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 September 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
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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
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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 No X
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 1996
(unaudited) and December 31, 1995
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended
September 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 September 30, 1996, Registrant had cash of
$17,122. 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 September 30, 1996, Registrant had
restricted cash of $205,041 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 on all of its properties. However, in
each of these 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).
(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. The first mortgage
holder for Lincoln Court and Green Street Apartments has agreed that,
in the event a need for capital expenditures arises with respect to
either property, it will fund capital expenditures at terms similar to
the first mortgage. The mortgagee did not fund any capital
expenditures during the third quarter of 1996.
In August 1996 the Registrant refinanced
$1,268,000 of the first mortgage on Lincoln Court. The refinancing
has an interest rate of 9.125%, is payable in monthly installments of
$10,317 and is due in September 2003.
(3) Results of Operations
During the third quarter of 1996, Registrant
incurred a net loss of $280,510 ($19.86 per limited partnership unit)
compared to a net loss of $453,020 ($32.08 per limited partnership
unit) for the same period in 1995. For the first nine months of 1996,
the Registrant incurred a net loss of $751,138 ($53.19 per limited
partnership unit) compared to a net loss of $1,337,802 ($94.73 per
limited partnership unit) for the same period in 1995.
Rental income decreased $113,680 from $410,220 in
the third quarter of 1995 to $296,540 in the same period in 1996 and
decreased $241,689 from $1,187,978 for the first nine months of 1995
to $946,289 in the same period in 1996. The decrease from the third
quarter and the first nine 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 (77% to 86%) at Lincoln Court and an increase at the
Loewy Building due to higher average rental rates.
Expense for rental operations decreased by
$109,519 from $255,098 in the third quarter of 1995 to $145,579 in the
same period in 1996 and decreased by $179,920 from $701,520 for the
first nine months of 1995 to $521,600 in the same period in 1996. The
decrease from the third quarter and the first nine 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. Commissions expense
increased due to commissions paid on a lease extension at the Loewy
Building by a 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
nine months of 1996 as compared to the same period in 1995 due to
higher rental income.
Interest expense decreased by $54,653 from
$350,829 in the third quarter of 1995 to $296,176 in the same period
in 1996 and decreased $354,186 from $1,102,192 for the first nine
months of 1995 to $748,006 in the same period in 1996. The decrease
for the three and nine month 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.
Depreciation and amortization expense decreased
$89,512 from $208,450 in the third quarter of 1995 to $118,938 in the
same period in 1996 and decreased $264,990 from $619,350 for the first
nine months of 1995 to $354,360 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 $250,000, compared to a loss of
approximately $393,000 for the same period in 1995. For the first
nine months of 1996 the Registrant's properties recognized a loss of
$632,000 compared to approximately $1,162,000 for the same period in
1995.
In the third quarter of 1996, Registrant incurred
a loss of $144,000 at Lincoln Court including $35,000 of depreciation
expense, compared to a loss of $98,000 in the third quarter of 1995,
including $34,000 of depreciation expense. The increase in the loss
from the third quarter of 1995 to the same period in 1996 is due to 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 improvements made by the
mortgage holder.
For the first nine months of 1996, Registrant
incurred a loss of $307,000 at Lincoln Court including $104,000 of
depreciation expense, compared to a loss of $256,000 for the same
period in 1995, including $103,000 of depreciation expense. The
increase in the loss from the first nine months of 1995 to the same
period in 1996 is the result of an increase in maintenance, management
fees and interest expense partially offset by an increase in rental
income due to an increase in occupancy (77% to 86%). Maintenance
expense increased due to improvements made at the property.
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 made by the mortgage holder.
In the third quarter of 1996, Registrant incurred
a loss of $31,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $39,000 including $15,000
of depreciation expense in the second quarter of 1995 and for the
first nine months of 1996, Registrant incurred a loss of $109,000 at
the Green Street Apartments including $44,000 of depreciation expense,
compared to a loss of $118,000 for the same period in 1995, including
$44,000 of depreciation expense. The decrease in the loss for the
quarter and the first nine months of 1995 to the same periods in 1996
is the result of an overall decrease in operating expenses due to
operational efficiencies achieved at the property.
In the third quarter of 1996, Registrant incurred
a loss of $75,000 at the Loewy Building, including $65,000 of
depreciation expense, compared to a loss of $76,000 including $65,000
of depreciation expense in the second quarter of 1995 and for the
first nine months of 1996, Registrant incurred a loss of $216,000 at
the Loewy Building including $195,000 of depreciation expense,
compared to a loss of $230,000 for the same period in 1995, including
$195,000 of depreciation expense. The decreased loss from the first
nine 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
commissions expense increased due to a lease extension with the tenant
who leases 34% of the building.
In the third quarter of 1996, Registrant incurred
a loss of $0 at Cathedral Court compared to a loss of $180,000
including $83,000 of depreciation expense in the second quarter of
1995 and for the first nine months of 1996, Registrant incurred a loss
of $0 at Cathedral Court compared to a loss of $558,000 for the same
period in 1995, including $250,000 of depreciation expense. The
decrease in the loss from the third quarter and the first nine 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 third quarter of 1996, the Registrant
recognized income of $15,101 at Magazine Place compared to a net loss
of $17,591 in the third quarter of 1995. For the first nine months of
1996 the Registrant recognized income of $20,350 compared to a net
loss of $8,736 for the same period in 1995. The Registrant accounts
for this investment on the equity method. The increase is due to
higher overall occupancy of the property combined with an overall
decrease in operating expenses.
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Assets
September 30, 1996 December 31, 1995
(Unaudited)
------------------ -----------------
Rental properties, at cost:
<S> <C> <C>
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 (4,344,281) (3,991,148)
---------- ----------
8,149,383 8,417,959
Cash and cash equivalents 17,122 10,685
Restricted cash 205,041 108,288
Accounts and notes receivable 6,213 7,385
Investment in affiliate 296,530 276,180
Other assets (net of amortization of
$71,002 and $69,775 at September 30, 1996
and December 31, 1995, respectively)
165,008 66,975
---------- ----------
Total $ 8,839,297 $ 8,887,472
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,442,842 $ 7,776,693
Accounts payable:
Trade 688,951 579,664
Related parties 567,477 533,200
Taxes 13,223 155,907
Interest payable 804,881 755,866
Other liabilities 9,988 15,399
Tenant security deposits 47,251 54,919
---------- ----------
Total liabilities 10,574,613 9,871,648
Partners' equity (1,735,316) (984,176)
---------- ----------
Total $ 8,839,297 $ 8,887,472
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Rental income $ 296,540 $ 410,220 $ 946,289 $1,187,978
Interest income 41 228 689 518
------- ------- ------- ---------
Total revenues 296,582 410,448 946,978 1,188,496
------- ------- ------- ---------
Costs and expenses:
Rental operations 145,579 255,098 521,600 701,520
General and
administrative 31,500 31,500 94,500 94,500
Interest 296,176 350,829 748,006 1,102,192
Depreciation and
amortization 118,938 208,450 354,360 619,350
------- ------- ------- ---------
Total costs and expenses 592,193 845,877 1,718,466 2,517,562
Loss before equity in affiliate (295,611) (435,429) (771,488) (1,329,066)
-------- -------- --------- ---------
Equity in income (loss) of
affiliate 15,101 (17,591) 20,350 (8,736)
-------- -------- --------- ---------
Net loss ($ 280,510) ($ 453,020) ($ 751,138) ($1,337,802)
======== ======== ========= =========
Net loss per limited partnership
unit:
Loss before equity in affiliate ($ 20.93) ($ 30.83) ($ 54.63) ($ 94.11)
Equity in income (loss) of
affiliate 1.07 (1.25) 1.44 (.62)
----- ----- ----- -----
Net loss ($ 19.86) ($ 32.08) ($ 53.19) ($ 94.73)
===== ===== ===== =====
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Nine months ended
September 30,
1996 1995
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($ 751,138) ($1,337,802)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 354,360 619,350
Equity in (income) loss of affiliate (20,350) 8,736
Changes in assets and liabilities:
Increase in restricted cash (96,753) (49,811)
Decrease in accounts receivable 1,172 1,332
(Increase) decrease in other assets (99,263) 6,903
Increase in accounts payable - trade 109,287 104,693
Increase in accounts payable - related parties 34,277 45,430
Decrease in accounts payable - taxes (142,684) (36,282)
Increase in interest payable 49,016 653,883
(Decrease) increase in accrued liabilities (5,411) 6,117
(Decrease) increase in tenant security deposits (7,668) 12,505
-------- -------
Net cash (used in) provided by operating activitie s (575,155) 35,054
-------- -------
Cash flows from investing activities:
Capital expenditures (84,557) (145,316)
-------- -------
Net cash used in investing activities (84,557) (145,316)
-------- -------
Cash flows from financing activities:
Proceeds from debt financing 666,149 117,794
Principal payments 0 (7,829)
-------- -------
Net cash provided by financing activities 666,149 109,965
-------- -------
Increase (decrease) in cash and cash equivalents 6,437 (297)
Cash and cash equivalents at beginning of period 10,685 14,849
Cash and cash equivalents at end of period $ 17,122 $ 14,552
======== =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $406,278 $464,107
The accompanying notes are an integral part of these financial statements.
</TABLE>
<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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning the termination of certain
legal proceedings regarding foreclosure of Registrant's former
Cathedral Court property, see Registrant's Annual Report on Form 10-K
for the year ended 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 September 30, 1996.
<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: November 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,122
<SECURITIES> 0
<RECEIVABLES> 6,213
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,493,664
<DEPRECIATION> 4,344,281
<TOTAL-ASSETS> 8,839,297
<CURRENT-LIABILITIES> 1,269,651
<BONDS> 8,442,842
0
0
<COMMON> 0
<OTHER-SE> (1,735,316)
<TOTAL-LIABILITY-AND-EQUITY> 8,839,297
<SALES> 0
<TOTAL-REVENUES> 946,978
<CGS> 0
<TOTAL-COSTS> 521,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 748,006
<INCOME-PRETAX> (751,138)
<INCOME-TAX> 0
<INCOME-CONTINUING> (751,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (751,138)
<EPS-PRIMARY> (53.19)
<EPS-DILUTED> 0
</TABLE>
