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 March 31, 2002
[ ] 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)
March 31, 2002
Assets
Cash and cash equivalents $ 772
Receivables and deposits 257
Restricted escrows 269
Other assets 670
Investment properties:
Land $ 2,603
Buildings and related personal property 47,761
50,364
Less accumulated depreciation (25,833) 24,531
$ 26,499
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 329
Tenant security deposit liabilities 147
Accrued property taxes 398
Other liabilities 430
Due to an affiliate 6,790
Mortgage notes payable 25,984
Partners' Deficit
General partners $ (587)
Limited partners (1,224.25 units issued and
outstanding) (6,992) (7,579)
$ 26,499
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
March 31,
2002 2001
Revenues:
Rental income $ 1,566 $ 1,547
Other income 168 174
Total revenues 1,734 1,721
Expenses:
Operating 771 869
General and administrative 90 88
Depreciation 497 493
Interest 398 534
Property taxes 114 113
Total expenses 1,870 2,097
Loss before extraordinary item (136) (376)
Extraordinary loss on early extinguishment of debt
(Note C) -- (554)
Net loss $ (136) $ (930)
Net loss allocated to general partners (2%) $ (3) $ (19)
Net loss allocated to limited partners (98%) (133) (911)
$ (136) $ (930)
Per limited partnership unit:
Loss before extraordinary item $(108.64) $(300.59)
Loss on early extinguishment of debt -- (443.54)
Net loss $(108.64) $(744.13)
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, 2001 1,224.25 $ (584) $(6,859) $(7,443)
Net loss for the three months
ended March 31, 2002 -- (3) (133) (136)
Partners' deficit at
March 31, 2002 1,224.25 $ (587) $(6,992) $(7,579)
See Accompanying Notes to Consolidated Financial Statements
d)
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net loss $ (136) $ (930)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 497 493
Amortization of discounts and loan costs 91 62
Extraordinary loss on early extinguishment of debt -- 554
Change in accounts:
Receivables and deposits (64) (139)
Other assets (107) (144)
Accounts payable (387) (197)
Tenant security deposit liabilities 8 4
Accrued property taxes (58) (30)
Due to affiliate 276 109
Other liabilities 73 (135)
Net cash provided by (used in) operating activities 193 (353)
Cash flows from investing activities:
Property improvements and replacements (2,917) (237)
Net (deposits to) withdrawals from restricted escrows (39) 308
Net cash (used in) provided by investing activities (2,956) 71
Cash flows from financing activities:
Advances from Managing General Partner 1,200 3,847
Payments on mortgage notes payable (126) (116)
Proceeds from mortgage note payable 1,737 5,065
Repayment of mortgage note payable -- (7,812)
Prepayment penalty -- (359)
Loan costs paid (19) (417)
Net cash provided by financing activities 2,792 208
Net increase (decrease) in cash and cash equivalents 29 (74)
Cash and cash equivalents at beginning of period 743 1,130
Cash and cash equivalents at end of period $ 772 $ 1,056
Supplemental disclosure of cash flow information:
Cash paid for interest $ 394 $ 338
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ -- $ 27
At December 31, 2001 approximately $850,000 of property improvements and
replacements were included in accounts payable and are included in property
improvements and replacements at March 31, 2002.
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 month period ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. 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, 2001. The Managing
General Partner is a subsidiary of Apartment Investment and Management Company
("AIMCO"), a publicly traded real estate investment trust.
Certain reclassifications have been made to the 2001 balances to conform to the
2002 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.
During the three months ended March 31, 2002 and 2001, 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 $87,000 and $88,000 during the
three months ended March 31, 2002 and 2001, respectively, which is included in
operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $628,000 and
$65,000 during the three months ended March 31, 2002 and 2001, respectively,
which is included in general and administrative expenses and investment
properties. Included in these amounts are fees related to construction
management services provided by an affiliate of the Managing General Partner of
approximately $559,000 for the three months ended March 31, 2002. There were no
construction management service fees paid or accrued during the three months
ended March 31, 2001. The construction management fees are calculated based on a
percentage of additions to investment properties.
In accordance with the Partnership Agreement, the Managing General Partner has
advanced the Partnership funds to cover operational expenses and to assist in
the closing of the refinancing required at Reflections Apartments. At March 31,
2002, the amount of the outstanding loans and accrued interest to cover
operational expenses was approximately $3,065,000 and the amount of the
outstanding loan and accrued interest to assist the refinancing was
approximately $3,725,000. Both amounts are included in Due to affiliate on the
accompanying consolidated balance sheet. Interest is charged at prime plus 1%.
Interest expense was approximately $83,000 and $109,000 for the three months
ended March 31, 2002 and 2001, respectively.
The Partnership accrued a real estate commission of $18,000 as a result of the
sale of Shoppes at River Rock due to the Managing General Partner during the
year ended December 31, 1999 which is included in other liabilities in the
accompanying consolidated balance sheet. 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.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Managing General Partner. During the three months ended
March 31, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $105,000 and $116,000, respectively, for insurance coverage and
fees associated with policy claims administration which is included in operating
expenses.
Note C - Refinancing of Mortgage Note Payable
On January 16, 2001, the mortgages encumbering Reflections Apartments were
refinanced in order to finance the rehabilitation of 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 year ended
December 31, 2001, the lender advanced Reflections Apartments an additional
amount of approximately $3,845,000 and during the three months ended March 31,
2002 the lender advanced Reflections Apartments an additional $1,737,000.
Subsequent advances of up to $2,978,000 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 (4.63% at March 31, 2002). Due to the
rehabilitation project, approximately $174,000 and $43,000 of the interest
expense for the three months ended March 31, 2002 and 2001, respectively, was
capitalized. During December 2001, the Partnership adjusted the accumulated
expenditures used in calculating capitalized interest which resulted in an
overall decrease in fourth quarter 2001 interest expense of approximately
$190,000. The impact on the first quarter of 2001 was an increase in interest
expense of approximately $28,000. In addition, monthly cash flow payments will
be made to the lender until the anticipated completion date of the renovations.
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 $469,000 during the year ended December 31, 2001.
Additional loan costs of approximately $19,000 were incurred during the three
months ended March 31, 2002. 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 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 - 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 Managing 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 was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court heard argument on the
motion and ordered further briefing after which time the matter will be taken
under submission. 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. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint.
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 three
months ended March 31, 2002 and 2001:
Average Occupancy
2002 2001
Big Walnut Apartments
Columbus, Ohio (1) 97% 82%
LaFontenay I & II Apartments
Louisville, Kentucky (2) 85% 89%
The Trails Apartments
Nashville, Tennessee 93% 93%
Reflections Apartments
Indianapolis, Indiana (3) 35% 42%
(1) The Managing General Partner attributes the increase in occupancy at Big
Walnut Apartments to an improved job market and reduced average rental
rates.
(2) The Managing General Partner attributes the decrease in occupancy at
LaFontenay I & II Apartments to poor market conditions and tenants buying
homes due to low interest rates.
(3) 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 desirable tenants. At March 31, 2002 47.25% of
the units cannot be rented due to the rehabilitation.
Results of Operations
The Registrant's net loss for the three months ended March 31, 2002, was
approximately $136,000 compared to a net loss of approximately $930,000 for the
three months ended March 31, 2001. The decrease in net loss was partially due to
the extraordinary loss from the early extinguishment of debt related to the
refinancing of Reflections Apartments in January 2001 (see discussion in
"Liquidity and Capital Resources"). The loss before the extraordinary item was
approximately $136,000 for the three months ended March 31, 2002 as compared to
approximately $376,000 for the three months ended March 31, 2001. The decrease
in loss before the extraordinary item is due to a decrease in total expenses
and, to a lesser extent, an increase in total revenues.
Total expenses decreased due to decreases in operating and interest expenses.
Operating expense decreased primarily due to decreases in contract courtesy
patrol expense and operating costs capitalized as part of the renovation project
at Reflections which were offset by an increase in utility expense primarily at
Reflections Apartments. Interest expense decreased due to the new financing at
Reflections Apartments with variable rate interest that is lower than the 7.6%
rate on the old mortgage and to a portion of the interest on the debt at
Reflections being capitalized as part of the renovation project. In addition,
interest on advances from the Managing General Partner decreased due to a lower
average interest rate. These decreases were partially offset by increased loan
cost amortization at Reflections Apartments. Included in general and
administrative expenses are reimbursements to the Managing General Partner
allowed under the Partnership Agreement associated with its management of the
Partnership. Costs associated with the quarterly and annual communications with
investors and regulatory agencies and the annual audit required by the
Partnership Agreement are also included in general and administrative expenses.
Total revenues increased due to an increase in rental income which was partially
offset by a decrease in other income for the three months ended March 31, 2002.
Rental income increased due to an increase in occupancy at Big Walnut Apartments
and an increase in the average rental rate at Reflections which were partially
offset by decreases in occupancy at Reflections and Lafontenay Apartments. Other
income decreased due to a decrease in utility reimbursements at Lafontenay
Apartments, reduced laundry income at Reflections, LaFontenay and The Trails
Apartments and reduced interest income due to lower average cash balances in
interest bearing accounts partially offset by an increase in utility
reimbursements at Big Walnut and The Trails Apartments.
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 March 31, 2002, the Partnership had cash and cash equivalents of
approximately $772,000 as compared to approximately $1,056,000 at March 31,
2001. Cash and cash equivalents increased approximately $29,000 since December
31, 2001 primarily due to approximately $2,792,000 of cash provided by financing
activities and approximately $193,000 of cash provided by operating activities
partially offset by approximately $2,956,000 of cash used in investing
activities. Cash provided by financing activities consisted of advances from the
Managing General Partner and additional proceeds from refinancing the mortgage
note encumbering Reflections Apartments partially offset by principal payments
on the mortgages encumbering the Partnership's properties and additional loan
costs paid. Cash used in investing activities consisted of property improvements
and replacements and net deposits to restricted escrow accounts. 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 $125,000 during 2002 which consists of structural
improvements, appliance replacements, and floor covering replacements. The
Partnership has completed approximately $31,000 in capital expenditures at Big
Walnut Apartments as of March 31, 2002 consisting primarily of floor covering
replacements. These improvements were funded primarily from operating cash flow.
LaFontenay I & II Apartments: The property has budgeted, but is not limited to,
capital improvements of approximately $84,000 during 2002 which consists of
floor covering and appliance replacements, painting and HVAC replacements. The
Partnership has completed approximately $56,000 in capital expenditures at
LaFontenay I & II Apartments as of March 31, 2002, consisting primarily of roof
replacements, natural gas enhancements, plumbing fixtures and floor covering
replacements. These improvements were funded from operating cash flow and
replacement reserves.
The Trails: The property has budgeted, but is not limited to, capital
improvements of approximately $82,000 during 2002 which consists of swimming
pool improvements, floor covering, appliance and water heater replacements and
major landscaping. The Partnership has completed approximately $10,000 in
capital expenditures at The Trails Apartments as of March 31, 2002, consisting
primarily of floor covering replacements. These improvements were funded from
operating cash flow.
Reflections: In January 2001, the Managing General Partner refinanced the
mortgage encumbering this property. The proceeds are being used to fund the
rehabilitation project for this property with an anticipated completion in
September 2002. The Managing General Partner is currently evaluating the capital
spending required to complete the rehabilitation project during 2002. The
Partnership has completed approximately $1,970,000 in capital expenditures at
Reflections Apartments during the three months ended March 31, 2002, consisting
primarily of architect and consultant fees, development services, furniture and
fixtures, and structural improvements. 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 $25,984,000, net of discount, is amortized over
varying 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 finance the rehabilitation of 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 year ended
December 31, 2001, the lender advanced Reflections Apartments an additional
amount of approximately $3,845,000 and during the three months ended March 31,
2002 the lender advanced Reflections Apartments an additional $1,737,000.
Subsequent advances of up to $2,978,000 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 (4.63% at March 31, 2002). Due to the
rehabilitation project, approximately $174,000 and $43,000 of the interest
expense for the three months ended March 31, 2002 and 2001, respectively, was
capitalized. In addition, monthly cash flow payments will be made to the lender
until the anticipated completion date of the renovations. 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 $469,000
during the year ended December 31, 2001. Additional loan costs of approximately
$19,000 were incurred during the three months ended March 31, 2002. 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 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.
Pursuant to the Partnership Agreement, the term of the Partnership is scheduled
to expire on December 31, 2008. Accordingly, prior to such date the Partnership
will need to either sell its investment properties or extend the term of the
Partnership.
No cash distributions were made during the three months ended March 31, 2002 or
2001. The Registrant's cash available for distribution 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, refinancings and/or property sales. In light of the rehabilitation
project at Reflections and the significant amounts accrued to the Managing
General Partner at March 31, 2002, it is not anticipated that the Partnership
will make distributions in the foreseeable future. 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 March 31, 2002, the reserve account
balance was approximately $251,000 for Big Walnut Apartments.
In addition to its indirect ownership of the managing and associate general
partner interest in the Partnership, AIMCO and its affiliates currently own
610.25 limited partnership units in the Partnership representing 49.85% of the
outstanding units. A number of these units were acquired pursuant to tender
offers made by AIMCO or its affiliates. It is possible that AIMCO or its
affiliates will 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 49.85% 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. (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 Managing 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 was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court heard argument on the
motion and ordered further briefing after which time the matter will be taken
under submission. 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. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint.
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 March 31, 2002.
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: