UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 2-89185
GULLEDGE REALTY INVESTORS II
Virginia 54-1191237
(State of incorporation) (I.R.S. Employer Identification No.)
One North Jefferson, St. Louis, Missouri 63103
Registrant's telephone number: 314-955-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Limited Partnership Interests
(Title of class)
________________
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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 for 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
Documents Incorporated by Reference:
1. Registration Statement (No. 2-89185) of Registrant effective April 30, 1984
(the "Registration Statement").
2. Prospectus of Registrant dated April 30, 1984 (the "Prospectus").
3. Supplement No. 1 dated October 8, 1984 to Prospectus.
4. Supplement No. 2 dated February 6, 1985 to Prospectus.
5. Supplement No. 3 dated April 18, 1985 to Prospectus.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K
SIGNATURES
PART I
ITEM 1. BUSINESS.
Gulledge Realty Investors II, L.P., ("Registrant" or "Partnership") is a
Virginia limited partnership formed to invest as a limited partner in other
limited partnerships ("Project Partnerships") that own and operate apartment
complexes ("Projects") that are financed and/or operated under federal or state
housing assistance programs. Part of the objective of the Registrant is to
generate tax losses for investors. However, due to changes in the tax
regulations, the use of these losses has been restricted for most investors.
Gull-AGE Properties, Inc. ("General Partner"), a Delaware corporation, is the
General Partner of the Registrant. The stock of the General Partner is owned by
Gull-AGE Capital Group, Inc., whose stock was originally owned 50% by the
Gulledge Corporation ("Gulledge"), the former General Partner, and 50% by A.G.
Edwards, Inc. ("Edwards"), a St. Louis-based financial services holding company.
In March of 1988, Edwards, through an affiliate, acquired all the shares of
Gull-AGE Capital Group, Inc. formerly held by Gulledge. Edwards' principal
subsidiary, A.G. Edwards & Sons, Inc., a securities and commodities broker-
dealer, was a principal distributor of Units of the Registrant. As a result,
neither the General Partner nor Gull-AGE Capital Group, Inc. has any current
affiliation with Gulledge.
On November 1, 1990, Gull-AGE Properties, Inc. was approved by a majority-of-
interest of holders of limited partner units to become the sole General Partner
of the Registrant. Gull-AGE Properties, Inc. replaced the Gulledge Corporation
as Managing General Partner and Eugene A. Gulledge and Keith A. Gulledge as
individual General Partners.
Pursuant to the Securities Act of 1933, the Registrant filed a Form S-11
Registration Statement with the Securities and Exchange Commission. Reference
is made to the Prospectus contained in said Registration Statement declared
effective April 30, 1984.
Commencing on April 30, 1984, the Registrant began offering through Gulledge
Securities Corporation ("Selling Agent") and other broker-dealers up to 10,000
units (with an option to sell up to 25,000 units) of limited partnership
interest (the "Units") at $1,000 per unit ("Offering"), with a minimum purchase
of five Units ($5,000).
As of September 30, 1985, the date that the offering terminated, the
Registrant had accepted subscriptions for 11,458 units from 1,041 Investor
Limited Partners and 356 units from General and Special Limited Partners.
As of December 31, 1998, the Registrant has investments in Project
Partnerships which own the Projects listed below:
Year Housing Original OfferingAcquisitionGovernment
PROJECT Completed Units MortgagesProceeds Fees Programs
1.Carriage House1973 240 $4,860,050 $2,175,000 $ 195,750 HUD Section
of Florence Apts. 236
Florence, KY
2.Olympic Village 1977 320 $ 5,989,253 $ 2,720,000 $ 244,800
HUD Sections
Chicago Heights, IL 8 and
221(d)(4);
Illinois HDA
3.Hawthorn Ridge1977 176 $4,196,243 $1,836,000 $ 164,700 HUD Section
Woodbridge, IL 223(F)
4.Greentree 1977 100 $1,783,912 $591,250 $53,200 HUD Sections
Wilmington, NC 8 and 236
5.Colony Place1970 100 $1,744,265 $598,750 $53,950 HUD Sections
Fayetteville, NC 8 and 236
6.Country Oaks 1986 36 $1,054,350 $ 264,000 $ 23,760 FmHA
515
Somerville, TN
7.Rancho Vista 1986 28 $992,920 $239,500 $21,500 FmHA 515
Wickenburg, AZ
8.Pine West 1986 48 $1,282,500 $ 300,000 $ 27,000 FmHA 515
Indianola, MS
1,238 $24,129,046 $ 10,174,500 $ 915,160
Although each Project must compete in the market place for tenants, interest
subsidies and/or rent supplements from governmental agencies make it possible to
offer certain of these dwelling units to eligible tenants at a cost
significantly below the market rate for comparable conventionally-financed
dwelling units.
ITEM 2. PROPERTIES.
Other than its interests in the Project Partnerships, the Registrant does not
own any property. The General Partner believes that the projects described
below are all in satisfactory physical condition.
Average Effective
Occupancy Monthly Rental
Project 1998 1997 1998 1997
Carriage House of Florence Apts.98% 98% $369 $349
Olympic Village Apts. 94% 96% $804 $804
Hawthorn Ridge Apts. 97% 97% $762 $762
Greentree Apts. 98% 98% $328 $328
Colony Place Apts. 91% 96% $302 $302
Country Oaks Apts. 95% 94% $230 $224
Rancho Vista Apts. 91% 96% $317 $290
Pine West Apts. 99% 94% $275 $264
The Registrant had owned an investment in Camelot Housing which defaulted on its
mortgage in June 1995. The default was primarily caused by a decrease in
housing assistance payments from HUD and a resulting decline in occupancy. Due
to a significant amount of housing quality standard violations noted by HUD in a
physical inspection report, HUD greatly reduced its housing assistance payments
until such time as the repairs were completed. Without the payments from HUD,
the Project Partnership was unable to make its mortgage payments. The mortgage
was assigned to HUD at which time HUD initiated foreclosure proceedings. The
proceedings concluded during 1996. The effect on the Registrant's financial
statements was negligible because the investment in Project Partnerships was
reduced to zero several years ago. Also, this Project Partnership never paid
distributions nor was it expected to do so for the foreseeable future. In
addition, the tax effect of the foreclosure is negligible as losses from other
Project Partnerships are available to offset the gain due to the foreclosure.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is not currently subject to any pending material legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
As of December 31, 1998, the number of holders of units was 1,034.
The Registrant is a limited partnership and thus has no common stock. There
is no ready market for the Units and it is not anticipated that there will be
any market. Any acquisitions or dispositions of Units that have occurred have
been the result of private transactions, usually between related parties, and
the Registrant has no knowledge of the prices bid for or asked with respect to
the Units. The General Partner has no plans to offer any services that would
match prospective buyers with prospective sellers of Units.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
1998 1997 1996 1995 1994
Income from Distributions
and Other Miscellaneous
Revenue $56,010 $73,251 $45,946 $83,495 $109,886
Equity Income (Losses)
of Project Partnerships 141,971 (2,695,167) -0- -0- -0
Expenses (535,384) (248,899) (159,279) (132,509) (142,197)
Net Loss $(337,403) $(2,870,815) $ (113,333) $(49,014) $ (32,311)
Investment in Project
Partnerships $661,318 $976,602 $ -0- $ -0- $ -0
Total Assets $1,129,425 $1,498,463 $ 449,902 $448,855 $ 387,789
Net Loss per
partnership unit $ (29) $ (243) $ (10) $ (4) $ (3)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS.
The net loss for 1998 was $337,403 compared to $2,870,815 for 1997 and
$113,333 for 1996 (see Items 6 and 14(a)1). The net loss for 1998 decreased
from 1997 primarily due to the Registrant recognizing losses from one Project
Partnership (Hawthorn) in 1997 that had not been recognized in prior years.
This occurred due to the transaction described in the following two paragraphs.
During 1997, Hawthorn refinanced its mortgage and used the proceeds to make a
partial payment to the holder of a promissory note. The remaining balance of
the promissory note ($3,748,687) was assumed by the Registrant. Payment terms
are very similar to when Hawthorn held the promissory note. The promissory note
bears simple interest at a rate of 9%. Principal and interest payments can only
be made from distributions received from Hawthorn. The Registrant is not
required to use distributions from any other Project Partnerships to make
payments on this promissory note.
In conjunction with the assumption of the promissory note, the Registrant
recorded an investment in Hawthorn equal to the balance of the promissory note
assumed. Following the equity method of accounting for investments in project
partnership, the Registrant was then required to reduce the investment balance
by previously unrecognized losses from Hawthorn. Recognition of prior years'
unrecorded losses is the primary reason for the large increase in net loss for
1997 compared to prior years. However, in 1998 Hawthorn produced income and the
Registrant was required to recognize its share of that income under the equity
method of accounting. See footnote F of Item 14(a)1 for more information.
Distribution income received from the Project Partnerships was $32,183 in 1998
compared to $52,702 in 1997 and $26,763 in 1996. Income from distributions were
greater in 1997 compared to 1998 and 1996 primarily due to two Project
Partnerships that paid distributions in 1997 but did not pay distributions in
1998 or 1996.
Expenses increased in 1998 compared to prior years primarily because 1998
included a full year of interest expense on the promissory note assumed from
Hawthorn in 1997, as described earlier.
The accounting for an investment in a Project Partnership involves decreasing
the Registrant's investment in each Project Partnership by the Registrant's
share of the Project Partnership's loss until that investment reaches zero.
Losses incurred by a Project Partnership subsequent to the Registrant's
investment reaching zero are not reflected in the Registrant's financial
statements until such time as the Project Partnership reports net income.
Losses reported from the Project Partnerships are primarily the result of
depreciation expense and interest expense incurred on nonrecourse government
backed debt and nonrecourse secondary financing loans. These losses, in and of
themselves, do not accurately portray the surplus cash or excess cash (as
defined by HUD and Farmers' Home regulations) generating potential of the
projects, such surplus cash being available for distribution to the partners of
the Project Partnerships. The Registrant treats distributions as income, if the
investment in the Project Partnership is zero, or as a return or withdrawal of
capital invested in the Project Partnership, if the investment is above zero.
As of December 31, 1992, all investments in Project Partnerships were reduced to
a zero book basis; therefore, subsequent losses were not reported for financial
statement purposes. Now that the Registrant has a book basis in Hawthorn, as
discussed earlier, income and losses from Hawthorn will be reported for
financial statement purposes until the book basis is reduced to zero. Tax basis
losses from all the Project Partnerships remain available to the Registrant's
investors.
The Registrant's ownership interest in several of the Project Partnerships is
pledged as collateral in connection with promissory notes issued by the Project
Partnerships. The General Partner attempts to refinance the promissory notes as
they come due in order to avoid foreclosure by the noteholders and to continue
to defer the adverse tax consequences that would result from foreclosure. If
the General Partner were ever unable to renegotiate a promissory note, the
noteholder would likely exercise his rights to the collateral and seize the
Project Partnership. This would cause the Registrant to realize a gain for tax
purposes primarily due to the recapture of accelerated depreciation taken in
prior years.
The assets of the Registrant are illiquid. The primary source of cash to
finance day-to-day operations is from distributions, if any, to the Registrant
from the Project Partnerships. Due to a low volume of transactional activity,
the Registrant's need for cash to finance day-to-day operations is minimal. The
ability to sell the Registrant's assets, i.e. the Project Partnerships, is
limited by the overall market conditions in the geographic areas where the
Projects operate and, potentially, the ability of the Projects to qualify for
Low Income Housing Tax Credits. In addition, the purchase of these interests
was intended, and remains, to be for long-term investment purposes.
The distribution received from Project Partnerships in a given year is affected
by regulatory restrictions and limitations and by the operations of the Project
Partnerships. Operations of the Project Partnerships is, in turn, affected by
several factors, among which are:
Inflation and changing economic conditions involving the management and
ownership of rental real estate. Vacancy levels, rental payment defaults and
operating expenses are all dependent on general and local economic conditions.
Shifts in these conditions could impact operating results of the Project
Partnerships.
The need for capital additions or improvements may limit the amount of cash
available for distribution.
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 the 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The partnership is exposed to interest rate risk related to changes in fair
value on its fixed rate debt. As of December 31, 1998, the partnership had
$3,725,000 of principal and accrued interest on a fixed rate note bearing
interest at 9% (See Note E to the Financial statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of the Registrant are filed herewith (See
Item 14(a)1). The supplementary financial information specified by
Item 302 of Regulation S-K is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant has no officers or directors. The General Partner is Gull-AGE
Properties, Inc. The following is information concerning the officers and
directors of the General Partner, all of which are compensated by A.G. Edwards &
Sons, Inc., an affiliate of the General Partner:
Name Position
Robert L. Proost Director, President and
Treasurer
Robert J. Herleth Vice President and
Assistant Secretary
Douglas L. Kelly Secretary
Joseph G. Porter Assistant Treasurer
Robert L. Proost, age 61, has been a Director of the General Partner,
President and Treasurer since March 1, 1997. Mr. Proost succeeds David W.
Mesker who retired on February 28, 1997. Mr. Proost has been Treasurer of
Edwards since March 1, 1997. He is currently Treasurer, Corporate Vice
President, Assistant Secretary and Director of Administration of A.G. Edwards &
Sons, Inc., of which he has been an employee since 1988. Prior to joining A.G.
Edwards & Sons, Inc. he was a partner in Peper, Martin, Jensen, Maichel and
Hetlage, a St. Louis area law firm. He is also President of A.G.E. Realty
Corp., the Special Limited Partner, which owns other real estate properties and
interests, and President of The Ceres Investment Company, a wholly-owned
subsidiary of A.G. Edwards & Sons, Inc., which serves as general partner in
several limited partnerships which invest in commodities futures.
Robert J. Herleth, age 46, is a Vice President of the General Partner and
manages the operations of the General Partner. Mr. Herleth joined A.G.
Edwards & Sons, Inc. in 1980. Since then he has specialized in the areas of
real estate and finance. He is also Vice President of A.G.E. Realty Corp., the
Special Limited Partner, which owns other real estate properties and interests
and Vice President of Edwards Development Corporation which serves as general
partner for a limited partnership that owned a large apartment project in
Indianapolis, Indiana, that was sold in 1996. Prior to joining A.G. Edwards &
Sons, Inc., Mr. Herleth was employed by Pantheon Corporation, a St. Louis area
real estate development firm.
Douglas L. Kelly, age 50, is Secretary of the General Partner. Mr. Kelly
succeeds Ronald E. Buesinger who retired on February 28, 1994. Mr. Kelly joined
A.G. Edwards & Sons, Inc. on January 1, 1994 and serves as Director, Corporate
Vice President, Corporate Secretary and Director of Law and Compliance. Prior
to joining A.G. Edwards & Sons, Inc., Mr. Kelly was a partner in Peper, Martin,
Jensen, Maichel & Hetlage, a St. Louis area law firm, where he served as outside
counsel to A.G. Edwards & Sons, Inc. for eight years.
Joseph G. Porter, age 38, is the Assistant Treasurer of the General Partner.
Mr. Porter succeeds Eugene J. King who retired on February 28, 1999. Mr. Porter
joined A.G. Edwards & Sons, Inc. in 1982 and serves as Vice President and
Principal Accounting Officer.
The General Partner does not have any standing audit, nominating or
compensation committees.
ITEM 11. EXECUTIVE COMPENSATION.
Under the provisions of the Registrant's Limited Partnership Agreement, the
General Partner is entitled to receive an asset management fee (an annual
cumulative amount of $114,580) and a program management fee (an annual
noncumulative amount up to $59,250). The amount of these fees paid during 1998
were $0 for the asset management fee and $0 for the program management fee. The
accumulated amount of these fees accrued but not paid to the General Partner at
December 31, 1998 are $1,145,720 and $0, respectively. Additionally, $123,482
of accrued asset management fees remain unpaid to a former General Partner. The
ability to pay the program management fee is limited by payment of priority
items as outlined in the Registrant's Limited Partnership Agreement.
The General Partner is also to receive a fee of 1% of the gross capital
proceeds generated by the Project Partnerships, for services connected with the
disposition of Partnership investments. This payment is limited by payment of
priority items as outlined in the Registrant's Limited Partnership Agreement.
In addition, the General Partner will receive any fees to which the prior
General Partners would be entitled for performing services with respect to the
Project Partnerships of which the Registrant is the limited partner.
Please refer to Note C of the financial statements referenced under
Item 14(a)1 for additional information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The General Partner owns a 1.1% interest in the Registrant and its affiliate,
A.G.E. Realty Corporation, owns a 0.10% interest in the Partnership as Special
Limited Partner. As of December 31, 1998, no person was known by the Registrant
to be the beneficial owner of more than a 5% interest in the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
An affiliate of Gull-AGE Properties, Inc., A.G.E. Realty Corp. holds a .10%
interest in the Registrant as a Special Limited Partner.
Please refer to Item 11 for additional information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following financial statements are included:
1. Financial Statements of the Registrant (filed herewith as Exhibit 1).
Independent Auditors' Report.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the three years in the period ended
December 31, 1998.
Statements of Changes in Partners' Capital (Deficit) for the three
years in the period ended December 31, 1998.
Statements of Cash Flows for the three years in the period ended
December 31, 1998.
Notes to Financial Statements.
Financial Statements of Unconsolidated Limited Partnership meeting
requirements of significant subsidiary/investee (Exhibit 2).
No financial schedules are applicable.
Management will provide, without charge, a copy of the Registrant's
annual report on Form 10-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the year ended December 31,
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.
March 31, 1999 GULLEDGE REALTY INVESTORS II
(Registrant)
By: Gull-AGE Properties, Inc.
(General Partner)
By: /s/Robert L. Proost
Robert L. Proost
President & Treasurer
& Director
By:/s/Robert J. Herleth
Robert J. Herleth
Vice President
By: /s/Joseph G. Porter
Joseph G. Porter
Assistant Treasurer
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Partners of
Gulledge Realty Investors II:
We have audited the accompanying balance sheets of Gulledge Realty Investors II
(a limited partnership) as of December 31, 1998 and 1997, and the related
statements of operations, changes in partners' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Hawthorn Housing
Limited Partnership for the year ended December 31, 1998, a majority owned
Limited Partnership ("Project Partnership"), the Partnership's investment in
which is accounted for by use of the equity method. The Partnership's equity of
$661,318 in Hawthorne Housing Limited Partnership's net assets at December 31,
1998 and $141,971 of that Project Partnerships net income for the year then
ended are included in the accompanying financial statements. The Project
Partnership's financial statements referred to above were audited by another
auditor whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for such Project Partnership for the year ended
December 31, 1998, is based solely on the report of the other auditor.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of another auditor, such
financial statements present fairly, in all material respects, the financial
position of Gulledge Realty Investors II as of December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
March 26, 1999
RBG&CO.
S2300-020 INDEPENDENT AUDITORS' REPORT
To The Partners
Hawthorn Housing Limited Partnership
We have audited the accompanying balance sheet of Hawthorn Housing Limited
Partnership, Project No. 071-11069, a limited partnership, as of December 31,
1998 and the related statements of profit and loss, partners' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hawthorn Housing Limited
Partnership as of December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information (shown on Pages 12 through 14) is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.
In accordance with Government Auditing Standards, we have also issued a report
dated January 29, 1999 on our consideration of Hawthorn Housing Limited
Partnership's internal control structure and a report dated January 29, 1999 on
its compliance with laws and regulations.
/s/Rubin, Brown, Gornstein & Co. LLP
January 29, 1999
Rubin, Brown, Gornstein & Co. LLP 230 South Bemiston Avenue
Certified Public Accountants/Business Consultants St. Louis, MO 63105
314/727-8150 TELwww.rbgco.com 314/727-9195 FAX
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31,
Assets 1998 1997
Cash and cash equivalents $450,473 $490,764
Advances to Project Partnerships 17,634 31,097
Investment in Project Partnerships (Note E) 661,318 976,602
Total Assets $1,129,425 $1,498,463
Liabilities and Partners' Capital (Deficit)
Accounts payable $ 8,000 $ 7,000
Payable to affiliates (Note D) 1,313,202 1,278,104
Capital contributions payable 50,000 50,000
Note Payable (Note E) 3,725,322 3,793,055
Total Liabilities 5,096,524 5,128,159
Partners' Capital (Deficit) (Note B) (3,967,099) (3,629,696)
Total Liabilities and
Partners' Capital (Deficit) $1,129,425 $1,498,463
See Notes to Financial Statements.
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
Year Ended December 31,
1998 1997 1996
Revenue and equity in
Project Partnerships' operations:
Interest $23,827 $ 20,549 $19,183
Distributions from
Project Partnership 32,183 52,702 26,763
Equity in income (loss) of
Project Partnerships 141,971 (2,695,167)
197,981 (2,621,916) 45,946
Expenses:
Asset management fee (Note D) 114,580 114,580 114,580
Interest expense 320,462 44,368
Professional fees 9,000 8,553 29,055
Amortization 21,473 6,129
Operating expenses 91,342 59,925 9,515
535,384 248,899 159,279
Net Loss $(337,403) $(2,870,815) $ (113,333)
See Notes to Financial Statements.
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
THREE YEARS ENDED DECEMBER 31, 1998
Special
Total General Limited Limited
Balances at
January 1, 1996 $(645,548) $(15,692) $(28,277) $ (601,579)
Net loss for 1996 (113,333) (1,247) (2,153) (109,933)
Balances at
December 31, 1996 (758,881) (16,939) (30,430) (711,512)
Net loss for 1997 (2,870,815) (31,579) (54,545)
(2,784,691)
Balances at
December 31, 1997 (3,629,696) (48,518) (84,975)
(3,496,203)
Net loss for 1998 (337,403) (3,741) (6,569) (327,093)
Balances at
December 31, 1998 $(3,967,099) $(52,259) $(91,544) $ (3,823,296)
See Notes to Financial Statements.
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
Cash Flows From Operating Activities:
Net loss $(337,403) $ (2,870,815) $
(113,333)
Adjustments to reconcile net loss to
net cash from operating activities:
Equity in (income)/loss
of Project Partnership (141,971) 2,695,167
Distributions from zero-basis
Project Partnerships (32,183) (52,702) (26,763)
Amortization 21,473 6,129
Change in assets and liabilities:
Decrease (increase) in advances to
Project Partnerships 13,463 31,061 (12,125)
(Decrease)/increase in note payable (67,733) 44,368
Increase/(decrease) in accounts payable 1,000 (7,000)
(200)
Increase in payable to affiliates 35,098 133,321 114,580
Net Cash From Operating Activities (529,729) (5,127) (31,712)
Cash Flows From Investing Activities:
Distributions from all Project Partnerships 489,438 129,620
26,763
Net (Decrease) Increase In Cash
and Cash Equivalents (40,291) 124,493 (4,949)
Cash and Cash Equivalents-Beginning of Year 490,764 366,271 371,220
Cash and Cash Equivalents-End of Year $ 450,473$ 490,764$ 366,271
Supplemental disclosure of noncash financing and
investing activities:
Additional investment in partnerships through
assumption of Notes Payable $3,748,687
Interest payments totalled $133,104 in 1998, $0 in 1997 and $0 in 1996.
See Notes to Financial Statements.
GULLEDGE REALTY INVESTORS II, L.P.
(A VIRGINIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Note A Summary of Significant Accounting Policies
Partnership Organization
Gulledge Realty Investors II (the Partnership) is a limited
partnership organized on December 1, 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 Florence Housing Partnership,
Colony Place Associates, Ltd., Greentree Housing Limited Partnership,
Camelot Housing Limited Partnership, Hawthorn Housing Limited
Partnership, Olympic Housing Limited Partnership, Country Oaks
Apartments Limited Partnership, Pine West Ltd., and Rancho Vista
Associates. Except for Camelot Housing (see Note E), each of the
Project Partnerships is an operating real estate project which
receives mortgage interest and/or rental assistance from the United
States Department of Housing and Urban Development (HUD) or Farmer's
Home Administration. The Partnership commenced operations on March 1,
1984.
The financial statements include only those assets, liabilities, and
results of operations which relate to the business of Gulledge Realty
Investors II and do not include any assets, liabilities, or operating
results attributable to the partners' individual activities.
In November 1988, the General Partners (Eugene A. Gulledge, Keith A.
Gulledge and The Gulledge Corporation) filed for bankruptcy. The
Limited Partnership Agreement allows for the replacement of a General
Partner in such circumstances subject to Limited Partner approval. In
November 1990, by approval of a majority vote of the limited
partnership units, Gull-AGE Properties, Inc. (GAP) replaced Eugene A.
Gulledge, Keith A. Gulledge and The Gulledge Corporation as the sole
General Partner. GAP is not affiliated with the Gulledges or their
affiliates. GAP had been performing certain administrative duties on
behalf of the Gulledges since the bankruptcy filing. As General
Partner, GAP will continue the operation of the Partnership in
accordance with the Limited Partnership Agreement.
Cash and Cash Equivalents
The Partnership considers interest bearing money market account
balances to be cash equivalents.
Investment 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 Partnership's share of the Project
Partnerships' income or loss. The Partnership is under no obligation
to contribute additional capital, or to lend monies necessary to fund
cash flow deficiencies of the Project Partnerships, because the
Partnership 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.
Any distributions received from the Project Partnerships subsequent to
reducing the investment account to zero, will be recognized as income
in the year received.
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 Partnership are allocated to the partners in accordance
with the partnership agreement.
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.
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 Partners' Capital (Deficit)
Profits and losses of the Partnership are allocated pro-rata to the
partners in accordance with their interest as follows:
General partner (131 units) 1.1%
Special limited partners (225 units) 1.9
Investor limited partners (11,458 units) 97.0
100.0%
Upon dissolution and termination of the Partnership, the net proceeds
resulting from the sale of Partnership assets are first used to pay
all debts and liabilities of the Partnership; next, to repay capital
contributions of the partners less any prior cash distributions; then,
to the payment of a cumulative disposition fee to the General Partner,
with any remaining funds allocated as follows:
General partner 4.0%
Special limited partners 6.0
Investor limited partners 90.0
100.0%
In the event that net operating revenues, as defined, are realized
during any fiscal year, an annual noncumulative program management fee
of up to $59,250 is payable to the managing General Partner. The fee
represents compensation for maintaining the Partnership's books,
records and accounts per the Partnership agreement. The amount of the
program management fee plus the asset management fee accrued each year
shall not exceed .5% of invested assets, as defined in the
Partnership's Limited Partnership Agreement.
Upon the distribution of capital proceeds by the Partnership, the
General Partner is authorized to receive a cumulative disposition fee
equal to 1% of the capital proceeds generated through the sale of
Project Partnerships to the extent such proceeds exceed priority
payments as defined in the Partnership Agreement.
Note C Reconciliation of Operations: Financial Statement Versus Income Tax
Return
The financial statement loss is reconciled to income tax (loss) gain
for the years ended December 31, 1998, 1997 and 1996 as follows:
1998 1997 1996
Net Loss per
financial statements $(337,403) $(2,870,815) $ (113,333)
Add: equity in loss/(gain) of Project
Partnership for financial statement
purposes in excess of equity in loss/(gain)
of Project Partnership for tax return
purposes (141,971) 2,695,167
Less: equity in (losses) gains of
Project Partnerships for tax
return purposes in excess of
equity in (losses) gains of
Project Partnerships for financial
statement purposes (1,199,159) (1,531,938)
1,121,625
Distributions received from zero-basis
Project Partnership (32,183) (52,702) (26,763)
Net (Loss) Gain per
income tax return $(1,710,716) $(1,760,288) $ 981,529
The Net Gain per income tax return in 1996 is a result of the foreclosure
against Camelot Housing (see Note E).
Note D Payable To Affiliates
In accordance with the Partnership Agreement, the Partnership is
required to pay to the General Partner an annual asset management fee
of $114,580. Amounts due in accordance with this agreement are
included in payable to affiliates in the accompanying balance sheets.
Note E Project Partnerships
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 Partnership and the noteholder agreed to have the
promissory note assumed by the Partnership. The promissory note is
now collateralized by the partners' interests in the Hawthorn project
partnership. Principal and interest are only payable from surplus
cash received by the Partnership from the Hawthorn project
partnership. The Partnership is not required to make any payments
from surplus cash it receives from any other project. The promissory
note plus accrued interest totaled $3,725,000 at December 31, 1998,
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 Partnership 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
Partnership's share of any additional income or loss from Hawthorn.
This investment account will also be reduced whenever the Partnership
receives a distribution from Hawthorn. Therefore, until the
investment account is reduced to zero, the Partnership will not
recognize distribution income in future years from the Hawthorn
project partnership.
None of the Project Partnerships are experiencing significant cash
flow deficiencies after adding back non-cash items such as
depreciation, amortization and accrued interest on promissory notes
not currently payable to the operating losses of the Project
Partnerships.
Note E Project Partnerships (continued)
Camelot Housing defaulted on its mortgage in June 1995. The mortgage
was assigned to HUD and HUD initiated foreclosure proceedings. The
proceedings concluded during 1996. The effect on the Partnership's
financial statements was negligible because the investment in Camelot
was reduced to zero several years ago and Camelot was not expected to
pay distributions in the foreseeable future. A foreclosure on a
Project Partnership causes a gain for tax purposes primarily due to
the recapture of accelerated depreciation taken in prior years. The
tax gain caused by this foreclosure was offset by losses from other
Project Partnerships and suspended losses from prior years.
The Partnership's investment in the following Project Partnerships
(the "Projects") serves as collateral in connection with promissory
notes issued by the Projects as described below:
Project Partnership Promissory Note
(Debtor) Including Accrued Interest Payment Terms
Colony Place $2,035,000 9% interest due annually.
Principal plus unpaid interest
due on November 30, 1999
Florence Housing $4,868,000 13% interest due annually.
Principal plus unpaid interest
due on December 31, 1999
Greentree Housing $1,599,000 11% interest due annually.
Principal plus unpaid interest
due on December 31, 1999
Olympic Housing $7,502,000 10% interest due annually.
Principal plus unpaid interest
due on December 31, 2000
Note E Project Partnerships (continued)
The ability of the Projects to refinance or renegotiate these
Promissory Notes when due is uncertain at this time. Factors that may
affect the Projects' ability to refinance or renegotiate include
changes in tax laws, changes in interest rates, and the operations of
the Projects.
The Partnership could lose its ownership interest in the Project
Partnerships if it is unsuccessful in renegotiating these notes.
Though the Partnership's investment in these Project Partnerships is
zero, the impact on future operations could be significant as
distributions from Project Partnerships is the primary source of
revenue for the Partnership.
Colony Place's promissory note was originally due December 31, 1995,
but was extended until June 30, 1997, while a sale of the project was
being pursued under the Low Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). LIHPRHA was a program administered by
the Department of Housing and Urban Development ("HUD").
Unfortunately, funds are no longer available under the LIHPRHA
program. The promissory note 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.
Florence Housing's promissory note was originally due
December 31, 1995, but was extended to December 31, 1999, with
additional one year extensions available. Olympic Housing's
promissory note was originally due December 31, 1995, but was extended
to December 31, 2000. In addition, the interest rate on Olympic's
note was reduced from 12% to 10% and payment terms were changed to
allow more of the project's available surplus cash to be paid to the
noteholder as partial payment of the annual interest due on the
promissory note.
Note F Condensed Financial Data of Project Partnerships
The following is a summary of the condensed financial position and
results of operations of the Project Partnerships which have been
extracted from audited financial statements and are not covered by the
accompanying independent auditors' report (dollars in thousands):
Note F Condensed Financial Data of Project Partnerships (continued)
Colony Place Associates, Ltd.
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $1,158 $1,224 $1,291
Other Assets 128 124 95
$1,286 $1,348 $1,386
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $2,735 $2,638 $2,515
Other Liabilities 101 80 71
Partners' Capital (Deficit) (1,550) (1,370) (1,200)
$1,286 $1,348 $1,386
Condensed Statements of Operations
For The Year Ended
1998 1997 1996
Revenues:
Rental Income $ 336 $ 341 $ 347
Interest Income 3 1 1
Other Income 8 9 10
Total Revenue 347 351 358
Expenses:
Operating Expenses $ 297 $ 290 307
Financial Expenses 164 157 148
Depreciation 66 66 66
Total Expenses 527 513 521
Net Loss $(180) $(162) $(163)
Note F Condensed Financial Data of Project Partnerships (continued)
Country Oaks Apartments, Ltd.
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $ 242 $ 313 $ 378
Other Assets 195 185 184
$ 437 $ 498 $ 562
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $1,029 $1033 $1,038
Other Liabilities 59 59 58
Partners' Capital (Deficit) (651) (594) (534)
$ 437 $ 498 $ 562
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $ 156 $ 154 $ 157
Interest Income 4 7 4
Other Income 7 7 6
Total Revenue 167 168 167
Expenses:
Operating Expenses 59 64 55
Financial Expenses 88 88 88
Depreciation 73 72 71
Total Expenses 220 224 214
Net Loss $ (53) $(56) $ (47)
Note F Condensed Financial Data of Project Partnerships (continued)
Florence Housing Associates
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $3,277 $3,330 $3,465
Other Assets 703 789 849
$3,980 $4,119 $4,314
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $7,117 $7,087 $6,944
Other Liabilities 164 191 179
Partners' Capital (Deficit) (3,301) (3,159) (2,809)
$3,980 $4,119 $4,314
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $1,021 $ 972 $ 855
Interest Income 32 37 39
Other Income 16 17 12
Total Revenue 1,069 1,026 906
Expenses:
Operating Expenses 812 970 840
Financial Expenses 245 251 257
Depreciation 147 143 143
Total Expenses 1,204 1,364 1,240
Net Loss $(135) $(338) $(334)
Note F Condensed Financial Data of Project Partnerships (continued)
Greentree Housing, Ltd.
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $1,455 $1,504 $1,554
Other Assets 178 175 127
$1,633 $1,679 $1,681
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $2,604 $2,529 $2,423
Other Liabilities 78 79 35
Partners' Capital (Deficit) (1,049) (929) (777)
$1,633 $1,679 $1,681
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $ 401 $ 393 $ 389
Interest Income 3 1 1
Other Income 13 14 40
Total Revenue 417 408 430
Expenses:
Operating Expenses 323 322 341
Financial Expenses 164 160 140
Depreciation 50 50 50
Total Expenses 537 532 531
Net Loss $(120) $(124) $(101)
Note F Condensed Financial Data of Project Partnerships (continued)
Hawthorn Housing Limited Partnership
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $4,224 $4,473 $4,716
Other Assets 1,565 1,682 1,450
$5,789 $6,155 $6,166
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $4,860 $4,900 $8,388
Other Liabilities 260 269 181
Partners' Capital (Deficit) 669 986 (2,403)
$5,789 $6,155 $6,166
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $1,458 $1,439 $1,516
Interest Income 30 71 63
Other Income 30 35 16
Total Revenue 1,518 1,545 1,595
Expenses:
Operating Expenses 758 759 876
Financial Expenses 354 818 772
Depreciation 263 269 289
Total Expenses 1,375 1,846 1,937
Net Income/(Loss) $ 143 $(301) $(342)
Note F Condensed Financial Data of Project Partnerships (continued)
Olympic Housing Limited Partnership
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $7,612 $7,823 $7,762
Other Assets 773 834 1,042
$8,385 $8,657 $8,804
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $12,318 $11,476 $11,018
Other Liabilities 908 1,291 1,346
Partners' Capital (Deficit) (4,841) (4,110) (3,560)
$8,385 $8,657 $8,804
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $2,447 $2,421 $2,347
Interest Income 13 15 12
Other Income 38 43 36
Total Revenue 2,498 2,479 2,395
Expenses:
Operating Expenses 1,930 1,723 1,756
Financial Expenses 941 950 835
Depreciation 301 300 296
Total Expenses 3,172 2,973 2,887
Net Loss $(674) $(494) $(492)
Note F Condensed Financial Data of Project Partnerships (continued)
Pine West, Ltd.
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $1,021 $1,047 $1,073
Other Assets 138 122 120
$1,159 $1,169 $1,193
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $1,256 $1,260 $1,263
Other Liabilities 35 38 36
Partners' Capital (Deficit) (132) (129) (106)
$1,159 $1,169 $1,193
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $ 160 $ 148 $ 138
Interest Income 4 2 2
Other Income 6 7 8
Total Revenue 170 157 148
Expenses:
Operating Expenses 107 116 113
Financial Expenses 35 33 31
Depreciation 26 26 30
Total Expenses 168 175 174
Net Income/(Loss) $ 2 $(18) $ (26)
Note F Condensed Financial Data of Project Partnerships (continued)
Rancho Vista Associates
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $ 665 $ 699 $ 725
Other Assets 65 50 45
$ 730 $ 749 $ 770
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $ 908 $ 910 $ 912
Other Liabilities 17 10 10
Partners' Capital (Deficit) (195) (171) (152)
$ 730 $ 749 $ 770
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $ 164 $ 155 $ 158
Interest Income 1 1 1
Other Income 2 2 4
Total Revenue 167 158 163
Expenses:
Operating Expenses 76 61 65
Financial Expenses 82 83 84
Depreciation 33 33 33
Total Expenses 191 177 182
Net Loss $ (24) $(19) $ (19)
Note F Condensed Financial Data of Project Partnerships (continued)
Combined Total of Project Partnerships
Condensed Balance Sheets
December 31,
1998 1997 1996
Assets:
Rental Property (Net) $19,654 $20,413 $20,964
Other Assets 3,745 3,961 3,912
$23,399 $24,374 $24,876
Liabilities and Partners' Capital (Deficit):
Mortgage Notes Payable $32,827 $31,833 $34,501
Other Liabilities 1,622 2,017 1,916
Partners' Capital (Deficit) (11,050) (9,476) (11,541)
$23,399 $24,374 $24,876
Condensed Statements of Operations
For The Year Ended December 31,
1998 1997 1996
Revenues:
Rental Income $6,143 $6,023 $ 5,907
Interest Income 90 135 123
Other Income 120 134 132
Total Revenue 6,353 6,292 6,162
Expenses:
Operating Expenses 4,362 4,305 4,353
Financial Expenses 2,073 2,540 2,355
Depreciation 959 959 978
Total Expenses 7,394 7,804 7,686
Net Loss $(1,041) $(1,512) $ (1,524)
Note G Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information about
financial instruments, when it is practicable to estimate fair value.
The carrying amounts of assets and liabilities reported on the
statements of financial position that require such disclosure
approximate fair value.
EXHIBIT 21
FINANCIAL STATEMENTS
OF
UNCONSOLIDATED LIMITED PARTNERSHIPS
MEETING REQUIREMENTS OF SIGNIFICANT
SUBSIDIARY/INVESTEE
HAWTHORN HOUSING
LIMITED PARTNERSHIP
071-11069
FINANCIAL STATEMENTS
DECEMBER 31, 1998
RBG&CO.
S2300-020 INDEPENDENT AUDITORS' REPORT
To The Partners
Hawthorn Housing Limited Partnership
We have audited the accompanying balance sheet of Hawthorn Housing Limited
Partnership, Project No. 071-11069, a limited partnership, as of December 31,
1998 and the related statements of profit and loss, partners' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hawthorn Housing Limited
Partnership as of December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information (shown on Pages 12 through 14) is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.
In accordance with Government Auditing Standards, we have also issued a report
dated January 29, 1999 on our consideration of Hawthorn Housing Limited
Partnership's internal control structure and a report dated January 29, 1999 on
its compliance with laws and regulations.
/s/Rubin, Brown, Gornstein & Co. LLP
January 29, 1999
Rubin, Brown, Gornstein & Co. LLP 230 South Bemiston Avenue
Certified Public Accountants/Business Consultants St. Louis, MO 63105
314/727-8150 TELwww.rbgco.com 314/727-9195 FAX
BALANCE SHEET
PAGE 1 OF 2
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
1120 Cash - operations $403,449
1125 Cash - entity 1,722
1130 Tenant accounts receivable 2,188
1200 Miscellaneous prepaid expenses 15,690
1100T TOTAL CURRENT ASSETS $423,049
DEPOSITS HELD IN TRUST - FUNDED
1191 Tenant deposits held in trust 64,311
RESTRICTED DEPOSITS AND FUNDED RESERVES
1310 Escrow deposits 122,178
1320 Replacement reserve 462,650
1300T TOTAL DEPOSITS 584,828
FIXED ASSETS (NOTE 2)
1410 Land 620,000
1420 Buildings 6,549,236
1440 Building equipment - portable 479,089
1400T TOTAL FIXED ASSETS 7,648,325
1495 Less: Accumulated depreciation 3,423,877
1400N NET FIXED ASSETS 4,224,448
OTHER ASSETS
1520 Intangible assets 492,108
1000T TOTAL ASSETS $5,788,744
See the accompanying notes to financial statements
BALANCE SHEET
PAGE 2 OF 2
DECEMBER 31, 1998
LIABILITIES
CURRENT LIABILITIES
2100 Accounts payable - operations $24,342
2113 Accounts payable - entity 3,675
2120 Accrued wages payable 2,577
2123 Accrued management fee payable 7,110
2150 Accrued property taxes 148,771
2170 Mortgage payable -
first mortgage (short-term) 39,513
2174 Other loans -
advances from general partner 1,459
2210 Prepaid revenue 14,481
2122T TOTAL CURRENT LIABILITIES $241,928
DEPOSIT AND PREPAYMENT LIABILITIES
2191 Tenant deposits
held in trust (contra) 57,410
LONG-TERM LIABILITIES
2320 Mortgage payable -
first mortgage (Note 2) 4,820,297
2000T TOTAL LIABILITIES 5,119,635
PARTNERS' EQUITY
3130 Partners' equity 669,109
2033T TOTAL LIABILITIES
AND PARTNERS' EQUITY $5,788,744
See the accompanying notes to financial statements
STATEMENT OF PROFIT AND LOSS
FOR THE YEAR ENDED DECEMBER 31, 1998
PART 1 DESCRIPTION OF ACCOUNT ACCT. AMOUNT
NO.
Rent Revenue - Gross 5120 $1,129,
Potential 647
Tenant Assistance Payments 5121 $461,29
4
Rent Revenue - Stores and 5140 $
Commercial
Garage and Parking Spaces 5170 $
RENTAL Flexible Subsidy Revenue 5180 $
REVENUE Miscellaneous Rent Revenue 5190 $
5100 Excess Rent 5191 $
Rent Revenue/Insurance 5192 $
Special Claims Revenue 5193 $
Retained Excess Income 5194 $
TOTAL RENT REVENUE 5100T $1,590
,941
Apartments 5220 $(46,21
7)
Stores and Commercial 5240 $
VACANCI Rental Concessions 5250 $(87,15
ES 5)
5200 Garage and Parking Spaces 5270 $
Miscellaneous 5290 $
TOTAL VACANCIES 5200T $(133,
372)
NET RENTAL REVENUE Rent 5152N $1,457
Revenue Less Vacancies ,569
5300 Nursing Homes/ Assisted
Living/ Board and Care/
Other
Elderly Care/ Coop/ and 5300
Other Revenues
Financial Revenue - Project 5410 $4,295
Operations
FINANCI Revenue from Investments - 5430 $
AL Residual Receipts
REVENUE Revenue from Investments - 5440 $25,810
Replacement Reserve
5400 Revenue from Investments - 5490 $
Miscellaneous
TOTAL FINANCIAL REVENUE 5400T $30,105
Laundry and Vending Revenue 5910 $5,470
OTHER Tenant Charges 5920 $24,850
REVENUE Interest Reduction Payments 5945 $
Revenue
5900 Miscellaneous Revenue 5990 $ 59
TOTAL OTHER REVENUE 5900T $30,379
TOTAL REVENUE 5000T $1,518
,053
Conventions and Meetings 6203 $
Management Consultants 6204 $
Advertising and Marketing 6210 $13,574
Other Renting Expenses 6250 $
Office Salaries 6310 $22,921
ADMINIS Office Expenses 6311 $20,270
TRATIVE
EXPENSE Office or Model Apartment 6312 $8,664
S Rent
6200/63 Management Fee 6320 $78,032
00
Manager or Superintendent 6330 $32,919
Salaries
Administrative Rent Free 6331 $
Unit
Legal Expenses - Project 6340 $1,225
Audit Expense 6350 $13,125
Bookkeeping Fees/Accounting 6351 $
Services
Bad Debts 6370 $10,842
Miscellaneous Administrative 6390 $1,483
Expenses
TOTAL ADMINISTRATIVE 6263T $203,0
EXPENSES 55
Fuel Oil/Coal 6420 $
UTILITI Electricity 6450 $28,187
ES
EXPENSE Water 6451 $31,238
6400 Gas 6452 $53,678
Sewer 6453 $18,935
TOTAL UTILITIES EXPENSE 6400T $132,0
38
TOTAL EXPENSES (CARRY $335,0
FORWARD TO PAGE 2) 93
See the accompanying notes to financial statements
Page 1 of 2
Project Name: Hawthorn Housing Limited Partnership
BALANCE CARRIED FORWARD $335,0
93
DESCRIPTION OF ACCOUNT ACCT. AMOUNT
NO.
Payroll 6510 $94,1
09
Supplies 6515 $36,8
90
Contracts 6520 $72,2
34
OPERAT Operating and Maintenance Rent 6521 $
ING Free Unit
MAINTE Garbage and Trash Removal 6525 $8,465
NANCE
EXPENS Security Payroll/Contract 6530 $
ES
6500 Security Rent Free Unit 6531 $
Heating/Cooling Repairs and 6546 $4,720
Maintenance
Snow Removal 6548 $6,667
Vehicle and Maintenance Equipment 6570 $
Operation and Repairs
Miscellaneous Operating and 6590 $1,276
Maintenance Expenses
TOTAL OPERATING AND MAINTENANCE 6500T $ 224,361
EXPENSES
Real Estate Taxes 6710 $148,
106
Payroll Taxes (Project's Share) 6711 $14,6
13
TAXES Property and Liability Insurance 6720 $23,1
(Hazard) 41
AND Fidelity Bond Insurance 6721 $148
INSURA Workmen's Compensation 6722 $2,715
NCE
6700 Health Insurance and Other 6723 $7,033
Employee Benefits
Miscellaneous Taxes, Licenses, 6790 $3,105
Permits and Insurance
TOTAL TAXES AND INSURANCE 6700T $ 198,861
Interest on Mortgage Payable 6820 $322,
090
FINANC Interest on Notes Payable (Long- 6830 $
IAL Term)
EXPENS Interest on Notes Payable (Short- 6840 $
ES Term)
6800 Mortgage Insurance Premium/Service 6850 $24,5
Charge 00
Miscellaneous Financial Expenses 6890 $1,026
TOTAL FINANCIAL EXPENSES $ 347,616
6900 Nursing Homes/ Assisted Living/
Board and Care/ Other
Elderly Care Expenses 6900 $
TOTAL COST OF OPERATIONS BEFORE 6000T $ 1,105,931
DEPRECIATION AND AMORTIZATION
PROFIT (LOSS) BEFORE DEPRECIATION 5060T $ 412,122
AND AMORTIZATION
Depreciation Expense 6600 $248,
166
Amortization Expense 6610 $14,4
66
TOTAL DEPRECIATION AND $ 262,632
AMORTIZATION
OPERATING PROFIT OR (LOSS) 5060N $ 149,490
Officer's Salaries 7110 $
CORPOR Legal Expenses 7120 $3,675
ATE OR
MORTGA Federal, State, and Other Income 7130 $
GOR Taxes
ENTITY Interest Income 7140 $(37)
EXPENS Interest on Notes Payable 7141 $
ES
7100 Interest on Mortgage Payable 7142 $
Other Expenses Amortization of 7190 $2,447
organization costs
NET ENTITY EXPENSES 7100T $ 6,085
PROFIT OR LOSS (NET INCOME OR 3250 $ 143,405
LOSS)
MISCELLANEOUS OR OTHER INCOME AND EXPENSE SUB-ACCOUNT GROUPS.
If miscellaneous or other income and/or expense sub-accounts
(5190, 5290, 5490, 5990, 6390, 6590, 6790, 6890 and 7190) exceed
the Account Groupings by 10% or more, attach a separate schedule
describing or explaining the miscellaneous income or expense.
PART II
1. Total mortgage principal payments required during $36,99
the audit year (12 monthly payments). This applies to 6
all direct loans and HUD-held and fully insured
mortgages. Any HUD approved second mortgages should be
included in the figures. (S1000-010)
2. Total of 12 monthly deposits in the audit year into $18,60
the Replacement Reserve account, as required by the 0
Regulatory Agreement even if payments may be temporarily
suspended or reduced. (Account S1000-020)
3. Replacement Reserve or Residual Receipts releases $
which are included as expense items on this Profit and
Loss Statement. (Account S1000-030)
4. Project Improvement Reserve Releases under the $ N/A
Flexible Subsidy Program that are included as expense
items on this Profit and Loss Statement. (Account S1000-
040)
See the accompanying notes to financial statements
Page 2 of 2
STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
S1100-010 BEGINNING OF YEAR $986,467
3250 NET INCOME 143,405
S1200-420 DISTRIBUTIONS (460,763)
3130 END OF YEAR $669,109
STATEMENT OF CASH FLOWS
PAGE 1 OF 2
FOR THE YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES ACCOUNT AMOUNT
Receipts:
S1200-010 Rental receipts $1,462,231
S1200-020 Interest receipts 30,105
S1200-030 Other operating receipts 30,379
S1200-040 Total Receipts 1,522,715
Disbursements:
S1200-050 Administrative 123,998
S1200-070 Management fee 70,922
S1200-090 Utilities 132,993
S1200-110 Operating and maintenance 216,670
S1200-120 Real estate taxes 144,439
S1200-140 Property insurance 33,299
S1200-150 Miscellaneous taxes and insurance 14,613
S1200-160 Tenant security deposits (10,928)
S1200-180 Interest on mortgage 349,039
S1200-230 Total Disbursements 1,075,045
S1200-240 NET CASH PROVIDED BY OPERATING ACTIVITIES 447,670
CASH FLOWS FROM INVESTING ACTIVITIES
S1200-245 Net deposits to the
mortgage escrow account (43,726)
S1200-250 Net deposits to the
reserve for replacement account (20,150)
S1200-345 Entity investing activities:
S1200-346 Decrease in IHDA receivable S1200-347 26,692
S1200-346 Interest income from entity cash S1200-347 37
S1200-350 NET CASH USED IN INVESTING ACTIVITIES (37,147)
CASH FLOWS FROM FINANCING ACTIVITIES
S1200-360 Mortgage principal payments (40,190)
S1200-420 Distributions (460,763)
S1200-455 Entity financing activities:
S1200-456 Decrease in distributions payable S1200-457 (1,111)
S1200-460 NET CASH PROVIDED BY (USED IN)
FINANCIAL ACTIVITIES (502,064)
S1200-470 NET DECREASE IN CASH
AND CASH EQUIVALENTS (91,541)
S1200-480 BEGINNING OF PERIOD CASH
AND CASH EQUIVALENTS 496,712
S1200T END OF PERIOD CASH
AND CASH EQUIVALENTS $405,171
See the accompanying notes to financial statements
STATEMENT OF CASH FLOWS
PAGE 2 OF 2
FOR THE YEAR ENDED DECEMBER 31, 1998
RECONCILIATION OF NET INCOME TO NET CASH PROVIDEDACCOUNT AMOUNT
BY OPERATING ACTIVITIES
3250 Net income $143,405
Adjustments to reconcile net income to net cash
provided by operating activities:
6600 Depreciation 248,166
6610 Amortization 16,913
Change in assets and liabilities:
S1200-490 Increase in tenant accounts
receivable (2,071)
S1200-520 Decrease in prepaid expenses
26,388
S1200-530 Decrease in cash restricted for
tenant
security deposits 22,530
S1200-535 Increase in entity asset
accounts
S1200-536 Increase in cash - entity S1200-537 (37)
S1200-540 Decrease in accounts payable
(7,456)
S1200-580 Decrease in tenant security
deposits held in trust (10,576)
S1200-590 Increase in prepaid revenue
6,733
S1200-605 Increase (decrease) in entity
liability accounts
S1200-606 Increase in accounts payable -
entity S1200-607 3,675
S1200-610 NET CASH PROVIDED BY OPERATING ACTIVITIES $447,670
See the accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION (S3100-010)
The Partnership was organized as a limited partnership during June 1984 for
the purpose of constructing and operating a rental housing project pursuant
to a regulatory agreement with Illinois Housing Development Authority
(IHDA). In November 1997, the Project was refinanced under Section 223(f)
of the National Housing Act. The project consists of 176 units located in
Woodridge, Illinois, operating under the name of Hawthorn Ridge Apartments.
The project is regulated by the U.S. Department of Housing and Urban
Development (HUD) and the Illinois Housing Development Authority (IHDA), as
administrator of the housing assistance contract, as to rent charges and
operating methods.
The regulatory agreement with HUD limits annual distributions of net
operating receipts to "surplus cash". At December 31, 1998, there was
"surplus cash" in the amount of $361,840 available for distribution.
SIGNIFICANT ACCOUNTING POLICIES (S3100-040)
The following significant accounting policies have been followed in the
preparation of the financial statements:
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 reported period. Actual results could differ from those
estimates.
The Partnership considers all temporary cash investments as cash
equivalents. These temporary cash investments are securities held for
cash management purposes, having maturities of three months or less.
The Partnership deposits its cash in financial institutions. At times,
deposits exceed federally insured limits. The Partnership has not
experienced losses in such accounts.
HAWTHORN HOUSING LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
The Partnership provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in collection of all
receivables. The estimated losses are based on a review of the current
status of the existing receivables. No allowance for doubtful accounts
was provided for at December 31, 1998 as none was deemed necessary by
management.
Rental property is carried as cost. Depreciation is provided using
straight-line and accelerated methods over estimated useful lives ranging
from five to forty years.
The replacement reserve can only be used for improvements to buildings
upon prior approval of HUD.
Deferred loan costs of $506,303 consist of fees for obtaining the HUD
insured mortgage loan and are being amortized using the straight-line
method over the life of the mortgage loan. Accumulated amortization
amounted to $16,229 at December 31, 1998.
Organization costs of $118,800 are recorded at cost and are deferred and
amortized over a period of 15 years. Accumulated amortization amounted
to $116,766 at December 31, 1998.
Income or loss of the Partnership is allocated .01% to the general
partner and 99.99% to the limited partners. No income tax provision has
been included in the financial statements since income or loss of the
Partnership is required to be reported by the partners on their
respective income tax returns.
2. MORTGAGE PAYABLE (S3100-050)
The mortgage payable is insured by the Department of Housing and Urban
Development and collateralized by a deed of trust on the rental property.
The mortgage is payable to P/R Mortgage & Investment Corp. and bears
interest at the rate of 6.6% per annum. Principal and interest are payable
by the Partnership in monthly installments of $29,940 through December 2032.
Under agreements with the mortgage lender and HUD, the Partnership is
required to make monthly escrow deposits for property taxes, insurance,
mortgage insurance and replacement of project assets.
The scheduled maturities of the mortgage payable at December 31, 1998 are as
follows: (S3100-x1x)
YEAR AMOUNT
1999 S3100-060 $ 39,513
2000 S3100-070 42,201
2001 S3100-080 45,072
2002 S3100-090 48,138
2003 S3100-100 51,413
Thereafter S3100-110 4,633,473
$4,859,810
3. COMMITMENTS (S3100-X3X) (S3100-240)
The Partnership has entered into a regulatory agreement with HUD which
regulates, among other things, the rents which may be charged for apartment
units in the project, prohibits the sale of the project without HUD consent,
limits the annual distribution of cash flow to the partners and otherwise
regulates the relationship between the Partnership and HUD.
The Department of Housing and Urban Development, through a program
administered by the Illinois Housing Development Authority, has contracted
with the Partnership, effective December 1976, under Section 8 of the
National Housing Act of 1968, to make housing assistance payments to the
project on behalf of qualified tenants. The term of the agreement is five
years with renewal options for terms not to exceed forty years.
4. MANAGEMENT AGREEMENT (S3100-230)
The project is managed by Alan Fox Real Estate Investment and Management
Co., Inc. The management contract provides for a management fee of 5.4% of
gross collections. Alan Fox Real Estate Investment and Management Co., Inc.
has subcontracted the daily management of the project to Floyd M. Phillips &
Co., Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 450,473
<SECURITIES> 0
<RECEIVABLES> 17,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 468,107
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,129,425
<CURRENT-LIABILITIES> 1,371,202
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (3,967,099)
<TOTAL-LIABILITY-AND-EQUITY> 1,129,425
<SALES> 0
<TOTAL-REVENUES> 197,981
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 214,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,462
<INCOME-PRETAX> (337,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (337,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (337,403)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
