FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from.........to.........
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(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)
(864) 239-1000
(Issuer's telephone number)
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)
March 31, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 928
Receivables and deposits, net of $33
for doubtful accounts 564
Restricted escrows 875
Other assets 464
Investment properties:
Land $ 2,878
Buildings and related personal property 41,741
44,619
Less accumulated depreciation (21,658) 22,961
$ 25,792
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 149
Tenant security deposit liabilities 192
Accrued property taxes 527
Other liabilities 295
Mortgage notes payable 26,664
Partners' Deficit
General partners' $ (475)
Limited partners' (1,224.25 units issued
and outstanding) (1,560) (2,035)
$ 25,792
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,
1998 1997
Revenues:
Rental income $ 1,911 $ 2,045
Other income 183 150
Total revenues 2,094 2,195
Expenses:
Operating 961 947
General and administrative 81 73
Depreciation 495 498
Interest 567 619
Property taxes 198 193
Loss on disposal of property 164 --
Total expenses 2,466 2,330
Net loss $ (372) $ (135)
Net loss allocated to general
partners (2%) $ (7) $ (3)
Net loss allocated to limited
partners (98%) (365) (132)
Net loss $ (372) $ (135)
Net loss per limited partnership unit $(298.14) $(107.82)
Distributions per limited partnership unit $ -- $ 80.05
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
Units Partners' Partners' Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1997 1,224.25 $(468) $(1,195) $(1,663)
Net loss for the three months
ended March 31, 1998 -- (7) (365) (372)
Partners' deficit at
March 31, 1998 1,224.25 $(475) $(1,560) $(2,035)
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,
1998 1997
Cash flows from operating activities:
Net loss $ (372) $ (135)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 495 498
Amortization of discounts, loan costs
and leasing commissions 56 68
Loss on disposal of property 164 --
Change in accounts:
Receivables and deposits 374 25
Other assets 38 9
Accounts payable (77) 23
Tenant security deposit liabilities 3 (3)
Accrued property taxes (164) (52)
Other liabilities 24 (16)
Net cash provided by operating activities 541 417
Cash flows from investing activities:
Property improvements and replacements (339) (123)
Net receipts from (deposits to) restricted escrows 22 (32)
Net cash used in investing activities (317) (155)
Cash flows from financing activities:
Payments on mortgage notes payable (181) (124)
Distributions to partners -- (100)
Net cash used in financing activities (181) (224)
Net increase in cash and cash equivalents 43 38
Cash and cash equivalents at beginning of period 885 1,004
Cash and cash equivalents at end of period $ 928 $1,042
Supplemental disclosure of cash flow information:
Cash paid for interest $ 514 $ 553
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 consolidated financial statements of Davidson
Diversified Real Estate II, L.P. (the "Partnership") 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 month period ended March 31, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-KSB for the fiscal year ended December
31, 1997.
Reclassifications
Certain reclassifications have been made to the 1997 balances to conform to the
1998 presentation.
Principles of Consolidation
The financial statements include all the accounts of the Partnership and two
99.9% owned partnerships. The general partner of the consolidated partnerships
is Davidson Diversified Properties, Inc. Davidson Diversified Properties, Inc.
may be removed by the Partnership; therefore, the consolidated partnerships are
controlled and consolidated by the Partnership. All significant
interpartnership balances have been eliminated.
Effective December 31, 1997, Outlets Mall, L.P. was restructured into a limited
liability company known as Outlets GP, L.L.C. ("Outlets"). The Partnership owns
100% of the new entity. As a result, the Partnership consolidates its interest
in Outlets (whereby all accounts of Outlets are included in the consolidated
financial statements of the Partnership with intercompany accounts being
eliminated).
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. Prior to February 25, 1998, the Managing General Partner
was wholly-owned by MAE GP Corporation ("MAE GP"), an affiliate of Insignia
Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), which is an affiliate of
Insignia. Thus, the Managing General Partner is now a wholly-owned subsidiary
of IPT. The Partnership Agreement provides for payments to affiliates for
services and for reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership. The following payments were paid to affiliates of the
Managing General Partner during the three month periods ended March 31, 1998 and
1997 (in thousands):
1998 1997
Property management fees (included in operating
expense) $107 $107
Reimbursement for services of affiliates, including
approximately $50,000 and $19,000 of construction
oversight reimbursements in 1998 and 1997,
respectively (included in general and administrative
and operating expenses and investment properties) 105 75
Additionally, the Partnership paid approximately $2,000 during the three months
ended March 31, 1998 to an affiliate of the Managing General Partner for lease
commissions at the Partnership's commercial property. No lease commissions were
paid during the corresponding period in 1997. These lease commissions are
included in other assets and are amortized over the terms of the respective
leases.
For the period from January 1, 1997 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency affiliated with the
Managing General Partner with an 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 master policy. The
agent assumed the financial obligations to the affiliate of the Managing General
Partner which received payments on these obligations from the agent. The amount
of the Partnership's insurance premiums that accrued to the benefit of the
affiliate of the Managing General Partner by virtue of the agent's obligations
was not significant.
On September 26, 1997, an affiliate of the Managing General Partner purchased
Lehman Brothers' class "D" subordinated bonds of SASCO, 1992-M1. These bonds
are secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Big Walnut Apartments and Greensprings Manor Apartments owned by the
Partnership.
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
the third quarter of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the Managing General Partner of the
Partnership.
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. There were no distributions to the partners during the first quarter of
1998.
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, 1998 and 1997:
Average Occupancy
1998 1997
Big Walnut Apartments 95% 95%
Columbus, Ohio
LaFontenay Apartments 89% 92%
Louisville, Kentucky
The Trails Apartments 90% 91%
Nashville, Tennessee
Greensprings Manor Apartments 83% 88%
Indianapolis, Indiana
Shoppes At River Rock 66% 77%
(Formerly Outlet's Ltd. Mall)
Murfreesboro, Tennessee
The Managing General Partner attributes the decrease in occupancy at
Greensprings Manor Apartments to the local market for one bedroom and studio
apartments, which make up a large portion of Greensprings Manor's units, being
soft. The staff at Greensprings is focusing on effective marketing and tenant
satisfaction to combat the competitive market. Physical occupancy at
Greensprings had increased to 86% by the end of April 1998. Occupancy at the
Shoppes at River Rock has decreased due to increased competition from newer
shopping centers in its immediate vicinity. The anchor tenant vacated the
Shoppes at River Rock in 1997. Certain tenants at the shopping center have
exercised the option to pay a reduced rental rate based on tenant sales due to
the decreased occupancy brought about when the anchor tenant vacated. Rental
revenue for the first quarter of 1998 was materially affected because one of
these tenants continued to pay its monthly base rent until the first quarter of
1998, at which time it exercised the option to pay rent based on its sales. This
option was applied retroactively to the date the anchor tenant vacated and
resulted in a credit for the tenant which had overpaid its rent. The Managing
General Partner is exploring alternative concepts for repositioning the shopping
center in an attempt to fill its vacancies and improve occupancy.
The Partnership's net loss for the three months ended March 31, 1998, was
approximately $372,000 compared to a net loss of approximately $135,000 for the
corresponding period of 1997. The increase in net loss is primarily due to
decreased rental income and the loss on disposal of property incurred during the
first quarter of 1998. The decrease in rental income is primarily due to
decreased occupancy at Greensprings Manor and the Shoppes at River Rock, as
discussed above. The loss on disposal of property during the first quarter of
1998 was due to the write-off of the undepreciated value of roofs that were
replaced at LaFontenay. Partially offsetting the decreased rental income and
loss on disposal of property is decreased interest expense, primarily due to the
August 1997 refinancing of LaFontenay at a lower interest rate.
Included in operating expense during the three months ended March 31, 1998 is
approximately $13,000 of major repairs and maintenance comprised primarily of
exterior building repairs. During the corresponding period in 1997, operating
expense included approximately $53,000 of major repairs and maintenance expenses
consisting primarily of new gas service lines and water saving devices.
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.
At March 31, 1998, the Partnership had cash and cash equivalents of
approximately $928,000 compared to approximately $1,042,000 at March 31, 1997.
The net increase in cash and cash equivalents for the three months ended March
31, 1998 and 1997 is $43,000 and $38,000, respectively. Net cash provided by
operating activities increased due to increased cash provided by receivables and
deposits due to the refund of a deposit on LaFontenay's refinancing and to the
timing of payments. Partially offsetting this increase to cash was the
increased use of cash for property taxes due to the timing of payments and
decreased rental revenue, as discussed above. Net cash used in investing
activities increased due to increased property improvements and replacements,
which was partially offset by cash received from restricted escrows. Net cash
used in financing activities decreased due to the distribution to partners
during the three months ended March 31, 1997. Partially offsetting this
decrease was an increase in mortgage principal payments due to the modification
of the mortgage on The Trails, as discussed below, and to the refinancing of
LaFontenay, whose debt balance increased approximately $600,000 in August of
1997.
On August 6, 1997, the Partnership refinanced the mortgage encumbering
LaFontenay Apartments. The total indebtedness refinanced was approximately
$6,720,000. The refinancing replaced the existing indebtedness which carried
stated interest rates of 9.25% with a maturity date of August 1, 1997. The new
mortgage indebtedness of $7,325,000 carries a stated interest rate of 7.5% and
is amortized over 360 months with a balloon payment due on September 1, 2007.
The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments were called and, therefore, payable in full on February 1,
1997 in accordance with the terms of the agreements. On June 30, 1997, the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right on the Bond on a date prior to the
fifth anniversary of the modification.
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 $26,664,000, net of discount, matures
at various times with balloon payments due at maturity, at which time the
properties will either be refinanced or sold. 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, refinancings,
property sales and the availability of the cash reserves. Currently, the
Managing General Partner does not anticipate making any distributions during
1998.
Year 2000
The Partnership is dependent upon the Managing General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The Managing General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and its affiliates of
interests in certain general partner entities, past tender offers by Insignia
affiliates to acquire limited partnership units, the management of partnerships
by Insignia affiliates, as well as a recently announced agreement between
Insignia and AIMCO. The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. The Managing General Partner
was only recently served with the complaint, which it believes to be without
merit, and intends to vigorously defend the action.
The Partnership is unaware of any other 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:
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, 1998.
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, L.P.
By: Davidson Diversified Properties, Inc.
Its Managing General Partner
By: /s/Carroll D. Vinson
Carroll D. Vinson
President and Director
By: /s/Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President and Chief Accounting Officer
Date: May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Davidson Diversified Real Estate II, L.P. 1998 First 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, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 928
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 44,619
<DEPRECIATION> 21,658
<TOTAL-ASSETS> 25,792
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,664
0
0
<COMMON> 0
<OTHER-SE> (2,035)
<TOTAL-LIABILITY-AND-EQUITY> 25,792
<SALES> 0
<TOTAL-REVENUES> 2,094
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> 0
<INCOME-TAX> 0
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<NET-INCOME> (372)
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<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
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