FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (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 I, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 893
Receivables and deposits 132
Restricted escrows 321
Other assets 202
Investment properties:
Land $ 1,072
Buildings and related personal property 13,148
14,220
Less accumulated depreciation (7,665) 6,555
$ 8,103
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 26
Tenant security deposit liabilities 71
Accrued property taxes 250
Other liabilities 100
Due to affiliate 321
Mortgage notes payable 10,257
Partners' Deficit
General partners $ (122)
Limited partners (751.59 units issued and
outstanding) (2,800) (2,922)
$ 8,103
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 731 $ 688 $ 2,173 $ 2,098
Other income 75 68 214 188
Total revenues 806 756 2,387 2,286
Expenses:
Operating 320 402 1,010 1,022
General and administrative 28 32 91 105
Depreciation 134 163 449 450
Interest 206 207 622 623
Property taxes 67 60 199 207
Total expenses 755 864 2,371 2,407
Net income (loss) $ 51 $ (108) $ 16 $ (121)
Net income (loss) allocated to
general partners (5%) 3 (5) 1 (6)
Net income (loss) allocated to
limited partners (95%) 48 (103) 15 (115)
$ 51 $ (108) $ 16 $ (121)
Net income (loss) per limited
partnership unit $ 63.86 $(137.04) $ 19.96 $ (153.01)
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 income for the nine months
ended September 30, 1999 -- 1 15 16
Partners' deficit at
September 30, 1999 751.59 $ (122) $(2,800) $(2,922)
See Accompanying Notes to Consolidated Financial Statements
d)
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income (loss) $ 16 $ (121)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 449 450
Amortization of discounts and loan costs 46 38
Loss on disposal of property -- 49
Change in accounts:
Receivables and deposits 63 (42)
Other assets (37) 16
Accounts payable (28) 62
Tenant security deposit liabilities (2) (15)
Accrued property taxes (16) (14)
Other liabilities (17) 15
Net cash provided by operating activities 474 438
Cash flows from investing activities:
Property improvements and replacements (382) (947)
Net receipts from (deposits to) restricted escrows 588 (85)
Net cash provided by (used in)
investing activities 206 (1,032)
Cash flows from financing activities:
Payments on mortgage notes payable (125) (117)
Loan costs paid -- (16)
Distributions to partners -- (900)
Net cash used in financing activities (125) (1,033)
Net increase (decrease) in cash and cash equivalents 555 (1,627)
Cash and cash equivalents at beginning of period 338 1,976
Cash and cash equivalents at end of period $ 893 $ 349
Supplemental disclosure of cash flow information:
Cash paid for interest $ 576 $ 584
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 nine month periods ended September
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 interentity
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 nine month periods ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $124 $114
Reimbursement for services of affiliates
(included in investment properties,
general and administrative expenses and
operating expenses) 67 95
During the nine months ended September 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 $124,000 and
$114,000 for the nine month periods ended September 30, 1999 and 1998,
respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $67,000 and
$95,000 for the nine month periods ended September 30, 1999 and 1998,
respectively. These amounts include approximately $17,000 and $27,000 of
construction oversight reimbursements for the nine month periods ended September
30, 1999 and 1998, respectively.
Additionally, the Partnership paid approximately $4,000 during the nine months
ended September 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.
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 is owned by the Partnership.
NOTE D - SEGMENT REPORTING
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of two apartment complexes,
one located in Cincinnati, Ohio, and the other located in 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 nine months ended September 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 $ 2,173 $ -- $ 2,173
Other income 208 6 214
Interest expense 622 -- 622
Depreciation 449 -- 449
General and administrative expense -- 91 91
Segment income (loss) 101 (85) 16
Total assets 7,847 256 8,103
Capital expenditures for investment
properties 382 -- 382
1998 Residential Other Totals
Rental income $ 2,098 $ -- $ 2,098
Other income 152 36 188
Interest expense 623 -- 623
Depreciation 450 -- 450
General and administrative expense -- 105 105
Segment loss (52) (69) (121)
Total assets 8,044 325 8,369
Capital expenditures for investment
properties 947 -- 947
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 Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia 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 and the Insignia Merger (see
"Note B - Transfer of Control"). 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 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 ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the general partner will make tender offers for all
outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any 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 two apartment complexes. The
following table sets forth the average occupancy of the properties for the nine
months ended September 30, 1999 and 1998:
Average Occupancy
1999 1998
Ashley Woods Apartments
Cincinnati, Ohio 93% 89%
Versailles on the Lake Apartments
Fort Wayne, Indiana 91% 89%
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 net income of approximately $16,000 for the nine months
ended September 30, 1999 compared to a net loss of approximately $121,000 for
the nine months ended September 30, 1998. The Partnership's net income for the
three months ended September 30, 1999, was approximately $51,000 compared to a
net loss of approximately $108,000 for the three months ended September 30,
1998. The increase in net income for the three and nine months ended September
30, 1999, is due to an increase in total revenues and a decrease in total
expenses. Total revenues increased due to increased rental income and other
income. Rental income increased primarily due to increased occupancy and
increased average annual rental rates at both of the Partnership's properties,
which are partially offset by increased concession costs at both of the
Partnership's properties. Other income increased due to increased laundry
income at both of the Partnership's properties and increased tenant charges at
Ashley Woods. These increases were partially offset by a decrease in interest
income due to a decrease in the average cash balances held in interest-bearing
accounts.
Total expenses decreased primarily due to decreased operating expenses and
general and administrative expenses. Operating expenses decreased primarily due
to the fact that there was no loss on disposal of property during the nine
months ended September 30, 1999 as there was during the nine months ended
September 30, 1998. This loss resulted from the write-off of the undepreciated
value of roofs that were replaced at Ashley Woods during the second and third
quarters of 1998. In addition, insurance expense decreased at both of the
Partnership's properties due to a change in insurance carriers late in 1998.
Offsetting these decreases is an increase in maintenance expenses at Ashley
Woods in an effort to increase occupancy. Operating expense for the three
months ended September 30, 1999 decreased due to the timing of the completion of
maintenance projects at Ashley Woods, and due to the loss on disposal discussed
above. 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
September 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. Property tax expense for Ashley Woods
for the nine months ended September 30, 1998 includes additional amounts owed
due to a tax rate increase on tax bills received and paid in arrears. This
additional expenditure was paid during the first quarter of 1998. Property tax
for the nine months ended September 30, 1999, does not include any such
additional amount. The increase in property tax expense for the three months
ended September 30, 1999 is due to the timing of the receipt of property tax
bills for 1999 and 1998 which affected the accruals as of September 30, 1999 and
1998.
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 September 30, 1999, the Partnership had cash and cash equivalents of
approximately $893,000 as compared to approximately $349,000 at September 30,
1998. The increase in cash and cash equivalents of approximately $555,000 since
the Partnership's year ended December 31, 1998 is due to approximately $474,000
of cash provided by operating activities and approximately $206,000 of cash
provided by investing activities, which was partially offset by approximately
$125,000 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 money market 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 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:
Ashley Woods
During the nine months ended September 30, 1999, the Partnership completed
approximately $252,000 of capital improvements at the property, consisting
primarily of heating improvements, structural improvements, carpet and vinyl
replacement, and plumbing upgrades. 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 nine months ended September 30, 1999, the Partnership completed
approximately $130,000 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 operating cash flow.
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 $10,257,000, 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 properties cannot be
refinanced or sold for a sufficient amount, the Registrant will risk losing such
properties through foreclosure.
No cash distributions were made during the nine months ended September 30, 1999.
A cash distribution of $900,000 ($1,197.46 per limited partnership unit) was
made to the limited partners during the nine months ended September 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, the availability of cash
reserves and the timing of debt maturities, refinancings, and/or property sales.
The Partnership's distribution policy is reviewed on a semi-annual 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 during the remainder of 1999 or subsequent
periods.
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 September 30, 1999, had virtually completed 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.
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 virtually all of the server operating systems.
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 virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 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
September 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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 expenses
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 Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia 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 and the Insignia Merger (see
"Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer
of Control"). 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 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 ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the general partner will make tender offers for all
outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
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 September 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/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate I, L.P. 1999 Third 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, LP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 893
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,220
<DEPRECIATION> 7,665
<TOTAL-ASSETS> 8,103
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,257
0
0
<COMMON> 0
<OTHER-SE> (2,922)
<TOTAL-LIABILITY-AND-EQUITY> 8,103
<SALES> 0
<TOTAL-REVENUES> 2,387
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-BASIC> 19.96<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
