Back to GetFilings.com

(Mark One)

X    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the transition period from to
Commission file number 2-89185

                           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:

SIGNATURES

CERTIFICATIONS

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 original objective of the Registrant was 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.

        The Registrant is attempting to sell its assets and liquidate. Though the Registrant'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 Registrant. Proceeds, if any, for the sale of the Project Partnerships will be used to pay Registrant liabilities. The Registrant does not anticipate the sales to generate sufficient proceeds to make a distribution to partners. The sale of the assets will cause capital gains to be passed through to partners as a result of negative tax bases in each of the investments from the accumulation of previous years' losses. The partners will also realize ordinary income to the extent liabilities are not satisfied by the sales proceeds.

        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, by the ability of the Projects to qualify for Low Income Housing Tax Credits. For those Project Partnerships for which the Registrant's ownership interest is pledged as collateral in connection with promissory notes, the Registrant must also consider the outstanding balances of the notes and in some cases negotiate a reduced payoff on the notes.

        As of December 31, 2002, the Registrant has investments in Project Partnerships which own the Projects listed below:

        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.

        The Project Partnerships previously included Pine West Ltd. and Rancho Vista Associates, which limited partner interests were sold in 2001, and Florence Housing Associates and Greentree Housing Limited Partnership, which assets were sold in 2000 and 1999, respectively.

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.

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.

Item 5.        Market for the Registrant's Common Stock and Related Security Holder Matters.

        As of December 31, 2002, the number of holders of units was 1,006.

        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.

Item 7.         Management's Discussion and Analysis of Financial Condition and Result of Operations.

        The Registrant is a limited partnership formed to acquire limited partner interests in real estate limited partnerships (Project Partnerships). Part of the original objective of the Registrant was to generate tax losses for investors. However, due to changes in the tax regulations, there are some restrictions on the use of these losses.

        The Registrant is attempting to sell its assets and liquidate the Partnership. 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, by the ability of the Projects to qualify for Low Income Housing Tax Credits. For those Project Partnerships for which the Registrant's ownership interest is pledged as collateral in connection with promissory notes, the Registrant must also consider the outstanding balances of the notes and in some cases negotiate a reduced payoff on the notes. The sale of the assets will cause capital gains to be passed through to its partners as a result of negative tax bases in each of the investments from the accumulation of previous years losses.

        The accounting for an investment in a Project Partnership involves increasing and decreasing the Registrant's investment in each Project Partnership by the Registrant's share of the Project Partnership's income and loss, respectively. If losses accumulate greater than gains plus capital contributions and less distributions to date, the investment is reduced 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 non-recourse government backed debt and sole-recourse secondary financing loans. These losses, in and of themselves, do not accurately portray the surplus cash or excess cash (as defined by the United States Department of Hou sing and Urban Development ("HUD") and Farmers' Home Administration 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.

        The net loss for 2002 was $120,485 compared to net loss of $329,969 for 2001 and net loss for 2000 of $309,098 (see Items 6 and 15(a)1).

        Distribution income from zero-basis Project Partnerships was $399,314 in 2002 compared to $96,370 in 2001 and $24,489 in 2000. The increase in Distributions from zero-based Project Partnerships in 2002 as compared to 2001 was mainly the result of the accounting treatment of distributions from limited liability partnerships under the equity method (see Note A to the Financial Statements). Under the equity method, as applied to interests in Limited Liability Partnerships, once an investment balance reaches zero, distributions no longer reduce the investment account, but instead are recognized as distribution income. In 2002, the Registrant received a $399,314 distribution from Hawthorn, which was recognized as distributions from zero-basis Project Partnerships because the Registrant's beginning investment balance in Hawthorn was zero. In 2001, the Registrant received $373,481 of distributions from Hawthorn. The distribution reduced the Registrant's $286,570 beginning investment balance in Hawthorn to zero and the remaining $86,911 was recognized as distributions from zero-basis Project Partnerships. The increase in distribution income from Hawthorn was partially offset by a decrease in distributions received from the remaining Project Partnerships. The increase in Distributions from zero-based Project Partnerships in 2001 as compared to 2000 was mainly the result of recognizing $86,911 of distributions from Hawthorn as distribution income subsequent to the reduction of the investment balance to zero.

        Equity in income of Project Partnerships was $0 in 2002 as compared to $32,323 in 2001 and $173,537 in 2000. The decrease in equity in income of Project Partnerships in 2002 was also due to the accounting treatment of investments in limited liability partnerships under the equity method. In 2002, the Registrant did not recognize equity in income of Project Partnerships from Hawthorn, because the beginning investment balance was zero. In 2001, the beginning investment balance in Hawthorn was above zero. The Registrant recognized $32,323 as equity in income of Project Partnerships, which represented its pro-rata share of the earnings of Hawthorn prior to receipt of a distribution. The distribution reduced the investment balance to zero and the remaining amount was recognized as distributions from zero-basis project partnerships as explained above. Equity in income of Project Partnerships decreased in 2001 compared to 2000 due to a decrease in equity income from Hawthorn. Subsequent to receipt of the distribution and reduction of the investment balance to zero, equity income in Hawthorne was no longer recognized.

        The Gain on Sale of Project Partnerships of $31,867 in 2001 was due to the sale of the limited partner interests of Rancho Vista Associates and Pine West, Ltd.

        The increase in miscellaneous income was due to a $10,000 deposit received under the terms of a contract for the sale of Colony. The prospective buyer exercised its right under the sales contract to terminate the sale, forfeiting the deposit to the Registrant.

        Interest expense increased in 2002 compared to 2001 as the result of a 2 percent increase in the interest rate on the note payable that became effective July 1, 2002.

        Professional fees decreased in 2001 compared to 2000, due to a decrease in legal fees related to the sale of properties.

        Operating expenses in 2002 compared to 2001 increased as the result of state taxes paid on behalf of two of the Project Partnerships. Operating expenses decreased in 2001 compared to 2000 due to a decrease in bad debts from the Project Partnerships.

        The Registrant is liable for a promissory note that bears simple interest at a rate of 11 percent and is collateralized by the Registrant's ownership interest in Hawthorn. Principal and interest payable totaled $3,740,364 at December 31, 2002. Principal and interest can only be paid from distributions received from Hawthorn. The Registrant is not required to use distributions from other Project Partnerships to make payments on this promissory note. The promissory note along with accrued interest was due on June 30, 2002 and is currently in default. As a result, the Registrant's ownership interest in Hawthorn may revert to the noteholder (see Note F to Financial Statements). The noteholder has not notified the Registrant of a demand for payment or a claim on the collateral. In 2002, the Registrant entered into an agreement with a third-party purchaser to sell Hawthorn. The potential purchaser exercised its right under the contract to terminate the agreement. The Registrant is under negotiations with a third-party to sell Hawthorn.

        The Registrant's ownership interests in two other Project Partnerships (Olympic and Colony) are pledged as collateral in connection with promissory notes issued by the respective Project Partnerships. The Olympic promissory note was due on December 31, 2000. This note is currently in default. Olympic is under contract to third-party purchasers subject to regulatory approval. Prior to and in conjunction with signing the sales contract, the Partnership entered into an agreement with the noteholder for a reduced payoff on the promissory note. Subsequent to entering into the agreement, the noteholder notified the Partnership of its intent to foreclose on the Partnership's interest in Olympic in the event the current sales contract is not consummated. The Colony promissory note was due June 30, 1997 and had been extended to November 30, 1999, while the General Partner attempted to locate a buyer. A buyer was not located before November 30, 1999. This note is currently in default. Therefore, the Colony noteholder may demand payment and Colony may revert to its noteholder.

        Notwithstanding the balances owed on the defaulted notes, none of the Project Partnerships are experiencing significant operating cash flow deficiencies

        The distributions 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:

Shifts in these conditions could impact operating results of the Project Partnerships.

        In November 2002, FASB issued FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). For financial statements issued after December 15, 2002, FIN 45 requires that a guarantor make certain disclosures regarding guarantees of indemnification agreements. Starting January 1, 2003, FIN 45 will require that a liability be recognized at the fair value of the guarantee. The Partnership has adopted the disclosure provisions of FIN 45 in the accompanying financial statements and does not expect the liability recognition provisions will have a material impact on the Partnership's financial statements.

        In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 is to improve financial reporting by enterprises involved with variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Partnership has not finalized its analysis of FIN 46.

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, 2002, the partnership had $3,740,364 of principal and accrued interest on a fixed rate note bearing interest at 11% (See Note F to the Financial statements).

Item 8.        Financial Statements and Supplementary Data.

        Financial statements of the Registrant are filed herewith (See Item 15(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.

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:

        Douglas L. Kelly, age 54, is President, Secretary and Treasurer of the General Partner. Mr. Kelly succeeded Robert L. Proost who retired March 1, 2001. Mr. Kelly joined A.G. Edwards & Sons, Inc. on January 1, 1994 and serves as Director, Executive Vice President, Corporate Secretary, Director of Law and Compliance, Director of Administration and Chief Financial Officer.

        Robert J. Herleth, age 50, is a Vice President and Assistant Secretary 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.

        Joseph G. Porter, age 42, is a Vice President, Assistant Treasurer and Assistant Secretary of the General Partner. Mr. Porter manages the operations of the General Partner. Mr. Porter succeeded Eugene J. King who retired on February 28, 1999. Mr. Porter joined A.G. Edwards & Sons, Inc. in 1982 and serves as Senior Vice President, Assistant Director of Administration 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). No such fees were paid during 2002 or 2001. The accumulated amount of these fees accrued but not paid to the General Partner at December 31, 2002 are $889,460 of asset management fees and $0 of program management fees. 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 E of the financial statements referenced under Item 15(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 0.1% interest in the Partnership as Special Limited Partner. As of December 31, 2002, 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 Corporation holds a 0.1% interest in the Registrant as a Special Limited Partner.

        Please refer to Item 11 for additional information.

Item 14.        Evaluation of Disclosure Controls and Procedures.

        The management of the Registrant including Mr. Douglas L. Kelly as President and Mr. Joseph G. Porter as Vice President have evaluated the Registrant's disclosure controls and procedures. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those "controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on the evaluation of the Registrant's disclosure controls and procedures, it was determined that such controls and procedures were effective as of April 8, 2003, the date of the conclusion of the evaluation.

        Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after April 8, 2003, the date of the conclusion of the evaluation of disclosure controls and procedures.

Item 15.        Exhibits, Financial Statements, Schedules and Reports on Form 8-K

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.

April 10, 2003                                               GULLEDGE REALTY INVESTORS II
                                                                                            (Registrant)

                                                                        By:    Gull-AGE Properties, Inc.
                                                                                 (General Partner)

                                                                        By:    /s/Douglas L. Kelly
                                                                                 Douglas L. Kelly
                                                                                 President, Secretary,
                                                                                 Treasurer & Director

                                                                        By:    /s/Robert J. Herleth
                                                                                 Robert J. Herleth
                                                                                 Vice President & Assistant Secretary

                                                                        By:    /s/Joseph G. Porter
                                                                                 Joseph G. Porter
                                                                                 Vice President, Assistant Treasurer
                                                                                 & Assistant Secretary

To the Partners of
Gulledge Realty Investors II:

We have audited the accompanying balance sheets of Gulledge Realty Investors II (a limited Partnership) (the "Partnership") as of December 31, 2002 and 2001, and the related statements of operations, changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 2002. 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, a majority owned Limited Partnership ("the Project Partnership"), the Partnership's investment in which is accounted for by use of the equity method. The Partnership's investment in the Project Partnership's net assets of $0 and $0 at December 31, 2002 and 2001, respectively, and its share of Project Partnership's net income of $0, $32,323 and $173,537 for each of the three years in the period ended December 31, 2002 are included in the accompanying financial statements. The financial statements of the Project Partnership were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for such Project Partnership is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, such financial statements present fairly, in all material respects, the financial position of Gulledge Realty Investors II as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

/s/Deloitte & Touche, LLP

March 26, 2003

S2100-020

/s/Rubin, Brown, Gornstein & Co. LLP

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

Note A           Summary of Significant Accounting Policies

Note B           Partners' Deficit

Note C           Reconciliation of Operations: Financial Statement Versus Income Tax Return

Note D          Escrow Deposit

Note E           Payable To General Partner

Note F            Project Partnerships

Note G           Condensed Financial Data of Project Partnership