-----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, V87jSEfHTQ/R4X6R/H+ejAnEMKUOe5qMRqYMLugGBbRYoqeogXzRxmzT50oqTPAF pC37obkM+gq5JEKDFynQug== 0000792181-98-000011.txt : 19980813 0000792181-98-000011.hdr.sgml : 19980813 ACCESSION NUMBER: 0000792181-98-000011 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000750258 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [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: 98684131 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391513 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 10QSB 1 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 June 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.) One Insignia Financial Plaza, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, 1998 (in thousands, except unit data) Assets Cash and cash equivalents $ 788 Receivables and deposits, net of $42 for doubtful accounts 625 Restricted escrows 932 Other assets 456 Investment properties: Land $ 2,878 Buildings and related personal property 42,415 45,293 Less accumulated depreciation (22,142) 23,151 $ 25,952 Liabilities and Partners' Deficit Liabilities Accounts payable $ 476 Tenant security deposit liabilities 186 Accrued property taxes 528 Other liabilities 326 Mortgage notes payable 26,517 Partners' Deficit General partners' $ (476) Limited partners' (1,224.25 units issued and outstanding) (1,605) (2,081) $ 25,952 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 Six Months Ended June 30, June 30, 1998 1997 1998 1997 Revenues: Rental income $ 2,055 $ 2,075 $ 3,966 $ 4,120 Other income 198 261 381 411 Gain on casualty event 216 -- 216 -- Total revenues 2,469 2,336 4,563 4,531 Expenses: Operating 1,147 1,078 2,108 2,025 General and administrative 87 60 168 133 Depreciation 502 499 997 997 Interest 563 639 1,130 1,258 Property taxes 199 160 397 353 Loss on disposal of property 17 -- 181 -- Total expenses 2,515 2,436 4,981 4,766 Net loss $ (46) $ (100) $ (418) $ (235) Net loss allocated to general partners (2%) $ (1) $ (2) $ (8) $ (5) Net loss allocated to limited partners (98%) (45) (98) (410) (230) $ (46) $ (100) $ (418) $ (235) Net loss per limited partnership unit $ (36.76) $ (80.05) $(334.90) $(187.87) 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 six months ended June 30, 1998 -- (8) (410) (418) Partners' deficit at June 30, 1998 1,224.25 $ (476) $(1,605) $(2,081) See Accompanying Notes to Consolidated Financial Statements d) DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net loss $ (418) $ (235) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 997 997 Amortization of discounts, loan costs and leasing commissions 111 130 Loss on disposal of property 181 -- Gain on casualty event (216) -- Change in accounts: Receivables and deposits 304 (77) Other assets 29 (64) Accounts payable 250 (11) Tenant security deposit liabilities (3) 6 Accrued property taxes (163) (84) Other liabilities 55 4 Net cash provided by operating activities 1,127 666 Cash flows from investing activities: Property improvements and replacements (1,048) (257) Net deposits to restricted escrows (35) (48) Net insurance proceeds from casualty event 225 -- Net cash used in investing activities (858) (305) Cash flows from financing activities: Payments on mortgage notes payable (366) (250) Distributions to partners -- (100) Net cash used in financing activities (366) (350) Net (decrease) increase in cash and cash equivalents (97) 11 Cash and cash equivalents at beginning of period 885 1,004 Cash and cash equivalents at end of period $ 788 $ 1,015 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,023 $ 1,104 See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Davidson Diversified Real Estate II, L.P. (the "Partnership") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Davidson Diversified Properties, Inc. (the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 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 that it owns a controlling interest in. 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 controlled and consolidated by the Partnership. 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. Prior to February 25, 1998, the Managing General Partner was wholly-owned by MAE GP Corporation ("MAE GP"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), which is an affiliate of Insignia. Thus, the Managing General Partner is now a wholly-owned subsidiary of IPT. The partnership agreement provides for payments to affiliates for services and for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were paid to affiliates of the Managing General Partner during the six month periods ended June 30, 1998 and 1997 (in thousands): 1998 1997 Property management fees (included in operating expense) $215 $220 Reimbursement for services of affiliates (included in general and administrative expenses) 117 87 In addition, the Partnership paid approximately $78,000 and $21,000 during the six month periods ended June 30, 1998 and 1997, respectively, to an affiliate of the Managing General Partner for construction oversight reimbursements related to capital improvements and major repair projects. These costs are included in operating expenses and investment properties. The Partnership also paid approximately $2,000 during the six months ended June 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. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in IPT, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in September or October of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the Managing General Partner of the Partnership. NOTE C - DISTRIBUTION TO PARTNERS In February 1997, the Partnership distributed approximately $100,000 to the partners. The limited partners received approximately $98,000 ($80.05 per limited partnership unit) and the general partners received approximately $2,000. There were no distributions to the partners during the six months ended June 30, 1998. NOTE D - 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 June 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. 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 six month periods ended June 30, 1998 and 1997: Average Occupancy 1998 1997 Big Walnut Apartments 94% 95% Columbus, Ohio LaFontenay Apartments 90% 93% Louisville, Kentucky The Trails Apartments 91% 92% Nashville, Tennessee Greensprings Manor Apartments 84% 87% Indianapolis, Indiana Shoppes At River Rock 66% 75% (Formerly Outlet's Ltd. Mall) Murfreesboro, Tennessee The Managing General Partner attributes the decrease in occupancy at LaFontenay to ongoing construction at the property. The Managing General Partner believes once the construction is completed, occupancy will return to previous levels. Occupancy at Greensprings Manor Apartments has decreased due to the soft local market for one bedroom and studio apartments, which make up a large portion of Greensprings Manor's units. The staff at Greensprings is focusing on effective marketing and tenant satisfaction to combat the competitive market. Occupancy at the Shoppes at River Rock has decreased due to increased competition from newer shopping centers in its immediate vicinity. The anchor tenant vacated the Shoppes at River Rock in 1997. Certain tenants at the shopping center have exercised the option to pay a reduced rental rate based on tenant sales due to the decreased occupancy brought about when the anchor tenant vacated. Rental revenue for the six months ended June 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 anchor tenant vacated and resulted in a credit for the tenant, which had overpaid its rent. The Managing General Partner has recently signed a lease with a new tenant for a unit of approximately 10,000 square feet, effective August 10, 1998. Once this newly leased space is occupied, total occupancy will increase above the threshold which has allowed certain tenants to pay reduced rental rates. The Partnership's net loss for the six months ended June 30, 1998, was approximately $418,000 compared to a net loss of approximately $235,000 for the corresponding period of 1997. Net loss for the three months ended June 30, 1998 was $46,000 compared to a net loss of $100,000 for the three months ended June 30, 1997. The increase in net loss for the six month period is primarily due to decreased rental income and the loss on disposal of property incurred during the six months ended June 30, 1998, which more than offset the gain on casualty event recognized during the six months ended June 30, 1998. The decrease in rental income is primarily due to decreased occupancy at all of the Partnership's properties, primarily 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 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 D"). Also partially offsetting the decreased rental income and loss on disposal of property are decreased interest expense and major repair and maintenance expense. Interest expense decreased primarily due to the August 1997 refinancing of LaFontenay at a lower interest rate. Included in operating expense for the six months ended June 30, 1998, is approximately $40,000 of major repairs and maintenance comprised primarily of exterior building and parking lot repairs and landscaping. During the corresponding period in 1997, operating expense included approximately $92,000 of major repairs and maintenance expenses consisting primarily of new gas service lines, water saving devices, swimming pool repairs, 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 June 30, 1998, the Partnership had cash and cash equivalents of approximately $788,000 compared to approximately $1,015,000 at June 30, 1997. The net decrease in cash and cash equivalents for the six months ended June 30, 1998 was $97,000 compared to a net increase of $11,000 for the six months ended June 30, 1997. Net cash provided by operating activities increased due to increased cash provided by receivables and deposits due to the refund of a deposit on LaFontenay's refinancing and to the timing of payments. Accounts payable also 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 and decreased rental revenue, as discussed above. Net cash used in investing activities increased due to increased property improvements and replacements. Partially offsetting this increased use of cash were insurance proceeds received in 1998. Net cash used in financing activities remained constant. The distribution to partners during the six months ended June 30, 1997 was offset by an increase in mortgage principal payments due to the modification of the mortgage on The Trails, as discussed below, and to the refinancing of LaFontenay, whose debt balance increased approximately $600,000 in August of 1997. On August 6, 1997, the Partnership refinanced the mortgage encumbering La-Fontenay Apartments. The total indebtedness refinanced was approximately $6,720,000. The refinancing replaced the existing indebtedness which carried stated interest rates of 9.25% with a maturity date of August 1, 1997. The new mortgage indebtedness of $7,325,000 carries a stated interest rate of 7.5% and is amortized over 360 months with a balloon payment due on September 1, 2007. The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The Trails Apartments were called and, therefore, payable in full on February 1, 1997 in accordance with the terms of the agreements. On June 30, 1997, the Partnership entered into a Modification of Bond Documents with the issuer. Pursuant to the modification, the call notice was rescinded. The modification converted the monthly payments from interest only to principal and interest payments with an amortization period of twenty years. The note and bond mature on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the bondholder shall not exercise the call right on the bond on a date prior to the fifth anniversary of the modification. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the various properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The mortgage indebtedness of approximately $26,517,000, net of discount, matures at various times with balloon payments due at maturity, at which time the properties will either be refinanced or sold. The Partnership distributed $100,000 to the partners during the six months ended June 30, 1997. No cash distributions were made during the six months ended June 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. Currently, the Managing General Partner does not anticipate making any distributions during 1998. Year 2000 The Partnership is dependent upon the Managing General Partner and Insignia for management and administrative services. Insignia has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter (the "Year 2000 Issue"). The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Managing General Partner believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Partnership. Other Certain items discussed in this quarterly report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such forward-looking statements speak only as of the date of this quarterly report. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia and its affiliates of interests in certain general partner entities, past tender offers by Insignia affiliates to acquire limited partnership units, the management of partnerships by Insignia affiliates, as well as a recently announced agreement between Insignia and AIMCO. The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. 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 believes the action to be without merit, and intends to vigorously defend it. 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 June 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/Carroll D. Vinson Carroll D. Vinson President and Director By: /s/Robert D. Long, Jr. Robert D. Long, Jr. Vice President and Chief Accounting Officer Date: August 12, 1998 EX-27 2
5 This schedule contains summary financial information extracted from Davidson Diversified Real Estate II, L.P. 1998 Second Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000750258 DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. 1,000 6-MOS DEC-31-1998 JUN-30-1998 788 0 0 0 0 0 45,293 22,142 25,952 0 26,517 0 0 0 (2,081) 25,952 0 4,563 0 0 4,981 0 1,130 0 0 0 0 0 0 (418) (334.90) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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