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 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.
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.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is not currently subject to any pending material legal proceeding.
ITEM 4.
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.
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.
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.
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.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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.
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.
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.
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.
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