FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from.........to.........
Commission file number 0-13530
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
(Exact name of small business issuer as specified in its charter)
Delaware 62-1181565
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 951
Receivables and deposits 112
Restricted escrows 850
Other assets 212
Investment properties:
Land $ 1,072
Buildings and related personal property 12,353
13,425
Less accumulated depreciation (6,926) 6,499
$ 8,624
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 262
Tenant security deposit liabilities 82
Accrued property taxes 177
Other liabilities 111
Due to affiliate 321
Mortgage notes payable 10,438
Partners' Deficit
General partners' $ (115)
Limited partners' (751.59 units
issued and outstanding) (2,652) (2,767)
$ 8,624
See Accompanying Notes to Consolidated Financial Statements
b)
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Rental income $ 705 $ 703 $ 1,410 $ 1,387
Other income 57 51 120 100
Total revenues 762 754 1,530 1,487
Expenses:
Operating 302 317 591 604
General and administrative 37 27 73 56
Depreciation 143 140 287 276
Interest 208 216 416 431
Property taxes 61 60 147 123
Loss on disposal of property 29 -- 29 --
Total expenses 780 760 1,543 1,490
Net loss $ (18) $ (6) $ (13) $ (3)
Net loss allocated
to general partners (5%) $ (1) $ -- $ (1) $ --
Net loss allocated
to limited partners (95%) (17) (6) (12) (3)
$ (18) $ (6) $ (13) $ (3)
Net loss per limited
partnership unit $ (22.62) $ (7.98) $ (15.97) $ (3.99)
Distributions per limited
partnership unit $ -- $ 1.33 $1,197.46 $ 254.13
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
c) CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners' Partners' Total
Original capital contributions 751.84 $ 1 $15,008 $15,009
Partners' deficit at
December 31, 1997 751.59 $ (114) $(1,740) $(1,854)
Distributions to partners -- -- (900) (900)
Net loss for the six months
ended June 30, 1998 -- (1) (12) (13)
Partners' deficit at
June 30, 1998 751.59 $ (115) $(2,652) $(2,767)
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net loss $ (13) $ (3)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 287 276
Amortization of discounts and loan costs 26 32
Loss on disposal of property 29 --
Change in accounts:
Receivables and deposits 5 94
Other assets 17 (39)
Accounts payable 230 (25)
Tenant security deposit liabilities (7) 4
Accrued property taxes (73) (74)
Other liabilities 10 (24)
Net cash provided by operating activities 511 241
Cash flows from investing activities:
Property improvements and replacements (489) (104)
Net deposits to restricted escrows (58) (39)
Net cash used in investing activities (547) (143)
Cash flows from financing activities:
Payments on mortgage notes payable (77) (56)
Loan costs paid (12) --
Distributions to partners (900) (201)
Net cash used in financing activities (989) (257)
Net decrease in cash and cash equivalents (1,025) (159)
Cash and cash equivalents at beginning of period 1,976 637
Cash and cash equivalents at end of period $ 951 $ 478
Supplemental disclosure of cash flow information:
Cash paid for interest $ 390 $ 400
See Accompanying Notes to Consolidated Financial Statements
e)
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate I, L.P. (the "Partnership") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-KSB for the year ended December 31, 1997.
Reclassifications
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation.
Principles of Consolidation
During the third quarter of 1997, Ashley Woods Associates L.P. was restructured
into a limited liability company known as Ashley Woods L.L.C. ("Ashley Woods").
The Partnership owns 100% of the new entity. As a result, the Partnership
consolidates its interest in Ashley Woods (whereby all accounts of Ashley Woods
are included in the consolidated financial statements of the Partnership with
intercompany accounts being eliminated).
NOTE B - DUE TO AFFILIATE
The Partnership is liable to a company affiliated with the Managing General
Partner through common ownership for real estate commissions in the amounts of
$125,000 for Revere Village and $196,000 for Essex which were sold in previous
years. Payment of the commissions will not be made to the affiliated company
until after payment to the limited partners of their original invested capital,
plus 8% per annum cumulative non-compounded on their adjusted invested capital
commencing on the last day of the calendar quarter in which each limited partner
was admitted to the Partnership through the date of payment.
NOTE C - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. Prior to February 25, 1998, the Managing General Partner
was wholly-owned by MAE GP Corporation ("MAE GP"), an affiliate of Insignia
Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), which is an affiliate of
Insignia. Thus, the Managing General Partner is now a wholly-owned subsidiary
of IPT. The partnership agreement provides for payments to affiliates for
property management services based on a percentage of revenue and for
reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership. The following amounts were paid to affiliates of the Managing
General Partner during each of the six month periods ended June 30, 1998 and
1997 (in thousands):
1998 1997
Property management fees (included in operating expense) $ 76 $ 75
Reimbursement for services of affiliates (included
in general and administrative expenses) 47 33
In addition, the Partnership paid approximately $10,000, during the six month
period ended June 30, 1998, to an affiliate of the Managing General Partner for
construction oversight reimbursements related to capital improvements and major
repair projects. Construction oversight reimbursements are included in operating
expenses and investment properties. The Partnership also paid approximately
$4,000 during the six months ended June 30, 1998 to an affiliate of the Managing
General Partner for reimbursements of costs related to the Ashley Woods loan
refinancing in November of 1997.
For the period from January 1, 1997 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency affiliated with the
Managing General Partner with an insurer unaffiliated with the Managing General
Partner. An affiliate of the Managing General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy. The
agent assumed the financial obligations to the affiliate of the Managing General
Partner which received payments on these obligations from the agent. The amount
of the Partnership's insurance premiums that accrued to the benefit of the
affiliate of the Managing General Partner by virtue of the agent's obligations
was not significant.
On September 26, 1997, an affiliate of the Managing General Partner purchased
Lehman Brother's Class "D" subordinated bonds of SASCO, 1992-M1. These bonds
are secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Versailles on the Lake Apartments owned by the Partnership.
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
September or October of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the Managing General Partner of the
Partnership.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of two apartment complexes. The
following table sets forth the average occupancy of the properties for the six
months ended June 30, 1998 and 1997:
Average
Occupancy
1998 1997
Ashley Woods Apartments
Cincinnati, Ohio 89% 89%
Versailles on the Lake Apartments
Fort Wayne, Indiana 91% 96%
The Managing General Partner attributes the decrease in occupancy at Versailles
on the Lake to the local rental market becoming soft and increased competition
from surrounding properties.
The Partnership realized a net loss of approximately $13,000 for the six months
ended June 30, 1998 compared to a net loss of approximately $3,000 for the six
months ended June 30, 1997. The Partnership's net loss for the three months
ended June 30, 1998 was approximately $18,000 compared to a net loss of
approximately $6,000 for the three months ended June 30, 1997. The increase in
net loss is primarily due to increased property tax and general and
administrative expenses, as well as a loss on disposal of property being
incurred. These increased expenses are partially offset by increased rental
revenue and other income. Property tax expense for Ashley Woods increased, as
estimated 1997 taxes were underaccrued due to a tax rate increase on tax bills
received and paid in arrears. Property tax expense for the six months ended
June 30, 1998 reflects this increase. General and administrative costs
increased primarily due to higher expense reimbursements. The loss on disposal
of property resulted from the second quarter write-off of the undepreciated
value of roofs that were replaced at Ashley Woods. Partially offsetting the
increased expenses was an increase in rental revenue due to increased rental
rates at both properties. Other income increased primarily due to increased
interest income on higher average cash balances from the refinancing of Ashley
Woods.
Included in operating expense for the six months ended June 30, 1998 was
approximately $11,000 of major repairs and maintenance comprised primarily of
window coverings and exterior painting. For the six months ended June 30, 1997,
operating expense included approximately $23,000 of major repairs and
maintenance comprised primarily of window coverings, parking lot repairs and
landscaping.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions, which can result in the use of
rental concessions and rental reductions to offset softening market conditions,
there is no guarantee that the Managing General Partner will be able to sustain
such a plan.
At June 30, 1998, the Partnership held cash and cash equivalents of
approximately $951,000 compared to approximately $478,000 at June 30, 1997. The
net decrease in cash and cash equivalents for the six months ended June 30, 1998
was approximately $1,025,000 compared to $159,000 for the six months ended June
30, 1997. Net cash provided by operations increased due to a decrease in cash
used for accounts payable and other assets due to the timing of payments. Net
cash used in investing activities increased due to increased property
improvements and replacements. Net cash used in financing activities increased
primarily due to increased distributions to the partners during the first six
months of 1998 compared to the first six months of 1997. The 1998 distribution
represented a portion of the net proceeds from the mortgage refinancing of
Ashley Woods, as discussed below.
On November 20, 1997, the Partnership refinanced the debt encumbering Ashley
Woods. The refinancing replaced indebtedness of approximately $5,941,000 with a
new mortgage in the amount of $8,000,000. The new mortgage carries a stated
interest rate of 7.29% and is amortized over 30 years. Payments of
approximately $55,000 are due on the first day of each month until maturity on
December 1, 2004, at which time a balloon payment of approximately $7,334,000 is
due. Loan costs of approximately $166,000 relating to the refinancing have been
paid through June 30, 1998.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of $10,438,000, net of discount, is amortized over
varying periods. Of this amount, $7,962,000, which matures in 2004, relates to
Ashley Woods and $2,476,000, which matures in 2002, relates to Versailles on the
Lake. At the time of maturity, the properties will either be sold or
refinanced. Distributions to partners of $900,000 and $201,000 were made during
the six months ended June 30, 1998 and 1997, respectively. Future cash
distributions will depend on the levels of net cash generated from operations,
refinancings, property sales and the availability of cash reserves. The
Managing General Partner does not anticipate making further distributions during
1998.
Year 2000
The Partnership is dependent upon the Managing General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The Managing General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and its affiliates of
interests in certain general partner entities, past tender offers by Insignia
affiliates to acquire limited partnership units, the management of partnerships
by Insignia affiliates, as well as a recently announced agreement between
Insignia and AIMCO. The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
Managing General Partners filed a motion seeking dismissal of the action. In
lieu of responding to the motion, the plaintiffs have filed an amended
complaint. The Managing General Partner believes the action to be without
merit, and intends to vigorously defend it.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature. The Managing General Partner of the Partnership
believes that all such pending or outstanding litigation will be resolved
without a material adverse effect upon the business, financial condition or
operations of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
By: Davidson Diversified Properties, Inc.
Its Managing General Partner
By: /s/Carroll D. Vinson
Carroll D. Vinson
President and Director
By: /s/Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President and
Chief Accounting Officer
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Davidson Diversified Real Estate I, L.P. 1998 Second Quarter 10-QSB
and is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000721673
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 951
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 13,425
<DEPRECIATION> 6,926
<TOTAL-ASSETS> 8,624
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,438
0
0
<COMMON> 0
<OTHER-SE> (2,767)
<TOTAL-LIABILITY-AND-EQUITY> 8,624
<SALES> 0
<TOTAL-REVENUES> 1,530
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416
<INCOME-PRETAX> 0
<INCOME-TAX> 0
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<NET-INCOME> (13)
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<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
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