February 28, 2000
United States
Securities and Exchange Commission
Washington, D.C. 20549
RE: Davidson Diversified Real Estate I, L.P.
Form 10-KSB
File No. 0-13530
To Whom it May Concern:
The accompanying Form 10-KSB for the year ended December 31, 1999 describes a
change in the method of accounting to capitalize exterior painting and major
landscaping, which would have been expensed under the old policy. The
Partnership believes that this accounting principle change is preferable because
it provides a better matching of expenses with the related benefit of the
expenditures and it is consistent with industry practice and the policies of the
Managing General Partner.
Please do not hesitate to contact the undersigned with any questions or comments
that you might have.
Very truly yours,
Stephen Waters
Real Estate Controller
<PAGE>
FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT
UNDER SECTION 13 OR 15(d)
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from _________to _________
Commission file number 0-13530
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
(Name of small business issuer in its charter)
Delaware 62-1181565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
Issuer's telephone number (864) 239-1000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units of Limited Partnership Interest
(Title of class)
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___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $3,218,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests as of December 31, 1999. No market exists for the Limited Partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Description of Business
Davidson Diversified Real Estate I, L.P. (the "Registrant" or "Partnership") is
a Delaware limited partnership organized in January 1983. The general partners
of the Partnership are Davidson Diversified Properties, Inc., a Tennessee
corporation ("Managing General Partner"); Diversified Equities, Limited, a
Tennessee limited partnership ("Associate General Partner"); and David W. Talley
("Individual General Partner") (collectively, the "General Partners"). The
Managing General Partner was wholly owned by MAE GP Corporation ("MAE").
Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust
("IPT"), a subsidiary of Apartment Investment and Management Company ("AIMCO").
Thus, the Managing General Partner is now wholly-owned by AIMCO (see "Transfer
of Control"). The Partnership Agreement provides that the Partnership is to
terminate on December 31, 2007, unless terminated prior to such date.
The offering of the Partnership's limited partnership units ("Units") commenced
on November 16, 1983, and terminated on September 14, 1984. The Partnership
received gross proceeds from the offering of $15,008,000 and net proceeds of
$13,507,200. Since its initial offering, the Registrant has not received, nor
are limited partners required to make additional capital contributions.
The Partnership's business is to own and operate existing real estate properties
for investment. The Partnership does not engage in any foreign operations nor
derive any income from foreign sources. All of the net proceeds of the offering
were invested in six properties, four of which have since been sold or
foreclosed upon. The Partnership continues to own and operate two of the
properties. See "Item 2. Description of Properties" below for a description of
the Partnership's remaining properties.
The Partnership receives income from its properties and is responsible for
operating expenses, capital improvements and debt service payments under
mortgage obligations secured by the properties. The Partnership financed its
properties primarily through non-recourse debt. Therefore, in the event of
default, the lender can generally only look to the subject property for recovery
of amounts due.
The Partnership has no employees. Management and administrative services are
provided by the Managing General Partner and agents retained by the Managing
General Partner. An affiliate of the Managing General Partner provided such
management services for the years ended December 31, 1999 and 1998.
Both the income and expenses of operating the properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand of similar properties resulting from various
market conditions, increases/decreases in unemployment or population shifts,
changes in the availability of permanent mortgage funds, changes in zoning laws,
or changes in patterns or needs of users. In addition, there are risks inherent
in owning and operating residential properties because such properties are
susceptible to the impact of economic and other conditions outside of the
control of the Partnership.
<PAGE>
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential properties within the market area of
the Partnership's properties. The number and quality of competitive properties,
including those which may be managed by an affiliate of the Managing General
Partner in such market area, could have a material effect on the rental market
for apartments at the Partnership's properties and the rents that may be charged
for such apartments. While the Managing General Partner and its affiliates own
and/or control a significant number of apartment units in the United States such
units represent an insignificant percentage of the total apartment units in the
United States and competition for the apartments is local. In addition, various
limited partnerships have been formed by the Managing General Partner and/or
affiliates to engage in business which may be competitive with the Partnership.
A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operations" included in "Item 6." of this
Form 10-KSB.
Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and IPT merged into 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 has had or will continue to have a material effect
on the affairs and operations of the Partnership.
Item 2. Description of Properties
The following table sets forth the Partnership's investments in properties:
Date of
Property Purchase Type of Ownership Use
Versailles on the Lake 04/05/84 Fee ownership subject to Apartment
Ft. Wayne, Indiana first and second mortgages. 156 units
Ashley Woods 07/31/84 Fee ownership subject to Apartment
Cincinnati, Ohio first mortgage. (1) 352 units
(1) Property is held by a Limited Liability Company of which the Registrant owns
100%.
<PAGE>
Schedule of Properties
Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.
Gross
Carrying Accumulated Useful Federal
Property Value Depreciation Life Method Tax Basis
(in thousands) (in thousands)
Versailles on the Lake $ 4,704 $ 2,735 5-25 yrs S/L $ 1,064
Ashley Woods 9,621 5,142 5-25 yrs S/L 3,298
$14,325 $ 7,877 $ 4,362
See "Note A" of the consolidated financial statements included in "Item 7.
Financial Statements" for a description of the Partnership's depreciation policy
and "Note J - Change in Accounting Principle".
Schedule of Property Indebtedness
The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.
<TABLE>
<CAPTION>
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due At
Property 1999 Rate Amortized Date Maturity (2)
(in thousands) (in thousands)
Versailles on the Lake
<S> <C> <C> <C> <C> <C>
1st mortgage $ 2,360 7.60% 21.42 yrs 11/15/02 $ 2,071
2nd mortgage 88 7.60% (1) 11/15/02 88
Ashley Woods 7,833 7.29% 30 yrs 12/01/04 7,334
$10,281 $ 9,493
Less unamortized
discounts (71)
Total $10,210
</TABLE>
(1) The loan requires interest only payments.
(2) See "Item 7. Financial Statements - Note C" for information with respect
to the Registrant's ability to prepay the loans and other specific details
about the loans.
<PAGE>
The Partnership exercised an interest rate buy-down option for Versailles on the
Lake reducing the stated rate from 8.76% to 7.60% during 1992. The fee for the
interest rate reduction was approximately $205,000 and is being amortized as a
loan discount using the effective interest method over the term of the loans.
The discount fee is reflected as a reduction of the mortgage notes payable and
increases the effective rate of the debt to 8.76%.
Rental Rates and Occupancy
Average annual rental rates and occupancy for 1999 and 1998 for each property:
Average Annual Average
Rental Rates Occupancy
(per unit)
Property 1999 1998 1999 1998
Versailles on the Lake $6,131 $5,920 92% 86%
Ashley Woods 6,821 6,577 92% 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. In addition, improvements were
made at the property which made it more attractive to new tenants. The Managing
General Partner attributes the increase in occupancy at Versailles on the Lake
to increased marketing and advertising efforts to attract new tenants.
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties are subject to competition from other
residential apartment complexes in the area. The Managing General Partner
believes that all of the properties are adequately insured. Each property is an
apartment complex which leases units for terms of one year or less. No
residential tenant leases 10% or more of the available space. All of the
properties are in good physical condition, subject to normal depreciation and
deterioration as is typical for assets of this type and age.
Real Estate Taxes and Rates
Real estate taxes and rates in 1999 for each property were:
1999 1999
Taxes Rate
(in thousands)
Versailles on the Lake $ 83* 8.97%
Ashley Woods 171 4.98%
*Amount per 1998 billings. Taxes are paid a year in arrears.
<PAGE>
Capital Improvements
Versailles on the Lake
During 1999, the Partnership completed approximately $175,000 of capital
improvements at the property, consisting primarily of lighting improvements,
carpet and vinyl replacement, appliances, and other building improvements. These
improvements were funded from the Partnership's reserves and operating cash
flow. The Partnership is currently evaluating the capital improvement needs of
the property for the upcoming year. The minimum amount to be budgeted is
expected to be $300 per unit or $46,800. Additional improvements may be
considered and will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
Ashley Woods
During 1999, the Partnership completed approximately $312,000 of capital
improvements at the property, consisting primarily of heating improvements,
parking lot improvements, plumbing upgrades, structural improvements, and carpet
and vinyl replacement. These improvements were funded from the Partnership's
reserves. The Partnership is currently evaluating the capital improvement needs
of the property for the upcoming year. The minimum amount to be budgeted is
expected to be $300 per unit or $105,600. Additional improvements may be
considered and will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
The capital improvements planned for the year 2000 at the Partnership's
properties will be made only to the extent of cash available from operations and
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.
Item 3. 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 action purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging 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
"Item 7. Financial Statements, Note B - Transfer of Control"). The plaintiffs
seek monetary damages and equitable relief, including judicial dissolution of
the Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs 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, settling
claims, subject to final court approval, on behalf of the Partnership and all
limited partners who own units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Superior Court of the
State of California, County of San Mateo, at which time the Court set a final
approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing
the Court received various objections to the settlement, including a challenge
to the Court's preliminary approval based upon the alleged lack of authority of
class plaintiffs' counsel to enter the settlement. On December 14, 1999, the
Managing General Partner and its affiliates terminated the proposed settlement.
Certain plaintiffs have filed a motion to disqualify some of the plaintiffs'
counsel in the action. 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 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1999, no matters were submitted to a vote
of Unit holders through the solicitation of proxies or otherwise.
<PAGE>
PART II
Item 5. Market for the Partnership Equity and Related Partner Matters
The Partnership, a publicly-held limited partnership, offered and sold 751.84
Limited Partnership Units aggregating $15,008,000. As of December 31, 1999,
there were 689 holders of record owning an aggregate of 751.59 Units. Affiliates
of the Managing General Partner owned 266.65 units or 35.478% at December 31,
1999.
The following table sets forth the distributions made by the Partnership for the
years ended December 31, 1999 and 1998.
Distributions
Aggregate Per Unit
(in thousands)
01/01/98 - 12/31/98 $900 $1,197.46
01/01/99 - 12/31/99 314 417.78
Both of these distributions represented a portion of the previously
undistributed net proceeds from the mortgage refinancing of Ashley Woods
Apartments during 1997 and were paid entirely to limited partners.
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 expenditures to permit distributions to its partners in 2000 or
subsequent periods.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 266.65
units of limited partnership units in the Partnership representing 35.478% of
the outstanding units. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner favorable to the interest of the Managing General Partner because of
their affiliation with the Managing General Partner.
Item 6. Management's Discussion and Analysis or Plan of Operation
The matters discussed in this Form 10-KSB 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-KSB 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. This item should be read in conjunction with
the consolidated financial statements and other items contained elsewhere in
this report.
Results of Operations
The Partnership realized a net loss of approximately $46,000 for the year ended
December 31, 1999 compared to a net loss of approximately $184,000 for the year
ended December 31, 1998. The decrease in net loss for the year ended December
31, 1999 is primarily due to an increase in total revenues which was partially
offset by an increase in total expenses. Total revenues increased primarily due
to an increase in rental income and to a lesser extent, an increase in other
income. Rental income increased primarily due to increased occupancy as noted in
"Item 2. Description of Properties" 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 increased due primarily to increased depreciation expense and to
a lesser extent, increased general and administrative expenses. Partially
offsetting these increases was a decrease in property tax expense. Depreciation
expense increased due to the timing of capital improvements completed during
1998 and 1999 that are now being depreciated. General and administrative expense
increased due to an increase in legal expense due to the 1999 settlement of a
lawsuit as disclosed in the Partnership's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998. This increase was partially offset by a
decrease in expense reimbursements paid to the Managing General Partner.
Included in general and administrative expenses at both December 31, 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 decreased primarily due to a decrease in
expense at Ashley Woods. For the year ended December 31, 1998, property tax
expense at Ashley Woods 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 year ended
December 31, 1999, does not include any such additional amount.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Managing General Partner. There was no effect from this change
during 1999 on the net loss. The cumulative effect, had this change been applied
to prior periods, is not material. The accounting principle change will not have
an effect on cash flow, funds available for distribution or fees payable to the
Managing General Partner and affiliates.
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 December 31, 1999, the Partnership had cash and cash equivalents of
approximately $681,000 compared to approximately $338,000 at December 31, 1998.
Cash and cash equivalents increased approximately $343,000 from the
Partnership's previous year ended December 31, 1998. The increase is due to
approximately $616,000 of cash provided by operating activities and
approximately $219,000 of cash provided by investing activities, which was
partially offset by approximately $492,000 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 partner distributions and, to a lesser extent, 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 Registrant and to comply with Federal,
state, and local legal and regulatory requirements. The Partnership is currently
evaluating the capital improvement needs of its properties for the upcoming
year. The minimum amount to be budgeted is expected to be $300 per unit or
$152,400. Additional improvements may be considered and will depend on the
physical condition of the properties as well as replacement reserves and
anticipated cash flow generated by the properties. 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 $10,210,000, 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.
A distribution of $314,000 ($417.78 per limited partnership unit) was made to
the limited partners during the year ended December 31, 1999. A cash
distribution of $900,000 ($1,197.46 per limited partnership unit) was made to
the limited partners during the year ended December 31, 1998. Both of these
distributions represented a portion of the previously undistributed 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 in the year 2000 or
subsequent periods.
Tender Offers
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 266.65
units of limited partnership units in the Partnership representing 35.478% of
the outstanding units. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner favorable to the interest of the Managing General Partner because of
their affiliation with the Managing General Partner.
Year 2000 Compliance
General Description
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 Managing Agent's
computer programs or hardware that had date-sensitive software or embedded chips
might have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted 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.
Computer Hardware, Software and Operating Equipment
In 1999, the Managing Agent completed all phases of its Year 2000 program by
completing the replacement and repair of any hardware or software system or
operating equipment that was not yet Year 2000 compliant. The Managing Agent's
hardware and software systems and its operating equipment are now Year 2000
compliant. No material failure or erroneous results have occurred in the
Managing Agent's computer applications related to the failure to reference the
Year 2000 to date.
Third Parties
To date, the Managing Agent is not aware of any significant supplier or
subcontractor (external agent) or financial institution of the Partnership that
has a Year 2000 issue that would have a material impact on the Partnership's
results of operations, liquidity or capital resources. However, the Managing
Agent has no means of ensuring or determining the Year 2000 compliance of
external agents. At this time, the Managing Agent does not believe that a Year
2000 issue of any non-compliant external agent will have a material impact on
the Partnership's financial position or results of operations.
Costs
The total cost of the Managing Agent's Year 2000 project was approximately $3.2
million and was funded from operating cash flows.
Risks Associated with the Year 2000
The Managing Agent completed all necessary phases of its Year 2000 program in
1999, and did not experience system or equipment malfunctions related to a
failure to reference the Year 2000. The Managing Agent or Partnership has not
been materially adversely affected by disruptions in the economy generally
resulting from the Year 2000 issue.
At this time, the Managing Agent does not believe that the Partnership's
businesses, results of operations or financial condition will be materially
adversely affected by the Year 2000 issue.
Contingency Plans Associated with the Year 2000
The Managing Agent has not had to implement contingency plans such as manual
workarounds or selecting new relationships for its banking or elevator operation
activities in order to avoid the Year 2000 issue.
<PAGE>
Item 7. Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
LIST OF FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Operations - Years ended December 31, 1999 and 1998
Consolidated Statement of Changes in Partners' Deficit - Years ended December
31, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Partners
Davidson Diversified Real Estate I, L.P.
We have audited the accompanying consolidated balance sheet of Davidson
Diversified Real Estate I, L.P. as of December 31, 1999, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Partnership's management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davidson
Diversified Real Estate I, L.P. at December 31, 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 21, 2000
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 1999
Assets
Cash and cash equivalents $ 681
Receivables and deposits 202
Restricted escrows 203
Other assets 178
Investment properties (Notes C & F):
Land $ 1,072
Buildings and related personal property 13,253
14,325
Less accumulated depreciation (7,877) 6,448
$ 7,712
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 60
Tenant security deposit liabilities 68
Accrued property taxes 259
Other liabilities 92
Due to affiliate (Note E) 321
Mortgage notes payable (Note C) 10,210
Partners' Deficit
General partners $ (125)
Limited partners (751.59 units issued and
outstanding) (3,173) (3,298)
$ 7,712
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
Years Ended December 31,
1999 1998
Revenues:
Rental income $ 2,947 $ 2,783
Other income 271 252
Total revenues 3,218 3,035
Expenses:
Operating 1,375 1,365
General and administrative 155 140
Depreciation 661 603
Interest 823 832
Property taxes 250 279
Total expenses 3,264 3,219
Net loss (Note D) $ (46) $ (184)
Net loss allocated to general partners (5%) $ (2) $ (9)
Net loss allocated to limited partners (95%) (44) (175)
$ (46) $ (184)
Net loss per limited partnership unit $(58.54) $(232.84)
Distributions per limited partnership unit $417.78 $1,197.46
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(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)
Distribution to partners -- -- (900) (900)
Net loss for the year ended
December 31, 1998 -- (9) (175) (184)
Partners' deficit at
December 31, 1998 751.59 $ (123) $(2,815) $(2,938)
Distribution to partners -- -- (314) (314)
Net loss for the year ended
December 31, 1999 -- (2) (44) (46)
Partners' deficit at
December 31, 1999 751.59 $ (125) $(3,173) $(3,298)
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
1999 1998
Cash flows from operating activities:
Net loss $ (46) $ (184)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 661 603
Amortization of discounts and loan costs 60 54
Loss on disposal of property -- 49
Change in accounts:
Receivables and deposits (7) (78)
Other assets (21) 19
Accounts payable 6 22
Tenant security deposit liabilities (5) (16)
Accrued property taxes (7) 16
Other liabilities (25) 16
Net cash provided by operating activities 616 501
Cash flows from investing activities:
Property improvements and replacements (487) (948)
Net receipts from (deposits to) restricted escrows 706 (117)
Net cash provided by (used in) investing
activities 219 (1,065)
Cash flows from financing activities:
Payments on mortgage notes payable (178) (158)
Payment of loan costs -- (16)
Distributions to partners (314) (900)
Net cash used in financing activities (492) (1,074)
Net increase (decrease) in cash and cash equivalents 343 (1,638)
Cash and cash equivalents at beginning of the year 338 1,976
Cash and cash equivalents at end of the year $ 681 $ 338
Supplemental disclosure of cash flow information:
Cash paid for interest $ 812 $ 777
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P.
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Organization and Significant Accounting Policies
Organization: Davidson Diversified Real Estate I, L.P. (the "Partnership" or
"Registrant"),is a Delaware limited partnership organized on January 14, 1983,
to acquire and operate residential real estate properties. As of December 31,
1999, the Partnership operates two residential properties located in Cincinnati,
Ohio and Ft. Wayne, Indiana. The Partnership's managing general partner is
Davidson Diversified Properties, Inc., (the "Managing General Partner"). The
Managing General Partner is a subsidiary of Apartment Investment and Management
Company ("AIMCO"), (see "Note B - Transfer of Control"). The directors and
officers of the Managing General Partner also serve as executive officers of
AIMCO. The Partnership Agreement provides that the Partnership is to terminate
on December 31, 2007 unless terminated prior to such date.
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.
Allocations to Partners: Net income (loss) of the Partnership and taxable income
(loss) are allocated 95% to the limited partners and 5% to the general partners.
Distributions of available cash (cash flow) are allocated among the limited
partners and the general partners in accordance with the agreement of limited
partnership.
Allocation of net income for tax purposes, arising from the occurrence of a sale
or refinancing shall be allocated as follows:
First, an amount equal to the aggregate deficit in the capital accounts of
the general and limited partners having deficits in their capital accounts
shall be allocated to each such partner in the same ratio as the deficit
such partner's capital account bears to the aggregate of all such
partner's deficits.
Second, to the limited partners in an amount equal to the cash distributed
to them from a sale or refinancing.
Third, the remainder, if any, 5% to the general partners and 95% to the
limited partners.
Distributions of cash from sales or refinancings shall be distributed in the
following order of priority.
First, to the limited partners, an amount which when added to all prior
distributions of cash from sales or refinancings shall equal their
original invested capital, plus an amount which, when added to all prior
distributions to the limited partners (excluding distributions which are
deducted in the calculation of adjusted invested capital), will equal 8%
per annum cumulative noncompounded on their adjusted invested capital,
commencing the last day of the calendar quarter in which each limited
partner is admitted to the Partnership through the date of payment.
Second, to an affiliate of the general partners, an amount equal to its
subordinated real estate commission, which fee is equal to the lesser of
(i) 3% of the gross sales price of a property or (ii) one-half of the
competitive commission, as defined, but may only be paid after the limited
partners have received their priority distributions as discussed in the
previous paragraph.
Third, 85% of the remaining cash from sales or refinancings to the limited
partners and 15% of the remaining cash from sales or refinancings to the
general partners.
Depreciation: Depreciation is provided by the straight-line method over the
estimated lives of the investment properties and related personal property. For
Federal income tax purposes, the accelerated cost recovery method is used (1)
for real property over 18 years for additions after March 15, 1984, and before
May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1,
1987, and (2) for personal property over 5 years for additions prior to January
1, 1987. As a result of the Tax Reform Act of 1986, for additions after December
31, 1986, the modified accelerated cost recovery method is used for depreciation
of (1) real property additions over 27 1/2 years, and (2) personal property
additions over 5 years.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the costs of exterior painting and major landscaping (Note J).
Investment Properties: Investment properties consist of two apartment complexes
and are stated at cost. Acquisition fees are capitalized as a cost of real
estate. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Partnership records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
For the years ended December 31, 1999 and 1998, no adjustments for impairment of
value were necessary.
Cash and Cash Equivalents: Includes cash on hand and in banks and money market
accounts. At certain times, the amount of cash deposited at a bank may exceed
the limit on insured deposits.
Tenant Security Deposits: The Partnership requires security deposits from
lessees for the duration of the lease, and such deposits are included in
receivables and deposits. Deposits are refunded when the tenant vacates,
provided the tenant has not damaged its space and is current on rental payments.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising: The Partnership expenses the costs of advertising as incurred.
Advertising expense, included in operating expenses, was approximately $55,000
and $45,000 for the years ended December 31, 1999 and 1998, respectively.
Restricted Escrows:
Reserve Account: The Partnership has a general reserve account for
Versailles to cover necessary repairs and replacements of existing
improvements, debt service, out-of-pocket expenses incurred for ordinary
and necessary administrative tasks, and payment of real property taxes and
insurance premiums. At December 31, 1999, this reserve totaled
approximately $65,000.
Capital Reserve: At the time of the refinancing of Ashley Woods' mortgage
note payable during 1997, approximately $626,000 of the proceeds were
designated for "capital improvements escrows" for certain capital
improvements. The required improvements were completed and all of these
funds were withdrawn during 1999.
Replacement Reserve: At the time of the refinancing of Ashley Woods'
mortgage note during 1997, a replacement reserve was established. The
Registrant is required to deposit approximately $8,000 per month in this
reserve account held by the mortgage lender in order to complete listed
capital improvements and replacements. At December 31, 1999, this reserve
balance totaled approximately $138,000.
Loan Costs: At December 31, 1999, loan costs of approximately $283,000, net of
accumulated amortization of approximately $133,000, are included in other assets
and are being amortized on a straight-line basis as interest expense over the
term of the respective loans.
Leases: The Partnership generally leases apartment units for twelve-month terms
or less. The Partnership recognizes income as earned on its leases. In addition,
it is the Partnership's policy to offer rental concessions during periods of
declining occupancy or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.
Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Derivative
Financial Instruments", as amended by SFAS No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amount of its financial instruments (except for long term
debt) approximates their fair value due to the short term maturity of these
instruments. The fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity, approximates its carrying
balance.
Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. See "Note G" for required disclosure.
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 has had or will continue to have a material effect on the
affairs and operations of the Partnership.
Note C - Mortgage Notes Payable
The principle terms of mortgage notes payable are as follows:
<TABLE>
<CAPTION>
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due At
Property 1999 Interest Rate Date Maturity
(in thousands) (in thousands)
Versailles on the Lake
<S> <C> <C> <C> <C> <C>
1st mortgage $ 2,360 $ 22 7.60% 11/15/02 $ 2,071
2nd mortgage 88 $ 1(1) 7.60% 11/15/02 88
Ashley Woods 7,833 55 7.29% 12/01/04 7,334
10,281 $ 78 $ 9,493
Less unamortized
Discounts (71)
Totals $10,210
</TABLE>
(1) Interest only payments
The mortgage notes payable are non-recourse and are secured by the related
property and improvements of the Partnership and by pledge of revenues from the
apartment properties. The notes require prepayment penalties if repaid prior to
maturity and prohibit resale of the properties subject to existing indebtedness.
The Partnership exercised an interest rate buy-down option for Versailles on the
Lake reducing the stated rate from 8.76% to 7.60% during 1992. The fee for the
interest rate reduction was approximately $205,000 and is being amortized as a
loan discount using the effective interest method over the term of the loans.
The discount fee is reflected as a reduction of the mortgage notes payable and
increases the effective rate of the debt to 8.76%.
Scheduled principal payments of the mortgage notes payable subsequent to
December 31, 1999, are as follows (in thousands):
2000 $ 176
2001 198
2002 2,354
2003 110
2004 7,443
$10,281
Note D - Income Taxes
The Partnership received a ruling from the Internal Revenue Service that it is
to be classified as a partnership for Federal income tax purposes. Accordingly,
no provision for income taxes is made in the consolidated financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.
The following is a reconciliation of reported net loss and Federal taxable loss
(in thousands, except per unit data):
1999 1998
Net loss as reported $ (46) $ (184)
Add (deduct):
Depreciation differences (7) 30
Unearned income 23 (31)
Disposal of fixed assets -- 49
Miscellaneous 25 30
Federal taxable loss $ (5) $ (106)
Federal taxable loss per
limited partnership unit $ (6.48) $(133.92)
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net liabilities at December 31, 1999 (in thousands):
1999
Net liabilities as reported $(3,298)
Differences in basis of assets and liabilities:
Buildings and land 249
Accumulated depreciation (2,335)
Other 533
Net liabilities - Federal tax basis $(4,851)
Note E - 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 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 years ended
December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $ 166 $ 152
Reimbursement for services of affiliates
(included in investment properties,
general and administrative expenses and
operating expenses) 85 117
During the years ended December 31, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from both of the
Registrant's properties as compensation for providing property management
services. The Registrant paid to such affiliates approximately $166,000 and
$152,000 for the years ended December 31, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $85,000 and
$117,000 for the years ended December 31, 1999 and 1998, respectively. These
amounts include approximately $19,000 and $27,000 of construction oversight
reimbursements for the years ended December 31, 1999 and 1998, respectively.
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 distributions 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.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 266.65
units of limited partnership units in the Partnership representing 35.478% of
the outstanding units. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner favorable to the interest of the Managing General Partner because of
their affiliation with the Managing General Partner.
On September 26, 1997, 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 owned by the Partnership.
Note F - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
Initial Cost
To Partnership
(in thousands)
Buildings Net Cost
and Related Capitalized
Personal Subsequent to
Description Encumbrances Land Property Acquisition
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Versailles on the Lake $ 2,448 $ 191 $ 3,847 $ 666
Ashley Woods 7,833 881 5,815 2,925
- ----- --- --- - ----- - -----
Totals $10,281 $ 1,072 $ 9,662 $ 3,591
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Gross Amount At Which
Carried
At December 31, 1999
(in thousands)
Buildings
And Date of
Personal Accumulated Construc- Date Depreciable
Description Land Property Total Depreciation tion Acquired Life-Years
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Versailles on the $ 191 $ 4,513 $ 4,704 $ 2,735 1970 04/84 5-25
Lake
Ashley Woods 881 8,740 9,621 5,142 1971 07/84 5-25
Totals $1,072 $13,253 $14,325 $ 7,877
</TABLE>
Reconciliation of "Real Estate and Accumulated Depreciation" (in thousands):
Year Ended December 31,
1999 1998
Investment Properties
Balance at beginning of year $13,838 $13,002
Property improvements 487 948
Property disposal -- (112)
Balance at end of year $14,325 $13,838
Accumulated Depreciation
Balance at beginning of year $ 7,216 $ 6,676
Depreciation expense 661 603
Property disposal -- (63)
Balance at end of year $ 7,877 $ 7,216
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1999 and 1998, is approximately $14,574,000 and $14,088,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 1999 and 1998, is approximately $10,212,000 and $9,543,000,
respectively.
<PAGE>
Note G - 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 segment profit (loss) before
depreciation. The accounting policies of the reportable segment are the same as
those described in the summary of significant accounting policies.
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 years 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.
<TABLE>
<CAPTION>
1999 Residential Other Totals
<S> <C> <C> <C>
Rental income $ 2,947 $ -- $ 2,947
Other income 260 11 271
Interest expense 823 -- 823
Depreciation 661 -- 661
General and administrative expense -- 155 155
Segment profit (loss) 98 (144) (46)
Total assets 7,488 224 7,712
Capital expenditures for investment
properties 487 -- 487
</TABLE>
<TABLE>
<CAPTION>
1998 Residential Other Totals
<S> <C> <C> <C>
Rental income $ 2,783 $ -- $ 2,783
Other income 214 38 252
Interest expense 832 -- 832
Depreciation 603 -- 603
General and administrative expense -- 140 140
Segment loss (82) (102) (184)
Total assets 7,970 290 8,260
Capital expenditures for investment
properties 948 -- 948
</TABLE>
<PAGE>
Note H - Distributions
A distribution of $314,000 ($417.78 per limited partnership unit) was made to
the limited partners during the year ended December 31, 1999. A distribution of
$900,000 ($1,197.46 per limited partnership unit) was made to the limited
partners during the year ended December 31, 1998. Both of these distributions
represented a portion of the previously undistributed net proceeds from the
mortgage refinancing of Ashley Woods Apartments during 1997.
Note I - 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 action purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging 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 plaintiffs seek monetary damages and
equitable relief, including judicial dissolution of the Partnership. On June 25,
1998, the Managing General Partner filed a motion seeking dismissal of the
action. In lieu of responding to the motion, the plaintiffs 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, settling claims, subject to final court
approval, on behalf of the Partnership and all limited partners who own units as
of November 3, 1999. Preliminary approval of the settlement was obtained on
November 3, 1999 from the Superior Court of the State of California, County of
San Mateo, at which time the Court set a final approval hearing for December 10,
1999. Prior to the December 10, 1999 hearing the Court received various
objections to the settlement, including a challenge to the Court's preliminary
approval based upon the alleged lack of authority of class plaintiffs' counsel
to enter the settlement. On December 14, 1999, the Managing General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to disqualify some of the plaintiffs' counsel in the action. 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 other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
<PAGE>
Note J - Change in Accounting Principle
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Managing General Partner. There was no effect from this change
during 1999 on the net loss. The cumulative effect, had this change been applied
to prior periods, is not material. The accounting principle change will not have
an effect on cash flow, funds available for distribution or fees payable to the
Managing General Partner and affiliates.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act
Davidson Diversified Real Estate I, L.P. (the "Partnership" or "Registrant") has
no officers or directors. Davidson Diversified Properties, Inc. (the "Managing
General Partner") manages and controls the Partnership and has general
responsibility and authority in all matters affecting its business.
The names of the directors and executive officers of the Managing General
Partner, their ages and the nature of all positions presently held by them are
set forth below. There are no family relationships between or among any officers
and directors.
Name Age Position
Patrick J. Foye 42 Executive Vice President and Director
Martha L. Long 40 Senior Vice President and Controller
Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow
offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long
Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.
Martha L. Long has been Senior Vice President and Controller of the Managing
General Partner and AIMCO since October 1998, as a result of the acquisition of
Insignia Financial Group, Inc. From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997, retaining that title until October 1998. From 1988
to June 1994, Ms. Long was Senior Vice President and Controller for The First
Savings Bank, FSB in Greenville, South Carolina.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Registrant under Rule 16a-3(e) during the Registrant's most recent fiscal
year and Forms 5 and amendments thereto furnished to the Registrant with respect
to its most recent fiscal year, the Registrant is not aware of any director,
officer, beneficial owner of more than ten percent of the units of limited
partnership interest in the Registrant that failed to file on a timely basis, as
disclosed in the above Forms, reports required by section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years except as follows:
AIMCO Properties, L.P. and its joint filers failed to timely file a Form 3 with
respect to its acquisition of Units and AIMCO and its joint filers failed to
timely file a Form 4 with respect to its acquisition of Units.
Item 10. Executive Compensation
None of the directors and officers of the Managing General Partner received any
remuneration from the Registrant.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Except as noted below, no person or entity was known by the Registrant to be the
beneficial owners of more than 5% of the Limited Partnership Units of the
Registrant as of December 31, 1999.
Entity Number of Units Percentage
AIMCO Properties, L.P. 162.25 21.588%
(an affiliate of AIMCO)
Cooper River Properties, LLC 85.65 11.396%
(an affiliate of AIMCO)
Insignia Properties, LP 18.50 2.461%
(an affiliate of AIMCO)
Davidson Diversified Properties, Inc. .25 .033%
(an affiliate of AIMCO)
Cooper River Properties, L.L.C., Insignia Properties, L.P., and Davidson
Diversified Properties, Inc. are indirectly ultimately owned by AIMCO. Their
business address is 55 Beattie Place, Greenville, SC 29602.
AIMCO Properties, L.P. is indirectly ultimately controlled by AIMCO. Its
business address is 2000 South Colorado Boulevard, Denver, CO 80222.
As of December 31, 1999, no director or officer of the Managing General Partner
owns, nor do the directors or officers as a group own any of the Partnership's
Units. No such director or officer had any right to acquire beneficial ownership
of additional Units of the Partnership.
Item 12. Certain Relationships and Related Transactions
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 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 years ended
December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees $166 $152
Reimbursement for services of affiliates 85 117
During the years ended December 31, 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 $166,000 and
$152,000 for the years ended December 31, 1999 and 1998, respectively.
<PAGE>
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $85,000 and
$117,000 for years ended December 31, 1999 and 1998, respectively. These amounts
include approximately $19,000 and $27,000 of construction oversight
reimbursements for the years ended December 31, 1999 and 1998, respectively.
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.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 266.65
units of limited partnership units in the Partnership representing 35.478% of
the outstanding units. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner favorable to the interest of the Managing General Partner because of
their affiliation with the Managing General Partner.
On September 26, 1997, 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 owned by the Partnership.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 18, Independent Accountants' Preferability Letter for
Change in Accounting Principle, is filed as an exhibit to this
report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
(b) Reports on Form 8-K filed in the fourth quarter of calendar 1999:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Partnership
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:
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Partnership and in the capacities and on the
date indicated.
/s/Patrick J. Foye Executive Vice President Date:
Patrick J. Foye and Director
/s/Martha L. Long Senior Vice President Date:
Martha L. Long and Controller
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE I, LP
EXHIBIT INDEX
Exhibit Description
2 Agreement and Plan of Merger, dated as of October 1, 1998,
by and between AIMCO and IPT; incorporated by reference to
Exhibit 2.1 filed with Registrant's Current Report on Form
8-K dated October 1, 1998.
3A Partnership Agreement dated January 14, 1983 is incorporated
by reference to Exhibit A to the Prospectus of the Partnership
dated November 16, 1983 as filed with the Commission pursuant
to Rule 424(b) under the Act.
3B Amendment No. 1 dated January 1, 1986 to the Partnership
Agreement is incorporated by reference to Exhibit 3B to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1985.
4 Certificate of Limited Partnership dated December 2, 1982 is
incorporated by reference to Exhibit 4 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987.
4A Certificate of Amendment of Certificate of Limited Partnership
dated March 24, 1983 is incorporated by reference to Exhibit
4A to the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987.
4B Restated Certificate of Limited Partnership dated June 8, 1983
is incorporated by reference to Exhibit 4B to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987.
4C Amended and Restated Certificate of Limited Partnership dated
January 1, 1986 is incorporated by reference to Exhibit 4C to
the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987.
10A Agent's Agreement dated November 1, 1983 between the
Partnership and Harvey Freeman & Sons, Inc. is incorporated by
reference to Exhibit 10B to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1983.
10B Agreement among Agents dated November 1, 1983 by and among
Harvey Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of
Arkansas, Harvey Freeman & Sons, Inc. of Florida, Harvey
Freeman & Sons, Inc. of Georgia, Harvey Freeman & Sons, Inc.
of Indiana, Harvey Freeman & Sons, Inc. of Kentucky, Harvey
Freeman & Sons, Inc. of Mississippi, Harvey Freeman & Sons,
Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio,
and Harvey Freeman & Sons, Inc. of South Carolina, is
incorporated by reference to Exhibit 10C to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1983.
10C Acquisition and Disposition Services Agreement dated October
3, 1983 between the Partnership and Criswell Freeman Company
is incorporated by reference to Exhibit 10D to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1983.
10D Contract for Sale of Real Estate for Versailles on the Lake
dated March 16, 1984 between Versailles on the Lake
Associates, an Illinois limited partnership and Tennessee
Trust Company, Trustee, is incorporated by reference to
Exhibit 10(b) to the Partnership's Current Report on Form 8-K
dated April 4, 1984.
10E Assignment of Contract for Sale dated April 2, 1984 between
Tennessee Trust Company, Trustee and the Partnership (relating
to Versailles on the Lake Apartments) is incorporated by
reference to Exhibit 10L to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1984.
10F Note dated November 19, 1984 executed by the Partnership
payable to American Fletcher National Bank and Trust Company
relating to Versailles on the Lake Apartments is incorporated
by reference to Exhibit 10W to the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1985.
10G Real Estate Mortgage, Assignment of Rents and Security
Agreement dated November 19, 1984 executed by the Partnership
payable to American Fletcher National Bank and Trust Company
relating to Versailles on the Lake is incorporated by
reference to Exhibit 10EE to the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1985.
10H Memorandum of Understanding among SEC Realty Corp.,
Tennessee Properties, L.P., Freeman Mortgage Corporation, J.
Richard Freeman, W. Criswell Freeman and Jacques-Miller
Properties, Inc. is incorporated by reference to Exhibit
10BB to the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
<PAGE>
10I Partnership Administration and Consultation Agreement among
Freeman Properties, Inc., Freeman Diversified Properties,
Inc., Residual Equities Limited and Jacques-Miller
Properties, Inc. is incorporated by reference to Exhibit
10CC to the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
10J Partnership Agreement of Ashley Woods Associates dated May 16,
1990 owned 99.9% by the Partnership relating to refinancing of
Ashley Woods Apartments is incorporated by reference to
Exhibit 10EE to the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10K Multifamily Note with Addendum dated June 14, 1990 executed by
Ashley Woods Associates payable to PW Funding Inc. relating to
Ashley Woods Apartments is incorporated by reference to
Exhibit 10FF to the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10L Multifamily Open-end Mortgage with Rider dated June 14, 1990
executed by Ashley Woods Associates in favor of PW Funding
Inc. relating to Ashley Woods Apartments is incorporated by
reference to Exhibit 10GG to the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
10M Termination Agreement dated December 31, 1991 among
Jacques-Miller, Inc., Jacques-Miller Property Management,
Davidson Diversified Properties, Inc., and Supar, Inc. is
incorporated by reference to Exhibit 10HH to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10N Assignment of Limited Partnership Interest of Freeman
Equities, Limited, dated December 31, 1991 between Davidson
Diversified Properties, Inc. and Insignia Jacques-Miller, L.P.
is incorporated by reference to Exhibit 10II to the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31,1991.
10O Assignment of General Partner Interests of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Properties, Inc. and MAE GP Corporation is incorporated by
reference to Exhibit 10JJ to the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
10P Stock certificate, dated December 31, 1991 showing ownership
of 1,000 shares of Davidson Diversified Properties, Inc. by
MAE GP Corporation is incorporated by reference to Exhibit
10KK to the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
<PAGE>
10Q Contracts related to refinancing of debt:
(a) First Deed of Trust and Security Agreement dated October
28, 1992 between Davidson Diversified Real Estate I,
Limited Partnership and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Versailles
on the Lake is incorporated by reference to Exhibit 10Q
(a) to the Partnership's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.
(b) Second Deed of Trust and Security Agreement dated
October 28, 1992 between Davidson Diversified Real
Estate I, Limited Partnership and First Commonwealth
Realty Credit Corporation, a Virginia Corporation,
securing Versailles on the Lake is incorporated by
reference to Exhibit 10Q (b) to the Partnership's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1992.
(c) First Assignment of Leases and Rents dated October 28,
1992 between Davidson Diversified Real Estate I, Limited
Partnership and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Versailles
on the Lake is incorporated by reference to Exhibit 10Q
(c) to the Partnership's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.
(d) Second Assignment of Leases and Rents dated October 28,
1992 between Davidson Diversified Real Estate, I Limited
Partnership and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Versailles
on the Lake is incorporated by reference to Exhibit 10Q
(d) to the Partnership's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.
(e) First Deed of Trust Note dated October 28, 1992 between
Davidson Diversified Real Estate I Limited Partnership
and First Commonwealth Realty Credit Corporation,
relating to Versailles on the Lake is incorporated by
reference to Exhibit 10Q (e) to the Partnership's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1992.
(f) Second Deed of Trust Note dated October 28, 1992 between
Davidson Diversified Real Estate I, Limited Partnership
and First Commonwealth Realty Credit Corporation
relating to Versailles on the Lake is incorporated by
reference to Exhibit 10Q (f) to the Partnership's Annual
Report on Form 10-KSB for the fiscal year ended December
31,1992.
10R Promissory Note dated November 20, 1997, by and between
Ashley Woods, L.L.C., a South Carolina limited liability
company, and Lehman Brothers Holdings, Inc., a Delaware
corporation.
<PAGE>
16 Letter from the Partnership's former independent accountant
regarding its concurrence with the statements made by the
Partnership is incorporated by reference to the exhibit filed
with Form 8-K dated September 30, 1992.
18 Independent Accountants' Preferability Letter for Change in
Accounting Principle, is attached as an exhibit to this
report.
27 Financial Data Schedule, is attached as an exhibit to this
report.
<PAGE>
Exhibit 18
February 7, 2000
Mr. Patrick J. Foye
Executive Vice President
Davidson Diversified Properties, Inc.
Managing General Partner of Davidson Diversified Real Estate I, L.P.
55 Beattie Place
P.O. Box 1089
Greenville, South Carolina 29602
Dear Mr. Foye:
Note J of Notes to the Consolidated Financial Statements of Davidson Diversified
Real Estate I, L.P. included in its Form 10-KSB for the year ended December 31,
1999 describes a change in the method of accounting to capitalize exterior
painting and major landscaping, which would have been expensed under the old
policy. You have advised us that you believe that the change is to a preferable
method in your circumstances because it provides a better matching of expenses
with the related benefit of the expenditures and is consistent with policies
currently being used by your industry and conforms to the policies of the
Managing General Partner.
There are no authoritative criteria for determining a preferable method based on
the particular circumstances; however, we conclude that the change in the method
of accounting for exterior painting and major landscaping is to an acceptable
alternative method which, based on your business judgment to make this change
for the reasons cited above, is preferable in your circumstances.
Very truly yours,
/s/Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate I, L.P. 1999 Fourth Quarter 10-KSB and is qualified in
its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000721673
<NAME> David Diversified Real Estate I, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 681
<SECURITIES> 0
<RECEIVABLES> 202
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 14,325
<DEPRECIATION> (7,877)
<TOTAL-ASSETS> 7,712
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 10,210
0
0
<COMMON> 0
<OTHER-SE> (3,298)
<TOTAL-LIABILITY-AND-EQUITY> 7,712
<SALES> 0
<TOTAL-REVENUES> 3,218
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-BASIC> (58.54)<F2>
<EPS-DILUTED> 0
<FN>
<F1> Registrant has an unclassified balance sheet. <F2> Multiplier is 1.
</FN>
</TABLE>
