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 June 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___
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)
June 30, 2000
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents $ 583
Receivables and deposits 267
Restricted escrows 156
Other assets 351
Investment properties:
Land $ 2,821
Buildings and related personal property 32,785
35,606
Less accumulated depreciation (18,796) 16,810
$ 18,167
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 69
Tenant security deposit liabilities 128
Accrued property taxes 331
Other liabilities 310
Mortgage notes payable 23,567
Partners' Deficit
General partners $ (125)
Limited partners (1,011.5 units issued and
outstanding) (6,113) (6,238)
$ 18,167
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
b)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(restated) (restated)
Revenues:
<S> <C> <C> <C> <C>
Rental income $ 1,451 $ 1,338 $ 2,827 $ 2,692
Other income 137 99 269 209
Total revenues 1,588 1,437 3,096 2,901
Expenses:
Operating 552 535 1,167 1,098
General and administrative 52 60 91 112
Depreciation 393 372 797 744
Interest 539 539 1,075 1,079
Property taxes 61 91 158 202
Total expenses 1,597 1,597 3,288 3,235
Loss before cumulative effect
of a change in accounting
principle (9) (160) (192) (334)
Cumulative effect on prior years
of a change in accounting for
the cost of exterior painting
and major landscaping -- -- -- 165
Net loss $ (9) $ (160) $ (192) $ (169)
Net loss allocated to general
partners (2%) $ -- $ (3) $ (4) $ (3)
Net loss allocated to limited
partners (98%) (9) (157) (188) (166)
$ (9) $ (160) $ (192) $ (169)
Per limited partnership unit:
Loss before cumulative effect
of a change in accounting
principle $ (8.90) $(155.21) $(185.86) $(324.27)
Cumulative effect of a change
in accounting principle -- -- -- 160.16
Net loss $ (8.90) $(155.21) $(185.86) $(164.11)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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 six months
ended June 30, 2000 -- (4) (188) (192)
Partners' deficit at
June 30, 2000 1,011.5 $ (125) $(6,113) $(6,238)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
d)
DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
(restated)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (192) $ (169)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 797 744
Amortization of mortgage discounts and loan costs 32 32
Cumulative effect of a change in accounting principle -- (165)
Change in accounts:
Receivables and deposits (7) 55
Other assets (47) (62)
Accounts payable (26) 27
Tenant security deposit liabilities 12 6
Accrued property taxes 47 (57)
Other liabilities (29) 70
Net cash provided by operating activities 587 481
Cash flows from investing activities:
Property improvements and replacements (347) (231)
Net deposits to restricted escrows (68) (4)
Net cash used in investing activities (415) (235)
Cash flows used in financing activities:
Payments on mortgage notes payable (69) (62)
Net increase in cash and cash equivalents 103 184
Cash and cash equivalents at beginning of period 480 168
Cash and cash equivalents at end of period $ 583 $ 352
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,041 $ 1,048
At December 31, 1999, approximately $78,000 of property improvements and
replacements were included in accounts payable.
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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 six month periods ended June 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 six months ended June 30, 1999 has
been restated to reflect the accounting change as if it were reported then. This
adjustment decreased income before the cumulative effect of the accounting
change for the three and six months ended June 30, 1999 by approximately $11,000
($10.87 per limited partnership unit) and by approximately $22,000 ($20.76 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 affect 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 payments were
paid or accrued to the Managing General Partner and affiliates during the six
months ended June 30, 2000 and 1999:
2000 1999
(in thousands)
Property management fees (included in
operating expenses) $154 $146
Reimbursement for services of affiliates
(included in operating and general and
administrative expenses and investment
properties) 57 53
Advance from Managing General Partner
(included in other liabilities) 73 --
During the six months ended June 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 $154,000 and $146,000 for
the six months ended June 30, 2000 and 1999, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $57,000 and
$53,000 for the six months ended June 30, 2000 and 1999, respectively.
As of June 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. Interest is charged at the prime rate plus 1%. Interest expense was
approximately $2,000 for the six months ended June 30, 2000 and is included in
interest expense.
AIMCO and its affiliates currently own 321.05 limited partnership units in the
Partnership representing 31.74% 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. 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 six months ended June 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 June 30, 2000 Residential Other Totals
Rental income $ 1,451 $ -- $ 1,451
Other income 136 1 137
Interest expense 539 -- 539
Depreciation 393 -- 393
General and administrative expense -- 52 52
Segment profit (loss) 42 (51) (9)
Three months ended June 30, 1999 Residential Other Totals
(restated)
Rental income $ 1,338 $ -- $ 1,338
Other income 98 1 99
Interest expense 539 -- 539
Depreciation 372 -- 372
General and administrative expense -- 60 60
Segment loss (101) (59) (160)
Six months ended June 30, 2000 Residential Other Totals
Rental income $ 2,827 $ -- $ 2,827
Other income 268 1 269
Interest expense 1,075 -- 1,075
Depreciation 797 -- 797
General and administrative expense -- 91 91
Segment loss (102) (90) (192)
Total assets 18,131 36 18,167
Capital expenditures for investment
properties 269 -- 269
Six months ended June 30, 1999 Residential Other Totals
(restated)
Rental income $ 2,692 $ -- $ 2,692
Other income 208 1 209
Interest expense 1,079 -- 1,079
Depreciation 744 -- 744
General and administrative expense -- 112 112
Cumulative effect of a change in
in accounting principle 165 -- 165
Segment loss (58) (111) (169)
Total assets 18,778 55 18,833
Capital expenditures for investment
properties 231 -- 231
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 will entertain applications for lead
counsel which must be filed by August 4, 2000. The Court has scheduled a hearing
on August 21, 2000 to address the issue of appointing lead counsel. 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 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 six
months ended June 30, 2000 and 1999:
Average Occupancy
2000 1999
Salem Courthouse
Indianapolis, Indiana (1) 93% 96%
Plainview Apartments
Louisville, Kentucky (2) 96% 90%
(1) The decrease in occupancy at Salem Courthouse is attributable to major
road construction which was begun during 2000 and is expected to continue
throughout the year which has had a negative impact on the curb appeal and
traffic flow in the area.
(2) 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 six months ended June 30, 2000 was
approximately $192,000 as compared to approximately $169,000 for the same period
in 1999. The Registrant's net loss for the three months ended June 30, 2000 was
approximately $9,000 as compared to approximately $160,000 for the same period
in 1999. The increase in net loss for the six months ended June 30, 2000 is
primarily attributable to the cumulative effect of a change in accounting
principle recognized during the six months ended June 30, 1999, as discussed
below. The Registrant's loss before cumulative effect of a change in accounting
principal for the six months ended June 30, 2000 was approximately $192,000 as
compared to approximately $334,000 for the same period in 1999. The Registrant's
loss before cumulative effect of a change in accounting principal for the three
months ended June 30, 2000 was approximately $9,000 as compared to approximately
$160,000 for the same period in 1999. The decrease in loss before cumulative
effect of a change in accounting principal for both the three and six months
ended June 30, 2000 is primarily attributable to an increase in total revenues.
Total revenues increased due to an increase in rental and other income. Rental
income 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 lease cancellation fees, interest income,
auxiliary services, and miscellaneous income at Salem Courthouse Apartments.
For the six months ended June 30, 2000 total expenses increased compared to the
same period in 1999. Total expenses increased primarily due to an increase in
operating and depreciation expenses that more than offset decreases in property
tax and general and administrative expenses. The increase in operating expense
is primarily due to an increase in maintenance expense at Salem Courthouse and
increases in advertising and utility expenses at Plainview Apartments.
Maintenance expense increased as a result of ground and yard work at Salem
Courthouse. In addition Salem Courthouse had received insurance proceeds during
1999 related to some water damage, which reduced maintenance expense during
1999. Advertising expense increased as a result of increased marketing efforts
at Plainview Apartments. 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 during the previous twelve
months. Property tax expense decreased as a result of several years of tax
refunds received for Salem Courthouse during 2000. General and administrative
expense decreased due to decreased legal costs as a result of the settlement of
a legal case during the six months ended June 30, 1999. Total expenses remained
constant for the three months ended June 30, 2000 compared to the same period in
1999 but did have increases in operating and depreciation expenses that were
offset by decreases in property tax and general and administrative expenses as
discussed above.
Included in general and administrative expenses at both June 30, 2000 and 1999
are 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. This accounting change was first reported during the fourth quarter of
1999. Accordingly, net loss for the three and six months ended June 30, 1999 has
been restated to reflect the accounting change as if it were reported then. This
adjustment decreased income before the cumulative effect of the accounting
change for the three and six months ended June 30, 1999 by approximately $11,000
($10.87 per limited partnership unit) and by approximately $22,000 ($20.76 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 affect 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 June 30, 2000, the Registrant had cash and cash equivalents of approximately
$583,000 as compared to approximately $352,000 at June 30, 1999. Cash and cash
equivalents increased approximately $103,000 for the six months ended June 30,
2000 from the Registrant's year ended December 31, 1999 and is primarily due to
approximately $587,000 of cash provided by operating activities, which is
partially offset by approximately $415,000 of cash used in investing activities
and approximately $69,000 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
$210,000 in budgeted and unbudgeted capital expenditures at Plainview Apartments
as of June 30, 2000, consisting primarily of heating upgrades, building
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 $59,000 in capital expenditures at Salem Courthouse Apartments as
of June 30, 2000, consisting primarily of floor covering and appliance
replacements and recreation facility enhancements. 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 $23,567,000, 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 six
months ended June 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 June 30, 2000,
the balance in the reserve account was approximately $156,000.
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 will entertain applications for lead
counsel which must be filed by August 4, 2000. The Court has scheduled a hearing
on August 21, 2000 to address the issue of appointing lead counsel. 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 June 30, 2000.
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: August 9, 2000
