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, 1997
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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
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391927
- ------------------------------- -------------------
(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 X No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1997 and 1996 (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, 1997, Registrant had cash of
$17,271. 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, 1997, Registrant had restricted
cash of $172,942 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 at all of its properties. 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, 1996.
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. 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 did not fund any capital
expenditures during the second quarter and the first six months of
1997 at Lincoln Court or 18th and Green.
The Registrant will seek to refinance the
outstanding mortgage on the Loewy Building which is scheduled to
mature in November 1997. There can be no assurances that such
financing will be available and, if not, the property will be marketed
for sale.
(3) Results of Operations
During the second quarter of 1997, Registrant
incurred a net loss of $219,938 ($15.58 per limited partnership unit)
compared to a net loss of $247,966 ($17.56 per limited partnership
unit) for the same period in 1996. For the first six months of 1997,
the Registrant incurred a net loss of $483,777 ($34.26 per limited
partnership unit) compared to a net loss of $470,627 ($33.33 per
limited partnership unit) for the same period in 1996.
Rental income decreased $8,305 from $309,714 in
the second quarter of 1996 to $301,409 in the same period in 1997.
The decrease from the second quarter of 1996 to the same period in
1997 is the result of a decrease in the average occupancy (98% to 92%)
at the Loewy Building and at Lincoln Court (86% to 84%).
Rental income decreased $31,921 from $649,749 for
the first six months of 1996 to $617,828 in the same period in 1997.
The decrease from the first six months of 1996 to the same period in
1997 is the result a decrease in rental income at The Loewy Building
due to a one-time recognition of rental income in the first quarter of
1996 (not repeated in 1997) that related to prior periods and was not
previously accrued and a decrease in rental income at Lincoln Court
due to a decrease in the average occupancy (87% to 84%).
Expense for rental operations decreased by $60,076
from $189,986 in the second quarter of 1996 to $129,910 in the same
period in 1997. The decrease from the second quarter to the same
period in 1997 is due to a decrease in management fees and real estate
taxes expense at Lincoln Court and a decrease in leasing fees at The
Loewy Building due to commissions relating to a lease extension in the
second quarter of 1996. Management fees expense decreased due to a
decrease in rental income while real estate taxes expense decreased
due to a one-time payment in the second quarter of 1996 of penalties
for unpaid real estate taxes.
Expense for rental operations decreased by $53,135
from $376,021 for the first six months of 1996 to $322,886 in the same
period in 1997. The decrease from the first six months of 1996 to the
same period in 1997 is due to a decrease in leasing fees at The Loewy
Building due to commissions relating to a lease extension in the
second quarter of 1996.
Interest expense increased by $7,532 from $227,775
in the second quarter of 1996 to $235,307 in the same period in 1997
and increased $18,397 from $451,830 for the first six months of 1996
to $470,227 in the same period in 1997. The increase for the three
and six month periods is mainly the result of a higher average
principal balance of the mortgage at Lincoln Court due to advances for
improvements made by the mortgage holder.
Depreciation and amortization expense increased
$7,046 from $117,711 in the second quarter of 1996 to $124,757 in the
same period in 1997 and increased $14,091 from $235,422 for the first
six months of 1996 to $249,513 in the same period in 1997. The
increases are the result of an increase in amortization expense at the
Loewy Building due to the amortization of leasing fees.
Losses incurred during the quarter at the
Registrant's properties amounted to $174,000, compared to a loss of
approximately $210,000 for the same period in 1996. For the first six
months of 1997 the Registrant's properties recognized a loss of
$392,000 compared to approximately $383,000 for the same period in
1996.
In the second quarter of 1997, Registrant incurred
a loss of $71,000 at Lincoln Court including $40,000 of depreciation
and amortization expense, compared to a loss of $93,000 in the second
quarter of 1996, including $35,000 of depreciation and amortization
expense. The decrease in the loss from the second quarter of 1996 to
the same period in 1997 is the result of a decrease in real estate
taxes expense due to the payment in the second quarter of 1996 of
penalties for unpaid real estate taxes and a decrease in management
fees expense due to a decrease in rental income partially offset by an
increase in interest expense due to a higher average principal balance
of the mortgage due to advances for improvements made by the mortgage
holder and a decrease in rental income due to a decrease in the
average occupancy (86% to 84%).
For the first six months of 1997, Registrant
incurred a loss of $166,000 at Lincoln Court including $80,000 of
depreciation and amortization expense, compared to a loss of $163,000
for the same period in 1996, including $69,000 of depreciation and
amortization expense. The increase in the loss from the first six
months of 1996 to the same period in 1997 is the result of an increase
in interest expense due to a higher average principal balance of the
mortgage due to advances for improvements made by the mortgage holder
and a decrease in rental income due to a decrease in the average
occupancy (87% to 84%).
In the second quarter of 1997, Registrant incurred
a loss of $31,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $31,000 including $14,000
of depreciation expense in the second quarter of 1996 and for the
first six months of 1997, Registrant incurred a loss of $78,000
including $29,000 of depreciation expense, compared to a loss of
$79,000 for the same period in 1996, including $29,000 of depreciation
expense. The decrease in the loss from the first six months of 1996
to the same period in 1997 is the result of an overall decrease in
operating expenses due to operational efficiencies achieved at the
property
In the second quarter of 1997, Registrant incurred
a loss of $72,000 at the Loewy Building, including $66,000 of
depreciation and amortization expense, compared to a loss of $86,000
including $65,000 of depreciation and amortization expense in the
second quarter of 1996. The decreased loss is the result of a
decrease in commissions expense due to a lease extension in the second
quarter of 1996 partially offset by a decrease in rental income due to
a decrease in average occupancy (98% to 92%) and an increase in
amortization expense due to the amortization of leasing fees.
For the first six months of 1997, Registrant
incurred a loss of $148,000 at the Loewy Building including $133,000
of depreciation and amortization expense, compared to a loss of
$141,000 for the same period in 1996, including $130,000 of
depreciation and amortization expense. The increased loss from the
first six months of 1996 to the same period in 1997 is the result of a
decrease in rental income due to the recognition of rental income in
the first quarter of 1996 that related to prior periods and was not
previously accrued, combined with an increase in amortization expense
due to the amortization of leasing fees partially offset by a decrease
in commissions expense due to a lease extension with the tenant who
leases 34% of the building in the second quarter of 1996.
Summary of Minority Interests
In the second quarter of 1997, the Registrant
incurred a loss of $10 at Magazine Place compared to income of $8,935
in the second quarter of in 1996. For the first six months of 1997
the Registrant recognized income of $3,765 compared to income of
$5,249 for the same period in 1996. The Registrant accounts for this
investment on the equity method. The decrease in income from the
first six months of 1996 to the same period in 1997 is due to an
overall decrease in operating expenses due to operational efficiencies
achieved at the property.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
June 30, 1997 December 31, 1996
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,973,585 11,969,523
Furniture and fixtures 86,351 86,351
---------- ----------
12,525,390 12,521,328
Less - Accumulated depreciation (4,702,212) (4,461,992)
---------- ----------
7,823,178 8,059,336
Cash and cash equivalents 17,271 20,862
Restricted cash 172,942 203,796
Accounts and notes receivable 7,473 8,058
Investment in affiliate 268,527 264,762
Other assets (net of amortization of
$86,983 and $77,689 at March 31, 1997 and
December 31, 1996, respectively) 153,334 155,157
---------- ----------
Total $ 8,442,725 $ 8,711,971
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,407,392 $ 8,414,901
Accounts payable:
Trade 811,654 752,257
Related parties 601,754 578,903
Interest payable 1,037,454 888,864
Other liabilities 17,446 52,506
Tenant security deposits 52,286 26,024
---------- ----------
Total liabilities 10,927,986 10,713,455
---------- ----------
Partners' equity (2,485,261) (2,001,484)
---------- ----------
Total $ 8,442,725 $ 8,711,971
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
Revenues:
Rental income $301,409 $309,714 $617,828 $ 649,749
Interest income 137 357 256 648
------- ------- --------- ---------
Total revenues 301,546 310,071 618,084 650,397
------- ------- --------- ---------
Costs and expenses:
Rental operations 129,910 189,986 322,886 376,021
General and
administrative 31,500 31,500 63,000 63,000
Interest 235,307 227,775 470,227 451,830
Depreciation and
amortization 124,757 117,711 249,513 235,422
-------- ------- --------- ---------
Total costs and expenses 521,474 566,972 1,105,626 1,126,273
Loss before equity in affiliate (219,928) (256,901) (487,542) (475,876)
Equity in income of affiliate (10) 8,935 3,765 5,249
------- ------- ------- ---------
Net loss ($219,938) ($247,966) ($483,777) ($ 470,627)
======= ======= ======= =========
Net loss per limited partnership
unit:
Loss before equity in affiliate ($ 15.57) ($ 18.19) ($ 34.53) ($ 33.70)
Equity in income of affiliate (.01) .63 .27 .37
------- ------- ------- ---------
Net loss ($ 15.58) ($ 17.56) ($ 34.26) ($ 33.33)
======= ======= ======= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
Six months ended
June 30,
1997 1996
Cash flows from operating activities:
Net loss ($483,777) ($470,627)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 249,513 235,422
Equity in income of affiliate (3,765) (5,249)
Changes in assets and liabilities:
Decrease (increase) in restricted cash 30,854 (15,983)
Decrease (increase) in accounts receivable 585 (2,514)
Increase in other assets (7,470) (32,224)
Increase in accounts payable - trade 59,397 76,381
Increase in accounts payable - related parties 22,851 22,851
Decrease in accounts payable - taxes 0 (135,684)
Increase in interest payable 148,590 152,798
Decrease in accrued liabilities (220) (8,336)
(Decrease) increase in tenant security deposits (8,578) 4,917
------- -------
Net cash provided by (used in) operating activities 7,980 (178,248)
------- -------
Cash flows from investing activities:
Capital expenditures (4,062) (84,557)
------- -------
Net cash used in investing activities (4,062) (84,557)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 0 257,190
Principal payments (7,509) 0
------- -------
Net cash (used in) provided by financing activities (7,509) 257,190
------- -------
Decrease in cash and cash equivalents (3,591) (5,615)
Cash and cash equivalents at beginning of period 20,862 10,685
------- -------
Cash and cash equivalents at end of period $ 17,271 $ 5,070
======= =======
The accompanying notes are an integral part of these financial statements.
<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 and notes thereto,
in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
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
To the best of its knowledge, Registrant is not party
to, nor is any of its property the subject of any pending material
legal proceedings.
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, 1997.
<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: August 25, 1997 DIVERSIFIED HISTORIC INVESTORS III
By: Dover Historic Advisors II, General Partner
By: EPK, Inc., Partner
By: /s/ Donna M. Zanghi
-----------------------
DONNA M. ZANGHI
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 17,271
<SECURITIES> 0
<RECEIVABLES> 7,473
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,525,390
<DEPRECIATION> 4,702,212
<TOTAL-ASSETS> 8,442,725
<CURRENT-LIABILITIES> 1,413,408
<BONDS> 8,407,392
0
0
<COMMON> 0
<OTHER-SE> (2,485,261)
<TOTAL-LIABILITY-AND-EQUITY> 8,442,725
<SALES> 0
<TOTAL-REVENUES> 618,084
<CGS> 0
<TOTAL-COSTS> 322,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 470,227
<INCOME-PRETAX> (483,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (483,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (483,777)
<EPS-PRIMARY> (34.26)
<EPS-DILUTED> 0
</TABLE>
