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 September 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)
September 30, 1996
Assets
Cash and cash equivalents:
Unrestricted $ 813
Restricted--tenant security deposits 197
Accounts receivable 166
Escrow for taxes and insurance 499
Restricted escrows 952
Other assets 424
Investment properties:
Land $ 2,878
Buildings and related personal property 40,734
43,612
Less accumulated depreciation (18,911) 24,701
$ 27,752
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 373
Tenant security deposits 195
Accrued taxes 696
Other liabilities 274
Mortgage notes payable 26,716
Partners' Deficit $ (445)
General partners
Limited partners (1,224.25 units
issued and outstanding) (57) (502)
$ 27,752
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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 2,157 $ 2,158 $ 6,497 $ 6,398
Casualty gain 66 -- 252 --
Other income 160 158 545 472
Total revenues 2,383 2,316 7,294 6,870
Expenses:
Operating 815 764 2,393 2,193
General and administrative 76 43 236 148
Maintenance 409 140 875 643
Depreciation 495 446 1,448 1,310
Interest 627 633 1,870 1,891
Casualty loss -- -- -- 12
Property taxes 192 178 537 508
Total expenses 2,614 2,204 7,359 6,705
Income (loss) before
extraordinary item (231) 112 (65) 165
Extraordinary loss on
retirement of debt -- -- -- (32)
Net income (loss) $ (231) $ 112 $ (65) $ 133
Net income (loss) allocated
to general partners (2%) $ (5) $ 2 $ (1) $ 3
Net income (loss) allocated
to limited partners (98%) (226) 110 (64) 130
Net income (loss) $ (231) $ 112 $ (65) $ 133
Per limited partnership unit:
Income (loss) before
extraordinary item $ (184.60) $ 89.34 $ (52.28) $ 132.07
Extraordinary loss -- -- -- (25.76)
Net income (loss) $ (184.60) $ 89.34 $ (52.28) $ 106.31
<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 loss for the nine months
ended September 30, 1996 (1) (64) (65)
Distributions paid -- (2) (98) (100)
Partners' deficit
at September 30, 1996 1,224.25 $ (445) $ (57) $ (502)
<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)
Nine Months Ended
September 30,
1996 1995
Cash flows from operating activities:
Net (loss) income $ (65) $ 133
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 1,448 1,310
Amortization of loan costs, discounts 198 191
and lease concessions
Casualty (gain) loss (252) 12
Extraordinary loss on retirement
of debt -- 32
Change in accounts:
Restricted cash (14) 3
Accounts receivable -- 46
Escrow deposits for taxes (153) (231)
Other assets (22) (1)
Accounts payable 203 (269)
Tenant security deposit liabilities 10 (10)
Accrued taxes 189 176
Other liabilities (29) (13)
Net cash provided by operating
activities 1,513 1,379
Cash flows from investing activities:
Property improvements and replacements (879) (1,132)
Deposits to restricted escrow (353) (104)
Receipts from restricted escrow 44 74
Insurance proceeds from property damage 227 142
Net cash used in investing activities (961) (1,020)
Cash flows from financing activities:
Principal payments on notes payable (349) (319)
Repayment of mortgage notes payable -- (1,765)
Proceeds from long-term borrowings -- 1,820
Loan costs (4) (31)
Distributions (100) (2)
Net cash used in financing activities (453) (297)
Net increase in cash 99 62
Cash and cash equivalents at beginning of period 714 794
Cash and cash equivalents at end of period $ 813 $ 856
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,675 $ 1,720
See Accompanying Notes to Consolidated Financial Statements
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
three and nine month periods ended September 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 nine month periods ended
September 30, 1996 and 1995.
1996 1995
(in thousands)
Property management fees $ 285 $ 340
Reimbursement for services of affiliates 186 131
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.
NOTE C - DISTRIBUTION TO PARTNERS
In August 1996, the Partnership distributed $100,000 to the partners. The
limited partners received $98,000 ($80.05 per limited partnership unit) and the
general partners received $2,000.
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 nine months ended September 30, 1996 and 1995:
Average
Occupancy
Property 1996 1995
Big Walnut Apartments
Columbus, Ohio 96% 97%
Lafontenay Apartments
Louisville, Kentucky 94% 95%
The Trails Apartments
Nashville, Tennessee 93% 98%
Greensprings Manor Apartments
Indianapolis, Indiana 93% 91%
Outlet's Ltd. Mall
Murfreesboro, Tennessee 83% 89%
Occupancy at The Trails Apartments decreased due primarily to move outs relating
to job transfers out of the Nashville area and as a result of 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. 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 loss for the nine months ended September 30, 1996, was
$65,000 versus net income of $133,000 for the nine months ended September 30,
1995. The Partnership realized a net loss of $231,000 for the three months
ended September 30, 1996, versus net income of $112,000 for the three months
ended September 30, 1995. The decrease in income can be primarily attributed to
an increase in expenses.
Expenses increased due to increases in general and administrative, maintenance,
and operating expenses but were partially offset by increases in rental income,
other income, and a casualty gain. General and administrative expense increased
due to increases in partnership administration cost reimbursements, audit fees
and insurance. Maintenance expense increased at Big Walnut Apartments due
primarily to damp spring weather which resulted in excessive roof and balcony
repairs. This increased expenditures for interior and exterior improvements due
to interior painting, dry wall, and concrete work which had to be done.
Operating expense increased due primarily to repairs for leaking pipes at Big
Walnut and the hiring of maintenance employees on a full-time basis at
Greensprings Manor Apartments. Depreciation expense increased due to additional
purchases of depreciable fixed assets. 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 Lafontenay Apartments. Both
properties experienced greater turnover compared to the prior year, which in
turn increased cleaning and lease cancellation fees. 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 expects to receive an additional
$91,000 as more of the reconstruction is completed. Also, in February 1996,
there was another fire at The Trails Apartments which caused minor smoke damage.
As of September 30, 1996, $18,000 of expenses had been incurred for the clean-up
of this fire. Insurance proceeds of $14,000 are expected to be received in the
fourth quarter of 1996. As a result of the above, the Partnership realized a
$252,000 casualty gain as of September 30, 1996.
During the first nine 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 nine months ended September
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 $813,000 at September 30, 1996, versus
unrestricted cash of $856,000 at September 30, 1995. Net cash provided by
operating activities increased primarily due to the change in accounts payable
due to the timing of payments. 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 the
Partnership making a distribution during the first nine months of 1996.
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 $26,716,000 (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.
During the first nine months of 1996 distributions in the amount of $100,000
were paid. The amount and timing of future cash distributions will depend on
the levels of cash generated from operations, property sales, and the
availability of cash reserves.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an
exhibit to this report.
b) Reports on Form 8-K:
None filed during the quarter ended September 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: November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II Limited Partnership 1996 Third 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 813
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 43,612
<DEPRECIATION> (18,911)
<TOTAL-ASSETS> 27,752
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,716
0
0
<COMMON> 0
<OTHER-SE> (502)
<TOTAL-LIABILITY-AND-EQUITY> 27,752
<SALES> 0
<TOTAL-REVENUES> 7,294
<CGS> 0
<TOTAL-COSTS> 7,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,870
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65)
<EPS-PRIMARY> (52.28)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
