FORM 10-QSB---QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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)
September 30, 1999
Assets
Cash and cash equivalents $ 1,374
Receivables and deposits 409
Restricted escrows 207
Other assets 268
Investment in joint venture 107
Investment properties:
Land $ 4,120
Buildings and related personal property 21,209
25,329
Less accumulated depreciation (11,743) 13,586
$ 15,951
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 179
Tenant security deposit liabilities 88
Accrued property taxes 343
Other liabilities 125
Mortgage notes payable 11,811
Partners' (Deficit) Capital
General partners $ (668)
Limited partners (26,776 units issued and
outstanding) 4,073 3,405
$ 15,951
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 1,169 $ 1,113 $ 3,518 $ 3,304
Other income 60 62 175 162
Total revenues 1,229 1,175 3,693 3,466
Expenses:
Operating 494 583 1,428 1,597
General and administrative 77 56 175 172
Depreciation 233 222 688 666
Interest 248 250 745 752
Property taxes 121 114 338 338
Total expenses 1,173 1,225 3,374 3,525
Equity in income
of joint venture 12 11 68 38
Net income (loss) $ 68 $ (39) $ 387 $ (21)
Net income (loss) allocated
to general partners (3%) $ 2 $ (1) $ 12 $ (1)
Net income (loss) allocated
to limited partners (97%) 66 (38) 375 (20)
$ 68 $ (39) $ 387 $ (21)
Net income (loss) per limited
partnership unit $ 2.47 $ (1.41) $ 14.01 $ (0.76)
Distributions per
limited partnership unit $ 5.43 $ 3.63 $ 9.97 $ 10.87
See Accompanying Notes to Consolidated Financial Statements
c)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(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
Distributions to partners -- (8) (267) (275)
Net income for the nine months
ended September 30, 1999 -- 12 375 387
Partners' (deficit) capital
at September 30, 1999 26,776 $ (668) $ 4,073 $ 3,405
See Accompanying Notes to Consolidated Financial Statements
d)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except unit data)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income (loss) $ 387 $ (21)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 688 666
Amortization of discounts and loan costs 59 59
Equity in income of joint venture (68) (38)
Change in accounts:
Receivables and deposits 79 (81)
Other assets (48) 8
Accounts payable 128 (3)
Tenant security deposit liabilities 6 (10)
Accrued property taxes (28) 65
Other liabilities -- 10
Net cash provided by operating activities 1,203 655
Cash flows from investing activities:
Property improvements and replacements (649) (325)
Net withdrawals from restricted escrows 105 21
Distributions from joint venture 177 131
Net cash used in investing activities (367) (173)
Cash flows from financing activities:
Payments on mortgage notes payable (107) (100)
Distributions to partners (275) (300)
Net cash used in financing activities (382) (400)
Net increase in cash and cash equivalents 454 82
Cash and cash equivalents at beginning of period 920 776
Cash and cash equivalents at end of period $1,374 $ 858
Supplemental disclosure of cash flow information:
Cash paid for interest $ 686 $ 694
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 nine month periods ended
September 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 fiscal 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. 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) 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 nine
months ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $187 $176
Reimbursement for services of affiliates (included in
general and administrative expense, operating expense,
and investment properties) 82 101
During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Partnership's properties as compensation for providing property
management services. The Partnership paid to such affiliates approximately
$187,000 and $176,000 for the nine months ended September 30, 1999 and 1998,
respectively.
An affiliate of the Managing General Partner received reimbursements of
accountable administrative expenses amounting to approximately $82,000 and
$101,000 for the nine months ended September 30, 1999 and 1998, respectively,
including approximately $16,000 and $8,000, respectively, in construction
service costs.
On September 25, 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.
On August 27, 1998, an affiliate of the Managing General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 9,000 of the outstanding
units of limited partnership interest in the Partnership at $375 per Unit, net
to the seller in cash. As a result of the tender offer, the Purchaser acquired
3,830 (approximately 14.30%) of the outstanding limited partner units of the
Partnership.
On July 23, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 9,886.37 units of limited
partnership interest in the Partnership (approximately 36.92% of the total
outstanding limited partner units) for a purchase price of $225 per unit. The
offer expired on October 14, 1999. Pursuant to this offer, AIMCO Properties,
L.P., acquired 236 units. As a result of these tender offers, AIMCO and its
affiliates currently own 5,191 units of limited partnership interest in the
Partnership representing approximately 19.39% of the total outstanding limited
partner 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 (see "Note G - Legal Proceedings").
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 nine months ended September 30, 1999, of
the Sterling Crest Joint Venture is as follows (in thousands):
Total assets $ 7,820
Total liabilities (6,202)
Total venture's equity $ 1,618
1999 1998
Total revenues $ 1,939 $ 1,823
Total expenses (1,544) (1,581)
$ 395 $ 242
The Partnership received distributions of approximately $177,000 and $131,000
from the joint venture during the nine months ended September 30, 1999 and 1998.
For the nine months ended September 30, 1999 and 1998, the Partnership
recognized equity in the income of the joint venture of approximately $68,000
and $38,000, respectively.
NOTE E - DISTRIBUTIONS
During the nine months ended September 30, 1999, the Partnership distributed
approximately $275,000 of which approximately $267,000 was paid to the limited
partners (approximately $9.97 per limited partnership unit) from operations.
During the nine months ended September 30, 1998, the Partnership distributed
approximately $300,000 of which approximately $291,000 was paid to the limited
partners (approximately $10.87 per limited partnership unit) from operations.
NOTE F - SEGMENT INFORMATION
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 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 nine months ended September 30, 1999 and 1998, is
shown in the following 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 $ 3,518 $ -- $ 3,518
Other income 159 16 175
Interest expense 745 -- 745
Depreciation 688 -- 688
General and administrative expense -- 175 175
Equity in income of joint venture -- 68 68
Segment profit (loss) 478 (91) 387
Total assets 15,252 699 15,951
Capital expenditures for investment
properties 649 -- 649
1998 Residential Other Totals
Rental income $ 3,304 $ -- $ 3,304
Other income 144 18 162
Interest expense 752 -- 752
Depreciation 666 -- 666
General and administrative expense -- 172 172
Equity in income of joint venture -- 38 38
Segment profit (loss) 95 (116) (21)
Total assets 15,218 710 15,928
Capital expenditures for investment
properties 325 -- 325
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 Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control"). The complaint seeks monetary damages and
equitable relief, including judicial dissolution of the Partnership. On June
25, 1998, the Managing General Partner filed a motion seeking dismissal of the
action. In lieu of responding to the motion, the plaintiffs have filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any 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 operations. 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
nine months ended September 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Northsprings Apartments 96% 96%
Atlanta, Georgia
Lakeside Apartments 94% 93%
Charlotte, North Carolina
Bexley House Apartments 92% 92%
Columbus, Ohio
Covington Pointe Apartments (1) 93% 81%
Dallas, Texas
(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 nine months ended September 30, 1999, was
approximately $387,000 compared to a net loss of approximately $21,000 for the
corresponding period in 1998. The Partnership's net income for the three month
period ended September 30, 1999, was approximately $68,000 compared to a net
loss of approximately $39,000 for the corresponding period in 1998. The
increase in net income for the three and nine month periods ended September 30,
1999 is primarily attributable to an increase in total revenues and a decrease
in total expenses. Total revenues increased primarily as a result of an increase
in rental income. Rental income increased primarily as a result of an increase
in average annual occupancy at two of the Partnership's investment properties,
while the other two remained constant, combined with an increase in average
rental rates at all of the properties. The increase in other income for the
nine months ended September 30, 1999, is primarily attributable to an increase
in tenant fees collected primarily at Covington Pointe Apartments and at
Northsprings Apartments. The decrease in total expenses is primarily
attributable to a decrease in operating expenses. Operating expenses decreased
due to lower insurance and maintenance costs at all the Partnership's
properties. The decrease in insurance expense is due to lower rates provided by
a new insurance carrier. The decrease in maintenance expense is due to major
landscaping and interior and exterior improvements performed at the properties
in 1998.
General and administrative expense increased due to 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, which was partially offset by lower management reimbursement to the
Managing General Partner. Included in general and administrative expenses for
the nine months ended September 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 nine months ended
September 30, 1999, was an increase in equity in income of the joint venture
property from approximately $38,000 at September 30, 1998, to approximately
$68,000 at September 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 nine months ended September 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 an increase in net income
resulting from increased rental income in 1999 due to increases in average
rental rates at the Brighton Crest property. In addition, net income increased
due to a decrease in total expenses resulting from higher operating expenses in
1998 as compared to 1999 due to the completion during the nine months ended
September 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 September 30, 1999, the Partnership had cash and cash equivalents of
approximately $1,374,000 compared to approximately $858,000 at September 30,
1998. The increase in cash and cash equivalents for the nine months ended
September 30, 1999, from the Partnership's year ended December 31, 1998, was
approximately $454,000. This increase is due to approximately $1,203,000 of
cash provided by operating activities partially offset by approximately $367,000
of cash used in investing activities and approximately $382,000 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 distributions from the
joint venture. Cash used in financing activities consisted of distributions to
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 the Partnership's properties are detailed below.
Covington Pointe Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $370,000 of capital improvements at Covington Pointe Apartments
consisting primarily of exterior building improvements, roof replacements, and
structural 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
$318,000 for 1999 which include certain of the required improvements and
consists of parking lot upgrades, carpet replacement, structural improvements,
exterior building improvements, and fence replacement.
Northsprings Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $73,000 of capital improvements at Northsprings Apartments
consisting primarily of floor covering replacement, pool improvements, and other
building improvements. The pool improvements were complete as of September 30,
1999. 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 $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 nine months ended September 30, 1999, the Partnership completed
approximately $110,000 of capital improvements at Lakeside Apartments consisting
primarily of plumbing upgrades, floor covering replacement, and other building
improvements. The plumbing upgrades were complete as of September 30, 1999.
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 $233,000 for 1999 which include
certain of the required improvements and consists of landscaping improvements,
roof replacement, plumbing upgrades, parking lot improvements and carpet
replacement.
Bexley House Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $96,000 of capital improvements at Bexley House Apartments
consisting primarily of parking lot resurfacing, floor covering replacement,
cabinet replacement, and air conditioning upgrades. The parking lot
improvements were approximately 70% complete as of September 30, 1999. 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 $98,000
for 1999 which include 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 $11,811,000, 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 such indebtedness and/or sell the properties
prior to such maturity dates. If the properties cannot be refinanced or sold
for a sufficient amount, the Partnership may risk losing such properties through
foreclosure.
The Partnership distributed from operations approximately $275,000 of which
approximately $267,000 was paid to the limited partners (approximately $9.97 per
limited partnership unit) during the nine months ended September 30, 1999. A
distribution from operations of approximately $300,000 of which approximately
$291,000 was paid to the limited partners (approximately $10.87 per limited
partnership unit) was paid during the nine months ended September 30, 1998. The
Partnership's distribution policy is 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 improvements to permit further distributions to its partners in 1999 or
subsequent periods.
Tender Offer
On July 23, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 9,886.37 units of limited
partnership interest in the Partnership (approximately 36.92% of the total
outstanding limited partner units) for a purchase price of $225 per unit. The
offer expired on October 14, 1999. Pursuant to this offer, AIMCO Properties,
L.P., acquired 236 units. As a result of this tender offer AIMCO and its
affiliates currently own 5,191 units of limited partnership interest in the
Partnership representing approximately 19.39% of the total outstanding limited
partner 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 (see "Item 1. Financial Statements, Note G - Legal Proceedings").
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 General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of September 30, 1999, had virtually completed this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April 1999 the Managing Agent embarked on a data center consolidation project
that unifies its core financial systems under its Year 2000 compliant system.
The estimated completion date for this project is October 1999.
During 1998, the Managing agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and testing process was
completed in June 1999. The final software area is the office software and
server operating systems. The Managing Agent has upgraded all non-compliant
office software systems on each PC and has upgraded virtually all of the server
operating systems.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 1999. Any operating
equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
September 30, 1999 to replace or repair the operating equipment was
approximately $75,000. The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date, the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expenses
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA
FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer
of Control"). The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
Managing General Partner filed a motion seeking dismissal of the action. In
lieu of responding to the motion, the plaintiffs have filed an amended
complaint. The Managing General Partner filed demurrers to the amended complaint
which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON INCOME REAL ESTATE, L.P.
By: DAVIDSON DIVERSIFIED PROPERTIES, INC.
General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Income Real Estate LP 1999 Third Quarter 10-QSB and is qualified in its entirety
by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000768598
<NAME> DAVIDSON INCOME REAL ESTATE LP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,374
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 25,329
<DEPRECIATION> (11,743)
<TOTAL-ASSETS> 15,951
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 11,811
0
0
<COMMON> 0
<OTHER-SE> 3,405
<TOTAL-LIABILITY-AND-EQUITY> 15,951
<SALES> 0
<TOTAL-REVENUES> 3,693
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 745
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387
<EPS-BASIC> 9.97<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
