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 June 30, 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
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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
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 No X
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 1996 (unaudited) and December
31, 1995
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended June 30, 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 June 30, 1996, Registrant had cash of $5,070. Such funds are
expected to be used to pay liabilities 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 June 30, 1996, Registrant had restricted cash of $124,271
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. See Accountant's Report with respect to financial
statements included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
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 $37,292 during the second quarter of 1996 at Lincoln Court.
(3) Results of Operations
During the second quarter of 1996, Registrant incurred a net loss of
$247,966 ($17.56 per limited partnership unit) compared to a net loss of
$406,637 ($28.79 per limited partnership unit) for the same period in 1995. For
the first six months of 1996, the Registrant incurred a net loss of $470,627
($33.33 per limited partnership unit) compared to a net loss of $884,782 ($62.65
per limited partnership unit) for the same period in 1995.
Rental income decreased $73,060 from $382,774 in the second quarter of
1995 to $309,714 in the same period in 1996 and decreased $128,009 from $777,758
for the first six months of 1995 to $649,749 in the same period in 1996. The
decrease from the second quarter and the first six months of 1995 to the same
periods in 1996 is the result of the foreclosure of Cathedral Court in January
1996 partially offset by an increase in rental income due to an increase in
average occupancy (75% to 88%) at Lincoln Court and an increase at the Loewy
Building due to higher average rental rates.
Expense for rental operations decreased by $3,947 from $193,933 in the
second quarter of 1995 to $189,986 in the same period in 1996 and decreased by
$70,401 from $446,422 for the first six months of 1995 to $376,021 in the same
period in 1996. The decrease from the second quarter and the first six months of
1995 to the same periods in 1996 is mainly the result of the foreclosure of
Cathedral Court partially offset by an increase in maintenance, commissions and
management fee expense. Maintenance expense increased due to improvements made
at Lincoln Court in order to attract more tenants. Commissions expense increased
due to commissions paid on a lease extension at the Loewy Building with the
tenant who leases 34% of the building. Management fee expense increased due to
higher rental income at the Loewy Building. In addition, management fees
increased at Lincoln Court for the first six months of 1996 as compared to the
same period in 1995 due to higher rental income.
Interest expense decreased by $139,309 from $367,084 in the second
quarter of 1995 to $227,775 in the same period in 1996 and decreased $299,533
from $751,363 for the first six months of 1995 to $451,830 in the same period in
1996. The decrease for the three and six months periods is mainly the result of
the foreclosure of Cathedral Court partially offset by an increase at Lincoln
Court due to a higher average balance of the mortgage due to advances made by
the mortgage holder.
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<PAGE>
Depreciation and amortization expense decreased $86,739 from $204,450
in the second quarter of 1995 to $117,711 in the same period in 1996 and
decreased $175,478 from $410,900 for the first six months of 1995 to $235,422 in
the same period in 1996. The decrease is the result of the foreclosure of
Cathedral Court.
Losses incurred during the quarter at the Registrant's properties
amounted to $210,000, compared to a loss of approximately $406,000 for the same
period in 1995. For the first six months of 1996 the Registrant's properties
recognized a loss of $383,000 compared to approximately $769,000 for the same
period in 1995.
In the second quarter of 1996, Registrant incurred a loss of $93,000 at
Lincoln Court including $35,000 of depreciation expense, compared to a loss of
$102,000 in the second quarter of 1995, including $35,000 of depreciation
expense. The decrease in the loss from the second 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 (75% to 88%) partially offset by an increase in management
fees and interest expense. Management fees increased due to the higher rental
income and interest expense increased due to a higher average balance of the
mortgage due to advances for the improvements made by the mortgage holder.
For the first six months of 1996, Registrant incurred a loss of
$163,000 at Lincoln Court including $69,000 of depreciation expense, compared to
a loss of $158,000 for the same period in 1995, including $69,000 of
depreciation expense. The increase in the loss from the first six months of 1995
to the same period in 1996 is the result of increases in maintenance, management
fee expense and interest expense partially offset by an increase in rental
income due to an increase in average occupancy (75% to 88%). Maintenance expense
increased due to improvements made at the property in order to attract more
tenants. Management fees increased due to the higher rental income 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 second quarter of 1996, Registrant incurred a loss of $31,000 at
the Green Street Apartments, including $14,000 of depreciation expense, compared
to a loss of $35,000 including $14,000 of depreciation expense in the second
quarter of 1995. The decrease in the loss is the result of an overall decrease
in operating expenses due to operational efficiencies achieved at the property.
For the first six months of 1996, Registrant incurred a loss of $79,000
at the Green Street Apartments including $29,000 of depreciation expense,
compared to a loss of $79,000 for the same period in 1995, including $29,000 of
depreciation expense. The Registrant expects the results in the following
quarters to be similar to those experienced in the first six months of 1996.
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<PAGE>
In the second quarter of 1996, Registrant incurred a loss of $86,000 at
the Loewy Building, including $65,000 of depreciation expense, compared to a
loss of $73,000 including $65,000 of depreciation expense in the second quarter
of 1995. The increased loss is the result of an increase in commissions and
management fee expense partially offset by an increase in rental income due to
higher average rental rates. Management fee 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.
For the first six months of 1996, Registrant incurred a loss of
$141,000 at the Loewy Building including $130,000 of depreciation expense,
compared to a loss of $154,000 for the same period in 1995, including $130,000
of depreciation expense. The decreased loss from the first six months of 1995 to
the same period in 1996 is the result of an increase in rental income due to
higher average 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 second quarter of 1996, Registrant incurred a loss of $0 at
Cathedral Court compared to a loss of $196,000 including $84,000 of depreciation
expense in the second quarter of 1995 and for the first six months of 1996,
Registrant incurred a loss of $0 at Cathedral Court compared to a loss of
$378,000 for the same period in 1995, including $167,000 of depreciation
expense. The decrease in the loss from the second quarter and the first six
months of 1995 to the same periods 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 second quarter of 1996, the Registrant recognized income of
$8,935 at Magazine Place compared to income of $7,446 in the second quarter of
in 1995. For the first six months of 1996 the Registrant recognized income of
$5,249 compared to income of $8,855 for the same period in 1995. The Registrant
accounts for this investment on the equity method. The decrease in income from
the first six months of 1995 to the same period in 1996 is due to a decrease in
the average occupancy which resulted in a decrease in rental income.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
June 30, 1996 December 31, 1995
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(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,941,859 11,857,302
Furniture and fixtures 86,351 86,351
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12,493,664 12,409,107
Less - Accumulated depreciation (4,226,570) (3,991,148)
------------ ------------
8,267,094 8,417,959
Cash and cash equivalents 5,070 10,685
Restricted cash 124,271 108,288
Accounts and notes receivable 9,899 7,385
Investment in affiliate 281,430 276,180
Other assets (net of amortization of
$69,775 at March 31, 1996 and
December 31, 1995) 99,198 66,975
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Total $ 8,786,962 $ 8,887,472
============ ============
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,033,883 $ 7,776,693
Accounts payable:
Trade 656,045 579,664
Related parties 556,051 533,200
Taxes 20,223 155,907
Interest payable 908,664 755,866
Other liabilities 7,063 15,399
Tenant security deposits 59,836 54,919
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Total liabilities 10,241,765 9,871,648
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Partners' equity (1,454,803) (984,176)
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Total $ 8,786,962 $ 8,887,472
============ ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 309,714 $ 382,774 $ 649,749 $ 777,758
Interest income 357 110 648 290
--------- --------- ----------- -----------
Total revenues 310,071 382,884 650,397 778,048
--------- --------- ----------- -----------
Costs and expenses:
Rental operations 189,986 193,933 376,021 446,422
General and
administrative 31,500 31,500 63,000 63,000
Interest 227,775 367,084 451,830 751,363
Depreciation and
amortization 117,711 204,450 235,422 410,900
--------- --------- ----------- -----------
Total costs and expenses 566,972 796,967 1,126,273 1,671,685
--------- --------- ----------- -----------
Loss before equity in affiliate (256,901) (414,083) (475,876) (893,637)
Equity in income of affiliate 8,935 7,446 5,249 8,855
--------- --------- ----------- -----------
Net loss ($247,966) ($406,637) ($ 470,627) ($ 884,782)
========= ========= =========== ===========
Net loss per limited partnership
unit:
Loss before equity in affiliate ($ 18.19) ($ 29.32) ($ 33.70) ($ 63.28)
Equity in income of affiliate .63 .53 .37 .63
--------- --------- ----------- -----------
Net loss ($ 17.56) ($ 28.79) ($ 33.33) ($ 62.65)
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
Six months ended
June 30,
1996 1995
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Cash flows from operating activities:
Net loss ($470,627) ($884,782)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 235,422 410,900
Equity in income of affiliate (5,249) (8,855)
Changes in assets and liabilities:
Increase in restricted cash (15,983) (12,831)
(Increase) decrease in accounts receivable (2,514) 6,424
(Increase) decrease in other assets (32,224) 5,639
Increase in accounts payable - trade 76,381 60,565
Increase in accounts payable - related parties 22,851 45,430
Decrease in accounts payable - taxes (135,684) (25,782)
Increase in interest payable 152,798 421,718
(Decrease) increase in accrued liabilities (8,336) 11,325
Increase (decrease) in tenant security deposits 4,917 (924)
--------- ---------
Net cash (used in) provided by operating
activities (178,248) 28,827
--------- ---------
Cash flows from investing activities:
Capital expenditures (84,557) (60,215)
--------- ---------
Net cash used in investing activities (84,557) (60,215)
--------- ---------
Cash flows from financing activities:
Proceeds from debt financing 257,190 48,523
Principal payments 0 (7,829)
--------- ---------
Net cash provided by financing activities 257,190 40,694
--------- ---------
(Decrease) increase in cash and cash equivalents (5,615) 9,306
Cash and cash equivalents at beginning of period 10,685 14,849
--------- ---------
Cash and cash equivalents at end of period $ 5,070 $ 24,155
========= =========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(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.
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<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 June 30,
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 24, 1996 DIVERSIFIED HISTORIC INVESTORS III
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By: Dover Historic Advisors II, General Partner
By: DHP, Inc., Partner
By: /s/ Donna M. Zanghi
------------------------------
DONNA M. ZANGHI
Secretary and Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000792979
<NAME> DIVERSIFIED HISTORIC INVESTORS III
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,070
<SECURITIES> 0
<RECEIVABLES> 9,899
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,198
<PP&E> 12,493,664
<DEPRECIATION> 4,226,570
<TOTAL-ASSETS> 8,786,962
<CURRENT-LIABILITIES> 1,232,319
<BONDS> 8,033,883
0
0
<COMMON> 0
<OTHER-SE> (1,454,803)
<TOTAL-LIABILITY-AND-EQUITY> 8,786,962
<SALES> 0
<TOTAL-REVENUES> 650,397
<CGS> 0
<TOTAL-COSTS> 439,021
<OTHER-EXPENSES> 235,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 451,830
<INCOME-PRETAX> (470,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (470,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (470,627)
<EPS-PRIMARY> (33.33)
<EPS-DILUTED> 0.00
</TABLE>
