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, 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)
September 30, 2001
Assets
Cash and cash equivalents $ 554
Receivables and deposits 317
Restricted escrows 233
Other assets 737
Investment properties:
Land $ 2,603
Buildings and related personal property 42,355
44,958
Less accumulated depreciation (24,855) 20,103
$ 21,944
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 648
Tenant security deposit liabilities 148
Accrued property taxes 543
Other liabilities 311
Due to Managing General Partner 5,422
Mortgage notes payable 22,488
Partners' Deficit
General partners $ (587)
Limited partners (1,224.25 units issued and
outstanding) (7,029) (7,616)
$ 21,944
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Revenues:
Rental income $ 1,543 $ 1,648 $ 4,651 $ 5,099
Other income 141 139 473 390
Total revenues 1,684 1,787 5,124 5,489
Expenses:
Operating 872 929 2,522 2,888
General and administrative 97 135 304 271
Depreciation 521 472 1,516 1,432
Interest 511 433 1,555 1,513
Property taxes 129 90 294 294
Total expenses 2,130 2,059 6,191 6,398
Loss before extraordinary item (446) (272) (1,067) (909)
Extraordinary loss on early
extinguishment of debt -- -- (554) --
Net loss $ (446) $ (272) $ (1,621) $ (909)
Net loss allocated to general
partners (2%) $ (9) $ (5) $ (32) $ (18)
Net loss allocated to limited
partners (98%) (437) (267) (1,589) (891)
$ (446) $ (272) $ (1,621) $ (909)
Per limited partnership unit:
Loss before extraordinary item $(356.96) $(218.10) $ (854.40) $(727.79)
Extraordinary item -- -- (443.54) --
Net loss $(356.96) $(218.10) $(1,297.94) $(727.79)
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 nine months
ended September 30, 2001 -- (32) (1,589) (1,621)
Partners' deficit at
September 30, 2001 1,224.25 $ (587) $(7,029) $(7,616)
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,
2001 2000
Cash flows from operating activities:
Net loss $(1,621) $ (909)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 1,516 1,432
Amortization of discounts and loan costs 219 169
Extraordinary loss on early extinguishment of debt 554 --
Loss on disposal of property -- 20
Change in accounts:
Receivables and deposits (131) 212
Other assets (59) (60)
Accounts payable 258 (220)
Tenant security deposit liabilities 6 (23)
Accrued property taxes 55 13
Other liabilities (353) 28
Net cash provided by operating activities 444 662
Cash flows from investing activities:
Property improvements and replacements (3,010) (1,263)
Net withdrawals from restricted escrows 196 84
Net cash used in investing activities (2,814) (1,179)
Cash flows from financing activities:
Advances from Managing General Partner 3,867 611
Payments on mortgage notes payable (357) (562)
Proceeds from mortgage note payable 6,924 --
Repayment of mortgage note payable (7,812) --
Prepayment penalty (359) --
Loan costs paid (469) --
Net cash provided by financing activities 1,794 49
Net decrease in cash and cash equivalents (576) (468)
Cash and cash equivalents at beginning of period 1,130 1,398
Cash and cash equivalents at end of period $ 554 $ 930
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,421 $ 1,446
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ 25 $ --
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, 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.
Reclassifications:
Certain reclassifications have been made to the 2000 balances to conform to the
2001 presentation.
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
nine months ended September 30, 2001 and 2000:
2001 2000
(in thousands)
Property management fees (included in
operating expenses) $ 263 $ 278
Reimbursement for services of affiliates
(included in general and administrative
expenses and investment properties) 355 234
Due to Managing General Partner 5,422 1,113
During the nine months ended September 30, 2001 and 2000, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's properties for providing property management services. The
Registrant paid to such affiliates approximately $263,000 and $278,000 for the
nine months ended September 30, 2001 and 2000, respectively.
An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$355,000 and $234,000 for the nine months ended September 30, 2001 and 2000,
respectively. Included in reimbursements for services for the nine months ended
September 30, 2001 and 2000 are approximately $157,000 and $36,000,
respectively, of construction service reimbursements.
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 September 30, 2001, the amount of the
outstanding loans and accrued interest to cover operational expenses was
approximately $1,651,000 and the amount of the outstanding loan and accrued
interest to assist the refinancing was approximately $3,771,000 and are included
in Due to Managing General Partner. Interest is charged at the prime rate plus
1%. Interest expense was approximately $332,000 and $68,000 for the nine months
ended September 30, 2001 and 2000, respectively.
The Partnership accrued a real estate commission due to the Managing General
Partner of $48,000 upon the sale of Shoppes at River Rock 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 September 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 609.25 limited partnership units in
the Partnership representing 49.77% of the outstanding units at September 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 voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner. As a
result of its ownership of 49.77% of the outstanding units, AIMCO is in a
position to influence all such 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 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 nine
months ended September 30, 2001, the lender advanced Reflections Apartments an
additional amount of approximately $1,884,000. Subsequent advances of up to
$6,676,000 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 (6.575% for September 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 $469,000 during the nine months ended
September 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 requires 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. (the "Nuanes action") 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. On July 20, 2001,
plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which, together with a demurrer filed
by other defendants, is currently scheduled to be heard on November 15, 2001.
The Court has set the matter for trial in January 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. The matters are currently scheduled to be heard
on November 15, 2001.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases 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, 2001 and 2000:
Average Occupancy
2001 2000
Big Walnut Apartments
Columbus, Ohio (1) 83% 92%
LaFontenay I & II Apartments
Louisville, Kentucky 93% 93%
The Trails Apartments
Nashville, Tennessee 94% 96%
Reflections Apartments (formerly
Greensprings Manor Apartments)
Indianapolis, Indiana (2) 39% 52%
(1) The Managing General Partner attributes the decrease in occupancy at Big
Walnut Apartments to job transfers and tenants buying homes due to low
interest rates.
(2) The Managing General Partner attributes the decrease in occupancy at
Reflections 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 nine months ended September 30, 2001
was approximately $446,000 and $1,621,000, respectively, as compared to a net
loss for the three and nine months ended September 30, 2000 of approximately
$272,000 and $909,000, respectively. The increase in net loss for the nine
months ended September 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 in "Liquidity and Capital Resources"). The loss
before extraordinary item was approximately $1,067,000 for the nine months ended
September 30, 2001 as compared to $909,000 for the nine months ended September
30, 2000. The loss before extraordinary item for the three months ended
September 30, 2001 was approximately $446,000 compared to approximately $272,000
for the three months ended September 30, 2000. The increase in loss before the
extraordinary item for the nine months ended September 30, 2001 was due to a
decrease in total revenues partially offset by a decrease in total expenses. The
increase in loss before extraordinary item for the three months ended September
30, 2001 was due to a decrease in total revenue and an increase in total
expenses. For the three and nine month periods ended September 30, 2001, total
revenues decreased primarily due to a decrease in rental income partially offset
by an increase in other income. Rental income decreased primarily due to a
decrease in occupancy at all the investment properties except LaFontenay I & II
Apartments partially offset by an increase in the average rental rate at all the
properties. Other income increased primarily due to an increase in utility
reimbursements and late charge fees at all of the Partnership's properties, an
increase in laundry income at all properties except Big Walnut Apartments and
increased lease cancellation fees at all properties except Reflections
Apartments partially offset by a decrease in interest income due to lower
balances on deposit in interest bearing accounts.
Total expenses decreased for the nine months ended September 30, 2001 due to a
decrease in operating expense partially offset by increases in general and
administrative, depreciation and interest expenses. Total expenses increased for
the three months ended September 30, 2001 due to increases in depreciation and
interest expenses offset by decreases in operating expense and general and
administrative expense. Operating expense decreased for the three and nine
months ended September 30, 2001 primarily due to a decrease in contract security
patrol at Reflections Apartments and maintenance supplies at all of the
Partnership's properties partially offset by increases in advertising expense in
an effort to increase occupancy, in utilities due to increased cost of gas and
electricity in the areas and in insurance premiums at all of the Partnership's
properties. Depreciation expense increased for the three and nine months ended
September 30, 2001 primarily due to capital improvements placed into service
during the prior twelve months. Interest expense increased for the three and
nine months ended September 30, 2001 primarily due to increases in interest on
general partnership loans and the amortization of loan costs at Reflections
Apartments.
General and administrative expenses increased for the nine months ended
September 30, 2001 primarily due to increases in the cost of services included
in the management reimbursements to the general partner as allowed under the
Partnership Agreement and increases in state license fees and taxes, especially
in Tennessee where The Trails Apartments is located. General and administrative
expenses decreased for the three months ended September 30, 2001 primarily due
to the timing of the receipt of the Tennessee State license fees and taxes. Also
included in general and administrative expenses 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, 2001, the Partnership had cash and cash equivalents of
approximately $554,000 as compared to approximately $930,000 at September 30,
2000. Cash and cash equivalents decreased approximately $576,000 for the nine
months ended September 30, 2001 from the Partnership's year end, primarily due
to approximately $2,814,000 of cash used in investing activities which was
partially offset by approximately $1,794,000 of cash provided by financing
activities and approximately $444,000 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 and advances from the Managing General Partner partially
offset by repayment of the previous mortgages encumbering Reflections
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 $209,000 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 $122,000 in budgeted capital expenditures at Big
Walnut Apartments as of September 30, 2001 consisting primarily of floor
covering replacements and plumbing fixture replacements. These improvements were
funded primarily from operating cash flow and Partnership reserves.
LaFontenay I & II Apartments: The property has budgeted, but is not limited to,
capital improvements of approximately $171,000 during the current year which
consists of floor covering and appliance replacements, and HVAC replacements.
The Partnership has completed approximately $211,000 in budgeted and unbudgeted
capital expenditures at LaFontenay I & II Apartments as of September 30, 2001,
consisting primarily of structural improvements, HVAC replacements, plumbing
fixture replacements, water heater replacements, and appliances and floor
covering replacements. These improvements were funded primarily from operating
cash flow and Partnership reserves.
The Trails: The property has budgeted, but is not limited to, capital
improvements of approximately $234,000 during the current year which consists of
lighting and other building improvements and water heater replacements. The
Partnership has completed approximately $206,000 in capital expenditures at The
Trails Apartments as of September 30, 2001, consisting primarily of water
submetering enhancements, floor covering, water heater and appliance
replacements and major landscaping. These improvements were funded primarily
from operating cash flow.
Reflections: 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 $2,496,000 in
capital expenditures at Reflections Apartments as of September 30, 2001,
consisting primarily of floor covering replacements, HVAC replacements, parking
area enhancements, architect and consultant fees, structural improvements,
signage, 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 $22,488,000, 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 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 nine
months ended September 30, 2001, the lender advanced Reflections Apartments an
additional amount of approximately $1,884,000. Subsequent advances of up to
$6,676,000 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 (6.575% for September 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 $469,000 during the nine months ended
September 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 nine months ended September 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 September 30, 2001, the account balance was approximately
$222,000 for Big Walnut Apartments.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 609.25 limited partnership units in
the Partnership representing 49.77% of the outstanding units at September 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 voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner. As a
result of its ownership of 49.77% of the outstanding units, AIMCO is in a
position to influence all such 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. (the "Nuanes action") 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. On July 20, 2001,
plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which, together with a demurrer filed
by other defendants, is currently scheduled to be heard on November 15, 2001.
The Court has set the matter for trial in January 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. The matters are currently scheduled to be heard
on November 15, 2001.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases 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 September 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: