FORM 10-QSB--QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO 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 (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
Greenville, South Carolina 29602
(Address of principal executive offices) Zip Code
(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 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
(Unaudited)
June 30, 1997
Assets
Cash and cash equivalents:
Unrestricted $ 315
Restricted-tenant security deposits 104
Accounts receivable 13
Escrows for taxes 193
Restricted escrows 172
Other assets 472
Investment properties:
Land $ 2,821
Buildings and related personal
property 30,926
33,747
Less accumulated depreciation (14,344) 19,403
$20,672
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 96
Tenant security deposits 105
Accrued interest 89
Accrued taxes 349
Other liabilities 127
Mortgage notes payable 23,890
Partners' Deficit
General partners $ (80)
Limited partners (1,011.5 units
issued and outstanding) (3,904) (3,984)
$20,672
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 1,295 $ 1,285 $ 2,579 $ 2,543
Other income 102 106 251 220
Total revenues 1,397 1,391 2,830 2,763
Expenses:
Operating 505 422 958 825
General and administrative 40 51 83 86
Maintenance 161 232 318 363
Depreciation 348 335 693 667
Interest 544 547 1,089 1,093
Property taxes 113 96 222 204
Total expenses 1,711 1,683 3,363 3,238
Casualty gain -- 4 -- 10
Net loss $ (314) $ (288) $ (533) $ (465)
Net loss allocated to general
partners (2%) $ (6) $ (6) $ (11) $ (9)
Net loss allocated to limited
partners (98%) (308) (282) (522) (456)
Net loss $ (314) $ (288) $ (533) $ (465)
Net loss per limited partnership
unit: $(304.50) $(278.79) $(516.07) $(450.82)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
c) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(in thousands, except unit data)
(Unaudited)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,013 $ 1 $20,240 $20,241
Partners' deficit at
December 31, 1996 1,011.5 $ (69) $(3,382) $(3,451)
Net loss for the six months
ended June 30, 1997 -- (11) (522) (533)
Partners' deficit at
June 30, 1997 1,011.5 $ (80) $(3,904) $(3,984)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
d) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (533) $ (465)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation 693 667
Amortization of mortgage discounts and
loan costs 33 32
Casualty gain -- (10)
Change in accounts:
Restricted cash 13 (13)
Accounts receivable (8) 13
Escrows for taxes (63) (79)
Other assets (60) 4
Accounts payable (95) (8)
Accrued property taxes 82 75
Tenant security deposit liabilities (13) 13
Other liabilities (93) (28)
Net cash (used in) provided by operating
activities (44) 201
Cash flows from investing activities:
Property improvements and replacements (134) (102)
Deposits to restricted escrows (4) (7)
Receipts from restricted escrows 86 11
Net cash used in investing activities (52) (98)
Cash flows used in financing activities:
Payments on mortgage notes payable (54) (50)
Net (decrease) increase in unrestricted cash
and cash equivalents (150) 53
Unrestricted cash and cash equivalents at
beginning of period 465 541
Unrestricted cash and cash equivalents at end
of period $ 315 $ 594
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,056 $ 1,060
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
e) DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate III Limited Partnership (the "Partnership or the
"Registrant") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of Davidson Diversified Properties, Inc. (the "Managing General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. 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, 1996.
Certain reclassifications have been made to the 1996 balances to conform to the
1997 presentation.
NOTE B - CLUBHOUSE DAMAGE
In November 1994, the clubhouse at Plainview Apartments sustained extensive
damage due to an electrical fire. The insurance proceeds to be received
subsequent to December 31, 1994, were originally estimated at $500,000. The
destroyed clubhouse had a net book value of $263,000, resulting in a casualty
gain of $237,000. A receivable for the estimated proceeds, along with the
retirement of the clubhouse's net book value and $202,000 of the corresponding
casualty gain was recognized at December 31, 1994. The remaining $35,000 of the
$237,000 casualty gain was deferred at December 31, 1994, due to related
expenses that were not reimbursable by insurance. During 1995, the Partnership
reduced its estimate of the casualty gain by $69,000 due to negotiations with
the insurance carrier which modified the scope of the clubhouse replacement and
reduced the insurance proceeds to be received. During the six months ended June
30, 1996, the Partnership recognized $10,000 of the deferred gain. As of June
30, 1996, all insurance proceeds had been received.
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 payments for
services and as reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership.
NOTE C - TRANSACTIONS WITH AFFILIATED PARTIES (CONTINUED)
The following payments were made to the Managing General Partner and its
affiliates during the six months ended June 30, 1997 and 1996:
1997 1996
(in thousands)
Property management fees $ 140 $ 137
Reimbursement for services of affiliates 55 66
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.
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, 1997 and 1996:
Average
Occupancy
1997 1996
Salem Courthouse
Indianapolis, Indiana 90% 94%
Plainview Apartments
Louisville, Kentucky 91% 93%
The Managing General Partner attributes the decrease in occupancy at Salem
Courthouse to the relocation of military personnel that were in the area.
The Partnership realized a net loss of $533,000 for the six months ended June
30, 1997, compared to a net loss of $465,000 for the corresponding period of
1996. The Partnership realized net losses of $314,000 and $288,000 for the
three months ended June 30, 1997 and 1996, respectively. The increase in net
loss for the three and six months ended June 30, 1997, versus the same periods
in 1996, is primarily attributable to an increase in total expenses, which is
only partially offset by an increase in revenues. Despite a slight drop in
occupancy, rental revenue increased due to an increase in average rental rates
at both investment properties. Other income increased for the three and six
months ended June 30, 1997, as a result of an increase in corporate unit rentals
at Plainview Apartments. The property leased twelve more units than budgeted
due to increased military personnel in the area in the first quarter of 1997.
Operating expenses increased due to increased corporate unit expenses at
Plainview Apartments as a result of an influx of military personnel in the area
in the first quarter of 1997, as mentioned above. Also, utility expenses
increased due to rate increases at both properties, maintenance salaries expense
increased at Plainview Apartments due to an additional technician being hired
and advertising expense increased at Salem Courthouse due to the extra
concessions that were offered after the military personnel left. Maintenance
expense decreased due to decreased expenditures at Salem Courthouse for swimming
pool repairs, such as painting, resurfacing, and retiling. At Plainview
Apartments, the completion of parking lot repairs and various interior and
exterior building repairs in 1996 led to a decrease in maintenance expense for
the three and six months ended June 30, 1997. Depreciation expense has increased
at both investment properties due to various interior capital improvements such
as floor covering and HVAC replacement.
The casualty gain for the six months ended June 30, 1996, relates to the
recognition of a portion of the deferred gain (See "Note B" of the Notes to
Consolidated Financial Statements).
Included in maintenance expense for the six months ended June 30, 1997, is
approximately $47,000 of major repairs and maintenance comprised primarily of
office equipment, exterior painting and exterior building improvements.
Included in maintenance expense for the six months ended June 30, 1996, is
approximately $71,000 of major repairs and maintenance comprised primarily of
exterior building repairs, swimming pool repairs, and gutter repairs.
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.
The Partnership held unrestricted cash and cash equivalents of $315,000 at June
30, 1997, compared to unrestricted cash and cash equivalents of $594,000 at June
30, 1996. Net cash used in operating activities for the six months ending June
30, 1997, results from an increase in prepaid liability insurance at both
investment properties, a decrease in the accrued liability related to hail
damage sustained in May 1996 at Plainview Apartments, and a decrease in accounts
payable due to the timing of the payment of various operating expenses. Net
cash used in investing activities decreased due to an increase in receipts from
restricted escrows. These receipts related to the remaining funds held in
escrow as a result of the hail damage mentioned previously. Net cash used in
financing activities was consistent for the six months ended June 30, 1997 and
1996.
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 meet 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
$23,890,000, net of discount, requires balloon payments which total $23,120,000
at dates ranging from October 2003 to November 2010, by which time the Managing
General Partner intends to sell or refinance the individual properties. There
were no cash distributions made for the six months ended June 30, 1997 or 1996.
Future cash distributions will depend on the levels of net cash generated from
operations, refinancings, property sales and the availability of Partnership
cash reserves.
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, 1997.
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.
Vice President/CAO
Date: August 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate III Limited Partnership 1997 Second Quarter 10-QSB and
is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000773679
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 315
<SECURITIES> 0
<RECEIVABLES> 13
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 33,747
<DEPRECIATION> 14,344
<TOTAL-ASSETS> 20,672
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 23,890
0
0
<COMMON> 0
<OTHER-SE> (3,984)
<TOTAL-LIABILITY-AND-EQUITY> 20,672
<SALES> 0
<TOTAL-REVENUES> 2,830
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,089
<INCOME-PRETAX> (533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533)
<EPS-PRIMARY> (516.07)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
