-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MExFQGw7js+/F8ZMseg66DRbsmoaz37mLYSmQVr9C/xLgbWsCzJl6G4eDUpUjskj hQPQPTINaatCnlO5MBpzfg== /in/edgar/work/0000711642-00-000344/0000711642-00-000344.txt : 20001115 0000711642-00-000344.hdr.sgml : 20001115 ACCESSION NUMBER: 0000711642-00-000344 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000750258 STANDARD INDUSTRIAL CLASSIFICATION: [6500 ] IRS NUMBER: 621207077 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-14483 FILM NUMBER: 768087 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: POST OFFICE BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 10QSB 1 0001.txt FORM 10-QSB 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___ 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
Assets 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
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, 2000 1999 2000 1999 Revenues: (Restated) (Restated) 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)
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, 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)
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, 2000 1999 Cash flows from operating activities: 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.
See Accompanying Notes to Consolidated Financial Statements 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).
Three Months Ended September 30, 2000 Residential Other Totals 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
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. 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. 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. 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: EX-27 2 0002.txt THIRD QUARTER 10-QSB
5 This schedule contains summary financial information extracted from Davidson Diversified Real Estate II 2000 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000750258 Davidson Diversified Real Estate II 1,000 9-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 930 0 368 0 0 0 41,426 (22,858) 20,666 0 23,649 0 0 0 (5,721) 20,666 0 5,489 0 0 4,885 0 1,513 0 0 0 0 0 0 (909) (727.79) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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