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 March 31, 1999
or
[ ] 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)
March 31, 1999
Assets
Cash and cash equivalents $ 1,141
Receivables and deposits 262
Restricted escrows 297
Other assets 297
Investment properties:
Land $ 4,120
Buildings and related personal property 20,624
24,744
Less accumulated depreciation (11,290) 13,454
Investment in joint venture 255
$ 15,706
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 33
Tenant security deposit liabilities 85
Accrued property taxes 165
Other liabilities 130
Mortgage notes payable 11,872
Partners' Capital (Deficit)
General partners' $ (668)
Limited partners' (26,776 units
issued and outstanding) 4,089 3,421
$ 15,706
See Accompanying Notes to Consolidated Statements
b)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 1,155 $ 1,103
Other income 64 48
Total revenues 1,219 1,151
Expenses:
Operating 481 477
General and administrative 57 54
Depreciation 235 222
Interest 249 251
Property taxes 108 111
Total expenses 1,130 1,115
Income before equity in income of joint venture 89 36
Equity in income of joint venture 39 12
Net income $ 128 $ 48
Net income allocated to general partners (3%) $ 4 $ 1
Net income allocated to limited partners (97%) 124 47
$ 128 $ 48
Net income per limited partnership unit $ 4.63 $ 1.76
Distributions per limited partnership unit $ -- $ 3.62
See Accompanying Notes to Consolidated 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
Net income for the three months
ended March 31, 1999 -- 4 124 128
Partners' (deficit) capital
at March 31, 1999 26,776 $ (668) $ 4,089 $ 3,421
See Accompanying Notes to Consolidated Statements
d)
DAVIDSON INCOME REAL ESTATE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 128 $ 48
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 235 222
Amortization of discounts and loan costs 20 20
Equity in income of joint venture (39) (12)
Change in accounts:
Receivables and deposits 226 117
Other assets (49) 13
Accounts payable (18) (80)
Tenant security deposit liabilities 3 (6)
Accrued property taxes (206) (118)
Other liabilities 5 (21)
Net cash provided by operating activities 305 183
Cash flows from investing activities:
Property improvements and replacements (64) (159)
Net withdrawals from restricted escrows 15 46
Distributions from joint venture -- 70
Net cash used in investing activities (49) (43)
Cash flows from financing activities:
Payments on mortgage notes payable (35) (33)
Distributions to partners -- (100)
Net cash used in financing activities (35) (133)
Net increase in cash and cash equivalents 221 7
Cash and cash equivalents at beginning of period 920 776
Cash and cash equivalents at end of period $1,141 $ 783
Supplemental disclosure of cash flow information:
Cash paid for interest $ 229 $ 232
See Accompanying Notes to Consolidated 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") 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 month period ended March 31, 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, a publicly traded real estate
investment trust ("AIMCO"), with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result, AIMCO acquired a 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 certain payments
to affiliates for services and as 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 three
months ended March 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 62 $ 59
Reimbursement for services of affiliates (included in
general and administrative and operating expenses) (1) 32 33
(1) Included in "Reimbursements for services of affiliates" for the three
months ended March 31, 1998 are approximately $4,000 in reimbursements for
construction oversight costs. There were no similar reimbursements to
affiliates during the comparable period of 1999.
During the three months ended March 31, 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
$62,000 and $59,000 for the three months ended March 31, 1999 and 1998,
respectively.
An affiliate of the Managing General Partner received reimbursements of
accountable administrative expenses amounting to approximately $32,000 and
$33,000 for the three months ended March 31, 1999 and 1998, respectively.
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 Sterling Crest Joint Venture is as follows
(in thousands):
March 31,1999
Total assets $ 8,576
Total liabilities (6,361)
Total venture's equity $ 2,215
Three Months Ended
March 31,
1999 1998
Total revenues $ 667 $ 613
Total expenses (445) (547)
$ 222 $ 66
The Partnership received no distributions from the joint venture during either
of the three months ended March 31, 1999 and 1998. For the three months ended
March 31, 1999 and 1998, the Partnership recognized equity in the income of the
joint venture of approximately $39,000 and $12,000, respectively.
NOTE E - DISTRIBUTIONS
There were no distributions declared or paid during the three months ended March
31, 1999. During the three months ended March 31, 1998, the Partnership
distributed to partners approximately $100,000 ($3.62 per limited partnership
unit) from operations.
NOTE F - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenues: 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.
Measurement of segment profit or loss: 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.
Factors management used to identify the Partnership's reportable segments: 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 three months ended March 31, 1999 and 1998 is shown
in the tables below (in thousands). The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Residential Other Totals
Rental income $ 1,155 $ -- $ 1,155
Other income 57 7 64
Interest expense 249 -- 249
Depreciation 235 -- 235
General and administrative expense -- 57 57
Equity in income of joint venture -- 39 39
Segment profit (loss) 139 (11) 128
Total assets 14,665 1,041 15,706
Capital expenditures for investment
properties 64 -- 64
1998
Residential Other Totals
Rental income $ 1,103 $ -- $ 1,103
Other income 42 6 48
Interest expense 251 -- 251
Depreciation 222 -- 222
General and administrative expense -- 54 54
Equity in income of joint venture -- 12 12
Segment profit (loss) 84 (36) 48
Total assets 15,178 787 15,965
Capital expenditures for investment
properties 159 -- 159
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
three months ended March 31, 1999 and 1998:
Average Occupancy
Property 1999 1998
Northsprings Apartments
Atlanta, Georgia 97% 96%
Lakeside Apartments (1)
Charlotte, North Carolina 94% 91%
Bexley House Apartments (2)
Columbus, Ohio 87% 92%
Covington Pointe Apartments (3)
Dallas, Texas 93% 84%
(1) The increase in occupancy at Lakeside Apartments is attributed to a
stronger market in the Charlotte area, and improvements made recently to
enchance the appearance of the property.
(2) Bexley House Apartments occupancy consists of an elderly clientele;
occupancy fluctuates depending upon the general health of its tenants and
their relocation to assisted living facilities.
(3) Occupancy increased at Covington Pointe Apartments as a result of an
increase in advertising and marketing efforts.
Results of Operations
The Partnership's income before equity in income of joint venture for the three
months ended March 31, 1999, was approximately $89,000 compared to approximately
$36,000 for the corresponding period in 1998. The increase in net income is
primarily attributable to an increase in total revenues partially offset by an
increase in total expenses. Revenues increased due to increases in both rental
and 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 is
primarily attributable to an increase in tenant fees collected at Covington
Pointe Apartments and an increase in interest income at the Lakeside Apartments
property. Total expense increased primarily due to an increase in depreciation
resulting from an increase in depreciable assets placed in service over the last
twelve months. There were slight increases in operating and general and
administrative expenses offset by slight decreases in interest and property tax
expenses.
Included in general and administrative expenses for the three months ended March
31, 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.
Net income for the three months ended March 31, 1999 was approximately $128,000
compared to approximately $48,000 for the same period of 1998. Contributing to
the increase in overall net income for the three months ended March 31, 1999 was
an increase in equity in income of the joint venture property from approximately
$12,000 at March 31, 1998 to approximately $39,000 at March 31, 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 three
months ended March 31, 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 higher operating expenses in 1998 as compared to 1999 related to exterior
building improvements, interior decorating expenses, and sewer repairs (which
were completed in 1998) and billings. In addition, rental income increased in
1999 due to increases in occupancy and average rental rates at the Brighton
Crest property.
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 March 31, 1999, the Partnership had cash and cash equivalents of
approximately $1,141,000, compared to approximately $783,000 at March 31, 1998.
The increase in cash and cash equivalents for the three months ended March 31,
1999 from the Partnership's year ended December 31, 1998, was approximately
$221,000. This increase is due to approximately $305,000 of cash provided by
operating activities partially offset by approximately $49,000 of cash used in
investing activities and approximately $35,000 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. Cash used in financing
activities consisted of 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 three months ended March 31, 1999, the Partnership completed
approximately $15,000 of capital improvements at Covington Pointe Apartments
consisting primarily of floor covering replacement and air conditioning
upgrades. 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 near term. Capital improvements
budgeted for 1999 include, but are not limited to, parking lot repairs, carpet
replacement, structural improvements, exterior painting and fence replacement,
which are expected to cost approximately $318,000.
Northsprings Apartments
During the three months ended March 31, 1999, the Partnership completed
approximately $13,000 of capital improvements at Northsprings Apartments
consisting primarily of floor covering replacement and fence replacements.
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 near term. Capital improvements budgeted for
1999 include, but are not limited to, building improvements, carpet replacement
and enhancement of recreational facilities, which are expected to cost
approximately $101,000.
Lakeside Apartments
During the three months ended March 31, 1999, the Partnership completed
approximately $17,000 of capital improvements at Lakeside Apartments consisting
primarily of floor covering and appliance replacement. These improvements were
funded from replacement 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 near term. Capital improvements budgeted for 1999 include,
but are not limited to, landscaping improvements, roof replacement, parking lot
improvements and carpet replacement, which are expected to cost approximately
$233,000.
Bexley House Apartments
During the three months ended March 31, 1999, the Partnership completed
approximately $19,000 of capital improvements at Bexley House Apartments
consisting primarily of cabinets/countertops and carpet replacements. 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 $150,000
of capital improvements over the near term. Capital improvements budgeted for
1999 include, but are not limited to, interior and exterior building
improvements which are expected to cost approximately $98,000.
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 $11,872,000, 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.
No distributions were declared or paid during the three months ended March 31,
1999. A distribution from operations of approximately $100,000 was paid to the
partners during the three months ended March 31, 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.
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the Managing General Partner. AIMCO and its
affiliates currently own 18.177% of the limited partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer for additional limited partnership interests in the Partnership.
There is a substantial likelihood that, within a short period of time, AIMCO OP
will offer to acquire limited partnership interests in the Partnership for cash
or preferred units or common units of limited partnership interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, 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
March 31, 1999, had completed approximately 75% 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 July
31, 1999.
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.
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 the testing process is
expected to be completed by July 31, 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 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
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. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
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 May 1999.
The Managing Agent has updated data transmission standards with two of the three
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 June 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 $2.8 million ($0.6 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 March 31, 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/ Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
Date: May 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Income Real Estate, L.P. 1999 First 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,141
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 24,744
<DEPRECIATION> (11,290)
<TOTAL-ASSETS> 15,706
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 11,872
0
0
<COMMON> 0
<OTHER-SE> 3,421
<TOTAL-LIABILITY-AND-EQUITY> 15,706
<SALES> 0
<TOTAL-REVENUES> 1,219
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128
<EPS-PRIMARY> 4.63<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
