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, 2001
[ ] 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)
June 30, 2001
Assets
Cash and cash equivalents $ 570
Receivables and deposits 252
Restricted escrows 268
Other assets 874
Investment properties:
Land $ 2,603
Buildings and related personal property 40,992
43,595
Less accumulated depreciation (24,334) 19,261
$ 21,225
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 981
Tenant security deposit liabilities 111
Accrued property taxes 401
Other liabilities 370
Due to Managing General Partner 5,317
Mortgage notes payable 21,215
Partners' Deficit
General partners $ (578)
Limited partners (1,224.25 units issued and
outstanding) (6,592) (7,170)
$ 21,225
See Accompanying Notes to Consolidated Financial Statements
b)
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Revenues:
Rental income $ 1,561 $ 1,672 $ 3,108 $ 3,451
Other income 158 139 332 251
Total revenues 1,719 1,811 3,440 3,702
Expenses:
Operating 781 916 1,650 1,959
General and administrative 119 74 207 136
Depreciation 502 486 995 960
Interest 510 545 1,044 1,080
Property taxes 52 67 165 204
Total expenses 1,964 2,088 4,061 4,339
Loss before extraordinary item (245) (277) (621) (637)
Extraordinary loss on early
extinguishment of debt -- -- (554) --
Net loss $ (245) $ (277) $ (1,175) $ (637)
Net loss allocated to general
partners (2%) $ (5) $ (6) $ (23) $ (13)
Net loss allocated to limited
partners (98%) (240) (271) (1,152) (624)
$ (245) $ (277) $ (1,175) $ (637)
Per limited partnership unit:
Loss before extraordinary item $(196.04) $(221.36) $(497.44) $(509.70)
Extraordinary item -- -- (443.54) --
Net loss $(196.04) $(221.36) $(940.98) $(509.70)
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, 2000 1,224.25 $ (555) $(5,440) $(5,995)
Net loss for the six months
ended June 30, 2001 -- (23) (1,152) (1,175)
Partners' deficit at
June 30, 2001 1,224.25 $ (578) $(6,592) $(7,170)
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,
2001 2000
Cash flows from operating activities:
Net loss $(1,175) $ (637)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 995 960
Amortization of discounts and loan costs 127 110
Extraordinary loss on early extinguishment of debt 554 --
Loss on disposal of property -- 19
Change in accounts:
Receivables and deposits (66) 252
Other assets (123) (45)
Accounts payable 574 --
Tenant security deposit liabilities (31) (31)
Accrued property taxes (87) (122)
Other liabilities (294) (63)
Net cash provided by operating activities 474 443
Cash flows from investing activities:
Property improvements and replacements (1,630) (910)
Net withdrawals from restricted escrows 161 81
Net cash used in investing activities (1,469) (829)
Cash flows from financing activities:
Advances from Managing General Partner 3,762 451
Payments on mortgage notes payable (235) (368)
Proceeds from mortgage note payable 5,554 --
Repayment of mortgage note payable (7,812) --
Prepayment penalty (359) --
Loan costs paid (475) --
Net cash provided by financing activities 435 83
Net decrease in cash and cash equivalents (560) (303)
Cash and cash equivalents at beginning of period 1,130 1,398
Cash and cash equivalents at end of period $ 570 $ 1,095
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,033 $ 925
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ 42 $ --
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 six month periods ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2001. 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, 2000. The Managing General Partner is an affiliate of Apartment Investment
and Management Company ("AIMCO"), a publicly traded real estate investment
trust.
Principles of Consolidation
The Registrant's financial statements include all the accounts of the
Partnership and its three 99.9% owned partnerships and one wholly owned
partnership. The 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.
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. 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
six months ended June 30, 2001 and 2000:
2001 2000
(in thousands)
Property management fees (included in
operating expenses) $ 177 $ 189
Reimbursement for services of affiliates
(included in general and administrative
expenses and investment properties) 135 91
Due to affiliates (included in other
liabilities) -- 243
Due to Managing General Partner 5,317 995
During the six months ended June 30, 2001 and 2000, 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 $177,000 and $189,000 for
the six months ended June 30, 2001 and 2000, respectively.
An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$135,000 and $91,000 for the six months ended June 30, 2001 and 2000,
respectively.
In accordance with the Partnership Agreement, the Managing General Partner has
loaned the Partnership funds to cover operational expenses and to assist in the
closing of the refinancing required at Reflections Apartments (formerly
Greensprings Manor Apartments). At June 30, 2001, the amount of the outstanding
loans and accrued interest for the funds to cover operational expenses was
approximately $1,619,000 and the amount of the outstanding loan and accrued
interest for the funds to assist the refinancing was approximately $3,698,000
and are included in Due to Managing General Partner. Interest is charged at the
prime rate plus 1%. Interest expense was approximately $226,000 and $42,000 for
the six months ended June 30, 2001 and 2000, respectively, and is included in
interest expense.
The Partnership accrued a real estate commission of $48,000 upon the sale of
Shoppes at River Rock due to the Managing General Partner during the year ending
December 31, 1999. During the year ended December 31, 2000, approximately
$30,000 of this commission was paid to an outside party for brokerage services.
Therefore, approximately $18,000 is accrued and included in other liabilities in
the accompanying consolidated balance sheet at June 30, 2001. Payment of this
commission is subordinate to the limited partners receiving their original
invested capital plus a cumulative non-compounded annual return of 8% on their
adjusted invested capital.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 608.50 limited partnership units in
the Partnership representing 49.70% of the outstanding units at June 30, 2001. 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 acquire
additional limited partnership interests in the Partnership for cash or in
exchange for units in the operating partnership of AIMCO either through private
purchases or tender offers. 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 49.70% 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 its affiliation with the Managing General Partner.
Note C - Refinancing of Mortgage Note Payable
On January 16, 2001, the mortgages encumbering Reflections Apartments (formerly
Greensprings Manor Apartments) were refinanced in order to pay for the
rehabilitation project at the property. The maximum new loan amount is
$13,600,000. Effective January 16, 2001, the lender made an initial advance of
$5,040,000. Prior to the initial advance, the Managing General Partner loaned
the Partnership approximately $3,673,000 in order for the Partnership to close
the refinancing of the property. This amount will be repaid from the further
refinancing that will occur after the completion of the rehabilitation project,
estimated to be September 2002. During the six months ended June 30, 2001, the
lender advanced Reflections Apartments (formerly Greensprings Manor) an
additional amount of approximately $514,000. Subsequent advances of up to
$8,046,000 will also be made to cover renovation work that is needed at the
property. The new loan matures in January 2004, with 2 one-year extension
options. Interest payments started in February 2001 based on LIBOR plus 280
basis points (7.26% for June 2001). In addition, monthly cash flow payments will
be made to the lender until the anticipated completion date of the renovations,
which is September 2002. Due to the rehabilitation project, a portion of the
interest expense is being capitalized. If any amount remains from these advances
on the completion date of the renovation, it will be applied to the principal
balance. Principal payments will begin in February 2003, and monthly deposits
into a replacement reserve will be required. In connection with the refinancing,
the Partnership incurred loan costs of approximately $90,000 as of December 31,
2000 and approximately $475,000 during the six months ended June 30, 2001. These
loan costs are included in other assets in the accompanying consolidated balance
sheet and are being amortized over the life of the mortgage. In connection with
the refinancing, the assets and liabilities of the property were transferred
from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO
Greensprings L.P. The partners of AIMCO Greensprings L.P. are the Partnership,
with 99.9% interest, and Davidson Diversified Properties, Inc., with 0.1%
ownership. The loan is collateralized by the property as well as the interest of
both the Partnership and Davidson Diversified Properties, Inc. in AIMCO
Greensprings L.P. The new mortgage replaced a first mortgage of approximately
$7,518,000 and a second mortgage of approximately $294,000. The Partnership
recognized an extraordinary loss on the early extinguishment of debt of
approximately $554,000 consisting of a prepayment penalty of approximately
$359,000 and the write off of unamortized loan costs and mortgage discounts of
approximately $195,000.
Note D - Segment Reporting
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and required that those enterprises report
selected information about operating segments in interim financial reports. It
also established standards for related disclosures about products and services,
geographic areas, and major customers. As defined in SFAS No. 131, the
Partnership has only one reportable segment. The Managing General Partner
believes that segment-based disclosures will not result in a more meaningful
presentation than the consolidated financial statements as currently presented.
Note E - 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, among other things, 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; management of
the partnerships by the Insignia affiliates; and the series of transactions
which closed on October 1, 1998 and February 26, 1999 whereby Insignia and
Insignia Properties Trust, respectively, were merged into AIMCO. 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 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 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 and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. Plaintiffs have until
August 16, 2001 to file a fourth amended complaint. The Managing General Partner
does not anticipate that any costs, whether legal or settlement 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 six
months ended June 30, 2001 and 2000:
Average Occupancy
2001 2000
Big Walnut Apartments
Columbus, Ohio (1) 82% 91%
LaFontenay I & II Apartments
Louisville, Kentucky 92% 94%
The Trails Apartments
Nashville, Tennessee (2) 93% 96%
Reflections Apartments (formerly
Greensprings Manor Apartments)
Indianapolis, Indiana (3) 41% 56%
(1) The Managing General Partner attributes the decrease in occupancy at Big
Walnut Apartments to an economic change and beneficial home buyer's market
in the area and rent concessions by competitors.
(2) The Managing General Partner attributes the decrease in occupancy at The
Trails Apartments to new construction in the area and rent concessions and
special promotional rates offered by competitors.
(3) The Managing General Partner attributes the decrease in occupancy at
Reflections Apartments (formerly 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.
Results of Operations
The Registrant's net loss for the three and six months ended June 30, 2001 was
approximately $245,000 and $1,175,000, respectively, as compared to a net loss
for the three and six months ended June 30, 2000 of approximately $277,000 and
$637,000, respectively. The increase in net loss for the six months ended June
30, 2001 was primarily due to the extraordinary loss from the early
extinguishment of debt related to the refinancing of the mortgage note
encumbering Reflections Apartments (formerly Greensprings Manor Apartments) in
January 2001 (see discussion below). The loss before the extraordinary item was
approximately $621,000 for the six months ended June 30, 2001 as compared to
$637,000 for the six months ended June 30, 2000. The decrease in loss before the
extraordinary item for the three and six months ended June 30, 2001 was due to a
decrease in total expenses partially offset by a decrease in total revenues.
Total revenues decreased primarily due to a decrease in rental income partially
offset by an increase in other income for the three and six months ended June
30, 2001. Rental income decreased primarily due to a decrease in occupancy at
all the investment properties as discussed above. Other income increased
primarily due to an increase in utility reimbursement income at all the
investment properties.
Total expenses decreased due to a decrease in operating expenses, interest
expense and property tax expense partially offset by an increase in general and
administrative expenses and depreciation expense. Operating expenses decreased
primarily due to a decrease in security patrol expense at Reflections Apartments
(formerly Greensprings Manor Apartments). The decrease in interest expense is
primarily due to the new financing at Reflections Apartments in January 2001
with a lower debt balance and a portion of the interest expense is being
capitalized. The decrease in property tax expense was primarily due to a
decrease in the assessed value of Reflections Apartments, a refund of 1999
property tax resulting from the decrease in the assessed value of Reflections
Apartments, and a portion of the property tax being capitalized at Reflections
Apartments. General and administrative expenses 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 and an
increase in state license fees and taxes, expecially in Tennessee where The
Trails Apartments is located. Also included in general and administrative
expenses were costs associated with the quarterly and annual communications with
investors and regulatory agencies and the annual audit required by the
Partnership Agreement. Depreciation expense increased primarily due to capital
improvements placed into service during the prior twelve months.
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 June 30, 2001, the Partnership had cash and cash equivalents of approximately
$570,000 as compared to approximately $1,095,000 at June 30, 2000. Cash and cash
equivalents decreased approximately $560,000 for the six months ended June 30,
2001 from the Partnership's year end, primarily due to approximately $1,469,000
of cash used in investing activities which was partially offset by approximately
$435,000 of cash provided by financing activities and approximately $474,000 of
cash provided by operating 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 primarily of proceeds from
refinancing the mortgage note encumbering Reflections Apartments (formerly
Greensprings Manor Apartments) and advances from the Managing General Partner
largely offset by repayment of the previous mortgages encumbering Reflections
Apartments (formerly Greensprings Manor Apartments), a prepayment penalty and
loan costs paid in relation to the refinancing and principal payments on the
mortgages encumbering the Partnership's properties. The Partnership invests its
working capital reserves in interest bearing 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 $103,000 during the current year which consists of
structural improvements, maintenance equipment, floor covering replacements,
cabinet enhancements, and recreational facilities improvements. The Partnership
has completed approximately $5,000 in budgeted capital expenditures at Big
Walnut Apartments as of June 30, 2001 consisting primarily of floor covering
replacements, appliance replacements, plumbing fixtures, and structural
improvements. 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 $73,000 during the current year which
consists of floor covering and appliance replacements, and HVAC replacements.
The Partnership has completed approximately $96,000 in budgeted and unbudgeted
capital expenditures at LaFontenay I & II Apartments as of June 30, 2001,
consisting primarily of structural improvements, HVAC replacements, plumbing
fixtures, water heater replacements, appliances and floor covering replacements
and roof 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 $146,000 during the current year which consists of
lighting and other building improvements and water heater replacements. The
Partnership has completed approximately $135,000 in capital expenditures at The
Trails Apartments as of June 30, 2001, consisting primarily of floor covering,
water heater and appliance replacements and major landscaping. These
improvements were funded primarily from operating cash flow.
Reflections (formerly Greensprings Manor): In January 2001, the Managing General
Partner refinanced the mortgage encumbering this property. The proceeds will be
used to fund the rehabilitation project that is planned for this property. This
project is expected to cost approximately $7,645,000 with anticipated completion
in September 2002. The Partnership has completed approximately $1,436,000 in
capital expenditures at Reflections Apartments (formerly Greensprings Manor
Apartments) as of June 30, 2001, consisting primarily of floor covering
replacements, HVAC replacements, office computers, structural and other building
improvements, cabinet and appliance replacements, interior decoration and major
landscaping. These improvements were funded primarily from refinancing proceeds
and operating cash flow.
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 $21,215,000, net of discount, is amortized over
periods 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
properties cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such properties through foreclosure.
On January 16, 2001, the mortgages encumbering Reflections Apartments (formerly
Greensprings Manor Apartments) were refinanced in order to pay for the
rehabilitation project at the property. The maximum new loan amount is
$13,600,000. Effective January 16, 2001, the lender made an initial advance of
$5,040,000. Prior to the initial advance, the Managing General Partner loaned
the Partnership approximately $3,673,000 in order for the Partnership to close
the refinancing of the property. This amount will be repaid from the further
refinancing that will occur after the completion of the rehabilitation project,
estimated to be September 2002. During the six months ended June 30, 2001, the
lender advanced Reflections Apartments (formerly Greensprings Manor) an
additional amount of approximately $514,000. Subsequent advances of up to
$8,046,000 will also be made to cover renovation work that is needed at the
property. The new loan matures in January 2004, with 2 one-year extension
options. Interest payments started in February 2001 based on LIBOR plus 280
basis points (7.26% for June 2001). In addition, monthly cash flow payments will
be made to the lender until the anticipated completion date of the renovations,
which is September 2002. Due to the rehabilitation project, a portion of the
interest expense is being capitalized. If any amount remains from these advances
on the completion date of the renovation, it will be applied to the principal
balance. Principal payments will begin in February 2003, and monthly deposits
into a replacement reserve will be required. In connection with the refinancing,
the Partnership incurred loan costs of approximately $90,000 as of December 31,
2000 and approximately $475,000 during the six months ended June 30, 2001. These
loan costs are included in other assets in the accompanying consolidated balance
sheet and are being amortized over the life of the mortgage. In connection with
the refinancing, the assets and liabilities of the property were transferred
from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO
Greensprings L.P. The partners of AIMCO Greensprings L.P. are the Partnership,
with 99.9% interest, and Davidson Diversified Properties, Inc., with 0.1%
ownership. The loan is collateralized by the property as well as the interest of
both the Partnership and Davidson Diversified Properties, Inc. in AIMCO
Greensprings L.P. The new mortgage replaced a first mortgage of approximately
$7,518,000 and a second mortgage of approximately $294,000. The Partnership
recognized an extraordinary loss on the early extinguishment of debt of
approximately $554,000 consisting of a prepayment penalty of approximately
$359,000 and the write off of unamortized loan costs and mortgage discounts of
approximately $195,000.
No cash distributions were made during the six months ended June 30, 2001 or
2000. The Registrant's distribution policy is reviewed on a monthly 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. There can be no assurance,
however, that the Registrant will generate sufficient funds from operations
after required capital expenditures to permit distributions to its partners in
2001 or subsequent periods. In addition, the Partnership may be restricted from
making distributions 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 for a total of approximately $100,000
to $251,000. As of June 30, 2001, the account balance was approximately $251,000
for Big Walnut Apartments.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 608.50 limited partnership units in
the Partnership representing 49.70% of the outstanding units at June 30, 2001. 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 acquire
additional limited partnership interests in the Partnership for cash or in
exchange for units in the operating partnership of AIMCO either through private
purchases or tender offers. 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 49.70% 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 its affiliation with the Managing General Partner.
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, among other things, 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; management of
the partnerships by the Insignia affiliates; and the series of transactions
which closed on October 1, 1998 and February 26, 1999 whereby Insignia and
Insignia Properties Trust, respectively, were merged into AIMCO. 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 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 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 and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. Plaintiffs have until
August 16, 2001 to file a fourth amended complaint. The Managing General Partner
does not anticipate that any costs, whether legal or settlement 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
None.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 2001.
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: