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, 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
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 735-5001
N/A
- ----------------------------------------------------------------------
(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 - September 30, 1997
(unaudited) and December 31, 1996
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended
September 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 September 30, 1997, Registrant had cash of
$15,741. 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, 1997, Registrant had
restricted cash of $165,959 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, 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. The first mortgage
holder for Lincoln Court, Green Street Apartments and Loewy Building,
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 1997.
(3) Results of Operations
During the third quarter of 1997, Registrant
incurred a net loss of $216,850 ($15.35 per limited partnership unit)
compared to a net loss of $280,510 ($19.86 per limited partnership
unit) for the same period in 1996. For the first nine months of 1997,
the Registrant incurred a net loss of $700,627 ($49.61 per limited
partnership unit) compared to a net loss of $751,138 ($53.19 per
limited partnership unit) for the same period in 1996.
Rental income increased $9,388 from $296,540 in
the third quarter of 1996 to $305,928 in the same period in 1997. The
increase from the third quarter of 1996 to the same period in 1997 is
the result of an increase in rental income at The Loewy Building due
to an increase in the average rental rates, an increase at 18th and
Green due to an increase in the average occupancy (94% to 97%) and an
increase at Lincoln Court due to an increase in the average occupancy
(78% to 86%) and in the average rental rates.
Rental income decreased $22,533 from $946,289 for
the first nine months of 1996 to $923,756 in the same period in 1997.
The decrease from the first nine months of 1996 to the same period in
1997 is the result of 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 a prior period
partially offset by an increase at 18th and Green due to an increase
in the average occupancy (92% to 93%) and an increase at Lincoln Court
due to an increase in the average rental rates.
Expense for rental operations decreased by $28,563
from $145,579 in the third quarter of 1996 to $117,016 in the same
period in 1997. The decrease from the third quarter of 1996 to the
same period in 1997 is mainly the result of a decrease in leasing fees
at The Loewy Building partially offset by an increase in management
fees expense at Lincoln Court due to an increase in rental income. At
the Loewy Building, leasing fees decreased due to commissions relating
to a lease extension in the second quarter of 1996 that were not
repeated in 1997.
Expense for rental operations and decreased by
$81,698 from $521,600 for the first nine months of 1996 to $439,902 in
the same period in 1997. The decrease from the first nine months of
1996 to the same period in 1997 is mainly the result of a decrease in
real estate taxes expense at Lincoln Court and a decrease in leasing
fees and management fees expense at The Loewy Building. Real estate
taxes expense at Lincoln Court decreased due to a one-time payment in
the second quarter of 1996 of penalties for unpaid real estate taxes
that increased tax expense over typical levels of tax expense. At the
Loewy Building, leasing fees decreased due to commissions relating to
a lease extension in the second quarter of 1996 that was not repeated
in 1997 and management fees expense decreased due to a decrease in
rental income.
Interest expense decreased by $60,254 from
$296,176 in the third quarter of 1996 to $235,922 in the same period
in 1997 and decreased $41,857 from $748,006 for the first nine months
of 1996 to $706,149 in the same period in 1997. The decreases are due
to the accrual of additional interest in the third quarter of 1996
that should have been accrued in prior years which did not recur in
1997.
Depreciation and amortization expense increased
$18,413 from $118,938 in the third quarter of 1996 to $137,351 in the
same period in 1997 and increased $32,504 from $354,360 for the first
nine months of 1996 to $386,864 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 and an increase
in amortization expense at Lincoln Court due to the amortization of
loan fees incurred in connection with the refinancing in June 1996.
Losses incurred during the quarter at the
Registrant's properties amounted to $169,000, compared to a loss of
approximately $250,000 for the same period in 1996. For the first
nine months of 1997 the Registrant's properties recognized a loss of
$561,000 compared to approximately $632,000 for the same period in
1996.
In the third quarter of 1997, Registrant incurred
a loss of $62,000 at Lincoln Court including $40,000 of depreciation
and amortization expense, compared to a loss of $144,000 in the third
quarter of 1996, including $35,000 of depreciation and amortization
expense. The decrease in the loss from the third quarter of 1996 to
the same period in 1997 is due to an increase in rental income
resulting from an increase in the average rental rates and the average
occupancy (78% to 86%) and a decrease in interest expense partially
offset by an increase in management fee expense. Interest expense
decreased due to the accrual of additional interest in the third
quarter of 1996 that should have been accrued in prior years and
management fees expense increased due to the increase in rental
income.
For the first nine months of 1997, Registrant
incurred a loss of $228,000 at Lincoln Court including $120,000 of
depreciation and amortization expense, compared to a loss of $307,000
for the same period in 1996, including $104,000 of depreciation and
amortization expense. The decrease in the loss from the first nine
months of 1996 to the same period in 1997 is the result of an increase
in rental income due to an increase in the average rental rates and a
decrease in real estate taxes and interest expense partially offset by
an increase in amortization expense. Real estate taxes expense
decreased due to the payment in the second quarter of 1996 of
penalties for unpaid real estate taxes and interest expense decreased
due to the accrual of additional interest in the third quarter of 1996
that should have been accrued in prior years. Amortization expense
increased due to the amortization of loan fees incurred in connection
with the refinancing in June 1996.
In the third quarter of 1997, Registrant incurred
a loss of $29,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $31,000 including $15,000
of depreciation expense in the third quarter of 1996 and for the first
nine months of 1997, Registrant incurred a loss of $107,000 including
$44,000 of depreciation expense, compared to a loss of $109,000 for
the same period in 1996, including $44,000 of depreciation expense.
The decrease in the loss for both the quarter and the first nine
months of 1996 to the same periods in 1997 is the result of an
increase in rental income due to increases in the average occupancy
(94% to 97% in the third quarter and 92% to 93% for the first nine
months).
In the third quarter of 1997, Registrant incurred
a loss of $78,000 at the Loewy Building, including $79,000 of
depreciation and amortization expense, compared to a loss of $75,000
including $65,000 of depreciation expense in the third quarter of
1996. The increased loss is the result of an increase in amortization
expense due to the amortization of leasing fees partially offset by a
decrease in commissions expense due to a commission paid in 1996 with
respect to a lease extension in the second quarter of that year which
was not repeated in 1997 and an increase in rental income due to an
increase in average rental rates.
For the first nine months of 1997, Registrant
incurred a loss of $226,000 at the Loewy Building including $212,000
of depreciation and amortization expense, compared to a loss of
$216,000 for the same period in 1996, including $195,000 of
depreciation expense. The increased loss from the first nine 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 (and not repeated in 1997) that related to a prior
period and was not previously accrued, combined with an increase in
amortization expense due to the amortization of leasing fees. The
increases are 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 and a decrease in management
fees expense due to the decrease in rental income.
Summary of Minority Interests
In the third quarter of 1997, the Registrant
incurred a loss of $1,000 at Magazine Place compared to income of
$15,000 in the third quarter of 1996. For the first nine months of
1997 the Registrant recognized income of $3,000 compared to income of
$20,000 for the same period in 1996. The Registrant accounts for this
investment on the equity method. The decrease is due to lower overall
occupancy of the property combined with an overall increase in
operating expenses.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
September 30, 1997 December 31, 1996
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,990,229 11,969,523
Furniture and fixtures 86,351 86,351
---------- ----------
12,542,034 12,521,328
Less - Accumulated depreciation (4,822,321) (4,461,992)
---------- ----------
7,719,713 8,059,336
Cash and cash equivalents 15,741 20,862
Restricted cash 165,959 203,796
Accounts and notes receivable 11,624 8,058
Investment in affiliate 267,479 264,762
Other assets (net of amortization of
$104,224 and $77,689 at September 30, 1997
and December 31, 1996, respectively) 243,596 155,157
---------- ----------
Total $ 8,424,112 $ 8,711,971
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,405,930 $ 8,414,901
Accounts payable:
Trade 860,136 752,257
Related parties 613,180 578,903
Interest payable 1,175,948 888,864
Other liabilities 18,143 52,506
Tenant security deposits 52,886 26,024
---------- ----------
Total liabilities 11,126,223 10,713,455
---------- ----------
Partners' equity (2,702,111) (2,001,484)
---------- ----------
Total $ 8,424,112 $ 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 Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Rental income $ 305,928 $ 296,540 $ 923,756 $ 946,289
Interest income 59 41 315 689
------- ------- --------- ---------
Total revenues 305,987 296,582 924,071 946,978
------- ------- --------- ---------
Costs and expenses:
Rental operations 117,016 145,579 439,902 521,600
General and administrative 31,500 31,500 94,500 94,500
Interest 235,922 296,176 706,149 748,006
Depreciation and
amortization 137,351 118,938 386,864 354,360
------- ------- --------- ---------
Total costs and expenses 521,789 592,193 1,627,415 1,718,466
------- ------- --------- ---------
Loss before equity in affiliate (215,802) (295,611) (703,344) (771,488)
------- ------- --------- ---------
Equity in (loss) income of
affiliate (1,048) 15,101 2,717 20,350
------- ------- --------- ---------
Net loss ($ 216,850) ($ 280,510) ($ 700,627) ($ 751,138)
======= ======= ========= =========
Net loss per limited partnership
unit:
Loss before equity in affiliate($ 15.27) ($ 20.93) ($ 49.80) ($ 54.63)
Equity in (loss) income of
affiliate ( .08) 1.07 .19 1.44
------- -------- --------- ---------
Net loss ($ 15.35) ($ 19.86) ($ 49.61) ($ 53.19)
======= ======== ========= =========
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 Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine months ended
September 30,
1997 1996
Cash flows from operating activities: ------ ------
Net loss ($ 700,627) ($ 751,138)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 386,864 354,360
Equity in income of affiliate (2,717) (20,350)
Changes in assets and liabilities:
Decrease (increase) in restricted cash 37,837 (96,753)
(Increase) decrease in accounts receivable (3,566) 1,172
Increase in other assets (114,974) (99,263)
Increase in accounts payable - trade 107,879 109,287
Increase in accounts payable - related parties 34,277 34,277
Decrease in accounts payable - taxes 0 (142,684)
Increase in interest payable 287,084 49,016
Decrease in accrued liabilities (7,881) (5,411)
Increase (decrease) in tenant security deposits 380 (7,668)
------- -------
Net cash provided by (used in) by operating activities24,556 (575,155)
------- -------
Cash flows from investing activities:
Capital expenditures (20,706) (84,557)
------- -------
Net cash used in investing activities (20,706) (84,557)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 0 666,149
Principal payments (8,971) 0
------- -------
Net cash (used in) provided by financing activities (8,971) 666,149
------- -------
(Decrease) increase in cash and cash equivalents (5,121) 6,437
Cash and cash equivalents at beginning of period 20,862 10,685
------- -------
Cash and cash equivalents at end of period $ 15,741 $ 17,122
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $419,065 $406,278
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 in Form 10-K of the
Registrant, and notes thereto, 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 Document
Number
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, 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: November 17, 1997 DIVERSIFIED HISTORIC INVESTORS III
-----------------
By: Dover Historic Advisors II, General Partner
By: EPK, Inc., Partner
By: /s/ Donna M. Zanghi
----------------------------
DONNA M. ZANGHI
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,741
<SECURITIES> 0
<RECEIVABLES> 11,624
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,542,034
<DEPRECIATION> 4,822,321
<TOTAL-ASSETS> 8,424,112
<CURRENT-LIABILITIES> 1,473,316
<BONDS> 8,405,930
0
0
<COMMON> 0
<OTHER-SE> (2,702,111)
<TOTAL-LIABILITY-AND-EQUITY> 8,424,112
<SALES> 0
<TOTAL-REVENUES> 924,071
<CGS> 0
<TOTAL-COSTS> 439,902
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 706,149
<INCOME-PRETAX> (700,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (700,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (700,627)
<EPS-PRIMARY> (49.61)
<EPS-DILUTED> 0
</TABLE>
