partnerships are the primary source of revenue for
the Registrant.
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 June 30, 1999.
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: August 13, 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 278,919
<SECURITIES> 0
<RECEIVABLES> 4,472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 283,391
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 590,126
<CURRENT-LIABILITIES> 1,167,901
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (4,165,280)
<TOTAL-LIABILITY-AND-EQUITY> 590,126
<SALES> 0
<TOTAL-REVENUES> 37,778
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 42,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,391
<INCOME-PRETAX> (83,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (83,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,126)
<EPS-BASIC> 0
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