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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 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 (I.R.S. 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___
<PAGE>
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)
September 30, 2000
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $ 930
Receivables and deposits, net of $179
for doubtful accounts 368
Restricted escrows 428
Other assets 372
Investment properties:
Land $ 2,603
Buildings and related personal property 38,823
41,426
Less accumulated depreciation (22,858) 18,568
$ 20,666
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 174
Tenant security deposit liabilities 144
Accrued property taxes 612
Other liabilities 695
Due to Managing General Partner 1,113
Mortgage notes payable 23,649
Partners' Deficit
General partners $ (549)
Limited partners (1,224.25 units issued and
outstanding) (5,172) (5,721)
$ 20,666
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
b)
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues: (Restated) (Restated)
<S> <C> <C> <C> <C>
Rental income $ 1,648 $ 1,883 $ 5,099 $ 5,711
Other income 139 120 390 405
Total revenues 1,787 2,003 5,489 6,116
Expenses:
Operating 924 895 2,883 2,738
General and administrative 140 85 276 248
Depreciation 472 393 1,432 1,257
Interest 433 515 1,513 1,539
Property taxes 90 159 294 474
Total expenses 2,059 2,047 6,398 6,256
Loss from continuing operations (272) (44) (909) (140)
Loss from discontinued operation -- (57) -- (123)
Impairment loss on discontinued
operations -- (660) -- (660)
Net loss $ (272) $ (761) $ (909) $ (923)
Net loss allocated to general
partners (2%) $ (5) $ (15) $ (18) $ (18)
Net loss allocated to limited
partners (98%) (267) (746) (891) (905)
$ (272) $ (761) $ (909) $ (923)
Per limited partnership unit:
Loss from continuing operations $(218.10) $ (35.12) $(727.79) $(111.90)
Loss from discontinued operation -- (45.74) -- (98.84)
Impairment loss on discontinued
operations -- (528.49) -- (528.49)
Net loss $(218.10) $(609.35) $(727.79) $(739.23)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
c)
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' 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 at
December 31, 1999 1,224.25 $ (531) $(4,281) $(4,812)
Net loss for the nine months
ended September 30, 2000 -- (18) (891) (909)
Partners' deficit at
September 30, 2000 1,224.25 $ (549) $(5,172) $(5,721)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
d)
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (909) $ (923)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1,432 1,511
Amortization of discounts, loan costs and leasing
commissions 169 180
Impairment loss on discontinued operations -- 660
Loss on disposal of property 20 --
Change in accounts:
Receivables and deposits 212 75
Other assets (60) (76)
Accounts payable (220) 274
Tenant security deposit liabilities (23) (7)
Accrued property taxes 13 (10)
Other liabilities 28 95
Net cash provided by operating activities 662 1,779
Cash flows from investing activities:
Property improvements and replacements (1,263) (842)
Net withdrawals from restricted escrows 84 70
Net cash used in investing activities (1,179) (772)
Cash flows from financing activities:
Advances from Managing General Partner 611 --
Payments on mortgage notes payable (562) (591)
Net cash provided by (used in) financing activities 49 (591)
Net (decrease) increase in cash and cash equivalents (468) 416
Cash and cash equivalents at beginning of period 1,398 971
Cash and cash equivalents at end of period $ 930 $ 1,387
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,446 $ 1,491
Supplemental disclosures of non-cash activity:
At December 31, 1999, there were approximately $91,000 of property
improvements and replacements in accounts payable.
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
e)
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" or "Registrant") 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, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. 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, 1999.
Principles of Consolidation:
The Registrant's financial statements include all the accounts of the
Partnership and its four 99.9% owned partnerships. The managing general partner
of the consolidated partnerships is Davidson Diversified Properties, Inc.
Davidson Diversified Properties, Inc. may be removed as the general partner of
the consolidated partnerships by the Registrant; therefore, the consolidated
partnerships are controlled and consolidated by the Registrant. All significant
interpartnership balances have been eliminated.
Reclassifications:
Certain reclassifications have been made to the 1999 balances to conform to the
2000 presentation.
Note B - Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
merged 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, AIMCO acquired 100% ownership interest in
the Managing General Partner. The Managing General Partner does not believe that
this transaction has had or will have a material effect on the affairs and
operations of the Partnership.
Note C - 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 (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following amounts were
paid or accrued to the Managing General Partner and its affiliates during the
nine months ended September 30, 2000 and 1999:
2000 1999
(in thousands)
Property management fees (included in
operating expenses) $ 278 $ 308
Reimbursement for services of affiliates
(included in operating and general
and administrative expenses and
investment properties) 234 173
Due to Managing General Partner 1,113 --
During the nine months ended September 30, 2000 and 1999, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's residential properties for providing property management
services. The Registrant paid to such affiliates approximately $278,000 and
$308,000 for the nine months ended September 30, 2000 and 1999, respectively.
An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$234,000 and $173,000 for the nine months ended September 30, 2000 and 1999,
respectively. A portion of both the current fees and the prior year fees were
not able to be paid due to the Partnership's cash flow. Accordingly, as of
September 30, 2000, a liability of approximately $290,000 exists and is
reflected in other liabilities.
In accordance with the Partnership Agreement, the Managing General Partner has
loaned the Partnership funds to cover operational expenses required at
Greensprings Manor Apartments. These loans were made in accordance with the
terms of the Partnership Agreement. At September 30, 2000, the amount of the
outstanding loans was approximately $1,113,000 and is included in due to
Managing General Partner. Interest is charged at the prime rate plus 1%.
Interest expense was approximately $68,000 for the nine months ended September
30, 2000 and is included in interest expense.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates currently own 506.50 limited partnership
units in the Partnership representing 41.372% of the outstanding units. A number
of these units were acquired pursuant to tender offers made by AIMCO or its
affiliates. It is possible that AIMCO or its affiliates will make one or more
additional offers to acquire additional limited partnership interests in the
Partnership for cash or in exchange for units in the operating partnership of
AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters, which
would include without limitation, voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner. As a
result of its ownership of 41.372% of the outstanding units, AIMCO is in a
position to significantly influence all voting decisions with respect to the
Registrant. When voting on matters, AIMCO would in all likelihood vote the Units
it acquired in a manner favorable to the interest of the Managing General
Partner because of their affiliation with the Managing General Partner.
Note D - Discontinued Operations
Shoppes at River Rock was the only commercial property owned by the Partnership
and represented one segment of the Partnership's operations. Due to the sale of
the property on December 30, 1999, the results of the commercial segment have
been shown as loss from discontinued operation for the three and nine month
periods ended September 30, 1999 and accordingly, the statements of operations
have been restated to reflect this presentation. Revenues of this property were
approximately $211,000 and $639,000 for the three and nine months ended
September 30, 1999. During the three months ended September 30, 1999, an
impairment loss of approximately $660,000 was recorded in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". As
a result of the impairment loss and loss from discontinued operations, the
Partnership recognized a total loss of approximately $717,000 and $783,000 for
the three and nine months ended September 30, 1999.
Note E - Segment Reporting
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership had two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of four apartment complexes, one each located in Ohio, Kentucky, Tennessee, and
Indiana. The Partnership rents apartment units to tenants for terms that are
typically twelve months or less. The commercial property segment consisted of a
shopping center located in Tennessee, which was sold on December 30, 1999. As a
result of the sale of the commercial property during 1999, the commercial
segment is shown as discontinued operations.
Measurement of segment profit and loss:
The Partnership evaluates performance based on segment profit (loss) before
depreciation. The accounting policies of the reportable segment are the same as
those described in the summary of significant accounting policies.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of investment properties that
offer different products and services. The reportable segments are each managed
separately because they provide distinct services with different types of
products and customers.
Segment information for the three and nine month periods ended September 30,
2000 and 1999 is shown in the tables below. The "Other" column includes
Partnership administration related items and income and expense not allocated to
the reportable segment (in thousands).
<TABLE>
<CAPTION>
Three Months Ended
September 30, 2000 Residential Other Totals
<S> <C> <C> <C>
Rental income $ 1,648 $ -- $ 1,648
Other income 134 5 139
Interest expense 433 -- 433
Depreciation 472 -- 472
General and administrative expense -- 140 140
Segment loss (137) (135) (272)
Nine Months Ended
September 30, 2000 Residential Other Totals
Rental income $ 5,099 $ -- $ 5,099
Other income 365 25 390
Interest expense 1,503 10 1,513
Depreciation 1,432 -- 1,432
General and administrative expense -- 276 276
Segment loss (648) (261) (909)
Total assets 20,274 392 20,666
Capital expenditures for investment
properties 1,172 -- 1,172
Three Months Ended
September 30,1999 Residential Commercial Other Totals
(discontinued) (Restated)
Rental income $ 1,883 $ -- $ -- $ 1,883
Other income 116 -- 4 120
Interest expense 515 -- -- 515
Depreciation 393 -- -- 393
General and administrative
expense -- -- 85 85
Loss from discontinued
operations -- (57) -- (57)
Impairment loss on discontinued
operations -- (660) -- (660)
Segment profit (loss) 37 (717) (81) (761)
Nine Months Ended
September 30,1999 Residential Commercial Other Totals
(discontinued) (Restated)
Rental income $ 5,711 $ -- $ -- $ 5,711
Other income 393 -- 12 405
Interest expense 1,539 -- -- 1,539
Depreciation 1,257 -- -- 1,257
General and administrative
expense -- -- 248 248
Loss from discontinued
operations -- (123) -- (123)
Impairment loss on discontinued
operations -- (660) -- (660)
Segment profit (loss) 96 (783) (236) (923)
Total assets 21,113 2,632 599 24,344
Capital expenditures for
investment properties 831 11 -- 842
</TABLE>
Note F - 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, its Managing General Partner and several of their affiliated
partnerships and corporate entities. The action 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 of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; the management of partnerships
by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek
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 filed
demurrers to the amended complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to final court approval, on behalf of the Partnership
and all limited partners who owned units as of November 3, 1999. Preliminary
approval of the settlement was obtained on November 3, 1999 from the Court, at
which time the Court set a final approval hearing for December 10, 1999. Prior
to the December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has currently scheduled a hearing on the matter for November 20,
2000. The Managing General Partner does not anticipate that costs associated
with this case will be material to the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and other filings with the Securities
and Exchange Commission made by the Registrant from time to time. The discussion
of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operation. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
The Partnership's investment properties consist of four apartment complexes. The
following table sets forth the average occupancy of the properties for the nine
months ended September 30, 2000 and 1999:
Average Occupancy
2000 1999
Big Walnut Apartments
Columbus, Ohio 92% 92%
LaFontenay I & II Apartments
Louisville, Kentucky 93% 92%
The Trails Apartments
Nashville, Tennessee 96% 95%
Greensprings Manor Apartments
Indianapolis, Indiana (1) 52% 91%
(1) The Managing General Partner attributes the decrease in occupancy at
Greensprings Manor Apartments to construction at the property. The
property is currently undergoing a major renovation project to enhance the
appearance of the property to attract additional tenants. At September 30,
2000, 35% of the units cannot be rented due to the construction.
Results of Operations
The Registrant's net loss for the three and nine months ended September 30, 2000
was approximately $272,000 and $909,000, respectively, as compared to a net loss
for the three and nine months ended September 30, 1999 of approximately $761,000
and $923,000, respectively. The decrease in the net loss is partially due to the
loss from discontinued operations and impairment loss on discontinued operations
recognized during the three and nine months ended September 30, 1999. Shoppes at
River Rock was the only commercial property owned by the Partnership and
represented one segment of the Partnership's operations. Due to the sale of the
property on December 30, 1999, the results of the commercial segment have been
shown as loss from discontinued operation for the three and nine month periods
ended September 30, 1999 and accordingly, the statements of operations have been
restated to reflect this presentation. Revenues of this property were
approximately $211,000 and $639,000 for the three and nine months ended
September 30, 1999. During the three months ended September 30, 1999, an
impairment loss of approximately $660,000 was recorded in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". As
a result of the impairment loss and loss from discontinued operations, the
Partnership recognized a total loss of approximately $717,000 and $783,000 for
the three and nine months ended September 30, 1999.
The Registrant's loss from continuing operations for the three and nine months
ended September 30, 2000 was approximately $272,000 and $909,000, respectively,
as compared to loss from continuing operations for the three and nine months
ended September 30, 1999 of approximately $44,000 and $140,000, respectively.
The increase in loss from continuing operations is primarily due to a decrease
in total revenues and an increase in total expenses.
Total revenues decreased primarily due to a decrease in rental income for the
three and nine month periods and a decrease in other income for the nine month
period. Rental income decreased primarily due to a decrease in occupancy at
Greensprings Manor Apartments as discussed above. This decrease in rental income
was partially offset by an increase in occupancy at two of the Partnership's
investment properties, and an increase in average rental rates at all four of
the properties. Other income decreased due to a decrease in utility and late
charges at Greensprings Manor Apartments.
Total expenses increased primarily due to increases in operating, general and
administrative, and depreciation expenses partially offset by decreases in
interest and property tax expenses. Operating expenses increased primarily due
to an increase in security patrol expense at Greensprings Manor Apartments.
General and administrative expense increased primarily due to an increase in the
cost of services included in the management reimbursements to the Managing
General Partner as allowed under the Partnership Agreement partially offset by a
decrease in legal fees resulting from the settlement of outstanding litigation
in 1999, as previously disclosed. Depreciation expense increased due to capital
improvements placed into service during the prior twelve months. Interest
expense decreased primarily due to a portion of the interest on the debt
encumbering Greensprings Manor Apartments being capitalized. This is a result of
the extensive rehabilitation that is to occur during 2001 which has affected the
property's ability to rent 35% of the total apartment units (see discussion
below). Property tax expense decreased primarily due to a decrease in the
assessed value of Greensprings Manor Apartments and a tax refund received at
LaFontenay I & II Apartments.
Also included in general and administrative expenses during the nine months
ended September 30, 2000 and 1999, are costs associated with the quarterly and
annual communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of the investment properties to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. 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.
Liquidity and Capital Resources
At September 30, 2000, the Partnership had cash and cash equivalents of
approximately $930,000 as compared to approximately $1,387,000 at September 30,
1999. Cash and cash equivalents decreased approximately $468,000 for the nine
months ended September 30, 2000 from the Partnership's year end, primarily due
to approximately $1,179,000 of cash used in investing activities which was
partially offset by approximately $662,000 of cash provided by operating
activities and approximately $49,000 of cash provided by financing activities.
Cash used in investing activities consisted of property improvements and
replacements partially offset by net withdrawals from escrow accounts maintained
by the mortgage lender. Cash provided by financing activities consisted of
advances from the Managing General Partner substantially offset by payments of
principal made on the mortgages encumbering the Partnership's properties. The
Partnership invests its working capital reserves in money market accounts.
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. Capital
improvements planned for each of the Registrant's properties are detailed below.
Big Walnut Apartments: The property has budgeted, but is not limited to, capital
improvements of approximately $747,000 during the current year which consists of
floor covering and appliance replacements, roof replacements, swimming pool
improvements and other property enhancements. The Partnership has completed
approximately $675,000 in budgeted and unbudgeted capital expenditures at Big
Walnut Apartments as of September 30, 2000 consisting primarily of roof
replacements, parking lot and swimming pool improvements, electrical upgrades,
building improvements, and appliance and floor covering replacements. These
improvements were funded primarily from operating cash flow.
LaFontenay I & II Apartments: The property has budgeted, but is not limited to,
capital improvements of approximately $95,000 during the current year which
consists of floor covering and appliance replacement, air conditioning and
heating replacements. The Partnership has completed approximately $167,000 in
budgeted and nonbudgeted capital expenditures at LaFontenay I & II Apartments as
of September 30, 2000, consisting primarily of plumbing improvements, appliance
and floor covering replacements, and heating and air conditioning unit
replacements. These improvements were funded primarily from operating cash flow.
The Trails: The property has budgeted, but is not limited to, capital
improvements of approximately $71,000 during the current year which consists of
floor covering and appliance replacements, and air conditioning upgrades. The
Partnership has completed approximately $106,000 in budgeted and nonbudgeted
capital expenditures at The Trails Apartments as of September 30, 2000,
consisting primarily of swimming pool improvements, gutter replacements, major
landscaping, and appliance and floor covering replacements. These improvements
were funded primarily from operating cash flow.
Greensprings Manor: The property has budgeted, but is not limited to, capital
improvements of approximately $144,000 during the current year which consists of
floor covering and appliance replacements, cabinet replacements, and heating and
air conditioning improvements. The Partnership has completed approximately
$224,000 in budgeted and nonbudgeted capital expenditures at Greensprings Manor
Apartments as of September 30, 2000, consisting primarily of floor covering
replacements, appliances, and capitalized interest (see discussion above). These
improvements were funded primarily from property operations. The Managing
General Partner is currently attempting to refinance the mortgage encumbering
this property. If the Managing General Partner is successful, a significant
portion of the proceeds will be used to fund the rehabilitation project that is
planned for this property. This project is expected to cost approximately
$7,500,000 and is expected to occur during the year 2001 with anticipated
completion in the first quarter of 2002.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $23,649,000, net of discount, is amortized over
two to nine years with required balloon payments ranging from November 15, 2002
to December 1, 2009. The Managing General Partner will attempt to refinance such
indebtedness and/or sell the properties prior to such maturity dates. If the
property cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such properties through foreclosure.
No cash distributions were made during the nine months ended September 30, 2000
or 1999. The Registrant's distribution policy is reviewed on a quarterly basis.
Future cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves, and the timing of debt
maturities, refinancing and/or property sales. Distributions may be restricted
by the requirement to deposit net operating income (as defined in the mortgage
note) into the reserve account until the reserve account is funded in an amount
equal to a minimum of $400 and a maximum of $1,000 per apartment unit for Big
Walnut Apartments and Greensprings Manor Apartments for a total of approximately
$330,000 to $825,000. The reserve account balance at September 30, 2000 was
approximately $419,000. There can be no assurance, however, that the Registrant
will generate sufficient funds from operations after planned capital
expenditures to permit distributions to its partners during the remainder of
2000 or subsequent periods.
<PAGE>
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, its Managing General Partner and several of their affiliated
partnerships and corporate entities. The action 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 of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; the management of partnerships
by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek
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 filed
demurrers to the amended complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to final court approval, on behalf of the Partnership
and all limited partners who owned units as of November 3, 1999. Preliminary
approval of the settlement was obtained on November 3, 1999 from the Court, at
which time the Court set a final approval hearing for December 10, 1999. Prior
to the December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has currently scheduled a hearing on the matter for November 20,
2000. The Managing General Partner does not anticipate that costs associated
with this case will be material to the Partnership's overall operations.
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, 2000.
<PAGE>
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 J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date:
