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 March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
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 (IRS 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 Exchange Act during the past 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, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1997
Assets
Cash and cash equivalents:
Unrestricted $ 1,042
Restricted--tenant security deposits 180
Accounts receivable 106
Escrows for taxes 317
Restricted escrows 758
Other assets 343
Investment properties
Land $ 2,878
Buildings and related personal property 41,025
43,903
Less accumulated depreciation (19,911) 23,992
$ 26,738
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 232
Tenant security deposits 180
Accrued taxes 533
Other liabilities 231
Mortgage notes payable 26,541
Partners' Deficit
General partners $ (455)
Limited partners (1,224.25 units issued
and outstanding) (524) (979)
$ 26,738
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1997 1996
Revenues:
Rental income $ 2,084 $ 2,162
Interest income 19 12
Other income 131 182
Total revenue 2,234 2,356
Expenses:
Operating 763 746
General and administrative 73 82
Maintenance 223 221
Depreciation 498 473
Interest 619 617
Property taxes 193 189
Bad debt -- 40
Loss on disposal of property -- 64
Total expenses 2,369 2,432
Net loss $ (135) $ (76)
Net loss allocated to general
partners (2%) (3) (2)
Net loss allocated to limited
partners (98%) (132) (74)
Net loss $ (135) $ (76)
Net loss per limited partnership unit $(107.51) $ (60.45)
See Accompanying Notes to Consolidated Financial Statements
c) DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Unit Partners Partners Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1996 1,224.25 $ (450) $ (294) $ (744)
Net loss for the three months
ended March 31, 1997 (3) (132) (135)
Distributions paid (2) (98) (100)
Partners' deficit at
March 31, 1997 1,224.25 $ (455) $ (524) $ (979)
See Accompanying Notes to Consolidated Financial Statements
d) DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1997 1996
Cash flows from operating activities:
Net loss $ (135) (76)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 498 473
Bad debt -- 40
Amortization of discounts, loan costs
and leasing commissions 68 65
Loss on disposal of property -- 64
Change in accounts:
Restricted cash 2 --
Accounts receivable (37) (4)
Escrows for taxes 60 (18)
Other assets 9 14
Accounts payable 23 (68)
Tenant security deposit liabilities (3) --
Accrued taxes (52) 35
Other liabilities (16) (1)
Net cash provided by operating activities 417 524
Cash flows from investing activities:
Insurance proceeds -- 227
Property improvements and replacements (123) (202)
Deposits to restricted escrows (32) (281)
Withdrawals from restricted escrows -- 3
Net cash used in investing activities (155) (253)
Cash flows from financing activities:
Payments on mortgage notes payable (124) (114)
Distributions (100) --
Net cash used in financing activities (224) (114)
Net increase in cash 38 157
Cash at beginning of period 1,004 714
Cash at end of period $ 1,042 871
Supplemental disclosure of cash flow information:
Cash paid for interest $ 553 554
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
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 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 month period ended March 31,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. 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 year
ended December 31, 1996.
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 (in thousands) were paid
to the Managing General Partner and affiliates in 1997 and 1996:
Three Months Ended
March 31,
1997 1996
Property management fees $107 $ 94
Reimbursement for services of affiliates 75 50
Included in "reimbursements for services of affiliates" for 1997 is
approximately $19,000 in reimbursements for construction oversight costs.
During 1996, Outlet's Ltd. Mall was managed by a third party. As of January
1997, the Managing General Partner assumed management of the day to day
operations.
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 February 1997, the Partnership distributed approximately $100,000 to the
partners. The limited partners received approximately $98,000 ($80.05 per
limited partnership unit) and the general partners received approximately
$2,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 the three months ended March 31, 1997 and 1996:
Average Occupancy
1997 1996
Big Walnut Apartments 95% 95%
Columbus, Ohio
Lafontenay Apartments 92% 94%
Louisville, Kentucky
The Trails Apartments 91% 94%
Nashville, Tennessee
Greensprings Manor Apartments 88% 93%
Indianapolis, Indiana
Outlet's Ltd. Mall 77% 84%
Murfreesboro, Tennessee
The Managing General Partner attributes the decrease in occupancy at The Trails
Apartments to increased competition caused by new construction of similar units
within The Trails' respective market. The Managing General Partner attributes
the decrease in occupancy at Greensprings Manor Apartments to location and age
of the investment property. Occupancy at Outlet's Mall has also decreased due
to a declining market for outlet type shopping centers. The Managing General
partner is in the process of repositioning the Mall into a different market in
hopes of reestablishing occupancy levels.
The Partnership's net loss for the three months ended March 31, 1997, was
approximately $135,000 compared to a net loss of approximately $76,000 for the
same period of 1996. The increase in net loss is primarily due to decreases in
rental income and other income. The decrease in rental income is due to
decreases in occupancy at Outlet's Mall, The Trails and Greensprings Manor
Apartments. The decrease in other income is due to a decrease in miscellaneous
income at the Partnership's Outlet's Mall property. Offsetting the above
decreases in income are bad debt expense and loss on disposal of property in
1996. Bad debt expense in 1996 related to reserves that were set up due to
tenants at Greensprings Manor Apartments that had been evicted, yet still had
outstanding accounts receivable balances. The loss on disposal of property in
1996 was due to a fire at The Trails Apartments which destroyed four apartment
units. The write-off of these units, which were not yet fully depreciated,
resulted in a $64,000 loss on disposal of property.
Included in operating and maintenance expense is $53,000 of major repairs and
maintenance comprised of office furniture, new gas service lines, and water
saving devices for the quarter ended March 31, 1997.
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 approximately $1,042,000 at March 31,
1997, versus unrestricted cash of approximately $871,000 at March 31, 1996. Net
cash provided by operating activities decreased due to an increase in net loss,
as discussed above, and an increase in accounts receivable. The increase in
accounts receivable was due to the timing of rents received from tenants. Net
cash used in investing activities decreased due to a decrease in deposits to
restricted escrows and a decrease in property improvements and replacements.
Offsetting these items was a decrease in insurance proceeds. Insurance proceeds
of $227,000 were received in 1996 for four destroyed apartment units at The
Trails Apartments. The proceeds were deposited in a restricted escrow account
from which funds were drawn for reconstruction expenses. Net cash used in
financing activities increased due to the Partnership making a distribution in
1997.
The Partnership has no material capital programs scheduled to be performed in
1997, although certain routine capital expenditures and maintenance expenses
have been budgeted. These capital expenditures and maintenance expenses will be
incurred only if cash is available from operations or is received from the
capital reserve account.
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 approximately $26,541,000, net of discount, with
stated interest rates of 7.6% to 10.125%, has maturity dates ranging from June
1997 to December 2009. 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. No distributions were made during the
quarter ended March 31, 1996. In February 1997, the Partnership distributed
approximately $100,000 to the partners. The limited partners received
approximately $98,000 ($80.05 per limited partnership unit) and the general
partners received approximately $2,000. Future cash distributions will depend
on the levels of net cash generated from operations, refinancing, property sales
and the availability of the 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 three months ended March 31, 1997.
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: April 21, 1997
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This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II, L.P. 1997 First Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
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