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, 1999
[ ] 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.)
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 I, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1999
Assets
Cash and cash equivalents $ 916
Receivables and deposits 122
Restricted escrows 296
Other assets 215
Investment properties:
Land $ 1,072
Buildings and related personal property 12,956
14,028
Less accumulated depreciation (7,531) 6,497
$ 8,046
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 46
Tenant security deposit liabilities 72
Accrued property taxes 183
Other liabilities 102
Due to affiliate 321
Mortgage notes payable 10,295
Partners' Deficit
General partners' $ (125)
Limited partners' (751.59 units
issued and outstanding) (2,848) (2,973)
$ 8,046
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,
1999 1998 1999 1998
Revenues:
Rental income $ 744 $ 705 $ 1,442 $ 1,410
Other income 77 57 139 120
Total revenues 821 762 1,581 1,530
Expenses:
Operating 354 331 690 620
General and administrative 28 37 63 73
Depreciation 164 143 315 287
Interest 210 208 416 416
Property taxes 66 61 132 147
Total expenses 822 780 1,616 1,543
Net loss $ (1) $ (18) $ (35) $ (13)
Net loss allocated
to general partners (5%) $ -- $ (1) $ (2) $ (1)
Net loss allocated
to limited partners (95%) (1) (17) (33) (12)
$ (1) $ (18) $ (35) $ (13)
Net loss per limited
partnership unit $ (1.33) $ (22.62) $ (43.91) $ (15.97)
Distributions per limited
partnership unit $ -- $ -- $ -- $1,197.46
See Accompanying Notes to Consolidated Financial Statements
c)
DAVIDSON DIVERSIFIED REAL ESTATE I, 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 751.84 $ 1 $15,008 $15,009
Partners' deficit at
December 31, 1998 751.59 $ (123) $(2,815) $(2,938)
Net loss for the six months
ended June 30, 1999 -- (2) (33) (35)
Partners' deficit at
June 30, 1999 751.59 $ (125) $(2,848) $(2,973)
See Accompanying Notes to Consolidated Financial Statements
d)
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net loss $ (35) $ (13)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 315 287
Amortization of discounts and loan costs 32 26
Loss on disposal of property -- 29
Change in accounts:
Receivables and deposits 73 5
Other assets (41) 17
Accounts payable (8) 230
Tenant security deposit liabilities (1) (7)
Accrued property taxes (83) (73)
Other liabilities (15) 10
Net cash provided by operating activities 237 511
Cash flows from investing activities:
Property improvements and replacements (190) (489)
Net receipts from (deposits to) restricted
escrows 613 (58)
Net cash provided by (used in) investing
activities 423 (547)
Cash flows from financing activities:
Payments on mortgage notes payable (82) (77)
Loan costs paid -- (12)
Distributions to partners -- (900)
Net cash used in financing activities (82) (989)
Net increase (decrease) in cash and cash
equivalents 578 (1,025)
Cash and cash equivalents at beginning of period 338 1,976
Cash and cash equivalents at end of period $ 916 $ 951
Supplemental disclosure of cash flow information:
Cash paid for interest $ 384 $ 390
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" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
Principles of Consolidation
The consolidated financial statements include the Partnership's 100% membership
interest in Ashley Woods L.L.C. 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 - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment Investment and Management Company ("AIMCO"), a publicly
traded real estate investment trust, with AIMCO being the surviving corporation
(the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in
the Managing General Partner. The Managing General Partner does not believe
that this transaction will have a material effect on the affairs and operations
of the Partnership.
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. Affiliates of the Managing General Partner provide
property management and asset management services to the Partnership. 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 payments were paid to affiliates of the Managing General Partner
during each of the six month periods ended June 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $ 81 $ 76
Reimbursement for services of affiliates
(included in investment properties,
general and administrative expenses
and operating expenses) 41 56
Additionally, the Partnership paid approximately $4,000 during the six months
ended June 30, 1998 to affiliates of the Managing General Partner for
reimbursements of costs related to the refinancing of Ashley Woods in November
1997. These costs were capitalized as loan costs and are being amortized over
the term of the loan.
During the six months ended June 30, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's properties as compensation for providing property management
services. The Registrant paid to such affiliates approximately $81,000 and
$76,000 for the six month periods ended June 30, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $41,000 and
$56,000 for the six month periods ended June 30, 1999 and 1998, respectively
(including approximately $10,000 of construction oversight reimbursements for
both periods).
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. The total amount of $321,000 is included on the consolidated balance
sheet as "Due to affiliate". Payment of the commissions will not be made to the
affiliated company until each limited partner has received a payment equal to
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.
On September 26, 1998, an affiliate of the Managing General Partner purchased
Lehman Brothers' class "D" Subordinated bonds of SASCO, 1992-M1. These bonds
are secured by 55 multi-family apartment mortgage loan pairs held in trust,
including Versailles on the Lake Apartments which are owned by the Partnership.
NOTE D - SEGMENT INFORMATION
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of two apartment complexes
in Cincinnati, Ohio and Fort Wayne, Indiana. The Partnership rents apartment
units to tenants for terms that are typically twelve months or less.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segment are the same as those of the Partnership as
described in the Partnership's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998.
The Partnership's reportable segment consists of investment properties that
offer similar products and services. Although each of the investment properties
is managed separately, they have been aggregated into one segment as they
provide services with similar types of products and customers.
Segment information for the six months ended June 30, 1999 and 1998 is shown in
the tables below (in thousands). The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Residential Other Totals
Rental income $1,442 $ -- $1,442
Other income 134 5 139
Interest expense 416 -- 416
Depreciation 315 -- 315
General and administrative expense -- 63 63
Segment income (loss) 23 (58) (35)
Total assets 7,770 276 8,046
Capital expenditures for investment
properties 190 -- 190
1998
Residential Other Totals
Rental income $1,410 $ -- $1,410
Other income 91 29 120
Interest expense 416 -- 416
Depreciation 287 -- 287
General and administrative expense -- 73 73
Segment income (loss) 31 (44) (13)
Total assets 7,780 844 8,624
Capital expenditures for investment
properties 489 -- 489
NOTE E - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, 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 entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs have filed an amended complaint. The Managing General Partner has
filed demurrers to the amended complaint which were heard during February 1999.
No ruling on such demurrers has been received. The Managing General Partner
does not anticipate that costs associated with this case, if any, 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 OR PLAN OF OPERATIONS
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 the 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 two apartment complexes. The
following table sets forth the average occupancy of the properties for the six
months ended June 30, 1999 and 1998:
Average Occupancy
1999 1998
Ashley Woods Apartments
Cincinnati, Ohio 93% 89%
Versailles on the Lake Apartments
Fort Wayne, Indiana 90% 91%
The Managing General Partner attributes the increase in occupancy at Ashley
Woods to increased marketing and advertising efforts along with concessions
currently being offered to attract new tenants.
Results of Operations
The Partnership realized a net loss of approximately $35,000 for the six months
ended June 30, 1999, compared to a net loss of approximately $13,000 for the six
months ended June 30, 1998. The Partnership's net loss for the three months
ended June 30, 1999, was approximately $1,000 compared to a net loss of
approximately $18,000 for the three months ended June 30, 1998. The increase in
net loss for the six months ended June 30, 1999, is due to an increase in total
expenses which was partially offset by an increase in total revenues. Total
revenues increased for the three and six months ended June 30, 1999, due to
increased rental income and other income. Rental income increased primarily due
to increased occupancy at Ashley Woods and increased average annual rental rates
at both of the Partnership's properties, which was partially offset by increased
concession costs at both of the Partnership's properties and a slight decrease
in occupancy at Versailles on the Lake. Other income increased due to increased
laundry income at both of the Partnership's properties and increased tenant
charges at Ashley Woods.
Total expenses increased for the comparable three and six month periods
primarily due to increased operating expenses which were partially offset by
decreased property taxes. Operating expenses increased primarily due to an
increase in maintenance expenses at Ashley Woods in an effort to increase
occupancy as well as increased utility expenses at Versailles on the Lake.
Offsetting these increases was a loss on disposal of property during the six
months ended June 30, 1998. This loss resulted from the write-off of the
undepreciated value of roofs that were replaced at Ashley Woods. There was no
similar loss during the six months ended June 30, 1999. Property tax expense
for Ashley Woods for the six months ended June 30, 1998, includes additional
amounts owed due to a tax rate increase on tax bills received and paid in
arrears for which there was an underaccrual in 1997. Property tax for the six
months ended June 30, 1999, does not include any such additional amount. This
additional expenditure was paid during the first quarter of 1998, so the expense
for the three months ended June 30, 1999, does not reflect any of this variance.
General and administrative expense decreased for the comparable periods
primarily due to a decrease in expense reimbursements paid to the Managing
General Partner. Included in general and administrative expenses at both June
30, 1999 and 1998, 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.
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.
Liquidity and Capital Resources
At June 30, 1999, the Partnership had cash and cash equivalents of approximately
$916,000 compared to approximately $951,000 at June 30, 1998. The increase in
cash and cash equivalents of approximately $578,000 as compared to the
Partnership's year ended December 31, 1998 is due to approximately $237,000 of
cash provided by operating activities and approximately $423,000 of cash
provided by investing activities, which was partially offset by approximately
$82,000 of cash used in financing activities. Cash provided by investing
activities consisted of net receipts from escrow accounts maintained by the
mortgage lender which was partially offset by property improvements and
replacements. Cash used in financing activities consisted of payments of
principal made on the mortgages encumbering the Registrant's properties. The
Registrant invests its working capital reserves in a money market account.
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 properties to adequately maintain the physical
assets and other operating needs of the Registrant 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:
Ashley Woods
During the six months ended June 30, 1999, the Partnership completed
approximately $99,000 of capital improvements at the property, consisting
primarily of heating improvements, appliances, carpet and vinyl replacement, and
plumbing repairs. These improvements were funded from the Partnership's
reserves. Based on a report received from an independent third party consultant
analyzing necessary exterior improvements and estimates made by the Managing
General Partner on interior improvements, it is estimated that the property
requires approximately $939,000 of capital improvements over the next few years.
Capital improvements planned for 1999, which include certain of the required
improvements, consist of interior and exterior building improvements. These
improvements are budgeted for, but not limited to, approximately $365,000.
Versailles on the Lake
During the six months ended June 30, 1999, the Partnership completed
approximately $91,000 of capital improvements at the property, consisting
primarily of office equipment, carpet and vinyl replacement, and appliances.
These improvements were funded from the Partnership's reserves. Based on a
report received from an independent third party consultant analyzing necessary
exterior improvements and estimates made by the Managing General Partner on
interior improvements, it is estimated that the property requires approximately
$427,000 of capital improvements over the next few years. Capital improvements
planned for 1999, which include certain of the required improvements, consist of
interior and exterior building improvements. These improvements are budgeted
for, but not limited to, approximately $277,000.
The 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 $10,295,000, net of discount, is amortized over
periods ranging from 21 to 30 years with balloon payments due in 2002 and 2004.
The Managing General Partner will attempt to refinance such indebtedness and/or
sell the properties prior to such maturity date. If the property cannot be
refinanced or sold for a sufficient amount, the Registrant will risk losing such
property through foreclosure.
No cash distributions were made during the six months ended June 30, 1999. A
cash distribution of $900,000 ($1,197.46 per limited partnership unit) was made
during the six months ended June 30, 1998. This distribution represented a
portion of the net proceeds from the mortgage refinancing of Ashley Woods during
1997. Future cash distributions will depend on the levels of net cash generated
from operations, timing of debt maturities, property sales, refinancings, and
the availability of cash reserves. The Partnership's distribution policy will
be reviewed on a quarterly basis. There can be no assurance, however, that the
Partnership will generate sufficient funds from operations after required
capital improvements to permit distributions to its partners in 1999 or
subsequent periods.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the Managing General Partner. AIMCO and its
affiliates currently own 14.223% of the partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer to acquire additional limited partnership interests in the
Partnership for cash or preferred units or common units of limited partnership
interests in AIMCO OP. While such an exchange offer is possible, no definite
plans exist as to when or whether to commence such an exchange offer, or as to
the terms of any such exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of June 30, 1999, had completed approximately 90% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by September 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
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 entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs have filed an amended complaint. The Managing General Partner has
filed demurrers to the amended complaint which were heard during February 1999.
No ruling on such demurrers has been received. The Managing General Partner
does not anticipate that costs associated with this case, if any, will be
material to the Partnership's overall operations.
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, 1999.
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/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President
Finance and Administration
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate I, L.P. 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 916
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,028
<DEPRECIATION> 7,531
<TOTAL-ASSETS> 8,046
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,295
0
0
<COMMON> 0
<OTHER-SE> (2,973)
<TOTAL-LIABILITY-AND-EQUITY> 8,046
<SALES> 0
<TOTAL-REVENUES> 1,581
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,616
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35)
<EPS-BASIC> (43.91)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
