March 29, 2000
United States
Securities and Exchange Commission
Washington, D.C. 20549
RE: Davidson Diversified Real Estate III, L.P.
Form 10-KSB
File No. 0-15676
To Whom it May Concern:
The accompanying Form 10-KSB for the year ended December 31, 1999 describes a
change in the method of accounting to capitalize exterior painting and major
landscaping, which would have been expensed under the old policy. 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.
Please do not hesitate to contact the undersigned with any questions or comments
that you might have.
Very truly yours,
Stephen Waters
Real Estate Controller
<PAGE>
FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(d)
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from _________to _________
Commission file number 0-15676
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
(Name of small business issuer in its charter)
Delaware 62-1242599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
Issuer's telephone number (864) 239-1000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Limited Partnership Units
(Title of class)
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___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $5,906,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests as of December 31, 1999. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Description of Business
Davidson Diversified Real Estate III, L.P. (the "Partnership" or "Registrant")
is a Delaware limited partnership organized in July 1985. The general partners
of the Partnership are Davidson Diversified Properties, Inc., a Tennessee
corporation ("Managing General Partner"); Freeman Equities, Limited, a Tennessee
limited partnership ("Associate General Partner"); and David W. Talley and James
T. Gunn (collectively, "Individual General Partners") (collectively, the
"General Partners"). The Partnership Agreement provides that the Partnership is
to terminate on December 31, 2010, unless terminated prior to such date.
The Managing General Partner is owned by MAE GP corporation ("MAE GP"), which is
wholly owned by Metropolitan Asset Enhancement, L.P., an affiliate of Insignia
Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), an affiliate of Insignia.
Effective October 1, 1998 and February 26, 1999, Insignia and IPT respectively
were merged into Apartment Investment and Management Company ("AIMCO"). (See
"Transfer of Control"). Thus the Managing General Partner is now a wholly-owned
subsidiary of AIMCO.
The offering of the Partnership's limited partnership units ("Units") commenced
on October 28, 1985, and terminated on October 24, 1986. The Partnership
received gross proceeds from the offering of $20,240,000 from the sale of 1,013
units and net proceeds of $17,912,400. Since its initial offering, the
Registrant has not received, nor are limited partners required to make
additional capital contributions.
Holders of Units shall hereinafter be referred to as Limited Partners ("Limited
Partners"). Limited Partners together with the General Partners shall be
referred to as the Partners ("Partners").
The Partnership's primary business is to operate and hold for investment
existing income-producing residential real estate properties. All of the net
proceeds of the offering were invested in the Partnership's six properties, four
of which have since been sold or foreclosed. The Partnership continues to own
and operate two of these properties. See "Item 2. Description of Properties,"
for a description of the Partnership's remaining properties.
The Partnership receives income from its properties and is responsible for
operating expenses, capital improvements and debt service payments under
mortgage obligations secured by the properties. The Partnership financed its
properties primarily through non-recourse debt. Therefore, in the event of
default, the lender can generally only look to the subject property for recovery
of amounts due.
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential properties within the market area of
the Partnership's properties. The number and quality of competitive properties,
including those which may be managed by an affiliate of the Managing General
Partner, in such market area could have a material effect on the rental market
for the apartments at the Registrant's properties and the rents that may be
charged for such apartments. While the Managing General Partner and its
affiliates own and/or control a significant number of apartment units in the
United States, such units represent an insignificant percentage of total
apartment units in the United States, and competition for apartments is local.
<PAGE>
The Registrant has no employees. Management and administrative services are
provided by the Managing General Partner and agents retained by the Managing
General Partner. An affiliate of the Managing General Partner has been providing
such property management services.
Both the income and expenses of operating the properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand for similar properties resulting from various
market conditions, increases/decreases in unemployment or population shifts,
changes in the availability of permanent mortgage financing, changes in zoning
laws, or changes in patterns or needs of users. In addition, there are risks
inherent in owning and operating residential properties because such properties
are susceptible to the impact of economic and other conditions outside of the
control of the Partnership.
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation" included in "Item 6" of this Form
10-KSB.
Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia and IPT merged into 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.
Item 2. Description of Properties:
The following table sets forth the Partnership's investments in properties:
<TABLE>
<CAPTION>
Date of
Property Purchase Type of Ownership Use
<S> <C> <C> <C>
Plainview Apartments 05/06/86 Fee ownership subject to Apartment
Louisville, Kentucky wraparound mortgage (1) 480 units
Salem Courthouse Apartments 11/30/85 Fee ownership subject to Apartment
Indianapolis, Indiana first and second mortgages 388 units
</TABLE>
(1) Property is held by a Limited Partnership in which the Registrant owns a
99.99% interest.
Schedule of Properties:
Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.
<TABLE>
<CAPTION>
Gross
Carrying Accumulated Useful Federal
Property Value Depreciation Life Method Tax Basis
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Plainview Apartments $21,880 $10,766 5-25 yrs S/L $ 7,293
Salem Courthouse
Apartments 13,457 7,233 5-25 yrs S/L 3,591
$35,337 $17,999 $10,884
</TABLE>
See "Note A" to the consolidated financial statements included in "Item 7.
Financial Statements" for a description of the Partnership's depreciation policy
and "Note I - Change in Accounting Principle".
Schedule of Property Indebtedness:
The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.
<TABLE>
<CAPTION>
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due At
Property 1999 Rate Amortized Date Maturity (3)
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Plainview Apartments
1st mortgage $15,336 9.33% (1) 11/15/10 $15,336
Salem Courthouse
Apartments
1st mortgage (2) 8,106 7.83% 28.67 yrs 10/15/03 7,513
2nd mortgage 271 7.83% (1) 10/15/03 271
23,713 $23,120
Less unamortized
discounts (85)
Total $23,628
</TABLE>
(1) Interest only payments.
(2) The discount from the mortgage refinancing of this property is reflected
as a reduction of the mortgage notes payable and increases the effective
rate of the debt to 8.13% for Salem Courthouse.
(3) See "Item 7. Financial Statements - Note C" for information with respect
to the Registrant's ability to repay the loans and other specific details
about the loans.
Rental Rates and Occupancy:
Average annual rental rates and occupancy for 1999 and 1998 for each property
are as follows:
Average Annual Average
Rental Rates Occupancy
(per unit)
Property 1999 1998 1999 1998
Plainview Apartments $7,355 $7,199 93% 92%
Salem Courthouse Apartments 6,387 6,171 95% 97%
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties are subject to competition from other
residential apartment complexes in the area. The Managing General Partner
believes that all of the properties are adequately insured. The properties are
apartment complexes which lease units for terms of one year or less. As of
December 31, 1999, no residential tenant leases 10% or more of the available
rental space. All of the properties are in good physical condition, subject to
normal depreciation and deterioration as is typical for assets of this type and
age.
Real Estate Taxes and Rates:
Real estate taxes and rates in 1999 for each property were as follows:
1999 1999
Taxes Rate
(in thousands)
Plainview Apartments $ 144 .46%
Salem Courthouse Apartments 271 9.77%
Capital Improvements:
Plainview Apartments: The Partnership completed approximately $571,000 in
capital expenditures at Plainview Apartments as of December 31, 1999, consisting
primarily of floor covering, appliance replacements, air conditioning upgrades,
swimming pool improvements, major landscaping and roofing projects. These
improvements were funded from operations. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year.
The minimum amount to be budgeted is expected to be $300 per unit or $144,000.
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 completed approximately $190,000 in
capital expenditures at Salem Courthouse Apartments as of December 31, 1999,
consisting primarily of floor covering and appliance replacements, structural
building improvements, air conditioning upgrades, and major landscaping. These
improvements were funded from cash flow and replacement reserves. The
Partnership is currently evaluating the capital improvement needs of the
property for the upcoming year. The minimum amount to be budgeted is expected to
be $300 per unit or $116,400. 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.
Item 3. 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 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 by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Item 7. Financial Statements, Note B - Transfer of Control"). 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 own units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Superior Court of the
State of California, County of San Mateo, 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
class plaintiffs' counsel to enter the settlement. On December 14, 1999, the
Managing General Partner and its affiliates terminated the proposed settlement.
Certain plaintiffs have filed a motion to disqualify some of the plaintiffs'
counsel in the action. 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.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1999, no matters were submitted to a vote
of Unit holders through the solicitation of proxies or otherwise.
<PAGE>
PART II
Item 5. Market for the Partnership Equity and Related Partner Matters
The Partnership, a publicly-held limited partnership, offered and sold 1,013
limited partnership units aggregating $20,240,000. The Partnership currently has
981 holders of record owning an aggregate of 1,011.5 Units. Affiliates of the
Managing General Partner owned 296.55 units or 29.32% at December 31, 1999. No
public trading market has developed for the Units, and it is not anticipated
that such a market will develop in the future.
There were no distributions to the Partners for the years ended December 31,
1999 and 1998.
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. The Partnership's distribution policy is
reviewed on an annual basis. There can be no assurance, however, that the
Partnership will generate sufficient funds from operations, after required
capital expenditures, to permit distributions to its partners in 2000 or
subsequent periods. See "Item 2. Description of Properties - Capital
Improvements" for information relating to anticipated capital expenditures at
the properties. 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 December 31, 1999, the balance in the reserve account
was approximately $88,000 including interest earned on the reserves.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 296.55
limited partnership units in the Partnership representing 29.32% of the
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB 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 operations. Accordingly,
actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
This item should be read in conjunction with the consolidated financial
statements and other items contained elsewhere in this report.
Results of Operations
The Registrant's net loss for the year ended December 31, 1999 was approximately
$535,000 as compared to approximately $892,000 for the year ended December 31,
1998. (See "Note D" of the consolidated financial statements for a
reconciliation of these amounts to the Registrant's federal taxable loss). The
decrease in net loss is the result of a decrease in total expenses, the
cumulative effect of a change in accounting principle and, to a lesser extent,
an increase in total revenues. Total expenses decreased primarily due to a
reduction in operating expense which was partially offset by an increase in
general and administrative expense and depreciation expense. Operating expenses
decreased primarily due to the completion of the following projects during 1998:
interior and exterior building improvements and yard and grounds improvements at
both properties, parking lot repairs at Salem Courthouse Apartments and swimming
pool repairs and exterior painting at Plainview Apartments. Insurance expense,
which is included in operating expense, also decreased at both properties due to
a change in the insurance carrier late in 1998 which has resulted in lower
premiums. General and administrative expense increased due to increased legal
costs as a result of the settlement of legal cases during 1999 as previously
disclosed in prior quarters. Depreciation expense increased as a result of an
increase in capitalized property improvements and replacements during the past
12 months which are now being depreciated.
The increase in total revenues is attributable to an increase in rental income
that more than offset a decrease in other income. Rental income increased due to
an increase in average annual rental rates at both properties as well as a
decrease in rental concessions offered by Salem Courthouse, which more than
offset the small decrease in average occupancy at Salem Courthouse. Other income
decreased due to a decrease in utility income collected at Plainview Apartments.
Included in general and administrative expenses at both December 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 investors and regulatory agencies and the annual
audit required by the Partnership Agreement are also included.
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. The effect of the change in 1999 was to decrease income before the
change by approximately $15,000 ($14.53 per limited partnership unit). The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle retroactively and is included
in net income 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 Registrant, 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 Registrant from increases in
expense. As part of this plan, the Managing General Partner attempts to protect
the Registrant 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 December 31, 1999, the Registrant had cash and cash equivalents of
approximately $480,000 as compared to approximately $168,000 at December 31,
1998. Cash and cash equivalents increased approximately $312,000 for the year
ended December 31, 1999. The increase in cash and cash equivalents is due
primarily to approximately $1,028,000 of cash provided by operating activities,
which is partially offset by approximately $588,000 of cash used in investing
activities and $128,000 of cash used in financing activities. Cash used in
investing activities consisted primarily 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 Registrant's
properties. The Registrant 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 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. The Partnership is currently
evaluating the capital improvement needs of the properties for the upcoming
year. The minimum to be budgeted is expected to be $300 per unit or $260,400.
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 properties. To the extent that such 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 $23,628,000, net of discount, requires balloon
payments which total approximately $23,120,000 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
date. If the properties cannot be refinanced or sold for a sufficient amount,
the Registrant will risk losing such properties through foreclosure.
There were no distributions to the partners for the years ended December 31,
1999 and 1998. 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. The Partnership's
distribution policy is reviewed on an annual basis. There can be no assurance,
however, that the Partnership will generate sufficient funds from operations,
after required capital expenditures, to permit any distributions to its partners
in 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 December 31, 1999, the balance in the reserve
account was approximately $88,000 including interest earned on the reserves.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 296.55
limited partnership units in the Partnership representing 29.32% of the
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. 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.
Year 2000 Compliance
General Description
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 Managing Agent's
computer programs or hardware that had date-sensitive software or embedded chips
might have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted 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.
Computer Hardware, Software and Operating Equipment
In 1999, the Managing Agent completed all phases of its Year 2000 program by
completing the replacement and repair of any hardware or software system or
operating equipment that was not yet Year 2000 compliant. The Managing Agent's
hardware and software systems and its operating equipment are now Year 2000
compliant. No material failure or erroneous results have occurred in the
Managing Agent's computer applications related to the failure to reference the
Year 2000 to date.
Third Parties
To date, the Managing Agent is not aware of any significant supplier or
subcontractor (external agent) or financial institution of the Partnership that
has a Year 2000 issue that would have a material impact on the Partnership's
results of operations, liquidity or capital resources. However, the Managing
Agent has no means of ensuring or determining the Year 2000 compliance of
external agents. At this time, the Managing Agent does not believe that a Year
2000 issue of any non-compliant external agent will have a material impact on
the Partnership's financial position or results of operations.
Costs
The total cost of the Managing Agent's Year 2000 project was approximately $3.2
million and was funded from operating cash flows.
Risks Associated with the Year 2000
The Managing Agent completed all necessary phases of its Year 2000 program in
1999, and did not experience system or equipment malfunctions related to a
failure to reference the Year 2000. The Managing Agent or Partnership have not
been materially adversely effected by disruptions in the economy generally
resulting from the Year 2000 issue.
At this time, the Managing Agent does not believe that the Partnership's
businesses, results of operations or financial condition will be materially
adversely effected by the Year 2000 issue.
Contingency Plans Associated with the Year 2000
The Managing Agent has not had to implement contingency plans such as manual
workarounds or selecting new relationships for its banking or elevator operation
activities in order to avoid the Year 2000 issue.
<PAGE>
Item 7. Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
LIST OF FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Operations - Years ended December 31, 1999 and
1998
Consolidated Statement of Changes in Partners' Deficit - Years ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 1999 and
1998
Notes to Consolidated Financial Statements
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Partners
Davidson Diversified Real Estate III, L.P.
We have audited the accompanying consolidated balance sheet of Davidson
Diversified Real Estate III, L.P. as of December 31, 1999, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Partnership's management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davidson
Diversified Real Estate III, L.P. at December 31, 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note I to the consolidated financial statements, the Partnership
changed its method of accounting to capitalize the cost of exterior painting and
major landscaping effective January 1, 1999.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 25, 2000
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents $ 480
Receivables and deposits 260
Restricted escrows 88
Other assets 328
Investment properties (Notes C, F and I):
Land $ 2,821
Buildings and related personal property 32,516
35,337
Less accumulated depreciation (17,999) 17,338
$ 18,494
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 173
Tenant security deposit liabilities 116
Accrued property taxes 284
Other liabilities 339
Mortgage notes payable (Notes C and F) 23,628
Partners' Deficit
General partners $ (121)
Limited partners (1011.5 units issued and
outstanding) (5,925) (6,046)
$ 18,494
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
<S> <C> <C>
Revenues:
Rental income $ 5,504 $ 5,426
Other income 402 435
Total revenues 5,906 5,861
Expenses:
Operating 2,259 2,560
General and administrative 244 190
Depreciation 1,527 1,418
Interest 2,153 2,167
Property taxes 423 418
Total expenses 6,606 6,753
Loss before cumulative effect of a change in
accounting principle (700) (892)
Cumulative effect on prior years of a change in
accounting for the cost of exterior painting and
major landscaping (Note I) 165 --
Net loss (Note D) $ (535) $ (892)
Net loss allocated to general partners (2%) $ (11) $ (18)
Net loss allocated to limited partners (98%) (524) (874)
$ (535) $ (892)
Net loss per limited partnership unit:
Loss before cumulative effect of a change in
accounting principle $(678.20) $(864.06)
Cumulative effect on prior years of a change in
accounting for the cost of exterior painting and
major landscaping 160.16 --
Net loss per limited partnership unit $(518.04) $(864.06)
Proforma amounts assuming the new method was applied retroactively:
Net loss $ (700) $ (818)
Net loss per limited partnership unit $(678.20) $(792.88)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(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, 1997 1,011.5 $ (92) $(4,527) $(4,619)
Net loss for the year ended
December 31, 1998 -- (18) (874) (892)
Partners' deficit at
December 31, 1998 1,011.5 $ (110) $(5,401) $(5,511)
Net loss for the year ended
December 31, 1999 -- (11) (524) (535)
Partners' deficit at
December 31, 1999 1,011.5 $ (121) $(5,925) $(6,046)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLDIATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net loss $ (535) $ (892)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1,527 1,418
Amortization of mortgage discounts and loan costs 61 65
Cumulative effect on prior year of change in
accounting principle (165) --
Change in accounts:
Receivables and deposits 109 (114)
Other assets (22) 25
Accounts payable 51 (165)
Tenant security deposit liabilities 7 25
Accrued property taxes (117) 123
Other liabilities 112 19
Net cash provided by operating activities 1,028 504
Cash flows used in investing activities:
Property improvements and replacements (683) (461)
Net withdrawals from (deposits to) restricted escrows 95 (8)
Net cash used in investing activities (588) (469)
Cash flows used in financing activities:
Payments on mortgage notes payable (128) (118)
Net increase (decrease) in cash and cash equivalents 312 (83)
Cash and cash equivalents at beginning of period 168 251
Cash and cash equivalents at end of period $ 480 $ 168
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,092 $ 2,102
Supplemental disclosure of non-cash activity:
Property improvements and replacements in
accounts payable $ 78 $ --
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
Notes To Consolidated Financial Statements
December 31, 1999
Note A - Organization and Significant Accounting Policies
Organization
Davidson Diversified Real Estate III, L.P. (the "Partnership" or "Registrant"),
is a Delaware limited partnership organized in July 1985 to acquire and operate
residential real estate properties. The Partnership owns and operates two
apartment complexes located in Kentucky and Indiana. The general partners of the
Registrant are Davidson Diversified Properties, Inc., a Tennessee corporation
("Managing General Partner"); Freeman Equities, Limited, a Tennessee limited
partnership ("Associate General Partner"); and David W. Talley and James T. Gunn
(collectively, "Individual General Partners") (collectively, the "General
Partners"). The Partnership Agreement provides that the Partnership is to
terminate on December 31, 2010 unless terminated prior to such date.
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.
Allocations of Profits, Gains and Loses
Net income (other than that arising from the occurrence of a sale or
disposition) and net loss shall be allocated 2% to the General Partners and 98%
to the Limited Partners.
Net income arising from the occurrence of a sale or disposition shall be
allocated as follows:
First, to each Partner having a negative balance in his capital account, an
amount of such net income (limited to such negative balance) in the same ratio
as the negative balance in such Partner's capital account bears to the aggregate
of the negative balances in all Partners' capital accounts;
Second, the remainder of such net income, if any, shall be allocated 2% to the
General Partners and 98% to the Limited Partners until the capital account
balance of each Limited Partner shall equal an amount equal to the excess, if
any, of (A) the sum of such Limited Partner's original invested capital, as
defined, plus an amount equal to an 8% per annum cumulative noncompounded return
on such Limited Partner's adjusted invested capital (commencing on the last day
of the calendar quarter in which such Limited Partner's contribution of original
invested capital is received by the Partnership), over (B) distributions
previously made to such Limited Partner in payment of such amounts.
Third, the remainder of such net income, if any, shall be allocate 15% to the
General Partners and 85% to the Limited Partners.
Uses of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Includes cash on hand, in banks and money market accounts. At certain times, the
amount of cash deposited at a bank may exceed the limit on insured deposits.
Tenant Security Deposits
The Partnership requires security deposits from lessees for the duration of the
lease and such deposits are included in receivables and deposits. Deposits are
refunded when the tenant vacates, provided the tenant has not damaged its space
and is current on rental payments.
Restricted Escrows:
Capital Improvement Reserves
At the time of the 1993 refinancing of the Salem Courthouse mortgage net
payable, approximately $176,000 of the proceeds were designated for a "Capital
Improvement Reserve" for certain improvements. During 1999 the remaining balance
in this account was returned to the property as all required capital
improvements had been completed.
Reserve Account
In addition to the Capital Improvement Reserve, a general operating reserve
account of approximately $114,000 was established with the refinancing proceeds
for Salem Courthouse. These funds were established to fund necessary repairs and
replacements of investment property, debt service, out-of-pocket expenses
incurred for ordinary and necessary administrative tasks, and payment of real
property taxes and insurance premiums. The Partnership was required to deposit
net operating income (as defined in the mortgage note) from the refinanced
property to the reserve account until the reserve account equaled $400 per
apartment unit or $155,200 in total. At December 31, 1999, the balance in the
reserve account was approximately $88,000 including interest earned on the
reserves.
Investment Properties
Investment properties consist of two apartment complexes and are stated at cost.
Acquisition fees are capitalized as a cost of real estate. In accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Costs of apartment
properties that have been permanently impaired have been written down to
appraised value. No adjustments for the impairment of value were necessary in
the years ended December 31, 1999 or 1998.
Depreciation
Depreciation is provided by the straight-line method over the estimated lives of
the apartment properties and related personal property. For Federal income tax
purposes, the accelerated cost recovery method is used (1) for real property
over 15 years for additions prior to March 16, 1984, 18 years for additions
after March 15, 1984 and before May 9, 1985, and 19 years for additions after
May 8, 1985, and before January 1, 1987, and (2) for personal property over 5
years for additions prior to January 1, 1987. As a result of the Tax Reform Act
of 1986, for additions after December 31, 1986, the modified accelerated cost
recovery method is used for depreciation of (1) real property additions over 27
1/2 years, and (2) personal property additions over 5 years.
Effective January 1, 1999 the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping (see Note I).
Loan Costs
Loan costs of approximately $559,000 less accumulated amortization of
approximately $266,000 are included in other assets and are being amortized on a
straight-line basis over the life of the loans.
Leases
The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership recognizes income as earned on its leases. In addition, the
Managing General Partner's policy is to offer rental concessions during
particularly slow periods or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amount of its financial instruments (except for long term
debt) approximates their fair value due to the short term maturity of these
instruments. The fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity, approximates its carrying
balance.
Advertising
The Partnership expenses the costs of advertising as incurred. Advertising
costs, of approximately $69,000 for both of the years ended December 31, 1999
and 1998, were charged to operating expense as incurred.
Segment Reporting
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" established standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
See "Note G" for required disclosure.
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 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 - Mortgage Notes Payable
<TABLE>
<CAPTION>
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due At
Property 1999 Interest Rate Date Maturity
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Plainview Apartments $15,336 $ 119 (1) 9.33% 11/15/10 $15,336
Salem Courthouse
Apartments
1st mortgage 8,106 64 7.83% 10/15/03 7,513
2nd mortgage 271 2 (1) 7.83% 10/15/03 271
23,713 $23,120
Less unamortized
discounts (85)
Totals $23,628
</TABLE>
(1) Interest only payments
The Partnership exercised an interest rate buy-down option for Salem Courthouse
Apartments when the debt was refinanced, reducing the stated rate from 8.13% to
7.83%. The fee for the interest rate reduction amounted to $177,000 and is being
amortized as a mortgage discount on the interest method over the life of the
loan. The unamortized discount fee is reflected as a reduction of the mortgage
notes payable and increases the effective rate of the debt to 8.13%.
The mortgage notes payable are non-recourse and are secured by pledge of the
respective investment properties and by pledge of revenues from the respective
apartment properties. Certain of the notes require prepayment penalties if
repaid prior to maturity and prohibit the sale of the properties subject to
existing indebtedness.
Scheduled principal payments of the mortgage notes payable subsequent to
December 31, 1999, are as follows (in thousands):
Years Ended December 31,
2000 $ 138
2001 149
2002 161
2003 7,929
2004 --
Thereafter 15,336
$23,713
<PAGE>
Note D - Income Taxes
The Partnership received a ruling from the Internal Revenue Service that it is
to be classified as a partnership for Federal income tax purposes. Accordingly,
no provision for income taxes is made in the consolidated financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.
The following is a reconciliation of reported net loss and Federal taxable loss
(dollar amounts in thousands, except unit data):
1999 1998
Net loss as reported $ (535) $ (892)
Add (deduct)
Depreciation difference (29) (28)
Unearned income (9) (19)
Other 52 13
Cumulative effect of change in
accounting principle (165) --
Federal taxable loss $ (686) $ (926)
Federal taxable loss per
limited partnership unit $(664.63) $(897.16)
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net liabilities (dollar amounts in thousands):
Net deficit as reported $ (6,046)
Land and buildings 532
Accumulated depreciation (6,986)
Syndication 1,621
Distribution fees 1,051
Other 73
Net liabilities - Federal tax basis $ (9,755)
<PAGE>
Note E - 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 payments were
paid or accrued to the Managing General Partner and affiliates during the years
ended December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expense) $ 297 $ 298
Reimbursement for services of affiliates
(included in operating and general and
administrative expenses and investment
properties) 108 154
During the years ended December 31, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from both of the
Registrant's properties for providing property management services. The
Registrant paid to such affiliates $297,000 and $298,000 for the years ended
December 31, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $108,000 and
$154,000 for the years ended December 31, 1999 and 1998, respectively.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 296.55
limited partnership units in the Partnership representing 29.32% of the
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. 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.
<PAGE>
Note F - Real Estate and Accumulated Depreciation
Initial Cost
To Partnership
(in thousands)
<TABLE>
<CAPTION>
Buildings Net Cost
and Related Capitalized
Personal Subsequent to
Description Encumbrances Land Property Acquisition
(in thousands) (in thousands)
Plainview Apartments
<S> <C> <C> <C> <C>
Louisville, Kentucky $15,336 $ 2,047 $16,584 $ 3,249
Salem Courthouse
Apartments
Indianapolis, Indiana 8,377 774 11,198 1,485
Totals $23,713 $ 2,821 $27,782 $ 4,734
</TABLE>
<TABLE>
<CAPTION>
Gross Amount At Which
Carried
At December 31, 1999
(in thousands)
Buildings
And Related
Personal Accumulated Date of Date Depreciable
Description Land Property Total Depreciation Construction Acquired Life-Years
<S> <C> <C> <C> <C> <C> <C> <C>
Plainview Phase I 1973 05/86
Apartments $ 2,047 $19,833 $21,880 $10,766 Phase II 1978 05/86 5-25 yrs
Salem Courthouse
Apartments 774 12,683 13,457 7,233 1978 11/85 5-25 yrs
Totals $ 2,821 $32,516 $35,337 $17,999
</TABLE>
Reconciliation of "Real Estate and Accumulated Depreciation" (in thousands):
Years Ended December 31,
1999 1998
(in thousands)
Investment Properties
Balance at beginning of year $34,411 $33,950
Property improvements 761 461
Cumulative effect on prior years of
a change in accounting principle 165 --
Balance at end of Year $35,337 $34,411
Accumulated Depreciation
Balance at beginning of year $16,472 $15,054
Additions charged to expense 1,527 1,418
Balance at end of year $17,999 $16,472
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1999 and 1998, is approximately $35,869,000 and $35,046,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 1999 and 1998, is approximately $24,985,000 and $23,428,000.
Note G - Segments Information
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 two apartment complexes,
located in Kentucky and 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 of the Partnership as described in the summary of significant accounting
policies.
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 years ended December 31, 1999 and 1998 is shown in
the tables below. The "Other" column includes Partnership administration related
items and income and expense not allocated to the reportable segment.
1999 Residential Other Totals
(in thousands)
Rental income $ 5,504 $ -- $ 5,504
Other income 400 2 402
Interest expense 2,153 -- 2,153
Depreciation 1,527 -- 1,527
General and administrative expense -- 244 244
Cumulative effect on prior years of
a change in accounting principle 165 -- 165
Segment loss (293) (242) (535)
Total assets 18,381 113 18,494
Capital expenditures 761 -- 761
1998 Residential Other Totals
(in thousands)
Rental income $ 5,426 $ -- $ 5,426
Other income 433 2 435
Interest expense 2,167 -- 2,167
Depreciation 1,418 -- 1,418
General and administrative expense -- 190 190
Segment loss (704) (188) (892)
Total assets 18,974 36 19,010
Capital expenditures 461 -- 461
Note H - 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 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 by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control"). The 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 own units as
of November 3, 1999. Preliminary approval of the settlement was obtained on
November 3, 1999 from the Superior Court of the State of California, County of
San Mateo, 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 class plaintiffs' counsel
to enter the settlement. On December 14, 1999, the Managing General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to disqualify some of the plaintiffs' counsel in the action. The
Managing General Partner does not anticipate that costs associated with this
case will be material to the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
Note I - 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. The effect of the change in 1999 was to decrease income before the
change by approximately $15,000 ($14.53 per limited partnership unit). The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle retroactively and is included
in net income for 1999. The pro forma amounts shown on the income statement have
been adjusted for the effect of retroactive application of this change. 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.
The effect of the new method for each quarter of 1999 on net income and net
income per limited partnership unit before the cumulative effect is as follows:
Increase/(Decrease) in Per limited
Net income partnership unit
First Quarter $(11,000) $(10.66)
Second Quarter (11,000) (10.66)
Third Quarter 2,000 1.94
Fourth Quarter 5,000 4.85
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
The Registrant has no officers or directors. The Managing General Partner is
Davidson Diversified Properties, Inc. The names and ages of, as well as the
position and offices held by, the present executive officers and directors of
the Managing General Partner are set forth below. There are no family
relationships between or among any officers or directors.
Name Age Position
Patrick J. Foye 42 Executive Vice President and Director
Martha L. Long 40 Senior Vice President and Controller
Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow
offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long
Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.
Martha L. Long has been Senior Vice President and Controller of the Managing
General Partner and AIMCO since October 1998, as a result of the acquisition of
Insignia Financial Group, Inc. From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997, retaining that title until October 1998. From 1988
to June 1994, Ms. Long was Senior Vice President and Controller for The First
Savings Bank, FSB in Greenville, South Carolina.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Registrant under Rule 16a-3(e) during the Registrant's most recent fiscal
year and Form 5 and amendments thereto furnished to the Registrant with respect
to its most recent fiscal year, the Registrant is not aware of any director,
officer, beneficial owner of more than ten percent of the units of limited
partnership interest in the Registrant that failed to file on a timely basis, as
disclosed in the above Forms, reports required by Section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years except as follows:
AIMCO and its joint filers failed to timely file a Form 4 with respect to its
acquisition of Units.
Item 10. Executive Compensation
None of the directors and officers of the Managing General Partner received any
remuneration from the Registrant.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Except as noted below as of December 31, 1999, no person or entity was known by
the Registrant to own of record or beneficially more than 5% of the Limited
Partnership Units of the Registrant.
Entity Number of Units Percentage
Insignia Properties LP
(an affiliate of AIMCO) 33.25 3.29%
AIMCO Properties LP
(an affiliate of AIMCO) 263.30 26.03%
Insignia Properties LP is indirectly owned by AIMCO. Its business address is 55
Beattie Place, Greenville, South Carolina 29602.
AIMCO Properties LP is indirectly controlled by AIMCO. Its business address is
2000 South Colorado Blvd, Denver, Colorado 80222.
No director or officer of the Managing General Partner owns any Units.
Item 12. Certain Relationships and Related Transactions
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 payments were
paid or accrued to the Managing General Partner and affiliates during the years
ended December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees $ 297 $ 298
Reimbursement for services of affiliates 108 154
During the years ended December 31, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from both of the
Registrant's properties for providing property management services. The
Registrant paid to such affiliates $297,000 and $298,000 for the years ended
December 31, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $108,000 and
$154,000 for the years ended December 31, 1999 and 1998, respectively.
Several tender offers were made by various parties, including affiliates of the
Managing General Partner, during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 296.55
limited partnership units in the Partnership representing 29.32% of the
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters. 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.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 18, Independent Accountants' Preferability Letter for Change in
Accounting Principle, is filed as an exhibit to this report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year 1999:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
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:
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Partnership and in the capacities and on the
dates indicated.
/s/Patrick J. Foye Executive Vice President Date:
Patrick J. Foye and Director
/s/Martha L. Long Senior Vice President and Date:
Martha L. Long Controller
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE III, LP
EXHIBIT INDEX
Exhibit Number Description of Exhibit
3 Partnership Agreement dated July 8, 1985 and amended as of
October 9, 1985 is incorporated by reference to Exhibit A to
the Prospectus of the Registrant dated October 28, 1985 as
filed with the Commission pursuant to Rule 424(b) under the
Act.
3A Second Amendment dated April 1, 1986 to the Partnership
Agreement dated July 8, 1985 as amended October 9, 1985 is
incorporated by reference to Exhibit 3A to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1986.
4 Certificate of Limited Partnership dated June 28, 1985 is
incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on form S-11 (Registration No.2-99257).
10A Property Management Agreement dated July 26, 1985 between the
Registrant and Harvey Freeman & Sons, Inc., is incorporated by
reference to Exhibit 10B to Amendment No. 1 to the Registrant's
Registration Statement on Form S-ii (Registration No. 2-99257).
10B Agreement among Agents dated November 1, 1983 by and among Harvey
Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas,
Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons,
Inc. of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey
Freeman & Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of
Mississippi, Harvey Freeman & Sons, Inc. of North Carolina,
Harvey Freeman & Sons, Inc. of Ohio, and Harvey Freeman & Sons,
Inc. of South Carolina, is incorporated by reference to Exhibit
10C to the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1983.
10C Acquisition and Disposition Services Agreement dated October
28, 1985 between the Registrant and Criswell Freeman Company
is incorporated by reference to Exhibit 10D to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1985.
10D Contract for Sale of Real Estate for Salem Courthouse
Apartments dated September 25, 1985 between Salem-Oxford
Associates, an Indiana limited partnership and Tennessee Trust
Company, Trustee, is incorporated by reference to Exhibit
10(a) to the Registrant's Current Report on Form 8-K dated
December 2, 1985.
10E First Amendment to Contract for Sale of Real Estate dated
October 29, 1985 between Salem Courthouse Associates, an
Indiana limited partnership and Tennessee Trust Company is
incorporated by reference to Exhibit 10(b) to the Registrant's
Current Report on Form 8-K dated December 2, 1985.
10F Assignment of Contract for Sale of Real Estate dated November
20, 1985 between Tennessee Trust Company, Trustee and the
Registrant is incorporated by reference to Exhibit 19(c) to
the Registrant's Current Report on Form 8-K dated December 2,
1985.
10G Mortgage Note dated December 2, 1985 payable to BancOhio
National Bank executed by the Registrant is incorporated by
reference to Exhibit 10H to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10H Real Estate Mortgage and Security Agreement dated December 2,
1985 to BancOhio National Bank executed by the Registrant is
incorporated by reference to Exhibit 10I to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985.
10I Promissory Noted dated December 2, 1985 payable to Freeman
Mortgage Corporation executed by the Registrant is
incorporated by reference to Exhibit 10J to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985.
10J Note executed by the Registrant payable to Phoenix Mutual Life
Insurance Company dated March 28, 1986 relating to Salem
Courthouse Apartments, is incorporated by reference to Exhibit
10J to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
10K Mortgage and Security Agreement executed by the Registrant to
Phoenix Mutual Life Insurance Company dated March 28, 1986
relating to Salem Courthouse Apartments, is incorporated by
reference to Exhibit 10K to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986.
10L Contract for Sale of Real Estate for Plainview Apartments
dated November 11, 1985 between NTS-Plainview Partners, a
Kentucky limited partnership and Tennessee Trust Company, a
Tennessee corporation, is incorporated by reference to Exhibit
10(a) to the Registrant's Current Report on Form 8-K dated May
6, 1986.
10M Assignment of Contract for Sale of Real Estate dated May 2,
1986 between Tennessee Trust Company, a Tennessee corporation
and the Registrant is incorporated by reference to Exhibit
10(b) to the Registrant's Current Report on Form 8-K dated May
6, 1986.
10N Amendment and Reinstatement of Contract for Sale of Real
Estate dated April 15, 1986 between NTS-Plainview Partners and
Tennessee Trust Company is incorporated by reference to
Exhibit 10(c) to the Registrant's Current Report on Form 8-K
dated May 6, 1986.
10O Mortgage Note dated May 6, 1986 executed by the Registrant
payable to NTS-Plainview Partners, a Kentucky limited
partnership, is incorporated by reference to Exhibit 10(f) to
the Registrant's Current Report on Form 8-K dated May 6, 1986.
10P Mortgage and Security Agreement dated May 6, 1986 executed by
the Registrant to NTS-Plainview Partners, a Kentucky limited
partnership, is incorporated by reference to Exhibit 10(g) to
the Registrant's Current Report on Form 8-K dated May 6, 1986.
10Q Agreement for Purchase and Sale of Woodbridge Apartments dated
April 4, 1986 between Regal Oaks Associates, an Illinois
general partnership and Tennessee Trust Company, a Tennessee
corporation, is incorporated by reference to Exhibit 10(a) to
the Registrant's Current Report on Form 8-K dated May 30,
1986.
10R Assignment of Agreement dated May 30, 1986 between Tennessee
Trust Company, a Tennessee corporation and the Registrant is
incorporated by reference to Exhibit 10(b) to the Registrant's
Current Report on Form 8-K dated May 30, 1986.
10S Memorandum of Understanding amount SEC Realty Corp., Tennessee
Properties, L.P., Freeman Mortgage Corporation, J. Richard
Freeman, W. Criswell Freeman and Jacques-Miller Properties, Inc.
is incorporated by reference to Exhibit 10II to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
10T Partnership Administration and Consultation Agreement among
Freeman Properties, Inc., Freeman Diversified Properties, Inc.,
Residual Equities Limited and Jacques-Miller Properties, Inc. is
incorporated by reference to Exhibit 10JJ to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
10U Termination Agreement, dated December 31, 1991 among
Jacques-Miller, Inc., Jacques-Miller Property Management,
Davidson Diversified Properties, Inc., and Supar, Inc. is
incorporated by reference to Exhibit 10KK to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10V Assignment of Limited Partnership Interest of Freeman
Equities, Limited dated December 31, 1991 between Davidson
Diversified Properties, Inc. and Insignia Jacques-Miller, L.P.
is incorporated by reference to Exhibit 10LL to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10W Assignment of General Partner Interests of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Properties, Inc. and MAE GP Corporation is incorporated by
reference to Exhibit 10MM to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10X Stock certificate, dated December 31, 1999 showing ownership
of 1,000 shares of Davidson Diversified Properties, Inc. by
MAE GP Corporation is incorporated by reference to Exhibit
10NN to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10Y Notice of Trustee's Sale of Real Estate in the Matter of
Foreclosure of the Deed of Trust of Davidson Diversified Real
Estate III, L.P. (regarding Woodbridge Apartments).
10Z Contracts related to refinancing of debt:
(a) First Mortgage and Security Agreement dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.
(b) Second Mortgage and Security Agreement dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.
(c) First Assignments of Lease and Rents dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.
(d) Second Assignments of Lease and Rents dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.
(e) First Mortgage Note dated September 30, 1993 between Salem
Courthouse, L.P. and Lexington Mortgage Company, relating to
Salem Courthouse.
(f) Second Mortgage Note dated September 30, 1993 between Salem
Courthouse, L.P. and Lexington Mortgage Company, relating to
Salem Courthouse.
10AA Amended, Restated and Substituted Mortgage Note dated November
15, 1995, executed by Plainview Apartments, L.P. payable to
NTS-Plainview Associates.
10BB Assignment of Leases, Rents, and Profits dated November 15, 1995,
executed by Plainview Apartments, L.P. to Nationwide Life
Insurance Co. and West Coast Life Insurance Co.
16 Letter from the Registrant's former independent accountant
regarding its concurrence with the statements made by the
Registrant is incorporated by reference to the exhibit filed with
Form 8-K dated September 30, 1992.
18 Independent Accountants' Preferability Letter for Change in
Accounting Principle.
27 Financial Data Schedule.
99A Agreement of Limited Partnership for Davidson III GP Limited
Partnership between Davidson Diversified Properties, Inc. and
Davidson Diversified Real Estate III.
99B Agreement of Limited Partnership for Salem Courthouse L.P.
between Davidson III GP Limited Partnership and Davidson
Diversified Real Estate III, L.P. entered into on September 15,
1993.
Exhibit 18
February 7, 2000
Mr. Patrick J. Foye
Executive Vice President
Davidson Diversified Properties, Inc.
Managing General Partner of Davidson Diversified Real Estate III, L.P.
55 Beattie Place
P.O. Box 1089
Greenville, South Carolina 29602
Dear Mr. Foye:
Note I of Notes to the Consolidated Financial Statements of Davidson Diversified
Real Estate III, L.P. included in its Form 10-KSB for the year ended December
31, 1999 describes a change in the method of accounting to capitalize exterior
painting and major landscaping, which would have been expensed under the old
policy. You have advised us that you believe that the change is to a preferable
method in your circumstances because it provides a better matching of expenses
with the related benefit of the expenditures and is consistent with policies
currently being used by your industry and conforms to the policies of the
Managing General Partner.
There are no authoritative criteria for determining a preferable method based on
the particular circumstances; however, we conclude that the change in the method
of accounting for exterior painting and major landscaping is to an acceptable
alternative method which, based on your business judgment to make this change
for the reasons cited above, is preferable in your circumstances.
Very truly yours,
/s/Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversidifed Real Estate III. LP. 1999 Fourth Quarter 10-KSB and is qualified in
its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000773679
<NAME> Davidson Diversified Real Estate III, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 480
<SECURITIES> 0
<RECEIVABLES> 260
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 35,337
<DEPRECIATION> (17,999)
<TOTAL-ASSETS> 18,494
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 23,628
0
0
<COMMON> 0
<OTHER-SE> (6,046)
<TOTAL-LIABILITY-AND-EQUITY> 18,494
<SALES> 0
<TOTAL-REVENUES> 5,906
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,153
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535)
<EPS-BASIC> (518.04)<F2>
<EPS-DILUTED> 0
<FN>
<F1> Registrant has an unclassified balance sheet.
<F2> Multiplier is 1.
</FN>
</TABLE>
