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 September 30, 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.)
55 Beattie Place, 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)
September 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 645
Receivables and deposits, net of $54
for doubtful accounts 802
Restricted escrows 669
Other assets 520
Investment properties:
Land $ 2,878
Buildings and related personal property 42,620
45,498
Less accumulated depreciation (22,619) 22,879
$ 25,515
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 366
Tenant security deposit liabilities 187
Accrued property taxes 726
Other liabilities 407
Mortgage notes payable 26,366
Partners' Deficit
General partners' $ (485)
Limited partners' (1,224.25 units issued
and outstanding) (2,052) (2,537)
$ 25,515
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
Rental income $ 2,032 $ 2,004 $ 5,998 $ 6,124
Other income 184 196 565 607
Gain on casualty event -- -- 216 --
Total revenues 2,216 2,200 6,779 6,731
Expenses:
Operating 1,314 1,137 3,422 3,162
General and administrative 86 71 254 204
Depreciation 498 518 1,495 1,515
Interest 559 588 1,689 1,846
Property taxes 198 187 595 540
Loss on disposal of property 17 -- 198 --
Total expenses 2,672 2,501 7,653 7,267
Net loss $ (456) $ (301) $ (874) $ (536)
Net loss allocated
to general partners (2%) $ (9) $ (6) $ (17) $ (11)
Net loss allocated
to limited partners (98%) (447) (295) (857) (525)
$ (456) $ (301) $ (874) $ (536)
Net loss per limited
partnership unit $(365.12) $(240.96) $(700.02) $(428.83)
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 nine months
ended September 30, 1998 -- (17) (857) (874)
Partners' deficit at
September 30, 1998 1,224.25 $ (485) $(2,052) $(2,537)
See Accompanying Notes to Consolidated Financial Statements
d)
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net loss $ (874) $ (536)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 1,495 1,515
Amortization of discounts, loan costs
and leasing commissions 168 183
Loss on disposal of property 198 --
Gain on casualty event (216) --
Bad debt -- 64
Change in accounts:
Receivables and deposits 127 (226)
Other assets (54) (56)
Accounts payable 140 (32)
Tenant security deposit liabilities (2) 8
Accrued property taxes 35 103
Other liabilities 136 (10)
Net cash provided by operating activities 1,153 1,013
Cash flows from investing activities:
Property improvements and replacements (1,291) (638)
Net withdrawals from (deposits to) restricted
escrows 228 (507)
Net insurance proceeds from casualty event 225 --
Net cash used in investing activities (838) (1,145)
Cash flows from financing activities:
Payments on mortgage notes payable (555) (396)
Repayment of mortgage notes payable -- (6,720)
Proceeds from long-term borrowing -- 7,325
Loan costs paid -- (273)
Distributions to partners -- (100)
Net cash used in financing activities (555) (164)
Net decrease in cash and cash equivalents (240) (296)
Cash and cash equivalents at beginning of period 885 1,004
Cash and cash equivalents at end of period $ 645 $ 708
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,528 $ 1,650
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"), a wholly-owned subsidiary of Insignia
Properties Trust ("IPT") (see "Note F"), 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, 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 the
lower tier partnerships in which it owns a controlling interest. The
Partnership owns a 99.9% limited partner interest in Big Walnut, L.P. and a
99.99% limited partner interest in The Trails, L.P. The general partners of Big
Walnut, L.P. and The Trails, L.P. may be removed by the Partnership; therefore,
Big Walnut, L.P. and The Trails, L.P. are deemed controlled by the Partnership.
As a result, the Partnership consolidates its interest in these partnerships
(whereby all accounts of these partnerships are included in the consolidated
financial statements of the Partnership with intercompany accounts being
eliminated). All significant interpartnership balances have been eliminated.
Effective July 28, 1997, LaFontenay, L.P. was restructured into a limited
liability company known as LaFontenay, L.L.C. ("LaFontenay"). The Partnership
owns 100% of the new entity. As a result, the Partnership consolidates its
interest in LaFontenay (whereby all accounts of LaFontenay are included in the
consolidated financial statements of the Partnership with intercompany accounts
being eliminated).
Effective December 31, 1997, the general partner of 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 well as all of the
limited partnership interest of Outlets. 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. Affiliates of the Managing General Partner provide
property management and asset management services to the Partnership. 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 nine month periods ended September 30, 1998 and 1997:
1998 1997
(in thousands)
Property management fees
(included in operating expense) $323 $330
Reimbursement for services of affiliates
including approximately $91,000 and $31,000
of construction oversight reimbursements in
1998 and 1997, respectively (included in
general and administrative expenses, operating
expenses and investment properties) 268 172
The Partnership also paid approximately $40,000 during the nine months ended
September 30, 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.
During September 1998, an affiliate of the Managing General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 400 of the outstanding
units of limited partnership interest in the Partnership at $6,000 per unit, net
to the seller in cash. The Purchaser has extended the tender offer expiration
date to November 16, 1998.
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 nine months
ended September 30, 1998.
NOTE D - MORTGAGE NOTES PAYABLE
On August 6, 1997, the Partnership refinanced the mortgage note payable
encumbering Lafontenay Apartments. The refinancing replaced indebtedness on
Lafontenay in the amount of approximately $6,720,000 which carried an interest
rate of 9.25% and had a maturity date of August 1, 1997. The new mortgage
indebtedness of $7,325,000 carries a stated interest rate of 7.5% and matures 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 loan 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 of the Bond on a date prior to the
fifth anniversary of the modification (June 30, 2002).
NOTE E - CASUALTY EVENT
In December 1997, a fire destroyed one building at The Trails Apartments. As a
result, the asset and related accumulated depreciation were written off in 1997.
At December 31, 1997, the proceeds received on the casualty approximated the
loss on write-off of the fire-damaged asset, with the difference of
approximately $9,000 being recorded as an insurance receivable. Therefore, no
gain or loss relating to this fire was recognized in 1997. At September 30,
1998, reconstruction of the destroyed building was ongoing, with the costs
reflected in investment properties as construction-in-process. The Partnership
recognized a casualty gain of approximately $216,000 in 1998, with insurance
proceeds received totaling $225,000.
NOTE F - TRANSFER OF CONTROL - SUBSEQUENT EVENT
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the Managing General Partner. In addition, AIMCO also acquired approximately
51% of the outstanding common shares of beneficial interest of IPT, the entity
which controls the Managing General Partner. Also, effective October 1, 1998,
IPT and AIMCO entered into an Agreement and plan of Merger pursuant to which IPT
is to be merged with and into AIMCO or a subsidiary of AIMCO (the "IPT Merger").
The IPT Merger requires the approval of the holders of a majority of the
outstanding IPT Shares. AIMCO has agreed to vote all of the IPT Shares owned by
it in favor of the IPT Merger and has granted an irrevocable limited proxy to
unaffiliated representatives of IPT to vote the IPT Shares acquired by AIMCO and
its subsidiaries in favor of the IPT Merger. As a result of AIMCO's ownership
and its agreement, the vote of no other holder of IPT is required to approve the
merger. The Managing General Partner does not believe that this transaction
will have a material effect on the affairs and operations of the Partnership.
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 nine month periods ended September 30, 1998 and 1997:
Average Occupancy
1998 1997
Big Walnut Apartments 94% 94%
Columbus, Ohio
LaFontenay Apartments 92% 94%
Louisville, Kentucky
The Trails Apartments 92% 94%
Nashville, Tennessee
Greensprings Manor Apartments 85% 87%
Indianapolis, Indiana
Shoppes At River Rock 68% 73%
(Formerly Outlet's Ltd. Mall)
Murfreesboro, Tennessee
The Managing General Partner attributes the decrease in occupancy at the Shoppes
at River Rock to increased competition from newer shopping centers in its
immediate vicinity. The largest tenant vacated the Shoppes at River Rock in
1997. Certain tenants at the shopping center exercised the option to pay a
reduced rental rate based on tenant sales due to the decreased occupancy brought
about when the aforementioned tenant vacated. Rental revenue for the nine
months ended September 30, 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 largest tenant vacated and
resulted in a credit for the tenant, which had overpaid its rent. A lease with
a new tenant for a unit of approximately 10,000 square feet was entered into
effective August 1998. With this newly leased space occupied, physical
occupancy is above the threshold which has allowed certain tenants to pay
reduced rental rates.
The Partnership's net loss for the nine months ended September 30, 1998, was
approximately $874,000 compared to a net loss of approximately $536,000 for the
corresponding period of 1997. Net loss for the three months ended September 30,
1998 was $456,000 compared to a net loss of $301,000 for the three months ended
September 30, 1997. The increase in net loss for the nine month period is
primarily due to decreased rental and other income, increased operating
expenses, and the loss on disposal of property incurred during the nine months
ended September 30, 1998, which more than offset decreased interest expense and
the gain on casualty event recognized during the nine months ended September 30,
1998. The decrease in rental income is primarily due to decreased average
occupancy, primarily at the Shoppes at River Rock, as discussed above. Also
contributing to the decrease was the retroactive rental adjustment recorded at
the Shoppes at River Rock during the first quarter of 1998, as discussed above.
The increase in operating expenses primarily related to the increase in
maintenance expense, which resulted from the costs associated with roof repairs
at Big Walnut, as discussed below. The loss on disposal of property was due to
the write-off of the undepreciated value of roofs that were replaced at
LaFontenay and Big Walnut. In addition, general and administrative expenses
increased due to an increase in expense reimbursements. The casualty gain of
$216,000 relates to fire damage at The Trails Apartments that was recorded in
1998 (see "Item 1. Financial Statements - Note E - Casualty Event"). Also
partially offsetting the decreased rental income, increased operating expenses
and loss on disposal was the decrease in interest expense which was primarily
due to decreased interest rates on the bonds that dictate The Trails' mortgage
interest rate and the August 1997 refinancing of LaFontenay at a lower interest
rate.
Included in operating expenses for the nine months ended September 30, 1998, is
approximately $285,000 of major repairs and maintenance comprised of exterior
painting, exterior building and parking lot repairs and landscaping. This
amount also includes approximately $194,000 of roofing repairs at Big Walnut.
The extensive roofing repairs were necessitated when excess roofing materials,
left on the roof after repairs were performed in a previous year, caused the
roof to partially collapse over time. The roofing contractor is no longer in
business. The cost of the repairs may be covered by insurance proceeds. The
original insurance claim was denied but has been appealed and is currently being
evaluated further. During the corresponding period in 1997, operating expenses
included approximately $118,000 of major repairs and maintenance expenses
consisting primarily of new gas service lines, water saving devices, swimming
pool repairs, landscaping and window coverings.
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 September 30, 1998, the Partnership had cash and cash equivalents of
approximately $645,000 compared to approximately $708,000 at September 30, 1997.
Net decreases in cash and cash equivalents for the nine month periods ended
September 30, 1998 and 1997, respectively, were $240,000 and $296,000. 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 receivable collections. Accounts payable and
other liabilities increased due to the timing of payments. Partially offsetting
these increases to cash was the increased use of cash for property taxes due to
the timing of payments. Net cash used in investing activities decreased due to
the insurance proceeds received in 1998 related to the Trails fire and increased
withdrawals from restricted escrows. Partially offsetting these increased
inflows of cash were increased property improvements and replacements during
1998. Net cash used in financing activities increased due to the refinancing
of the mortgage on LaFontenay Apartments, as discussed below. Mortgage
principal payments increased for the nine months ended September 30, 1998 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 loan 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 (June 30, 2002).
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 and to comply with
federal, state and local legal and regulatory requirements. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The General Partner is currently assessing the need for capital improvements at
each of the Partnership's properties. To the extent that additional capital
improvements are required, the Partnership's distributable cash flow, if any,
may be adversely affected, at least in the short term. The mortgage
indebtedness of approximately $26,366,000, net of discount, matures at various
times with balloon payments due at maturity. The General Partner will attempt
to refinance such indebtedness or sell the properties prior to such maturity
date. If the properties cannot be refinanced or sold for a sufficient amount,
the Partnership will risk losing such properties through foreclosure. The
Partnership distributed $100,000 to the partners during the nine months ended
September 30, 1997. No cash distributions were made during the nine months
ended September 30, 1998. Future cash distributions will depend on the levels
of net cash generated from operations, refinancings, property sales and the
availability of the cash reserves. The Partnership's distribution policy will be
reviewed on a quarterly basis. There can be no assurance, however, that the
Partnership will generate sufficient funds from operations to permit further
distributions to its partners in 1998 or subsequent periods.
Transfer of Control - Subsequent Event
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the Managing General Partner. In addition, AIMCO also acquired approximately
51% of the outstanding common shares of beneficial interest of Insignia
Properties Trust ("IPT"), the entity which controls the Managing General Partner
of the Partnership. Also, effective October 1, 1998, IPT and AIMCO entered into
an Agreement and plan of Merger pursuant to which IPT is to be merged with and
into AIMCO or a subsidiary of AIMCO (the "IPT Merger"). The IPT Merger requires
the approval of the holders of a majority of the outstanding IPT Shares. AIMCO
has agreed to vote all of the IPT Shares owned by it in favor of the IPT Merger
and has granted an irrevocable limited proxy to unaffiliated representatives of
IPT to vote the IPT Shares acquired by AIMCO and its subsidiaries in favor of
the IPT Merger. As a result of AIMCO's ownership and its agreement, the vote of
no other holder of IPT is required to approve the merger. The Managing General
Partner does not believe that this transaction will have a material affect on
the affairs and operations of the Partnership.
Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Partnership is
dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Managing Agent has determined that it will be required to modify or replace
significant portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Managing Agent
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Managing
Agent and the Partnership.
Status of Progress in Becoming Year 2000 Compliant
The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems. Assessments are continuing in regards to embedded systems in operating
equipment. The Managing Agent anticipates having all phases complete by June 1,
1999.
In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with, the Partnership has certain operating equipment,
primarily at the property sites, which needed to be evaluated for Year 2000
compliance. The focus of the Managing General Partner was to the security
systems, elevators, heating-ventilation-air-conditioning systems, telephone
systems and switches, and sprinkler systems. The Managing General Partner is
currently engaged in the identification of all non-compliant operational
systems, and is in the process of estimating the costs associated with any
potential modifications or replacements needed to such systems in order for them
to be Year 2000 compliant. It is not expected that such costs would have a
material adverse effect upon the operations of the Partnership.
Risk Associated with the Year 2000
The Managing General Partner believes that the Managing Agent has an effective
program in place to resolve the Year 2000 issue in a timely manner and has
appropriate contingency plans in place for critical applications that could
affect the Partnership's operations. To date, the Managing General Partner is
not aware of any external agent with a Year 2000 issue that would materially
impact the Partnership's results of operations, liquidity or capital resources.
However, the Managing General Partner has no means of ensuring that external
agents will be Year 2000 compliant. The Managing General Partner does not
believe that the inability of external agents to complete their Year 2000
resolution process in a timely manner will have a material impact on the
financial position or results of operations of the Partnership. However, the
effect of non-compliance by external agents is not readily determinable.
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 entities which were, at
the time, affiliates of Insignia ("Insignia 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. On June 25, 1998, the Managing General
Partner filed a motion seeking dismissal of the action. In lieu of responding
to the motion, the plaintiffs have filed an amended complaint. The Managing
General Partner has filed demurrers to the amended complaint which are scheduled
to be heard on January 8, 1999. The Managing General Partner believes the
action to be without merit, and intends to vigorously defend it.
On July 30, 1998 certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties LLC. V.
Insignia Financial Group, Inc. in the Superior Court of the State of California,
County of Los Angeles. The action involves 44 real estate limited partnerships
(including the Partnership) in which the plaintiffs allegedly own interests and
which Insignia Affiliates allegedly manage or control (the "Subject
Partnerships"). The complaint names as defendants Insignia, several Insignia
Affiliates alleged to be managing partners of the defendant limited
partnerships, the Partnership and the Managing General Partner. Plaintiffs
allege that they have requested from, but have been denied by each of the
Subject Partnerships, lists of their respective limited partners for the purpose
of making tender offers to purchase up to 4.9% of the limited partner units of
each of the Subject Partnerships. The complaint also alleges that certain of
the defendants made tender offers to purchase limited partner units in many of
the Subject Partnerships, with the alleged result that plaintiffs have been
deprived of the benefits they would have realized from ownership of the
additional units. The plaintiffs assert eleven causes of action, including
breach of contract, unfair business practices, and violations of the partnership
statutes of the states in which the Subject Partnerships are organized.
Plaintiffs seek compensatory, punitive and treble damages. The Managing General
Partner filed an answer to the complaint on September 15, 1998. The Managing
General Partner believes the claims o be without merit and intends to defend the
action vigorously.
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 September 30, 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/Patrick Foye
Patrick Foye
Executive Vice President
By: /s/Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
(Duly Authorized Officer)
Date: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Davidson Diversified Real Estate II, L.P. 1998 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, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 645
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 45,498
<DEPRECIATION> 22,619
<TOTAL-ASSETS> 25,515
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,366
0
0
<COMMON> 0
<OTHER-SE> (2,537)
<TOTAL-LIABILITY-AND-EQUITY> 25,515
<SALES> 0
<TOTAL-REVENUES> 6,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,689
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (874)
<EPS-PRIMARY> (700.02)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
