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, 2000
[ ] 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 0-15676
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
(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.)
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 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, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 2000
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $ 699
Receivables and deposits 326
Restricted escrows 157
Other assets 330
Investment properties:
Land $ 2,821
Buildings and related personal property 33,005
35,826
Less accumulated depreciation (19,185) 16,641
$ 18,153
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 87
Due to affiliate 145
Tenant security deposit liabilities 124
Accrued property taxes 433
Other liabilities 224
Mortgage notes payable 23,539
Partners' Deficit
General partners $ (128)
Limited partners (1,011.5 units issued and
outstanding) (6,271) (6,399)
$ 18,153
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
b)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(Restated) (Restated)
Revenues:
<S> <C> <C> <C> <C>
Rental income $ 1,405 $ 1,414 $ 4,232 $ 4,106
Other income 154 98 423 307
Total revenues 1,559 1,512 4,655 4,413
Expenses:
Operating 586 517 1,753 1,615
General and administrative 102 60 193 172
Depreciation 389 384 1,186 1,128
Interest 541 536 1,616 1,615
Property taxes 102 136 260 338
Total expenses 1,720 1,633 5,008 4,868
Loss before cumulative effect of a
change in accounting principle (161) (121) (353) (455)
Cumulative effect on prior years
of a change in accounting for
the cost of exterior painting and
major landscaping -- -- -- 165
Net loss $ (161) $ (121) $ (353) $ (290)
Net loss allocated to general
partners (2%) $ (3) $ (2) $ (7) $ (6)
Net loss allocated to limited
partners (98%) (158) (119) (346) (284)
$ (161) $ (121) $ (353) $ (290)
Per limited partnership unit:
Loss before cumulative effect
of a change in accounting
principle $(156.20) $(117.65) $(342.07) $(440.93)
Cumulative effect of a change in
accounting principle -- -- -- 160.16
Net loss $(156.20) $(117.65) $(342.07) $(280.77)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
c)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,013.0 $ 1 $20,240 $20,241
Partners' deficit at
December 31, 1999 1,011.5 $ (121) $(5,925) $(6,046)
Net loss for the nine months
ended September 30, 2000 -- (7) (346) (353)
Partners' deficit at
September 30, 2000 1,011.5 $ (128) $(6,271) $(6,399)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
d)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
(Restated)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (353) $ (290)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1,186 1,128
Amortization of mortgage discounts and loan costs 50 45
Cumulative effect of a change in accounting principle -- (165)
Change in accounts:
Receivables and deposits (66) (74)
Other assets (39) (47)
Accounts payable (8) 74
Due to affiliate 145 --
Tenant security deposit liabilities 8 9
Accrued property taxes 149 62
Other liabilities (115) 59
Net cash provided by operating activities 957 801
Cash flows from investing activities:
Property improvements and replacements (567) (546)
Net (deposits to) withdrawals from restricted escrows (69) 96
Net cash used in investing activities (636) (450)
Cash flows used in financing activities:
Payments on mortgage notes payable (102) (95)
Net increase in cash and cash equivalents 219 256
Cash and cash equivalents at beginning of period 480 168
Cash and cash equivalents at end of period $ 699 $ 424
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,566 $ 1,570
At December 31, 1999, approximately $78,000 of property improvements and
replacements were included in accounts payable.
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
e)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate III, 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, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. 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, 1999.
Principles of Consolidation
The financial statements include all of the accounts of the Partnership and its
99.9% limited partnership interest in Plainview Apartments, L.P. and its wholly
owned limited liability company Salem GP, LLC. The managing general partner of
the consolidated partnership is Davidson Diversified Properties, Inc. Davidson
Diversified Properties, Inc. may be removed as the managing general partner of
the consolidated partnership by the Registrant; therefore, the consolidated
partnership is controlled and consolidated by the Registrant. All significant
inter-entity balances have been eliminated.
Change in Accounting Principle
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping. The Partnership
believes that this accounting principle change is preferable because it provides
a better matching of expenses with the related benefit of the expenditures and
it is consistent with industry practice and the policies of the Managing General
Partner. This accounting change was first reported during the fourth quarter of
1999. Accordingly, net loss for the three and nine months ended September 30,
1999 has been restated to reflect the accounting change as if it were reported
then. This adjustment increased (decreased) income before the cumulative effect
of the accounting change for the three and nine months ended September 30, 1999
by approximately $2,000 ($1.98 per limited partnership unit) and by
approximately $(20,000) ($19.77 per limited partnership unit), respectively. The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle retroactively and is included
in the loss for 1999. The accounting principle change will not have an effect on
cash flow, funds available for distribution or fees payable to the Managing
General Partner and affiliates.
Note B - Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
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 has had or will have a material effect on the affairs and
operations of the Partnership.
Note C - Transactions with Affiliated Parties
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following expenses were
incurred by the Partnership to the Managing General Partner and affiliates
during the nine months ended September 30, 2000 and 1999:
2000 1999
(in thousands)
Property management fees (included in
operating expenses) $232 $222
Reimbursement for services of affiliates
(included in operating and general and
administrative expenses and investment
properties) 139 83
Advance from Managing General Partner
(included in due to affiliate) 64 --
During the nine months ended September 30, 2000 and 1999, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from both
of the Registrant's investment properties for providing property management
services. The Registrant paid to such affiliates approximately $232,000 and
$222,000 for the nine months ended September 30, 2000 and 1999, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $139,000 and
$83,000 for the nine months ended September 30, 2000 and 1999, respectively. At
September 30, 2000 approximately $81,000 of reimbursement for services was
accrued by the Partnership and is included in due to affiliates on the
accompanying consolidated balance sheet. Approximately $34,000 of the accrued
amount was paid subsequent to September 30, 2000.
During the nine months ended September 30, 2000 the Managing General Partner has
loaned the Partnership approximately $73,000 to cover operational expenses
required at Plainview Apartments. This loan was made in accordance with the
terms of the Partnership Agreement. At September 30, 2000 the balance of the
loan was approximately $64,000. Interest is charged at the prime rate plus 1%.
Interest expense was approximately $4,000 for the nine months ended September
30, 2000 and is included in interest expense.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates currently own 361.55 limited partnership
units in the Partnership representing 35.744% of the outstanding units. A number
of these units were acquired pursuant to tender offers made by AIMCO or its
affiliates. 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. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters, which
would include without limitation, voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner. When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner favorable to the interest of the Managing General Partner because of
their affiliation with the Managing General Partner.
Note D - Segment Reporting
Description of the types of products and services from which the reportable
segment derives its revenue:
The Partnership has one reportable segment: residential properties, which
consists of two apartment complexes, one located in Kentucky and the other in
Indiana. 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 segment profit (loss) before
depreciation. The accounting policies of the reportable segment are the same as
those described in the Partnership's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of investment properties that
offer similar products and services. Although each of the investment properties
is 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 and nine months ended September 30, 2000 and
1999 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.
Three Months Ended September 30, 2000 Residential Other Totals
Rental income $ 1,405 $ -- $ 1,405
Other income 154 -- 154
Interest expense 541 -- 541
Depreciation 389 -- 389
General and administrative expense -- 102 102
Segment (loss) profit (59) (102) (161)
Nine Months Ended September 30, 2000 Residential Other Totals
Rental income $ 4,232 $ -- $ 4,232
Other income 422 1 423
Interest expense 1,616 -- 1,616
Depreciation 1,186 -- 1,186
General and administrative expense -- 193 193
Segment loss (161) (192) (353)
Total assets 18,124 29 18,153
Capital expenditures for investment
properties 489 -- 489
Three Months Ended September 30, 1999 Residential Other Totals
Rental income $ 1,414 $ -- $ 1,414
Other income 98 -- 98
Interest expense 536 -- 536
Depreciation 384 -- 384
General and administrative expense -- 60 60
Segment loss (61) (60) (121)
Nine Months Ended September 30, 1999 Residential Other Totals
Rental income $ 4,106 $ -- $ 4,106
Other income 306 1 307
Interest expense 1,615 -- 1,615
Depreciation 1,128 -- 1,128
General and administrative expense -- 172 172
Cumulative effect of a change in
in accounting principle 165 -- 165
Segment loss (119) (171) (290)
Total assets 18,756 85 18,841
Capital expenditures for investment
properties 546 -- 546
Note E - 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, its Managing General Partner and several of their affiliated
partnerships and corporate entities. The action 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 of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; the management of partnerships
by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek
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,
settling claims, subject to final court approval, on behalf of the Partnership
and all limited partners who owned units as of November 3, 1999. Preliminary
approval of the settlement was obtained on November 3, 1999 from the Court, at
which time the Court set a final approval hearing for December 10, 1999. Prior
to the December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has currently scheduled a hearing on the matter for November 20,
2000. 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 pending or outstanding litigation that is not
of a routine nature arising in the ordinary course of business.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
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 Registrant from time to time. The
discussion of the Registrant'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 Registrant'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 two apartment complexes. The
following table sets forth the average occupancy of these properties for the
nine months ended September 30, 2000 and 1999:
Average Occupancy
2000 1999
Salem Courthouse
Indianapolis, Indiana 93% 95%
Plainview Apartments
Louisville, Kentucky (1) 96% 92%
(1) The increase in occupancy at Plainview Apartments is a result of improved
retention of tenants during the latter half of 1999 and into 2000. The
first part of 1999 was adversely affected by employment transfers and new
home purchases. Various concessions are being offered in an effort to
maintain occupancy levels.
Results of Operations
The Registrant's net loss for the nine months ended September 30, 2000 was
approximately $353,000 as compared to approximately $290,000 (as restated) for
the same period in 1999. The Registrant's net loss for the three months ended
September 30, 2000 was approximately $161,000 as compared to approximately
$121,000 (as restated) for the same period in 1999. The increase in net loss for
the nine months ended September 30, 2000 is primarily attributable to the
cumulative effect of a change in accounting principle recognized during the nine
months ended September 30, 1999, as discussed below. The Registrant's loss
before cumulative effect of a change in accounting principle for the nine months
ended September 30, 2000 was approximately $353,000 as compared to approximately
$455,000 (as restated) for the same period in 1999. The decrease in loss before
cumulative effect of a change in accounting principle for the nine months ended
September 30, 2000 is attributable to an increase in total revenues partially
offset by an increase in total expenses. The increase in loss before cumulative
effect of a change in accounting principle for the three months ended September
30, 2000 is attributable to an increase in total expenses and is partially
offset by an increase in total revenues. Total revenues for the nine months
ended September 30, 2000 increased due to an increase in rental and other income
compared to the corresponding period in 1999. Total revenues increased for the
three months ended September 30, 2000 as compared to the corresponding period in
1999 primarily due to an increase in other income, as discussed below, and was
partially offset by a decrease in rental income due to an increase in bad debt
expense. Rental income for the nine month period increased primarily due to
increased rental rates at both of the Registrant's properties and an increase in
occupancy at Plainview Apartments which more than offset the decrease in
occupancy at Salem Courthouse. Other income increased due to an increase in
interest income at Salem Courthouse Apartments and an increase in tenant utility
reimbursements and furnished apartment rentals at Plainview Apartments.
Total expenses for the three and nine months ended September 30, 2000 increased
primarily due to an increase in operating, general and administrative, and
depreciation expenses that more than offset a decrease in property taxes. The
increase in operating expense is primarily due to an increase in maintenance
expense at Salem Courthouse, an increase in utility expense at Plainview
Apartments, and increases in salaries and related benefits at both of the
Registrant's properties. Maintenance expense increased as a result of ground and
yard work, contract repairs, and interior building improvements at Salem
Courthouse. Utility expense increased due to increased occupancy at Plainview
Apartments. Depreciation expense increased due to new depreciable assets being
placed into service at both properties in the past twelve months. Property taxes
decreased as a result of the taxing authority lowering the assessed value for
Salem Courthouse during 2000.
General and administrative expense increased due to an increase in the cost of
services included in the management reimbursements to the Managing General
Partner as allowed under the Partnership Agreement partially offset by a
decrease in professional fees. In addition, costs associated with the quarterly
and annual communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement are included in general and
administrative expenses at both September 30, 2000 and 1999.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping. The Partnership
believes that this accounting principle change is preferable because it provides
a better matching of expenses with the related benefit of the expenditures and
it is consistent with industry practice and the policies of the Managing General
Partner. This accounting change was first reported during the fourth quarter of
1999. Accordingly, net loss for the three and nine months ended September 30,
1999 has been restated to reflect the accounting change as if it were reported
then. This adjustment increased (decreased) income before the cumulative effect
of the accounting change for the three and nine months ended September 30, 1999
by approximately $2,000 ($1.98 per limited partnership unit) and by
approximately $(20,000) ($19.77 per limited partnership unit), respectively. The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle retroactively and is included
in the loss for 1999. The accounting principle change will not have an effect on
cash flow, funds available for distribution or fees payable to the Managing
General Partner and affiliates.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment 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, 2000, the Registrant had cash and cash equivalents of
approximately $699,000 as compared to approximately $424,000 at September 30,
1999. Cash and cash equivalents increased approximately $219,000 for the nine
months ended September 30, 2000 from the Registrant's year ended December 31,
1999 and is primarily due to approximately $957,000 of cash provided by
operating activities, which is partially offset by approximately $636,000 of
cash used in investing activities and approximately $102,000 of cash used in
financing activities. Cash used in investing activities consisted of property
improvements and replacements and, to a lesser extent, net deposits to escrow
accounts maintained by the mortgage lender. Cash used in financing activities
consisted of payments of principal made on the mortgages encumbering the
Registrant's properties. The Registrant invests its working capital reserves in
a money market account.
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 properties to adequately maintain the physical
assets and other operating needs of the Registrant and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements planned
for both of the Registrant's properties are detailed below.
Plainview Apartments: The Partnership has budgeted approximately $206,000 for
capital improvements during 2000 at Plainview Apartments consisting primarily of
floor covering replacements, roof replacements, air conditioning improvements,
appliances, and heating upgrades. The Partnership completed approximately
$322,000 in budgeted and non-budgeted capital expenditures at Plainview
Apartments as of September 30, 2000, consisting primarily of heating upgrades,
structural improvements, and air conditioning, appliances, roof, and floor
covering replacements. These improvements were funded from operating cash flow.
Additional improvements may be considered and will depend on the physical
condition of the property as well as replacement reserves and anticipated cash
flow generated by the property.
Salem Courthouse Apartments: The Partnership has budgeted approximately $223,000
for capital improvements during 2000 at Salem Courthouse consisting primarily of
floor covering replacements, fencing, recreation facility enhancements, air
conditioning improvements, and appliances. The Partnership completed
approximately $167,000 in capital expenditures at Salem Courthouse Apartments as
of September 30, 2000, consisting primarily of floor covering and appliance
replacements and exterior building painting. These improvements were funded from
operating cash flow. Additional improvements may be considered and will depend
on the physical condition of the property as well as replacement reserves and
anticipated cash flow generated by the property.
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 Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $23,539,000, net of discount, is amortized over
360 months with a balloon payment of approximately $23,120,000 due at dates
ranging from October 15, 2003 to November 15, 2010. 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 Registrant will risk losing such properties through
foreclosure.
The Partnership did not make any distributions to its partners during the nine
months ended September 30, 2000 or 1999. The Partnership's distribution policy
is reviewed on an annual basis. Future cash distributions will depend on the
levels of net cash generated from operations, the availability of cash reserves,
and the timing of the debt maturities, refinancings and/or property sales. There
can be no assurance, however, that the Registrant will generate sufficient funds
from operations after planned capital expenditures to permit distributions to
its partners during the remainder of 2000 or subsequent periods. In addition,
the Partnership may be restricted from making distributions if the amount in the
reserve account for Salem Courthouse Apartments maintained by the mortgage
lender is less than $400 per apartment unit or $155,200. As of September 30,
2000, the balance in the reserve account was approximately $157,000.
<PAGE>
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, its Managing General Partner and several of their affiliated
partnerships and corporate entities. The action 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 of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; the management of partnerships
by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek
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,
settling claims, subject to final court approval, on behalf of the Partnership
and all limited partners who owned units as of November 3, 1999. Preliminary
approval of the settlement was obtained on November 3, 1999 from the Court, at
which time the Court set a final approval hearing for December 10, 1999. Prior
to the December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has currently scheduled a hearing on the matter for November 20,
2000. 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, 2000.
<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, L.P.
By: Davidson Diversified Properties, Inc.
Its Managing 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:
