FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14530
DAVIDSON INCOME REAL ESTATE, L.P.
(Exact name of small business issuer as specified in its charter)
Delaware 62-1242144
(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 of 1934 during the preceding 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 INCOME REAL ESTATE, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1999
Assets
Cash and cash equivalents $ 1,336
Receivables and deposits 335
Restricted escrows 260
Other assets 279
Investment properties:
Land $ 4,120
Buildings and related personal property 20,799
24,919
Less accumulated depreciation (11,510) 13,409
Investment in joint venture 193
$ 15,812
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 67
Tenant security deposit liabilities 89
Accrued property taxes 223
Other liabilities 104
Mortgage notes payable 11,842
Partners' Capital (Deficit)
General partners' $ (666)
Limited partners' (26,776 units
issued and outstanding) 4,153 3,487
$ 15,812
See Accompanying Notes to Consolidated Financial Statements
b)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
Rental income $ 1,194 $ 1,088 $ 2,349 $ 2,191
Other income 51 52 115 100
Total revenues 1,245 1,140 2,464 2,291
Expenses:
Operating 453 537 934 1,014
General and administrative 41 62 98 116
Depreciation 220 222 455 444
Interest 248 251 497 502
Property taxes 109 113 217 224
Total expenses 1,071 1,185 2,201 2,300
Equity in income
of joint venture 17 15 56 27
Net income (loss) $ 191 $ (30) $ 319 $ 18
Net income (loss) allocated
to general partners (3%) $ 6 $ (1) $ 10 $ --
Net income (loss) allocated
to limited partners (97%) 185 (29) 309 18
$ 191 $ (30) $ 319 $ 18
Net income (loss) per limited
partnership unit $ 6.91 $ (1.08) $ 11.54 $ 0.67
Distributions per limited
partnership unit $ 4.52 $ 3.62 $ 4.52 $ 7.25
See Accompanying Notes to Consolidated Financial Statements
c)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 26,776 $ 1 $26,776 $26,777
Partners' (deficit) capital
at December 31, 1998 26,776 $ (672) $ 3,965 $ 3,293
Distribution paid to partners -- (4) (121) (125)
Net income for the six months
ended June 30, 1999 -- 10 309 319
Partners' (deficit) capital
at June 30, 1999 26,776 $ (666) $ 4,153 $ 3,487
See Accompanying Notes to Consolidated Financial Statements
d)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 319 $ 18
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 455 444
Amortization of discounts and loan costs 39 39
Equity in income of joint venture (56) (27)
Change in accounts:
Receivables and deposits 153 47
Other assets (44) 16
Accounts payable 16 (49)
Tenant security deposit liabilities 7 (9)
Accrued property taxes (148) (48)
Other liabilities (21) (6)
Net cash provided by operating activities 720 425
Cash flows from investing activities:
Property improvements and replacements (239) (250)
Net withdrawals from restricted escrows 52 38
Distributions from joint venture 79 70
Net cash used in investing activities (108) (142)
Cash flows from financing activities:
Payments on mortgage notes payable (71) (66)
Distributions to partners (125) (200)
Net cash used in financing activities (196) (266)
Net increase in cash and cash equivalents 416 17
Cash and cash equivalents at beginning of period 920 776
Cash and cash equivalents at end of period $1,336 $ 793
Supplemental disclosure of cash flow information:
Cash paid for interest $ 458 $ 463
See Accompanying Notes to Consolidated Financial Statements
e)
DAVIDSON INCOME REAL ESTATE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Davidson Income
Real Estate, L.P. (the "Partnership" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999, are not necessarily indicative of the results that may be expected for the
fiscal 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 of the Partnership include its 100%
ownership interests in the following partnerships: Bexley House, L.P. and
Davidson IRE Associates, L.P. All significant interpartnership balances have
been eliminated.
NOTE B - TRANSFER OF CONTROL
Prior to February 25, 1998 the Managing General Partner was a wholly-owned
subsidiary of MAE GP Corporation ("MAE GP"), which was wholly owned by
Metropolitan Asset Enhancement, L.P. Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), thus the Managing General Partner
became a wholly-owned subsidiary of IPT.
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. ("Insignia") and IPT 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. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following transactions
with the Managing General Partner and/or its affiliates were incurred during the
six months ended June 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $124 $114
Reimbursement for services of affiliates (included in
general and administrative and operating expenses) 43 67
During the six months ended June 30, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Partnership's properties as compensation for providing property management
services. The Partnership paid to such affiliates approximately $124,000 and
$114,000 for the six months ended June 30, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursements of
accountable administrative expenses amounting to approximately $43,000 and
$67,000 for the six months ended June 30, 1999 and 1998, respectively (including
approximately $2,000 and $6,000, respectively, in construction service costs).
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 Bexley House Apartments owned by the Partnership.
NOTE D - INVESTMENT IN JOINT VENTURE
The Partnership owns a 17.5% interest in the Sterling Crest Joint Venture with
Davidson Growth Plus, L.P., an affiliate of the Managing General Partner, which
owns the remaining 82.5% of the joint venture. In connection with the joint
venture's purchase of Phase I of Brighton Crest Apartments on June 30, 1987, the
Partnership invested approximately $2,727,000 in the joint venture. The joint
venture purchased Phase II of Brighton Crest Apartments on December 15, 1987.
Summary financial information for the six months ended June 30, 1999, of the
Sterling Crest Joint Venture is as follows (in thousands):
Total assets $ 7,858
Total liabilities (15,324)
Total venture's equity $ 7,466
1999 1998
Total revenues $ 1,305 $ 1,218
Total expenses (1,000) (1,066)
$ 305 $ 152
The Partnership received distributions of approximately $79,000 and $70,000 from
the joint venture during the six months ended June 30, 1999 and 1998. For the
six months ended June 30, 1999 and 1998, the Partnership recognized equity in
the income of the joint venture of approximately $56,000 and $27,000,
respectively.
NOTE E - DISTRIBUTIONS
During the six months ended June 30, 1999, the Partnership distributed
approximately $125,000 of which approximately $121,000 was paid to the limited
partners (approximately $4.52 per limited partnership unit) from operations.
During the six months ended June 30, 1998, the Partnership distributed
approximately $200,000 of which approximately $194,000 was paid to the limited
partners (approximately $7.25 per limited partnership unit) from operations.
NOTE F - SEGMENT REPORTING
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of four apartment complexes
in four states in the United States: Georgia, North Carolina, Ohio and Texas.
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 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
are managed separately, they have been aggregated into one segment as they
provide services with similar types of products and customers.
Segment information for the six months ended June 30, 1999 and 1998, is shown in
the tables below (in thousands). The "Other" column includes Partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Residential Other Totals
Rental income $ 2,349 $ -- $ 2,349
Other income 102 13 115
Interest expense 497 -- 497
Depreciation 455 -- 455
General and administrative expense -- 98 98
Equity in income of joint venture -- 56 56
Segment profit (loss) 348 (29) 319
Total assets 14,933 879 15,812
Capital expenditures for investment
properties 239 -- 239
1998
Residential Other Totals
Rental income $ 2,191 $ -- $ 2,191
Other income 89 11 100
Interest expense 502 -- 502
Depreciation 444 -- 444
General and administrative expense -- 116 116
Equity in income of joint venture -- 27 27
Segment profit (loss) 96 (78) 18
Total assets 15,175 746 15,921
Capital expenditures for investment
properties 250 -- 250
NOTE G - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs have filed an amended complaint. The Managing General Partner filed
demurrers to the amended complaint which were heard during February 1999. No
ruling on such demurrers has been received. The Managing General Partner does
not anticipate that costs associated with this case, if any, will be material to
the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF 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 the other filings with the
Securities and Exchange Commission made by the Partnership from time to time.
The discussion of the Partnership'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 Partnership's business and
results of operation. Accordingly, actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those identified herein.
The Partnership's investment properties consist of four apartment complexes.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Northsprings Apartments
Atlanta, Georgia 97% 95%
Lakeside Apartments
Charlotte, North Carolina 94% 92%
Bexley House Apartments
Columbus, Ohio 91% 93%
Covington Pointe Apartments (1)
Dallas, Texas 93% 82%
(1) Occupancy increased at Covington Pointe Apartments as a result of an
increase in advertising and marketing efforts.
Results of Operations
The Partnership's net income for the six month period ended June 30, 1999, was
approximately $319,000 compared to net income of approximately $18,000 for the
corresponding period in 1998. The Partnership's net income for the three month
period ended June 30, 1999, was approximately $191,000 compared to a net loss of
approximately $30,000 for the corresponding period in 1998. The increase in net
income for the three and six months periods ended June 30, 1999, is primarily
attributable to an increase in total revenues and a decrease in total expenses.
Total revenues increased due to increases in rental income, and in the case of
the six months ended June 30, 1999, a slight increase in other income. Rental
income increased primarily as a result of an increase in average occupancy at
all of the Partnership's investment properties, with the exception of Bexley
House Apartments, combined with an increase in average rental rates at all of
the properties. The increase in other income for the six months ended June 30,
1999, is primarily attributable to an increase in tenant fees collected
primarily at Covington Pointe Apartments and at Northsprings Apartments. Total
expenses decreased primarily due to a decrease in operating expenses and to a
lessor extent, a decrease in general and administrative expenses. Operating
expenses decreased due to lower insurance costs at all the Partnership's
properties due to lower rates provided by a new insurance carrier and lower
maintenance costs. These decreases were partially offset by increased
advertising costs at all the Partnership's properties.
General and administrative expense decreased due to lower management
reimbursement to the Managing General Partner and lower professional fees
associated with managing the Partnership partially offset by an increase in
legal fees associated with the settlement of the Everest Lawsuit which was
disclosed in the Partnership's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998. Included in general and administrative expenses for
the six months ended June 30, 1999 and 1998, are management reimbursements to
the Managing General Partner allowed under the Partnership Agreement. In
addition, costs associated with the quarterly and annual communications with the
investors and regulatory agencies and the annual audit required by the
Partnership Agreement are also included.
Contributing to the increase in overall net income for the three and six months
ended June 30, 1999, was an increase in equity in income of the joint venture
property from approximately $27,000 at June 30, 1998, to approximately $56,000
at June 30, 1999. The Partnership owns a 17.5% interest in Sterling Crest Joint
Venture (the "Joint Venture"). Equity in the income of the Joint Venture
increased for the six months ended June 30, 1999, as a result of an increase in
the income of the Joint Venture's investment property, Brighton Crest. This
increase is primarily due to increased rental income in 1999 due to increases in
occupancy and average rental rates at the Brighton Crest property. In addition,
operating expenses were higher in 1998 as compared to 1999 due to the completion
during the six months ended June 30, 1998 of exterior building improvements.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions, which can result in the use of
rental concessions and rental reductions to offset softening market conditions,
there is no guarantee that the Managing General Partner will be able to sustain
such a plan.
Liquidity and Capital Resources
At June 30, 1999, the Partnership had cash and cash equivalents of approximately
$1,336,000 compared to approximately $793,000 at June 30, 1998. The increase in
cash and cash equivalents for the six months ended June 30, 1999, from the
Partnership's year ended December 31, 1998, was approximately $416,000. This
increase is due to approximately $720,000 of cash provided by operating
activities partially offset by approximately $108,000 of cash used in investing
activities and approximately $196,000 of cash used in financing activities.
Cash used in investing activities consisted of property improvements and
replacements partially offset by net withdrawals from restricted escrows
maintained by the mortgage lender and a distribution from the joint venture.
Cash used in financing activities consisted of a distribution to the partners
and payments of principal made on the mortgages encumbering the Partnership's
investment properties. The Partnership 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 investment 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 Partnership's properties are detailed
below.
Covington Pointe Apartments
During the six months ended June 30, 1999, the Partnership completed
approximately $54,000 of capital improvements at Covington Pointe Apartments
consisting primarily of floor covering replacement, structural improvements,
pool repairs, air conditioning units, and appliances. These improvements were
funded from 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 $318,000 of capital improvements over
the next few years. The Partnership has budgeted, but is not limited to,
capital improvements of $318,000 for 1999 which include certain of the required
improvements and consists of parking lot repairs, carpet replacement, structural
improvements, exterior painting and fence replacement.
Northsprings Apartments
During the six months ended June 30, 1999, the Partnership completed
approximately $47,000 of capital improvements at Northsprings Apartments
consisting primarily of floor covering replacement, pool repairs, landscaping,
and other building improvements. These improvements were funded from 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 $318,000 of capital improvements over the next
few years. The Partnership has budgeted, but is not limited to, capital
improvements of approximately $101,000 for 1999 which include certain of the
required improvements and consists of building improvements, carpet replacement
and enhancement of recreational facilities.
Lakeside Apartments
During the six months ended June 30, 1999, the Partnership completed
approximately $72,000 of capital improvements at Lakeside Apartments consisting
primarily of plumbing upgrades, floor covering replacement, furniture and
fixtures, and other building improvements. These improvements were funded from
Partnership 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 $150,000 of capital improvements over the next
few years. The Partnership has budgeted, but is not limited to, capital
improvements of approximately $233,000 for 1999 which include certain of the
required improvements and consists of landscaping improvements, roof
replacement, parking lot improvements and carpet replacement.
Bexley House Apartments
During the six months ended June 30, 1999, the Partnership completed
approximately $66,000 of capital improvements at Bexley House Apartments
consisting primarily of parking lot improvements, floor covering replacement,
cabinet replacement, furniture and fixtures, and air conditioning units. These
improvements were funded from Partnership reserves and 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 $150,000 of capital improvements over the next few years. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $98,000 for 1999 which consists of certain of the required
improvements and include interior and exterior building improvements.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $11,842,000, net of discounts, is amortized over
varying periods with balloon payments of approximately $1,097,000 due November
2002 and approximately $10,181,000 due November 2003. The Managing General
Partner will attempt to refinance and/or sell the properties prior to such
maturity dates. If the properties cannot be refinanced or sold for a sufficient
amount, the Partnership will risk losing such properties through foreclosure.
The Partnership distributed from operations approximately $125,000, of which
approximately $121,000 was paid to the limited partners (approximately $4.52 per
limited partnership unit) during the six months ended June 30, 1999. A
distribution from operations of approximately $200,000 of which approximately
$194,000 was paid to the limited partners (approximately $7.25 per limited
partnership unit) was paid during the six months ended June 30, 1998. The
Partnership's distribution policy will be reviewed on a quarterly basis. Future
cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves, and the timing of debt
maturities, refinancings and/or property sales. There can be no assurance,
however, that the Partnership will generate sufficient funds from operations
after required capital expenditures to permit further distributions to its
partners in 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 June 30, 1999, had completed approximately 90% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by September 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs have filed an amended complaint. The Managing General Partner filed
demurrers to the amended complaint which were heard during February 1999. No
ruling on such demurrers has been received. The Managing General Partner does
not anticipate that costs associated with this case, if any, will be material to
the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b)Reports on Form 8-K:
None filed during the quarter ended June 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON INCOME REAL ESTATE, L.P.
By: DAVIDSON DIVERSIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President
Finance and Administration
Date: August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Income Real Estate, L.P. 1999 Second Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000768598
<NAME> DAVIDSON INCOME REAL ESTATE, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,336
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 24,919
<DEPRECIATION> (11,510)
<TOTAL-ASSETS> 15,812
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 11,842
0
0
<COMMON> 0
<OTHER-SE> 3,487
<TOTAL-LIABILITY-AND-EQUITY> 15,812
<SALES> 0
<TOTAL-REVENUES> 2,464
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 319
<EPS-BASIC> 11.54<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
