UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
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or
[ ] 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 0-15843
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DIVERSIFIED HISTORIC INVESTORS III
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391927
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 500, 1521 Locust Street, Philadelphia, PA 19102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 735-5001
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N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - March 31, 1996 (unaudited) and
December 31, 1995
Consolidated Statements of Operations - Three Months Ended March
31, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - Three Months Ended March
31, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(1) Liquidity
As of March 31, 1996, Registrant had cash of $9,178. Such
funds are expected to be used to pay liabilities and general and administrative
expenses of Registrant, and to fund cash deficits of the properties. Cash
generated from operations is used primarily to fund operating expenses and debt
service. If cash flow proves to be insufficient, the Registrant will attempt to
negotiate loan modifications with the various lenders in order to remain current
on all obligations. The Registrant is not aware of any additional sources of
liquidity.
As of March 31, 1996, Registrant had restricted cash of
$100,493 consisting primarily of funds held as security deposits, replacement
reserves and escrows for taxes and insurance. As a consequence of the
restrictions as to use, Registrant does not deem these funds to be a source of
liquidity.
In recent years the Registrant has realized significant
losses, including the foreclosure of one property, due to the properties'
inability to generate sufficient cash flow to pay their operating expenses and
debt service. At the present time, with the exception of the Magazine Place,
where the Registrant does not receive any of the distributable cash, the
Registrant has feasible loan modifications in place. However, in all three
cases, the mortgages are basically "cash-flow" mortgages, requiring all
available cash after payment of operating expenses to be paid to the first
mortgage holder. Therefore, it is unlikely that any cash will be available to
the Registrant to pay its general and administrative expenses.
It is the Registrant's intention to continue to hold the
properties until they can no longer meet the debt service requirements and the
properties are foreclosed, or the market value of the properties increases to a
point where they can be sold at a price which is sufficient to repay the
underlying indebtedness (principal plus accrued interest).
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<PAGE>
(2) Capital Resources
Due to the relatively recent rehabilitations of the
properties, any capital expenditures needed are generally replacement items and
are funded out of cash from operations or replacement reserves, if any. The
Registrant is not aware of any factors which would cause historical capital
expenditures levels not to be indicative of capital requirements in the future
and accordingly does not believe that it will have to commit material resources
to capital investment in the foreseeable future. If the need for capital
expenditures does arise, the first mortgage holder for Lincoln Court and 18th
and Green has agreed to fund capital expenditures at terms similar to the first
mortgage. The mortgagee funded $47,265 during the first quarter of 1996 at
Lincoln Court.
(3) Results of Operations
During the first quarter of 1996, Registrant incurred a net
loss of $222,661 ($15.77 per limited partnership unit) compared to a net loss of
$478,145 ($33.86 per limited partnership unit) for the same period in 1995.
Rental income decreased $54,949 from $394,984 in the first
quarter of 1995 to $340,035 in the same period in 1996. The decrease from the
first quarter of 1995 to the same period in 1996 is the result of the
foreclosure of Cathedral Court in January 1996 and a decrease in rental income
due to a decrease in average occupancy (93% to 88%) at the Green Street
Apartments partially offset by an increase in rental income due to an increase
in average occupancy (76% to 89%) at Lincoln Court and an increase at the Loewy
Building due to average higher rental rates.
Expense for rental operations decreased by $66,454 from
$252,489 in the first quarter of 1995 to $186,035 in the same period in 1996.
The decrease from the first quarter of 1995 to the same period in 1996 is mainly
the result of the foreclosure of Cathedral Court partially offset by an increase
in maintenance, commissions and management fees expense. Maintenance expense
increased due to improvements made at Lincoln Court in order to attract more
tenants. Commissions expense increased due to a higher turnover of the units at
the Green Street Apartments and commissions paid on a lease extension at the
Loewy Building with the tenant who leases 34% of the building. Management fees
expense increased due to higher rental income at the Loewy Building.
Interest expense decreased by $160,224 from $384,279 in the
first quarter of 1995 to $224,055 in the same period in 1996. The decrease is
mainly the result of the foreclosure of Cathedral Court partially offset by an
increase in interest expense at Lincoln Court due to a higher average balance of
the mortgage due to advances made by the mortgage holder.
Depreciation and amortization expense decreased $88,739 from
$206,450 in the first quarter of 1995 to $117,711 in the same period in 1996.
The decrease is the result of the foreclosure of Cathedral Court.
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<PAGE>
Losses incurred during the quarter at the Registrant's
properties amounted to $173,000, compared to a loss of approximately $393,000
for the same period in 1995.
In the first quarter of 1996, Registrant incurred a loss of
$70,000 at Lincoln Court including $34,000 of depreciation expense, compared to
a loss of $86,000 in the first quarter of 1995, including $34,000 of
depreciation expense. The decrease in the loss from the first quarter of 1995 to
the same period in 1996 is the result of an increase in rental income due to an
increase in average occupancy (76% to 89%) partially offset by an increase in
maintenance and interest expense. Maintenance expense increased due to
improvements made at the property in order to attract more tenants and interest
expense increased due to a higher average balance of the mortgage due to
advances for the improvements made by the mortgage holder.
In the first quarter of 1996, Registrant incurred a loss of
$48,000 at the Green Street Apartments, including $15,000 of depreciation
expense, compared to a loss of $44,000 including $15,000 of depreciation expense
in the first quarter of 1995. The increased loss is the result of a decrease in
rental income due to a decrease in average occupancy (93% to 88%) combined with
an increase in commissions expense due to the higher turnover of units.
In the first quarter of 1996, Registrant incurred a loss of
$55,000 at the Loewy Building, including $65,000 of depreciation expense,
compared to a loss of $81,000 including $65,000 of depreciation expense in the
first quarter of 1995. The decreased loss from the first quarter of 1995 to the
same period in 1996 is the result of an increase in rental income due to average
higher rental rates partially offset by an increase in commissions and
management fee expense. Management fees expense increased due to the higher
rental income and commission expense increased due to a lease extension with the
tenant who leases 34% of the building.
In the first quarter of 1996, Registrant incurred a loss of
$0 at Cathedral Court compared to a loss of $182,000 including $83,000 of
depreciation expense in the first quarter of 1995. The decrease in the loss from
the first quarter of 1995 to the same period in 1996 is due to the fact that the
property was foreclosed by the lender in January 1996. The Registrant wrote off
the property as of December 31, 1995.
Summary of Minority Interests
In the first quarter of 1996, the Registrant incurred a net
loss of $3,686 at Magazine Place compared to income of $1,409 in the first
quarter of in 1995. The Registrant accounts for this investment on the equity
method. The difference from the first quarter of 1995 to the same period in 1996
is a decrease in the average occupancy which resulted in a decrease in rental
income.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
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(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
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Assets
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March 31, 1996 December 31, 1995
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(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,904,567 11,857,302
Furniture and fixtures 86,351 86,351
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12,456,372 12,409,107
Less - Accumulated depreciation (4,108,859) (3,991,148)
------------ ------------
8,347,513 8,417,959
Cash and cash equivalents 9,178 10,685
Restricted cash 100,493 108,288
Accounts and notes receivable 10,620 7,385
Investment in affiliate 272,494 276,180
Other assets (net of amortization of
$69,775 at March 31, 1996 and December 31,
1995) 66,975 66,975
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Total $ 8,807,273 $ 8,887,472
============ ============
Liabilities and Partners' Equity
--------------------------------
Liabilities:
Debt obligations $ 7,816,410 $ 7,776,693
Accounts payable:
Trade 611,974 579,664
Related parties 544,626 533,200
Taxes 145,407 155,907
Interest payable 829,620 755,866
Other liabilities 11,154 15,399
Tenant security deposits 54,919 54,919
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Total liabilities 10,014,110 9,871,648
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Partners' equity (1,206,837) (984,176)
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Total $ 8,807,273 $ 8,887,472
============ ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
1996 1995
---- ----
Revenues:
Rental income $ 340,035 $ 394,984
Interest income 291 180
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Total revenues 340,326 395,164
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Costs and expenses:
Rental operations 186,035 252,489
General and administrative 31,500 31,500
Interest 224,055 384,279
Depreciation and amortization 117,711 206,450
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Total costs and expenses 559,301 874,718
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Loss before equity in affiliate (218,973) (479,554)
Equity in (loss) income of affiliate (3,686) 1,409
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Net loss ($222,661) ($478,145)
========= =========
Net loss per limited partnership unit:
Loss before equity in affiliate ($ 15.51) ($ 33.96)
Equity in loss (income) of affiliate (.26) .10
--------- ---------
Net loss ($ 15.77) ($ 32.86)
========= =========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three months ended
March 31,
1996 1995
---- ----
Cash flows from operating activities:
Net loss ($222,661) ($478,145)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 117,711 206,450
Equity in loss (income) of affiliate 3,686 (1,409)
Changes in assets and liabilities:
Decrease in restricted cash 7,795 60,560
Increase in accounts receivable (3,235) (14,405)
Decrease in other assets 0 15,599
Increase in accounts payable - trade 32,310 15,165
Increase in accounts payable - related parties 11,426 33,206
Decrease in accounts payable - taxes (10,500) (28,504)
Increase in interest payable 73,754 172,589
(Decrease) increase in accrued liabilities (4,245) 7,918
Decrease in tenant security deposits 0 (33,967)
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Net cash provided by (used in) operating
activities 24,365 (44,983)
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Cash flows from investing activities:
Capital expenditures (47,265) (16,628)
--------- ---------
Net cash used in investing activities (47,265) (16,628)
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Cash flows from financing activities:
Proceeds from debt financing 47,265 0
Principal payments (7,548) 0
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Net cash provided by financing activities 39,717 0
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Decrease in cash and cash equivalents (1,507) (28,355)
Cash and cash equivalents at beginning of period 10,685 31,438
--------- ---------
Cash and cash equivalents at end of period $ 9,178 $ 3,082
========= =========
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
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(a Pennsylvania limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Diversified Historic
Investors III (the "Registrant") and related notes have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
accompanying consolidated financial statements and related notes should be read
in conjunction with the audited financial statements in Form 10-K of the
Registrant, and notes thereto, for the year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented.
-8-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1990, Cathedral Court General Partnership ("CCGP"), a
partnership which owned the Cathedral Court property, and in which the
Registrant held a 99% interest, filed a reorganization petition pursuant to
Chapter 11 of the U.S. Bankruptcy Code. Although a plan of reorganization was
filed, it was not approved. Pursuant to a settlement agreement reached with the
first mortgage holder on July 31, 1993 the bankruptcy was dismissed. CCGP
anticipated that, subsequent to the bankruptcy's dismissal, the first mortgage
holder would attempt to sell the loan, but that the Registrant would be given a
right of first refusal. In September 1994, the first mortgage holder petitioned
the Circuit Court for the City of Baltimore in the matter of Harrington v.
Cathedral Court General Partnership, Case No. 89340045/CE 106281, to have a
receiver appointed, and such petition was granted. Pursuant to the appointment
of the receiver, CCGP was directed to deliver immediate possession of any and
all property connected with and used in the current operation of the property to
the receiver and on January 22, 1996 the lender foreclosed on the property. The
Registrant wrote off the property as of December 31, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the quarter covered by this report
to a vote of security holders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Document
-------------- --------
3 Registrant's Amended and Restated
Certificate of Limited Partnership
and Agreement of Limited
Partnership, previously filed as
part of Amendment No. 2 of
Registrant's Registration
Statement on Form S-11, are
incorporated herein by reference.
21 Subsidiaries of the Registrant are
listed in Item 2. Properties on
Form 10-K, previously filed and
incorporated herein by reference.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended
March 31, 1996.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 1, 1996 DIVERSIFIED HISTORIC INVESTORS III
------------
By: Dover Historic Advisors II, General Partner
By: DHP, Inc., Partner
By: /s/ Donna M. Zanghi
-----------------------
DONNA M. ZANGHI
Secretary and Treasurer
-10-
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<ARTICLE> 5
<CIK> 0000792979
<NAME> DHI III
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,178
<SECURITIES> 0
<RECEIVABLES> 10,620
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 167,468
<PP&E> 12,456,372
<DEPRECIATION> 4,108,859
<TOTAL-ASSETS> 8,807,273
<CURRENT-LIABILITIES> 1,302,007
<BONDS> 7,816,410
0
0
<COMMON> 0
<OTHER-SE> (1,206,837)
<TOTAL-LIABILITY-AND-EQUITY> 8,807,273
<SALES> 0
<TOTAL-REVENUES> 340,326
<CGS> 0
<TOTAL-COSTS> 217,535
<OTHER-EXPENSES> 117,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,055
<INCOME-PRETAX> (222,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> (222,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (222,661)
<EPS-PRIMARY> (15.77)
<EPS-DILUTED> 0
</TABLE>
