<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
Commission File
For the fiscal year ended December 31, 1997 Number 0-17461
----------------- -------
SOUTHEASTERN INCOME PROPERTIES II LIMITED PARTNERSHIP
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Virginia 54-1288787
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Cambridge Center, Cambridge, Massachusetts 02142
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 234-3000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
-------------------------------------
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $3,778,000.
No market exists for the limited partnership interests of the Registrant, and,
therefore, no aggregate market value can be determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Business.
Southeastern Income Properties II Limited Partnership (the
"Registrant") was organized under the Virginia Uniform Limited Partnership Act
on September 20, 1984 for the purpose of acquiring, owning, operating, and
ultimately selling existing residential apartment complexes located primarily
in the southeastern United States. The general partner of the Registrant is
Winthrop Southeast Limited Partnership, a Delaware limited partnership ("WSLP"
or the "Managing General Partner"), whose general partner is Eight Winthrop
Properties, Inc., a Delaware corporation ("Eight Winthrop"). (See "Item 1,
Business Change in Control.")
The Registrant was initially capitalized with a deemed contribution
of $200 from the Original General Partner and a cash contribution of $100 from
SIP II Assignor Corporation, a Virginia corporation (the "Assignor Limited
Partner"). In 1988, the Registrant sold, pursuant to a Registration Statement
on Form S-11 (Registration No. 33-17659) filed with the Securities and
Exchange Commission, 50,000 assignee units of limited partnership interest
("Units") in the Registrant at a purchase price of $500 per Unit (an aggregate
of $25,000,000).
The Registrant's only business is acquiring, owning, operating and
ultimately selling residential apartment complexes. See Item 2, "Description
of Properties." The Registrant invested $16,042,088 of the original offering
proceeds (net of sales commissions and sales and organizational costs, but
including acquisition fees and expenses) in four residential apartment
properties. All four properties were acquired by the Registrant directly.
Three properties were purchased free and clear of mortgage indebtedness, while
the fourth, St. Michaels, was purchased subject to an existing mortgage loan.
See Item 2, "Description of Property" for information relating to the
foreclosure of St. Michaels by the mortgage lender.
Employees
The Registrant does not have any employees. Until March 18, 1996,
management services were performed for the Registrant at its properties by
on-site personnel all of whom were employees of Winthrop Management, an
affiliate of the Managing General Partner, which directly managed the
Registrant's properties. All payroll and associated expenses of such on-site
personnel were fully reimbursed by the Registrant to Winthrop Management.
Pursuant to a management agreement, Winthrop Management provided certain
property management services to the Registrant in addition to
<PAGE>
providing on-site management. Winthrop Management is a Massachusetts general
partnership whose Managing General partner is First Winthrop Corporation, the
parent of Eight Winthrop.
On March 18, 1996, Registrant appointed an unaffiliated management
company to assume management of its properties. (See "Item 3, Legal
Proceedings.") The provisions of the new management agreement are
substantially similar to those of the Winthrop Management Agreement. The term
of the existing Management Agreement is for one year, renewable annually.
Competition
The real estate business is highly competitive and the Registrant's
properties have active competition from similar properties in the vicinity
including, in certain instances, properties owned by affiliates of the
Registrant. Furthermore, various limited partnerships controlled by the
Managing General Partner and/or its affiliates are also engaged in business
which may be competitive with the Registrant. The Registrant is also competing
for potential buyers with respect to the ultimate sale of its properties. See
"Item 6, Management's Discussion and Analysis of Financial Condition and
Results of Operation."
Change in Control.
On July 18, 1995 Londonderry Acquisition II Limited Partnership, a
Delaware limited partnership ("Londonderry II"), an affiliate of Apollo Real
Estate Advisors, L.P. ("Apollo"), acquired, among other things, a general
partner interest in W.L. Realty, L.P. ("W.L. Realty") and a sixty four percent
(64%) limited partnership interest in W.L. Realty. WFA owns the remaining
thirty-five percent (35%) limited partnership interest.
As a result of the foregoing acquisitions, Londonderry II is the sole
general partner of W.L. Realty which is the sole general partner of Linnaeus,
which in turn was, until October 27, 1997, the sole, and currently is the
managing, general partner of WFA. As a result of the foregoing, effective July
18, 1995, Londonderry II became the controlling entity of the Managing General
Partner. In connection with the transfer of control, the officers and
directors of Eight Winthrop resigned and new officers and directors were
appointed. See "Item 9, Directors and Executive Officers of the Registrant."
3
<PAGE>
Item 2. Description of Property.
The following table sets forth the location, number of units,
acquisition date, original acquisition cost and nature of interest held for
the Registrant's residential apartment properties at December 31, 1997.
<TABLE>
<CAPTION>
No. Partnership
Of Acquisition Acquisition Nature
Property Name Location Units Date Cost of Title
- -------------- ------------------- ----- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
Hunter's Creek Charlottesville, VA 240 9/29/84 $ 7,585,054 Fee
Apts. Simple
Copper Croft Roanoke, VA 120 5/06/88 $ 3,065,019 Fee
Apts. Simple
The Greenbyre Apts. Charlotte, NC 174 3/07/89 $ 4,948,659 Fee
Simple
- --------------------------------------------------------------------------------------------------
TOTAL 534 $15,598,732
==================================================================================================
</TABLE>
The following table sets forth the mortgage balance as of
December 31, 1997, the interest rate, the amortization period, the maturity
date and the principal balance due upon maturity.
<TABLE>
<CAPTION>
12/31/97 Mortgage
Mortgage Interest Amortization Maturity Balance
Property Name Balance Rate Period Date at Maturity
- -------------- ---------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Hunter's Creek $3,956,000 9.52% 30 yrs. 3/01/00 $3,833,000
Apts.
Copper Croft - - - - -
Apts.
The Greenbryre - - - - -
Apts.
- --------------------------------------------------------------------------------------------------
TOTAL $3,956,000 $3,833,000
==================================================================================================
</TABLE>
The Mortgage loan for the St. Michaels property matured on June 1,
1997. As a result of the principal balance on the mortgage loan being in
excess of the property's value, the Partnership was unable to refinance such
loan or sell the property at a value sufficient to satisfy the loan. As a
result, the mortgage lender foreclosed on the property as of August 1, 1997.
The Partnership recognized an extraordinary gain on such foreclosure of
$757,801.
The following table sets forth the average annual occupancy rate and
per unit average monthly rental rate at the Registrant's properties for the
years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Hunter's Creek Copper Croft Greenbryre
---------------------- ---------------------- ----------------------
Average Average Average
Year Occupancy Rent/Unit Occupancy Rent/Unit Occupancy Rent/Unit
---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996 79% $528 95% $457 92% $568
1997 84% $539 95% $479 94% $586
----- -----
</TABLE>
4
<PAGE>
Set forth below is a table showing the carrying value and accumulated
depreciation and federal tax basis of each of the Registrant's properties as
of December 31, 1997.
<TABLE>
<CAPTION>
Federal
Carrying Accumulated Tax
Property Name Value Depreciation Rate Method Basis
- -------------- ---------- ------------ -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Hunter's Creek $8,988,000 $3,297,000 5-30 yrs S/L $4,083,000
Copper Croft $3,625,000 $1,150,000 5-30 yrs S/L $2,426,000
Apts.
The Greenbryre $5,899,000 $2,160,000 5-30 yrs S/L $3,665,000
Apts.
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TOTAL $18,512,000 $6,607,000 $10,174,000
==================================================================================================
</TABLE>
The following table sets forth the realty tax rate and realty taxes
paid for each Property in 1997.
Tax Taxes
Property Name Rate Paid
-------------- ----- --------
Hunter's Creek .72 $ 65,000
Apts.
Copper Croft 1.13 $ 36,000
Apts.
The Greenbryre 1.255 $ 64,000
Apts.
-------------------------------------------------------
TOTAL $165,000
=======================================================
As noted under "Item 1, Description of Business", the real estate
industry is highly competitive. All of the Properties of the Registrant are
subject to competition from other apartment complexes in the area. The
Registrant maintains property and liability insurance on it properties which
the Registrant believes to be adequate. The apartment leases for the
Registrant's properties are for a term of one year or less, and no tenant
leases 10% or more of the available rental space. Except for necessary capital
expenditures, the Registrant has no present intentions of investing any
additional capital in the properties.
5
<PAGE>
Item 3. Legal Proceedings.
Except as disclosed below, the Registrant is not a party, nor are any
of its properties subject, to any material pending legal proceedings.
National Loan Investors, L.P., Plaintiff v. Winthrop Management,
First Winthrop Corporation, Winthrop Southeast Limited Partnership,
Southeastern Income Properties, L.P., Southeastern Income Properties II, L.P.
and Insignia Management Corporation, Defendant, HI-317-1 in the Circuit Court
for the City of Richmond, Virginia.
This matter was tried without a jury in the summer of 1997, but, to
date, the court has not announced its ruling. The litigation arose out of loan
to Winthrop Southeast, L.P., in the principal amount of $1,161,000.00,
pursuant to a "Consolidated and Modified Note," dated August 8, 1991. National
Loan Investors ("NLI"), the current Noteholder, sued the named
affiliates/subsidiaries of the Company and Insignia Management Corporation for
the entire balance on the note, in addition to all accrued interest and other
damages, including punitive damages. NLI voluntarily dismissed the Partnership
from this action during the trial.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
period covered by this report.
6
<PAGE>
PART II
Item 5. Market Price for the Registrant's Common Equity and Related
Stockholder Matters.
The Registrant is a partnership and thus has no common stock. There
is currently no established public market in which the Units are traded, nor
is it anticipated that a public market will develop. Trading in the Units is
sporadic and occurs solely through private transactions.
As of March 15, 1998, there were 1,716 holders of 35,801 Units.
Distributions of $273,162 ($7.63 per Unit) were made to holders of
the Units for the year ended December 31, 1996. No distributions were made to
holders of Units during the year ended December 31, 1997. Amounts distributed
resulted entirely from cash generated from the operations of the properties
owned by the Registrant. See "Item 6, Management's Discussion and Analysis or
Plan of Operation," for information relating to the Registrant's future
distributions.
7
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
The matters discussed in this Form 10-KSB contain certain
forward-looking statements and involve risks and uncertainties (including
changing market conditions, competitive and regulatory matters, etc.) detailed
in the disclosure contained in this Form 10-KSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Registrant's business and
results of operation. Accordingly, actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those identified herein.
Liquidity and Capital Resources
The Registrant receives rental income from its properties and is
responsible for operating expenses, administrative expenses, capital
improvements and debt service payments. The Registrant's properties are leased
to tenants who are subject to leases of up to one year.
The Registrant had $1,161,000 of cash and cash equivalents at December 31,
1997. The increase of $514,000 in cash and cash equivalents at December 31,
1997 as compared to December 31, 1996 was due to $954,000 of cash provided by
operations, which was partially offset by $372,000 of cash used for capital
improvements (investing activities) and $67,000 of principal payments on the
mortgage notes (financing activities). The increase in operating activities
was due primarily to improved property operations resulting from an overall
increase in occupancy and average rental rates. All other increases
(decreases) in assets and liabilities are the result of the timing of certain
receipts and payments.
It is expected that future rental revenue and other income from the
Registrant's properties will continue to be sufficient to cover all
administrative expenses of the Registrant and all operating expenses and debt
service of the properties, as well as necessary capital expenditures. As a
result of the continued capital improvements, it is expected that cash
available for distribution will remain limited. Future distribution levels
will be reviewed on a quarterly basis.
The ability of the Registrant's properties to improve operations may
affect the liquidity of the Registrant. Inflation
8
<PAGE>
and changing economic conditions in the future could affect vacancy levels,
rental payment defaults and operating expenses of the Registrant's properties,
and thus, could affect the Registrant's revenue, net income and liquidity.
At December 31, 1997, the Registrant has $1,161,000 of unrestricted
cash reserves. The Registrant has invested, and expects to continue to invest,
such amounts in money market instruments until required for partnership
purposes. As of December 31, 1997 the Registrant had $359,000 in reserves held
by the mortgage lender, the use of which is restricted for capital
improvements to Hunters Creek Apartments. Therefore, as of December 31, 1997,
the Registrant has total reserves of $1,520,000, which is expected to be
sufficient to satisfy working capital requirements of the Registrant. The
Registrant, as required by the Registrant's Partnership Agreement, must retain
as working capital reserves an amount equal to at least 1% of capital
contributions of the Unit Holders.
The Registrant is in the process of reviewing the status of all the
properties with a view towards disposing of all its properties, depending on
property operations and market conditions. The mortgage loan on St. Michaels
matured June 1, 1997. As a result of the principal balance on the mortgage
loan being in excess of the property's value, the Partnership was unable to
refinance such loan or sell the property at a value sufficient to satisfy the
loan. As a result, the mortgage lender foreclosed on the property as of August
1, 1997. The Partnership recognized an extraordinary gain on such foreclosure
of $757,801.
The Registrant is dependent upon the Managing General Partner for
management and administrative services. The Managing General Partner has
completed an assessment and believes that its computer systems will function
properly with respect to dates in the year 2000 and thereafter (the "Year 2000
Issue"). Accordingly, it is not expected that the Registrant will incur any
material costs associated with, or be materially affected by, the Year 2000
Issue.
Results of Operations
The Registrant's net income before extraordinary items for the year
ended December 31, 1997 was $196,000 as compared to a net loss of $205,000 for
the year ended December 31, 1996. The increase in net income before
extraordinary gain was due to improved operating results at the Registrant's
three remaining properties.
Total revenues decreased to $3,778,000 for the year ended
9
<PAGE>
December 31, 1997 as compared to $4,128,000 for the year ended December 31,
1996. Rental income decreased from $3,733,000 to $3,434,000 in 1997 as result
of the loss through foreclosure of the Registrant's St. Michaels property in
August 1997. Rental revenue for the remaining properties, however, increased
by $155,000 for 1997 as compared to 1996 due to increased average occupancy
and rental rate. Similarly, other income decreased by $95,000 as a result of
the loss of St. Michaels. Other income increased by $33,000 at the
Registrant's remaining properties.
Operating expenses declined from $2,598,000 for the year ended December 31,
1996 to $2,075,000 for the year ended December 31, 1997. The St. Michaels
foreclosure accounted for $462,000 of the decline with the remaining
properties' operating expenses declining by $61,000. The decline in operating
expenses at the Registrant's remaining properties was primarily attributable
to lower repair and maintenance expense. Interest expense and depreciation
expense declined as a result of the St. Michaels foreclosure.
10
<PAGE>
Item 7. Financial Statements.
11
<PAGE>
TABLE OF CONTENTS
Southeastern Income Properties II Limited Partnership
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF PARTNERS' CAPITAL F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners and Unit Holders of
Southeastern Income Properties II Limited Partnership
We have audited the accompanying balance sheets of Southeastern Income
Properties II Limited Partnership as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital, and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Southeastern Income
Properties II Limited Partnership as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Reznick Fedder & Silverman
Bethesda, Maryland
February 20, 1998
- 2 -
<PAGE>
Southeastern Income Properties II Limited Partnership
BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Investment in rental property
Land $ 1,930,156 $ 2,664,225
Building and building improvements 14,200,144 17,990,842
Personal property 2,381,325 3,527,668
18,511,625 24,182,735
Less: accumulated depreciation 6,606,923 8,426,051
11,904,702 15,756,684
Cash and cash equivalents 1,160,850 647,080
Tenant security deposits - funded 79,220 162,055
Loan costs, net of accumulated amortization of $157,032 and
$200,346, respectively 55,593 88,389
Other assets 436,258 416,730
1,731,921 1,314,254
$ 13,636,623 $ 17,070,938
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities applicable to investment in rental property
Mortgages payable $ 3,955,975 $ 8,215,187
Other liabilities
Accounts payable 6,011 32,825
Accrued interest payable 32,400 63,955
Rents deferred credits 11,724 17,923
Tenants security deposits 80,418 100,510
Other liabilities 20,198 64,684
Total liabilities 4,106,726 8,495,084
Partners' capital
Limited partners' unit holders', 50,000 units authorized, 10,783,947 9,973,010
35,801 outstanding December 31, 1997 and 1996
Special limited partner (1,254,577) (1,388,143)
General partner 527 (9,013)
Total partners' capital 9,529,897 8,575,854
$ 13,636,623 $ 17,070,938
================ =================
</TABLE>
See notes to financial statements
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<PAGE>
Southeastern Income Properties II Limited Partnership
STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Income
Rental $ 3,434,336 $ 3,732,898
Interest income 38,871 26,676
Other income 304,959 368,125
3,778,166 4,127,699
Expenses
Leasing 167,415 219,765
General and administrative 316,623 310,757
Management fees 214,217 245,499
Utilities 311,124 402,779
Repairs and maintenance 670,016 994,029
Insurance 137,573 139,409
Taxes 257,927 285,496
Total operating expenses 2,074,895 2,597,734
Other expenses
Partnership expenses 152,762 59,474
Interest expense 532,005 755,167
Depreciation and amortization 822,262 920,795
Total expenses 3,581,924 4,333,170
Net income (loss) before extraordinary item 196,242 (205,471)
Extraordinary item - gain on foreclosure of property 757,801 -
Net income (loss) $ 954,043 $ (205,471)
Net income (loss) allocated to general partner $ 9,540 $ (2,055)
Net income (loss) allocated to limited partners' unit holders $ 810,937 $ (174,650)
Net income (loss) allocated to special limited partner $ 133,566 $ (28,766)
Net income (loss) allocated to each unit $ 22.65 $ (4.88)
Weighted average number of units outstanding - limited partners $ 35,801 $ 35,801
================= ================
</TABLE>
See notes to financial statements
- 4 -
<PAGE>
Southeastern Income Properties II Limited Partnership
STATEMENTS OF PARTNERS' CAPITAL
Year ended December 31,
<TABLE>
<CAPTION>
Special Limited Total
General limited partners' unit partners'
partner partner holders' capital
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ (6,930) $ (1,356,646) $ 10,420,822 $ 9,057,246
Net loss (2,055) (28,766) (174,650) (205,471)
Distributions including $7.65 per L/P (28) (2,731) (273,162) (275,921)
unit holders
Balance, December 31, 1996 (9,013) (1,388,143) 9,973,010 8,575,854
Net income 9,540 133,566 810,937 954,043
Balance, December 31, 1997 $ 527 $ (1,254,577) $ 10,783,947 $ 9,529,897
=========== ============== ============== ==============
</TABLE>
- 5 -
<PAGE>
Southeastern Income Properties II Limited Partnership
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 954,043 $ (205,471)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation 789,466 881,020
Amortization 32,796 39,775
Gain on foreclosure of property (757,801) -
Decrease in intangibles - 75,272
Increase in other assets (50,102) (51,943)
Decrease in accounts payable (26,814) (58,360)
Decrease in rents deferred credit (6,199) (8,996)
Increase (decrease) in tenant security deposits 62,743 (17,161)
(Decrease) increase in other liabilities (44,486) 25,893
Net cash provided by operating activities 953,646 680,029
Cash flows from investing activities
Investment in rental property (372,401) (280,768)
Net cash used in investing activities (372,401) (280,768)
Cash flows from financing activities
Distributions to partners - (275,921)
Payments on mortgages (67,475) (103,402)
Net cash used in financing activities (67,475) (379,323)
NET INCREASE IN CASH AND CASH EQUIVALENTS 513,770 19,938
Cash and cash equivalents, beginning 647,080 627,142
Cash and cash equivalents, end $ 1,160,850 $ 647,080
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 532,045 $ 755,167
============= ============
</TABLE>
Significant noncash investing and financing activities
In 1997, there was a foreclosure on the St. Michaels property as more fully
described in note G.
See notes to financial statements
- 6 -
<PAGE>
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Southeastern Income Properties II Limited Partnership (the "Partnership")
was originally formed in September 1984 for the purpose of acquiring,
operating and ultimately selling a 240-unit apartment complex now known as
Hunters Creek Apartments, near Charlottesville, Virginia.
The partnership agreement (the "Agreement") has been amended several
times. Among the amendments were changes in the allocation of net loss
between the general and limited partners during the periods. The Agreement
provided for K-A Southeastern Income Properties II Limited Partnership
("K-A SIP II"), a Virginia limited partnership, to be the general partner
and for a public offering of up to 50,000 assignee units of limited
partnership interest ("Units") at $500 per unit. During 1988, the
Partnership sold 35,801 units. The Partnership used a portion of the
offering to repay all of the mortgages payable related to Hunters Creek
and to pay for a portion of the cost of acquiring Coppercroft in Roanoke,
Virginia, The Greenbyre in Charlotte, North Carolina and St. Michaels in
Newport News, Virginia (See note B).
In early 1992, the unit holders approved certain changes in (and
amendments to ) the partnership agreement, which converted K-A SIP II to a
special limited partner and admitted Winthrop Southeast Limited
Partnership ("WSLP") as the sole general partner, effective February 12,
1992. K-A SIP II retained its current capital account and adjusted capital
contribution upon its conversion to special limited partner status. Under
the revised Agreement, taxable income and loss is to be allocated 85% to
unit holders, 14% to K-A SIP II and 1% to WSLP. Federal tax regulations,
however, limit allocations of net losses due to considerations provided in
Internal Revenue Section 704 (b). As a result, the Partnership's 1996
federal tax return reflects a reallocation of losses only to the limited
partners and WSLP. The revised partnership agreement also provides for K-A
SIP II and WSLP to receive .99% and .01%, respectively, and the limited
partners to receive the remaining 99%, of distributable cash from
operations for five years from the date WSLP became the Partnership's
general partner and 88% and 12%, respectively, thereafter, until the unit
holders have received their preferred return. After the unit holders have
received a noncompounded, noncumulative annual cost return equal to 10% of
their capital contributions, as adjusted for certain capital transactions,
K-A SIP II and WSLP will receive 14% and 1%, respectively, of
distributable cash from operations for five years from the date WSLP
became the Partnership's general partner and 12.32% and 2.68%,
respectively, thereafter. Winthrop Management ("Winthrop"), an affiliate
of WSLP, served as the management agent for the properties from August 1,
1991 through March 17, 1996 and Insignia Management Group, currently
serves as the management agent for the properties effective March 18,
1996.
Upon liquidation of the Partnership, after payment of, or adequate
provision for, the debts and obligations of the Partnership, the remaining
assets of the Partnership would be distributed to all partners and unit
holders with positive capital accounts in the proportion that the positive
balance in each partner's or unit holder's capital account bore to the
aggregate of such positive balances,
- 7 -
<PAGE>
after taking into account all capital account adjustments for the
Partnership's taxable year during which such liquidation occurred.
Investment in Rental Property
The investment in rental property is recorded at cost. Depreciation is
determined by the straight-line method over the estimated useful lives of
the various assets. Estimated useful lives are 27.5 to 30 years for
buildings and building improvements and 5 to 7 years for personal
property.
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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Loan Costs
Loan costs incurred in connection with obtaining financing are being
amortized over the terms of the loans.
Replacement Reserves
Replacement reserves are comprised of partnership funds held by the
Partnership's mortgage lenders, the use of which are limited to specific
capital or other costs, are included in other assets and total $359,263 in
1997 and $288,274 in 1996.
Rental Income
Rental income is recognized as rents become due. Rental payments received
in advance are deferred until earned. All leases between the Partnership
and the tenants of the property are operating leases.
Income Taxes
No provision or benefit for income taxes has been included in these
financial statements since taxable income and loss passes through to, and
is reportable by, the partners individually.
Net Income (Loss) Allocated to Each Unit
- 8 -
<PAGE>
Net income (loss) allocable to each limited partner's unit is computed
using the weighted average number of units outstanding in each year.
Cash Equivalents
For the purposes of the statements of cash flows, the Partnership
considers all highly liquid investments consisting of a money market fund
to be cash equivalents. The carrying amount as of December 31, 1997 of
$716,577 approximates fair value because of the short maturity of this
instrument.
NOTE B - INVESTMENT IN RENTAL PROPERTY
On September 29, 1984, the Partnership acquired Hunters Creek, a 240-unit
apartment complex near Charlottesville, Virginia. In connection with this
acquisition, the Partnership assumed a first deed of trust mortgage on the
project.
On May 6, 1988, the Partnership acquired Coppercroft, a 120-unit apartment
complex in Roanoke, Virginia. The total cost of the project, $2,830,000,
was funded from a portion of the proceeds from the public offering of the
units.
On March 7, 1989, the Partnership acquired The Greenbyre, a 174-unit
apartment complex in Charlotte, North Carolina. The total cost of the
project, $4,650,000, was funded from a portion of the proceeds from the
public offering of the units.
On April 30, 1990, the Partnership acquired St. Michaels, a 260-unit
apartment complex in Newport News, Virginia. In connection with this
acquisition, the Partnership assumed the first deed of trust mortgage with
an outstanding balance of $4,543,417 and paid the remainder of the
$5,000,000 purchase price from a portion of the proceeds from the public
offering of the units. This apartment complex was foreclosed upon on July
31, 1997, as more fully described in note G to the financial statements.
NOTE C - MORTGAGE PAYABLE
During 1990, the Partnership acquired St. Michaels by assuming a mortgage
with an outstanding balance of $4,543,417. During 1992, the Partnership
renegotiated the terms of the mortgage. The mortgage with a balance of
$4,223,282 at December 31, 1996 was payable in monthly installments
totaling $37,013 of principal and interest at 8.75% per annum through June
1, 1997 with a balloon payment of approximately $4,152,088. On July 31,
1997, St. Michaels apartment complex was foreclosed upon as more fully
described in note G to the financial statements.
During 1993, the Partnership refinanced Hunters Creek by obtaining a
$4,100,000 mortgage. The mortgage balance is $3,955,975 at December 31,
1997 and $3,991,905 at December 31, 1996,
- 9 -
<PAGE>
and is payable in monthly installments totaling $34,535 of principal and
interest at 9.52% per annum through March 1, 2000, with a balloon payment
of approximately $3,832,712.
Based on the interest rates of loans with similar maturities currently
available to the Partnership, the estimated fair value of the Hunters
Creek mortgage payable approximates fair value.
Hunters Creek apartment project, as referred to above, is pledged as
collateral for its mortgage.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate collateral, plus other amounts
deposited with the lender.
Aggregate maturities of the mortgage payable for the years following
December 31, 1997 are as follows:
------------------------- -- ---------------
December 31, 1998 $ 39,504
------------------------- -- ---------------
------------------------- -- ---------------
1999 43,434
------------------------- -- ---------------
------------------------- -- ---------------
2000 3,873,037
------------------------- -- ---------------
NOTE D - RELATED-PARTY TRANSACTIONS
The Partnership has incurred management fees, accounting fees and investor
servicing fees as expenses resulting from transactions with WSLP and
Winthrop Management. The investor servicing fees for part of 1996 were
paid to First Winthrop Corporation.
1997 1996
Management fees $ - $ 63,608
Investor servicing fees 31,031 32,650
Accounting fees - 7,940
$ 31,031 $ 104,198
================== ==================
The accounting fees were included in general and administrative expenses
and the management and investor servicing fees are included in management
fees on the statements of operations.
The Partnership entered into a management agreement with Winthrop which
provided for a management fee of 5% of gross revenues through March 17,
1996. On March 18, 1996, the Partnership entered into a new management
agreement with Insignia Management Group ("Insignia"), under the same
terms as the management agreement with Winthrop. Management fees charged
to operations and paid to Insignia during 1997 and 1996 were $183,186 and
$149,241, respectively. Insignia was an unaffiliated entity until October
28, 1997, as more fully
- 10 -
<PAGE>
described in note H to the financial statements.
NOTE E - INCOME TAXES AND PARTNERS' CAPITAL
The following is the reconciliation of the income (loss) and partners'
capital for federal income tax purposes with the net income (loss) and
partners' capital for financial statement purposes.
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net income (loss) for financial statement purposes $ 954,043 $ (205,471)
Excess of tax depreciation over depreciation for book purposes (96,262) (152,831)
Excess of gain on foreclosure of assets (834,019) -
Other (16,612) (8,996)
Income (loss) for federal income tax purposes $ 7,150 $ (367,298)
================ ================
1997 1996
---------------- ----------------
Partners' capital for financial statement purposes $ 9,529,897 $ 8,575,854
Cumulative effect of excess of depreciation for federal income tax (2,640,519) (2,544,257)
purposes
Provision for investment property write-down - 823,414
Other 543 17,155
Offering costs 1,706,304 1,706,304
Adjustment due to foreclosure of property (10,605) -
Adjustment of fixed assets for federal income tax purposes in (1,478,434) (1,478,434)
connection with recapitalization of the Partnership
Section 734 step-up 2,179,679 2,179,679
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Partners' capital for federal income tax purposes $ 9,286,865 $ 9,279,715
=============== ===============
The difference between investment in rental property for tax purposes and
financial statement purposes for 1997 and 1996 is as follows:
1997 1996
Investment in rental property as reported $ 11,904,702 $ 15,756,684
Investment in rental property for tax purposes 10,228,374 14,887,980
$ 1,676,328 $ 868,704
=============== ===============
</TABLE>
NOTE F - CONCENTRATION OF CREDIT RISK
At December 31, 1997, the Partnership had bank deposits in excess of
federally insured limits totaling $351,866.
NOTE G - GAIN ON FORECLOSURE OF PROPERTY
On July 31, 1997, the Partnership executed a Foreclosure and Turnover
Agreement with John Hancock Mutual Life Insurance Company on the
Partnership's investment in St. Michaels. The outstanding principal
balance of the mortgage and unpaid interest at the date of foreclosure was
$4,191,737 and $31,555, respectively. The net book value of the rental
property at the foreclosure date were $3,434,917 and replacement reserves
of $30,574 were transferred to the lender. The total gain on the
foreclosure of the rental property recognized by the Partnership during
the year ended December 31, 1997 was $757,801. In addition, fully
amortized loan costs of $76,110 were written off at July 31, 1997.
NOTE H - OTHER INFORMATION
On October 28, 1997, Insignia Financial Group acquired 100% of the class B
stock of First Winthrop Corporation, an affiliate of the general partner.
- 12 -
<PAGE>
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
12
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant.
(a) Identification of Directors and Executive Officers.
The Registrant has no officers or directors. The Managing General
Partner manages and controls substantially all of the Registrant's affairs and
has general responsibility and ultimate authority in all matters affecting its
business. As of March 1, 1998, the names of the directors and executive
officers of Eight Winthrop, the general partner of the Managing General
Partner, and the position held by each of them, are as follows:
Has served as a
Director and/or
Officer of the Managing
Name Positions Held General Partner since
---------------- --------------- -----------------------
Michael L. Ashner Chief Executive January 1996
Officer and
Director
Edward Williams Chief Financial April 1996
Officer,
Vice President
and Treasurer
Peter Braverman Senior Vice January 1996
President
Carolyn Tiffany Vice President October 1995
and Clerk
Michael L. Ashner, age 46, has been the Chief Executive Officer of
Winthrop Financial Associates, A Limited Partnership ("WFA") since January 15,
1996. From June 1994 until January 1996, Mr. Ashner was a Director, President
and Co-chairman of National Property Investors, Inc., a real estate investment
company ("NPI"). Mr. Ashner was also a Director and executive officer of NPI
Property Management Corporation ("NPI Management") from April 1984 until
January 1996. In addition, since 1981 Mr. Ashner has been President of Exeter
Capital Corporation, a firm which has organized and administered real estate
limited partnerships.
Edward V. Williams, age 57, has been the Chief Financial Officer of
WFA since April 1996. From June 1991 through March 1996, Mr. Williams was
Controller of NPI and NPI Management. Prior to 1991, Mr. Williams held other
real estate related positions including Treasurer of Johnstown American
Companies and Senior Manager at Price Waterhouse.
13
<PAGE>
Peter Braverman, age 46, has been a Senior Vice President of WFA
since January 1996. From June 1995 until January 1996, Mr. Braverman was a
Vice President of NPI and NPI Management. From June 1991 until March 1994, Mr.
Braverman was President of the Braverman Group, a firm specializing in
management consulting for the real estate and construction industries. From
1988 to 1991, Mr. Braverman was a Vice President and Assistant Secretary of
Fischbach Corporation, a publicly traded, international real estate and
construction firm.
Carolyn Tiffany, age 31, has been employed with WFA since January
1993. From 1993 to September 1995, Ms. Tiffany was a Senior Analyst and
Associate in WFA's accounting and asset management departments. From October
1995 to present Ms. Tiffany has been a Vice President in the asset management
and investor relations departments of WFA.
One or more of the above persons are also directors or officers of a
general partner (or general partner of a general partner) of the following
limited partnerships which either have a class of securities registered
pursuant to Section 12(g) of the Securities and Exchange Act of 1934, or are
subject to the reporting requirements of Section 15(d) of such Act: Winthrop
Partners 79 Limited Partnership; Winthrop Partners 80 Limited Partnership;
Winthrop Partners 81 Limited Partnership; Winthrop Residential Associates I, A
Limited Partnership; Winthrop Residential Associates II, A Limited
Partnership; Winthrop Residential Associates III, A Limited Partnership; 1626
New York Associates Limited Partnership; 1999 Broadway Associates Limited
Partnership; Nantucket Island Associates Limited Partnership; One Financial
Place Limited Partnership; Presidential Associates I Limited Partnership;
Riverside Park Associates Limited Partnership; Springhill Lake Investors
Limited Partnership; Twelve AMH Associates Limited Partnership; Winthrop
California Investors Limited Partnership; Winthrop Growth Investors I Limited
Partnership; Winthrop Interim Partners I, A Limited Partnership; Southeastern
Income Properties II Limited Partnership; and Winthrop Miami Associates
Limited Partnership.
Except as indicated above, neither the Partnership nor the Managing
General Partner has any significant employees within the meaning of Item
401(b) of Regulation S-B. There are no family relationships among the officers
and directors of the Managing General Partner.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Registrant under Rule 16a-3(e) during the Registrant's most
recent fiscal year and Forms 5 and amendments thereto furnished to the
Registrant with respect to
14
<PAGE>
its most recent fiscal year, the Registrant is not aware of any director,
officer, beneficial owner of more than ten percent of the units of limited
partnership interest in the Registrant that failed to file on a timely basis,
as disclosed in the above Forms, reports required by section 16(a) of the
Exchange Act during the most recent fiscal year or prior fiscal years.
Item 10. Executive Compensation.
The Registrant is not required to and did not pay any compensation to
the officers or directors of Eight Winthrop. Eight Winthrop does not presently
pay any compensation to any of its officers and directors (See "Item 12,
Certain Relationships and Related Transactions").
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
(a) Security Ownership of Certain Beneficial Owners.
No person or group is known by the Registrant to be the beneficial
owner of more than 5% of the outstanding Units as of March 15, 1998. Under the
Registrant's partnership agreement, the voting rights of the Limited Partners
are limited and, in some circumstances, are subject to the prior receipt of
certain opinions of counsel or judicial decisions.
(b) Security Ownership of Management.
As of March 15, 1998, no officers, directors or partners of WFA, WSLP
or Eight Winthrop own any Units of the Registrant.
(c) Changes in Control.
As of March 15, 1998, there exists no arrangement known to the
Registrant the operation of which may at a subsequent date result in a change
in control of the Registrant, other than the following:
In connection with the withdrawal of the Original General Partner and
the substitution of WSLP as the Managing General Partner, WSLP entered into
certain loan arrangements with NLI's predecessor, including the pledge of its
general partnership interest. In the event NLI was successful in enforcing its
remedies under the security agreement, NLI may claim an interest in the
general partnership interest of the Registrant. WSLP disputes the validity of
the security interest, and would vigorously defend any action, and raise,
among other meritorious
15
<PAGE>
defenses, the fact that the transfer of the general partnership interest
requires the consent of a majority of Unit holders.
Item 12. Certain Relationships and Related Transactions.
Under the Registrant's partnership agreement, the general partners
and their affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense
reimbursements from the Registrant.
The following table sets forth the amounts of the fees, commissions
and cash distributions which the Registrant paid to or accrued for the account
of the Managing General Partner and its affiliates for the years ended
December 31, 1996, and 1997:
<TABLE>
<CAPTION>
Recipient Type of Compensation 1996 1997
- ------------------ -------------------------- ------- ----------
<S> <C> <C> <C>
WSLP Cash Distribution (1) $ 28 $ --
Winthrop Management Property Management Fee (2) 64,000 --
First Winthrop Corp. Investor Servicing Fee (3) 33,000 31,000
Winthrop Management Accounting Services Fee (4) 8,000 --
-------- ----------
TOTAL: $105,000 $ 31,000
======== ==========
</TABLE>
- -----------------
(1) Equal to .01% of cash flow distributed to all partners of the Registrant.
(2) Equal to 5.0% of gross collected revenues of the Registrant's properties.
Effective March 18, 1996, Property Management Services have been
performed at the Registrant's properties by an unaffiliated third party.
(3) Equal to 1.0% of gross collected revenues of the Registrant's properties.
(4) Equal to $2.50 per apartment unit per month.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits - The Exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report and incorporated in this
Annual Report as set forth in said index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter covered by
this report.
16
<PAGE>
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.
SOUTHEASTERN INCOME PROPERTIES II
LIMITED PARTNERSHIP
By: Winthrop Southeastern Limited
Partnership,
Its General Partner
By: Eight Winthrop
Properties, Inc.,
Its General Partner
By: /s/ Michael L. Ashner
-----------------------
Michael L. Ashner
Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature/Name Title Date
- -------------- ----- ----
/s/ Michael L. Ashner Chief Executive March 30, 1998
- --------------------- Officer and Director
Michael L. Ashner
/s/ Edward Williams Chief Financial Officer March 30, 1998
- ---------------------
Edward Williams
17
<PAGE>
Index to Exhibits
Exhibit
Number Document
2.1 Agreement and Addendum to Agreement by and among Glade M.
Knight ("Knight"), Ben T. Austin, III ("Austin"), Winthrop
Southeast Limited Partnership ("WSLP") and Investors Savings
Bank, F.S.B. ("ISB") (the "Agreement") dated as of August 8,
1991 and effective as of August 16, 1991. [The exhibits to
the Agreement have been omitted from the Agreement and are
listed in the Agreement.] (Exhibit 2.1)(5)
2.2 Supplemental Agreement by and among WSLP, Knight, and ISB
(the "Knight Agreement") dated as of August 8, 1991 and
effective as of August 16, 1991. [The exhibits to the
Knight Agreement have been omitted from the Knight
Agreement and are listed in the Knight Agreement.]
(Exhibit 2.2)(5)
2.3 Supplemental Agreement and Addendum to Supplemental
Agreement by and among WSLP, Austin and ISB dated as of
August 8, 1991 and effective as of August 16, 1991.
(Exhibit 2.3)(5)
2.4 Employment Agreement by and between WSLP and Austin dated
as of August 8, 1991 and effective as of August 16, 1991.
(Exhibit 2.4)(5)
2.5 Supplemental Agreement by and between WSLP and ISB dated
as of August 8, 1991 and effective as of August 16, 1991.
(Exhibit 2.5)(5)
3.1 Amended and Restated Agreement of Limited Partnership of
Southeastern Income Properties II Limited Partnership.
(Exhibit 3.1)(2)
3.2 First Amendment to Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.9)(1)
3.3 Second Amendment to Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.10)(1)
3.4 Third Amendment to the Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.11)(1)
18
<PAGE>
3.5 Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.12)(1)
3.6 Fifth Amendment to the Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.6)(3)
3.7 Sixth Amendment to the Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.7)(3)
3.8 Seventh Amendment to the Amended and Restated Agreement of
Limited Partnership of Southeastern Income Properties II
Limited Partnership. (Exhibit 3.8)(7)
3.9 Articles of Incorporation of SIP II Assignor Corporation.
(Exhibit 3.6)(1)
3.10 Bylaws of SIP II Assignor Corporation. (Exhibit 3.7)(1)
10.1 Apartment Management Agreement, dated February 12, 1992
between the Registrant and Winthrop Management (for Copper
Croft Apartments). (Exhibit 10.4)(6)
10.2 Apartment Management Agreement, dated February 12, 1992
between the Registrant and Winthrop Management (for
Hunters Creek Apartments). (Exhibit 10.5)(6)
10.3 Apartment Management Agreement, dated February 12, 1992
between the Registrant and Winthrop Management (for The
Greenbryre Apartments). (Exhibit 10.6)(6)
10.4 Properties Acquisition Agreement between Southeastern
Income Properties II Limited Partnership and Knight Austin
Corporation. (Exhibit 10.2)(2)
10.5 Real Estate Consulting Agreement between Southeastern
Income Properties II Limited Partnership and WFS Realty
Corporation. (Exhibit 10.3)(2)
10.6 Repair Supervisory Contract. (Exhibit 10.6)(4)
10.7 Supervisory Insurance Adjustment Contract. (Exhibit 10.7)(4)
10.8 Mortgage Brokerage and Consulting Agreement. (Exhibit 10.8)(4)
- ----------------------------------
19
<PAGE>
(1) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's registration statement on
Form S-11 (Registration No. 33-17659).
(2) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's 1987 Annual Report.
(3) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's 1988 Annual Report.
(4) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's 1989 Annual Report.
(5) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's Current Report on Form 8-K on
September 3, 1991.
(6) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's 1991 Annual Report.
(7) Incorporated by reference to the exhibit shown in parentheses filed
with the Commission in the Registrant's 1992 Annual Report filed on
Form 10-K.
