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 March 31, 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
PAGE
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)
March 31, December 31,
ASSETS 1999 1998
Cash and cash equivalents $ 451,276 $ 450,473
Advances to Project
Partnerships 20,950 17,634
Investment in Project
Partnership (Note B) 661,318 661,318
Total Assets $ 1,133,544 $ 1,129,425
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 10,000 $ 8,000
Payable to affiliates 1,352,847 1,313,202
Note payable (Note B) 3,802,851 3,725,322
Capital contributions payable 50,000 50,000
Total Liabilities 5,215,698 5,096,524
Partners' Capital (Deficit) (4,082,154) (3,967,099)
Total Liabilities and
Partners' Capital (Deficit) $ 1,133,544 $ 1,129,425
See Notes to Financial Statements.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
Revenue:
Interest income $ 4,119 $ 5,253
4,119 5,253
Expenses:
Asset management fee 28,645 28,645
Professional fees 2,000 2,000
Consulting fees 11,000
Interest expense (Note B) 77,529 83,190
119,174 113,835
Net loss $(115,055) $(108,582)
See Notes to Financial Statements.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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 three
months ended
March 31, 1998 (108,582) (1,194) (2,063) (105,325)
Balances at
March 31, 1998 $ (3,738,278) $ (49,712) $ (87,038) $ (3,601,528)
Balances at
January 1, 1999 $ (3,967,099) $ (52,259) $ (91,544) $ (3,823,296)
Net loss for three
months ended
March 31, 1999 (115,055) (1,266) (2,186) (111,603)
Balances at
March 31, 1999 $ (4,082,154) $ (53,525) $ (93,730) $ (3,934,899)
Number of ownership units 11,814 131 225 11,458
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
Cash Flows From Operating Activities:
Net loss $(115,055) $(108,582)
Adjustments to reconcile net loss
to net cash from operating activities:
Change in assets and liabilities:
Increase in advances
to Project Partnerships (3,316) (915)
Increase in accounts payable 2,000 2,000
Increase in payable to affiliates 39,645 29,560
Increase in interest payable 77,529 83,190
Net Cash From Operating Activities 803 5,253
Net Increase In Cash and Cash Equivalents 803 5,253
Cash and Cash Equivalents Beginning of Period 450,473 490,764
Cash and Cash Equivalents End of Period $ 451,276 $ 496,017
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 three months ended March 31,
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.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(Continued)
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
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(Continued)
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 $3,802,851 at
March 31, 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 THREE MONTHS ENDED MARCH 31, 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 increase
in net loss for the three months ended March 31, 1999 compared to the three
months ended March 31, 1998 was due to the increase in consulting fees.
Consulting fees increased compared to the same period last year, due to the fact
that they were not accrued until the third quarter of 1998.
The promissory note that was assumed from Hawthorn bears simple interest at a
rate of 9%. Principal and interest payable totaled $3,802,851 at March 31,
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.
MANAGEMENT'S FINANCIAL DISCUSSION
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(Continued)
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.
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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 March 31, 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: May 14, 1999 By:/s/Robert L. Proost
Robert L. Proost
President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 451,276
<SECURITIES> 0
<RECEIVABLES> 20,950
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 472,226
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,133,544
<CURRENT-LIABILITIES> 1,412,847
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (4,082,154)
<TOTAL-LIABILITY-AND-EQUITY> 1,133,544
<SALES> 0
<TOTAL-REVENUES> 4,119
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 41,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,529
<INCOME-PRETAX> (115,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,055)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
