FORM 10-QSB--QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Quarterly or Transitional Report
(As last amended by 34-32231, eff. 6/3/93.)
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period.........to.........
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (864) 239-1000
Check whether the issuer (1) 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 .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1996
Assets
Cash and cash equivalents:
Unrestricted $ 999
Restricted--tenant security deposits 190
Accounts receivable 68
Escrow for taxes 355
Restricted escrows 961
Other assets 432
Investment properties:
Land $ 2,878
Buildings and related personal property 40,366
43,244
Less accumulated depreciation (18,415) 24,829
$ 27,834
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 235
Tenant security deposits 191
Accrued taxes 505
Other liabilities 274
Mortgage notes payable 26,800
Partners' Capital (Deficit)
General partners $ (439)
Limited partners (1,224.25 units
issued and outstanding) 268 (171)
$ 27,834
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 2,178 $ 2,126 $ 4,340 $ 4,240
Other income 191 147 385 314
Total revenues 2,369 2,273 4,725 4,554
Expenses:
Operating 830 786 1,576 1,510
General and administrative 78 60 160 105
Maintenance 245 211 466 422
Depreciation 480 442 953 864
Interest 626 608 1,243 1,258
Bad debt recovery, net (40) -- -- --
Property taxes 156 176 345 330
Total expenses 2,375 2,283 4,743 4,489
(Loss) income before loss on
disposal of property,
casualty item and
extraordinary item (6) (10) (18) 65
Loss on disposal of property (2) -- (2) --
Casualty gain (loss) 250 (12) 186 (12)
Income (loss) before
extraordinary item 242 (22) 166 53
Extraordinary loss on
retirement of debt -- -- -- (32)
Net income (loss) $ 242 $ (22) $ 166 $ 21
Net income allocated
to general partners (2%) $ 5 $ -- $ 3 $ --
Net income (loss) allocated
to limited partners (98%) 237 (22) 163 21
Net income (loss) $ 242 $ (22) $ 166 $ 21
Per limited partnership unit:
Income (loss) before
extraordinary item $ 193.59 $ (17.97) $ 133.14 $ 42.43
Extraordinary loss -- -- -- (25.62)
Net income (loss) $ 193.59 $ (17.97) $ 133.14 $ 16.81
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
c) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' (deficit) capital
at December 31, 1995 1,224.25 $ (442) $ 105 $ (337)
Net income for the six months
ended June 30, 1996 -- 3 163 166
Partners' (deficit) capital
at June 30, 1996 1,224.25 $ (439) $ 268 $ (171)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
d) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 166 $ 21
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 953 864
Amortization of loan costs, discounts 131 127
and lease concessions
Casualty (gain) loss (186) 12
Extraordinary loss on retirement
of debt -- 32
Loss on disposal of property 2 --
Change in accounts:
Restricted cash (7) (2)
Accounts receivable 33 85
Escrow deposits for taxes (8) (28)
Other assets (2) (4)
Accounts payable 28 (48)
Tenant security deposit liabilities 6 (1)
Accrued taxes (4) (2)
Other liabilities (29) 14
Net cash provided by operating
activities 1,083 1,070
Cash flows from investing activities:
Property improvements and replacements (473) (811)
Deposits to restricted escrow (321) (65)
Receipts from restricted escrow 3 28
Insurance proceeds from property damage 227 6
Net cash used in investing activities (564) (842)
Cash flows from financing activities:
Principal payments on notes payable (231) (210)
Repayment of mortgage notes payable -- (1,765)
Proceeds from long-term borrowings -- 1,820
Loan costs (3) (31)
Distributions -- (2)
Net cash used in financing activities (234) (188)
Net increase in cash 285 40
Cash and cash equivalents at beginning of period 714 794
Cash and cash equivalents at end of period $ 999 $ 834
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,114 $ 1,124
Property improvements and replacements in
accounts payable $ 37 $ --
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
e) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Davidson Diversified Properties, Inc. (the "Managing General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1996. For
further information, refer to the financial statements and footnotes thereto
included in the Davidson Diversified Real Estate II, L.P.'s (the "Partnership")
annual report on Form 10-KSB for the fiscal year ended December 31, 1995.
Certain reclassifications have been made to the 1995 information to conform to
the 1996 presentation.
Note B - Transactions with Affiliated Parties
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The partnership agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following were paid to the
Managing General Partner and affiliates for each of the six month periods ended
June 30, 1996 and 1995.
1996 1995
(in thousands)
Property management fees $ 211 $ 226
Reimbursement for services of affiliates 113 98
The Partnership insures its properties under a master policy through an agency
and insurer unaffiliated with the Managing General Partner. An affiliate of the
Managing General Partner acquired, in the acquisition of a business, certain
financial obligations from an insurance agency which was later acquired by the
agent who placed the current year's master policy. The current agent assumed
the financial obligations to the affiliate of the Managing General Partner who
receives payments on these obligations from the agent. The amount of the
Partnership's insurance premiums accruing to the benefit of the affiliate of the
Managing General Partner by virtue of the agent's obligations is not
significant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of four apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for each of the six months ended June 30, 1996 and 1995:
Average
Occupancy
1996 1995
Big Walnut Apartments
Columbus, Ohio 96% 97%
Lafontenay Apartments
Louisville, Kentucky 93% 95%
The Trails Apartments
Nashville, Tennessee 93% 98%
Greensprings Manor Apartments
Indianapolis, Indiana 94% 90%
Outlet's Ltd. Mall
Murfreesboro, Tennessee 83% 90%
Occupancy at The Trails Apartments decreased due to move outs relating to job
transfers out of the Nashville area and due to tenants buying homes due to
attractive interest rates. Also contributing to the decrease in occupancy at The
Trails Apartments was the fire that destroyed four units. A few tenants
residing close to the destroyed units have moved out due to the reconstruction.
The Managing General Partner attributes the increase in occupancy at
Greensprings Manor Apartments to successful marketing efforts on efficiency
apartments. Outlet's Ltd. Mall also had a decrease in occupancy primarily due
to the move out of Leslie Fay, a tenant that occupied 6,250 square feet or 6% of
the total space.
The Partnership's net income for the six months ended June 30, 1996, was
$166,000 versus net income of $21,000 for the six months ended June 30, 1995.
The Partnership realized net income of $242,000 for the three months ended June
30, 1996, versus a net loss of $22,000 for the three months ended June 30, 1995.
The increased income can be primarily attributed to a casualty gain of $186,000
for the six months ended June 30, 1996 (see discussion below).
Revenues increased because of rental income and other income increases but was
partially offset by increases in general and administrative, maintenance, and
depreciation expenses. Rental income increased due to increases in average
rental rates at all of the Partnership's investment properties. Other income
increased due to an increase in lease cancellation fees and cleaning and damage
fees at Greensprings Manor Apartments and Lafontennay Apartments. Both
properties experienced greater turnover compared to the prior year, which in
turn increased cleaning and lease cancellation fees. General and administrative
expense increased primarily due to an increase in partnership administration
cost reimbursements. Maintenance expense increased at Big Walnut Apartments due
to damp spring weather that caused excessive roof and balcony repairs. This
increased interior and exterior improvements because interior painting, dry
wall, and concrete work had to be done. Depreciation expense increased due to
additional purchases of depreciable fixed assets. Lafontennay Apartments
realized a $2,000 loss on disposal of property during the first six months of
1996. This loss related to the write-off of a roof due to replacement. This
roof was not fully depreciated at the time of the replacement. On January 8,
1996, a fire at The Trails Apartments destroyed four apartment units. The
write-off of these units, which were not yet fully depreciated, resulted in a
$62,000 loss on disposal of property. During the second quarter of 1996, the
Trails Apartments received insurance proceeds of $227,000 and estimates that it
will receive an additional $27,000 as more of the reconstruction is finished.
Also, in February 1996, there was another fire at The Trails Apartments that
only caused minor smoke damage. As of June 30,1996, only $6,000 of expenses had
been incurred for the clean-up of this fire. No insurance proceeds are to be
expected since the estimated costs to repair the units is less than the
insurance deductible. As a result of the above, the Partnership realized a
$186,000 casualty gain as of June 30, 1996.
During the first six months of 1995, the Partnership recorded two casualties.
Big Walnut Apartments incurred storm damage which resulted in a casualty gain of
$2,000, net of insurance proceeds. The Trails Apartments continued to
experience problems with the pool due to freeze damage and recorded a casualty
loss of $14,000, net of insurance proceeds. As a result of these casualties,
the Partnership netted a $12,000 casualty loss for the six months ended June 30,
1995.
On January 19, 1995, the Partnership refinanced the mortgage encumbering
Outlet's Ltd. Mall. The total indebtedness refinanced was $1,765,000 of which
$337,000 related to the first mortgage and $1,428,000 related to the second
mortgage. The refinancing replaced the existing indebtedness which carried
stated interest rates ranging from 8.5% to 10.75% with maturity dates ranging
from April 1995 to October 1995. The new mortgage indebtedness of $1,820,000
carries a stated interest rate of 10.125% and is amortized over 180 months with
a balloon payment due on January 15, 2000. As a result of the refinancing, the
Partnership recognized an extraordinary loss of $32,000, as a result of the
write-off of an unamortized mortgage discount and unamortized loan costs.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions, which can result in the use of
rental concessions and rental reductions to offset softening market conditions,
there is no guarantee that the Managing General Partner will be able to sustain
such a plan.
The Partnership had unrestricted cash of $999,000 at June 30, 1996, versus
unrestricted cash of $834,000 at June 30, 1995. Net cash provided by operating
activities increased slightly due to an increase in net income and accounts
payable. Partially offsetting this increase was a decrease in other
liabilities. Net cash used in investing activities decreased due to a decrease
in property improvements and replacements. In 1995, there were substantial
property improvements at Outlet's Ltd. Mall in an attempt to modernize the mall.
Net cash used in financing activities increased due to an increase in principal
payments on notes payable.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of $26,800,000 (net of discount), with stated interest
rates of 7.6% to 10.125%, has maturity dates ranging from June 1997 to November
2002. Included in the outstanding indebtedness is a first mortgage, secured by
the Lafontenay Apartments, which matures June 1, 1997, with a principal balance
due at maturity of $6,728,000. The Managing General Partner intends to
refinance this indebtedness in order to obtain a more favorable interest rate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature. The Managing General Partner of the Partnership believes
that all such pending or outstanding litigation will be resolved without a
material adverse effect upon the business, financial condition, or operations of
the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: None.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President/CAO
Date: August 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II Limited Partnership 1996 Second Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 999
<SECURITIES> 0
<RECEIVABLES> 68
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 43,244
<DEPRECIATION> 18,415
<TOTAL-ASSETS> 27,834
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,800
0
0
<COMMON> 0
<OTHER-SE> (171)
<TOTAL-LIABILITY-AND-EQUITY> 27,834
<SALES> 4,725
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,243
<INCOME-PRETAX> 166
<INCOME-TAX> 0
<INCOME-CONTINUING> 166
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166
<EPS-PRIMARY> 133.14<F2>
<EPS-DILUTED> 0
<FN>
<F1>The Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
