FORM 10-QSB.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Quarterly or Transitional Report
(As last amended by 34-32231, eff. 6/3/93.)
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period.........to.........
Commission file number 0-15676
DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Delaware 62-1242599
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (803) 239-1000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1995
Assets
Cash:
Unrestricted $ 583,110
Restricted-tenant security deposits 106,190
Accounts receivable 371,349
Escrows for taxes 172,313
Restricted escrows 240,341
Other assets 318,237
Investment properties:
Land $ 2,821,084
Buildings and related personal
property 29,873,564
32,694,648
Less accumulated depreciation (11,803,124) 20,891,524
$22,683,064
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 118,501
Tenant security deposits 109,575
Accrued interest 852,263
Accrued taxes 314,894
Other liabilities 131,691
Mortgage notes payable 23,226,215
Partners' Deficit
General partners $ (41,401)
Limited partners (1,011.5 units
issued and outstanding) (2,028,674) (2,070,075)
$22,683,064
See Accompanying Notes to Consolidated Financial Statements
1
<PAGE>
b) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Rental income $1,206,048 $1,222,676 $2,377,004 $2,429,571
Other income 111,012 104,249 252,036 209,418
Total revenues 1,317,060 1,326,925 2,629,040 2,638,989
Expenses:
Operating 366,333 314,486 691,562 649,655
General and administrative 41,268 25,439 64,398 45,008
Property management fees 66,490 65,489 125,990 131,479
Maintenance 188,390 146,040 354,926 247,596
Depreciation 315,832 302,447 627,807 602,789
Interest 536,874 536,884 1,074,156 1,074,314
Property taxes 67,510 102,660 176,629 191,442
Adjustment to casualty
gain (Note B) (92,604) -- 69,396 --
Total expenses 1,490,093 1,493,445 3,184,864 2,942,283
Loss on disposal of property -- (26,601) -- (26,601)
Net loss $ (173,033) $ (193,121) $ (555,824) $ (329,895)
Net loss allocated to general
partners (2%) $ (3,461) $ (3,862) $ (11,116) $ (6,598)
Net loss allocated to limited
partners (98%) (169,572) (189,259) (544,708) (323,297)
$ (173,033) $ (193,121) $ (555,824) $ (329,895)
Net loss per limited
partnership unit $ (167.64) $ (186.83) $ (538.52) $ (319.15)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
c) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,013 $ 1,000 $20,240,000 $20,241,000
Partners'deficit at December 31,
1994 1,011.5 $(30,285) $(1,483,966) $(1,514,251)
Net loss for the six months
ended June 30, 1995 -- (11,116) (544,708) (555,824)
Partners' deficit at June 30,
1995 1,011.5 $(41,401) $(2,028,674) $(2,070,075)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
d) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1995 1994
Cash flows from operating activities:
Net loss $ (555,824) $ (329,895)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation 627,807 602,789
Adjustment to casualty gain (69,396) --
Amortization of discounts and
loan costs 24,519 21,238
Loss on disposal of property -- 26,601
Casualty gain -- (2,754)
Change in accounts:
Restricted cash (245) 18,882
Accounts receivable 211,966 (54,274)
Escrows for taxes (69,658) (147,477)
Other assets (8,380) --
Accounts payable 36,762 (16,463)
Accrued property taxes 51,282 81,852
Tenant security deposit liabilities 1,951 (2,397)
Accrued interest 24,469 24,469
Other liabilities (79,697) 5,392
Net cash provided by
operating activities 195,556 227,963
Cash flows from investing activities:
Property improvements and replacements (190,776) (120,419)
Deposits to restricted escrows (68,085) (78,963)
Receipts from restricted escrows 31,268 --
Net insurance proceeds -- 2,754
Net cash used in
investing activities (227,593) (196,628)
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended
June 30,
1995 1994
Cash flows from financing activities:
Payments on mortgage notes payable $ (45,811) $ (42,372)
Loan costs -- (3,334)
Net cash used in financing
activities (45,811) (45,706)
Net decrease in cash (77,848) (14,371)
Cash at beginning of period 660,958 542,047
Cash at end of period $ 583,110 $ 527,676
Supplemental disclosure of cash
flow information:
Cash paid for interest $1,025,168 $1,028,607
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
e) DAVIDSON DIVERSIFIED REAL ESTATE III L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements 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 the 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, 1995, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1995.
For further information, refer to the financial statements and footnotes
thereto included in the Partnership's annual report on Form 10-KSB for the
fiscal year ended December 31, 1994.
Certain reclassifications have been made to the 1994 information to conform
to the 1995 presentation.
Note B - Clubhouse Damage
In November of 1994, the clubhouse at Plainview Apartments sustained
extensive damage due to an electrical fire. The insurance proceeds to be
received after December 31, 1994, were originally estimated at $500,000. The
destroyed clubhouse had a net book value of $262,720 resulting in a casualty
gain of $237,280. A receivable for the estimated proceeds, along with the
retirement of the clubhouse's net book value and $202,280 of the corresponding
casualty gain was recognized at December 31, 1994. The remaining $35,000 of
the $237,280 casualty gain was deferred at December 31, 1994, due to related
expenses to be incurred in 1995 that are not reimbursable by insurance.
During the six months ended June 30, 1995, the Partnership reduced its
estimate of the casualty gain by $69,396 due to negotiations with the
insurance carrier which modified the scope of the clubhouse replacement and
reduced the insurance proceeds to be received.
Note C Transactions with Affiliated Parties
Affiliates of Insignia Financial Group, Inc. ("Insignia") own the
controlling ownership interest in the Partnership's Managing General Partner.
The Partnership has no employees and is dependent on the Managing General
Partner and
6
<PAGE>
Note C - Transactions with Affiliated Parties (continued)
its affiliates for the management and administration of all partnership
activities. The Partnership Agreement provides for payments for services and
reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership.
The following payments were made to affiliates of Insignia in the first six
months of 1995 and 1994:
Six Months Ended
June 30,
1995 1994
Property management fees $125,990 $131,479
Data processing services 1,370 1,025
Marketing services 64 1,160
Reimbursement for services of affiliates 49,087 40,980
The Partnership insures its properties under a master policy through an
agency and insurer unaffiliated with the Managing General Partner. An
affiliate of the Managing General Partner acquired, in the acquisition of a
business, certain financial obligations from an insurance agency which was
later acquired by the agent who placed the current year's master policy. The
current agent assumed the financial obligations to the affiliate of the
Managing General Partner, who receives payment on these obligations from the
agent. The amount of the Partnership's insurance premiums accruing to the
benefit of the affiliate of the Managing General Partner by virtue of the
agent's obligations is not significant.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of two apartment
complexes. The following table sets forth the average occupancy of these
properties for the six months ended June 30, 1995 and 1994:
Average
Occupancy
1995 1994
Salem Courthouse
Indianapolis, Indiana 92% 93%
Plainview Apartments
Louisville, Kentucky 89% 93%
The Managing General Partner attributes the decrease in occupancy at
Plainview Apartments to an increase in the number of tenants purchasing homes
and the fire related to the clubhouse.
The Partnership incurred a net loss of $555,824 for the six months ended
June 30, 1995, as compared to a net loss of $329,895 for the corresponding
period of 1994. The Partnership incurred net losses of $173,033 and $193,121
for the three months ended June 30, 1995, and 1994, respectively. Other
income increased for the six months ended June 30, 1995, as a result of
increased lease cancellation fees and cleaning and damage charges at Plainview
Apartments.
Operating expenses increased for the three month period ended June 30,
1995, compared to the corresponding period of 1994 primarily as a result of
miscellaneous operating expenses related to the proposed refinancing of
Plainview. General and administrative expenses increased for the three and
six months ended June 30, 1995, compared to the corresponding periods ended
June 30, 1994, due to increases in general partner expense reimbursements.
Property taxes decreased for the three months ended June 30, 1995, compared to
the corresponding period of 1994. The 1994 expense related to Salem
Courthouse was based on 1993 billings which were higher than the actual 1994
billings. Property tax expense for the first half of 1995 was based on these
lower 1994 billings and was partially offset by an increase related to the
Plainview property reassessment. Maintenance expense increased for the three
and six months ended June 30, 1995, primarily as a result of extensive
interior repairs performed at Plainview Apartments including painting, cabinet
and drywall repairs.
The adjustment to casualty gain for the three and six months ended June 30,
1995, resulted from negotiations with the insurance carrier that modified the
scope of the clubhouse replacement and adjusted the insurance proceeds to be
received. The loss on disposal of property at June 30, 1994, relates to roof
replacements at Plainview.
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
8
<PAGE>
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.
The Partnership held unrestricted cash of $583,110 at June 30, 1995,
compared to unrestricted cash of $527,676 at June 30, 1994. The decrease in
net cash provided by operating activities for the six months ended June 30,
1995, compared to the same period ended June 30, 1994, was due primarily to
increased payments of other liabilities, partially offset by accounts
receivable collections. Net cash used in investing activities increased for
the six months ended June 30, 1995, compared to the six months ended June 30,
1994, because of increased property improvements, partially offset by receipts
from restricted escrows.
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 various properties to adequately maintain the
physical assets as well as future maturing mortgage obligations and related
refinancing expenses. Such assets are currently thought to be sufficient for
any near-term needs of the partnership. The mortgage indebtedness of
$23,226,215, net of discount, requires balloon payments at dates ranging from
June 20, 1995, to October 15, 2003, by which time the General Partner intends
to sell or refinance the individual properties. A ten year extension for the
$14,500,000 of debt encumbering Plainview Apartments which matured June 20,
1995, is currently being discussed with the existing lender. The extension
agreement would also encompass a reduction in the stated interest rate to the
current market rate. The $265,904 of second mortgage debt, net of discount,
secured by Salem Courthouse Apartments requires interest-only payments and
matures October 15, 2003. The first mortgage of $8,460,311, net of discount,
secured by Salem Courthouse is amortized over 28.67 years and also matures
October 15, 2003. No cash distributions were made during 1994 or the first
six months of 1995. Future cash distributions will depend on the levels of
net cash generated from operations, refinancings, property sales and the
availability of partnership cash reserves.
Salem Courthouse Apartments and Plainview Apartments are both in lower tier
partnerships known as Salem Courthouse, L.P. and Plainview Apartments, L.P.,
respectively, in which Davidson Diversified Real Estate III is the 99.99%
limited partner, thus retaining substantially all economic benefits from the
properties.
9
<PAGE>
PART II - OTHER INFORMATION
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, 1995.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DAVIDSON DIVERSIFIED REAL ESTATE III
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/Carroll D. Vinson
Carroll D. Vinson
President
By: /s/Robert D. Long, Jr.
Robert D. Long, Jr.
Controller and Principal
Accounting Officer
Date: August 11, 1995
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate III's 1995 Second Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 583,110
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,791,540
<PP&E> 32,694,648
<DEPRECIATION> 11,803,124
<TOTAL-ASSETS> 22,683,064
<CURRENT-LIABILITIES> 1,526,924
<BONDS> 23,226,215
<COMMON> 0
0
0
<OTHER-SE> (2,070,075)
<TOTAL-LIABILITY-AND-EQUITY> 22,683,064
<SALES> 0
<TOTAL-REVENUES> 2,629,040
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,184,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,074,156
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (555,824)
<EPS-PRIMARY> (538.52)
<EPS-DILUTED> 0
</TABLE>
