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, 1998
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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.)
1609 Walnut Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 557-9800
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, 1998
(unaudited) and December 31, 1997
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 (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, 1998, Registrant had cash of
$52,766. 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, 1998, Registrant had
restricted cash of $155,644 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, the
Registrant has feasible loan modifications in place at Lincoln Court,
Green Street and the Loewy Building. 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).
Since the lenders have agreed to forebear from
taking any foreclosure action as long as cash flow payments are made,
the Registrant believes it is appropriate to continue presenting the
financial statements on a going concern basis.
(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,
Loewy Building and Green Street has agreed to fund capital
expenditures at terms similar to the first mortgage. The mortgagee
did not fund any capital expenditures during the third quarter and the
first nine months of 1998 at the three properties.
(3) Results of Operations
During the third quarter of 1998, Registrant
incurred a net loss of $228,343 ($16.17 per limited partnership unit)
compared to a net loss of $216,850 ($15.35 per limited partnership
unit) for the same period in 1997. For the first nine months of 1998,
the Registrant incurred a net loss of $705,881 ($49.98 per limited
partnership unit) compared to a net loss of $700,627 ($49.61 per
limited partnership unit) for the same period in 1997.
Rental income increased $3,834 from $305,928 in
the third quarter of 1997 to $309,762 in the same period in 1998. The
increase from the third quarter of 1997 to the same period in 1998 is
the result of an increase in the average occupancy (90% to 100%) at
the Loewy Building and at Green Street Apartments (94% to 97%)
partially offset by a decrease in the average occupancy at Lincoln
Court (86% to 85%).
Rental income increased $18,659 from $923,756 for
the first nine months of 1997 to $942,415 in the same period in 1998.
The increase from the first nine months of 1997 to the same period in
1998 is the result of an increase in the average occupancy at Green
Street Apartments (93% to 95%) and an increase in the average rental
rates and average occupancy (84% to 88%) at Lincoln Court.
Expense for rental operations increased by $12,946
from $117,016 in the third quarter of 1997 to $129,962 in the same
period in 1998. The increase from the third quarter of 1997 to the
same period in 1998 is due to an increase in maintenance expense at
the Loewy Building due to repairs made to the heating and air
conditioning system.
Expense for rental operations increased by $17,307
from $439,902 for the first nine months of 1997 to $457,209 in the
same period in 1998. The increase from the first nine months of 1997
to the same period in 1998 is due to an increase in maintenance
expense at the Loewy Building partially offset by a decrease in
maintenance and commissions expense at Lincoln Court. At the Loewy
Building, maintenance expense increased due to repairs made to the
heating and air conditioning system and at Lincoln Court, maintenance
and commissions expense decreased due to a decrease in the turnover of
apartment units.
Interest expense increased by $4,663 from $235,922
in the third quarter of 1997 to $240,585 in the same period in 1998
and decreased $17,886 from $706,149 for the first nine months of 1997
to $688,263 in the same period in 1997. The decrease for the nine-
month period is due to an adjustment made in 1997 to properly
calculate interest on the mortgage loan at the Loewy Building.
Losses incurred during the quarter at the
Registrant's properties amounted to $180,000, compared to a loss of
approximately $169,000 for the same period in 1997. For the first
nine months of 1998 the Registrant's properties recognized a loss of
$545,000 compared to approximately $561,000 for the same period in
1997.
In the third quarter of 1998, Registrant incurred
a loss of $60,000 at Lincoln Court including $38,000 of depreciation
and amortization expense, compared to a loss of $62,000 in the third
quarter of 1997, including $40,000 of depreciation and amortization
expense. The decrease in the loss from the third quarter of 1997 to
the same period in 1998 is the result of a decrease in rental income
due to a decrease in the average occupancy (86% to 85%).
For the first nine months of 1998, Registrant
incurred a loss of $196,000 at Lincoln Court including $119,000 of
depreciation and amortization expense, compared to a loss of $228,000
for the same period in 1997, including $120,000 of depreciation and
amortization expense. The decrease in the loss from the first nine
months of 1997 to the same period in 1998 is the result of an increase
in rental income due to an increase in the average occupancy (84% to
88%) and an increase in the average rental rates combined with a
decrease in maintenance and commissions expense due to a decrease in
the turnover of apartment units.
In the third quarter of 1998, Registrant incurred
a loss of $33,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $29,000 including $15,000
of depreciation expense in the third quarter of 1997. The increase in
the loss from the third quarter of 1997 to the same period in 1998 is
the result of a decrease in rental income due to a decrease in the
average occupancy (97% to 94%).
For the first nine months of 1998, Registrant
incurred a loss of $105,000 at the Green Street Apartments including
$44,000 of depreciation expense, compared to a loss of $107,000 for
the same period in 1997, including $44,000 of depreciation expense.
The decrease in the loss from the first nine months of 1997 to the
same period in 1998 is the result of an increase in rental income due
to an increase in the average occupancy (93% to 95%).
In the third quarter of 1998, Registrant incurred
a loss of $80,000 at the Loewy Building, including $72,000 of
depreciation and amortization expense, compared to a loss of $78,000
including $79,000 of depreciation and amortization expense in the
third quarter of 1997. The increased loss is the result of an
increase in maintenance expense partially offset by an increase in
rental income due to an increase in average occupancy (90% to 100%).
Maintenance expense increased due to repairs made to the heating and
air conditioning system.
For the first nine months of 1998, Registrant
incurred a loss of $244,000 at the Loewy Building including $216,000
of depreciation and amortization expense, compared to a loss of
$226,000 for the same period in 1997, including $212,000 of
depreciation and amortization expense. The increased loss from the
first nine months of 1997 to the same period in 1998 is the result of
an increase in maintenance expense partially offset by a decrease in
interest expense. Maintenance expense increased due to repairs made
to the heating and air conditioning system. Interest expense
decreased due to an adjustment made in 1997 to properly calculate
interest on the mortgage loan.
Summary of Minority Interests
In the third quarter of 1998, the Registrant
incurred a loss of $7,974 at Magazine Place compared to a loss of
$1,048 in the third quarter of in 1997 and for the first nine months
of 1998, incurred a loss of $20,285 compared to income of $2,717 for
the same period in 1997. The Registrant accounts for this investment
on the equity method. The increase in the loss from the third quarter
and the first nine months of 1997 to the same periods in 1998 is due
to costs incurred in connection with a refinancing of the property.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
September 30, 1998 December 31, 1997
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 12,001,924 11,985,674
Furniture and fixtures 95,447 95,447
---------- ----------
12,562,825 12,546,575
Less - Accumulated depreciation (5,320,516) (4,956,401)
---------- ----------
7,242,309 7,590,174
Cash and cash equivalents 52,766 308
Restricted cash 155,644 126,684
Accounts and notes receivable 25,407 16,666
Investment in affiliate 214,905 235,190
Other assets (net of amortization of
$139,841 and $114,337 at September 30,
1998 and December 31, 1997, respectively) 497,708 227,277
---------- ----------
Total $ 8,188,739 $ 8,196,299
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,765,830 $ 8,418,142
Accounts payable:
Trade 971,471 874,012
Related parties 658,883 624,606
Interest payable 1,426,151 1,239,576
Other liabilities 45,178 7,915
Tenant security deposits 46,088 51,029
---------- ----------
Total liabilities 11,913,601 11,215,280
---------- ----------
Partners' equity (3,724,862) (3,018,981)
---------- ----------
Total $ 8,188,739 $ 8,196,299
========== ==========
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, 1998 and 1997
(Unaudited)
Three months Nine months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Revenues:
Rental income $ 309,762 $ 305,928 $ 942,415 $ 923,756
Interest income 524 59 1,581 315
------- ------- ------- ---------
Total revenues 310,286 305,987 943,996 924,071
------- ------- ------- ---------
Costs and expenses:
Rental operations 129,962 117,016 457,209 439,902
General and administrative 31,500 31,500 94,500 94,500
Interest 240,585 235,922 688,263 706,149
Depreciation and
Amortization 128,608 137,351 389,620 386,864
------- ------- --------- ---------
Total costs and expenses 530,655 521,789 1,629,592 1,627,415
------- ------- --------- ---------
Loss before equity in affiliate (220,369) (215,802) (685,596) (703,344)
Equity in (loss) income of (7,974) (1,048) (20,285) 2,717
Affiliate
-------- -------- -------- --------
Net loss ($ 228,343)($ 216,850)($ 705,881)($ 700,627)
======== ======== ======== ========
Net loss per limited partnership
unit:
Loss before equity in affiliate ($ 15.60)($ 15.27)($ 48.55)($ 49.80)
Equity in (loss) income of (.57) (.08) (1.43) .19
affiliate
-------- -------- -------- --------
Net loss ($ 16.17)($ 15.35)($ 49.98)($ 49.61)
======== ======== ======== ========
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, 1998 and 1997
(Unaudited)
Nine months ended
September 30,
1998 1997
Cash flows from operating activities:
Net loss ($ 705,881) ($ 700,627)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 389,620 386,864
Equity in loss (income) of affiliate 20,285 (2,717)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (28,960) 37,837
Increase in accounts receivable (8,741) (3,566)
Increase in other assets (295,936) (114,974)
Increase in accounts payable - trade 97,459 107,879
Increase in accounts payable - related parties 34,277 34,277
Increase in interest payable 186,575 287,084
Increase (decrease) in accrued liabilities 37,263 (7,881)
(Decrease) increase in tenant security deposits (4,941) 380
------- -------
Net cash (used in) provided by operating activities (278,980) 24,556
------- -------
Cash flows from investing activities:
Capital expenditures (16,250) (20,706)
------- -------
Net cash used in investing activities (16,250) (20,706)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 360,459 0
Principal payments (12,771) (8,971)
------- -------
Net cash provided by (used in) financing activities 347,688 (8,971)
------- -------
Increase (decrease) in cash and cash equivalents 52,458 (5,121)
Cash and cash equivalents at beginning of period 308 20,862
------- -------
Cash and cash equivalents at end of period $ 52,766 $ 15,741
======= =======
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, 1997.
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, 1998.
<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: December 14, 1998 DIVERSIFIED HISTORIC INVESTORS III
-----------------
By: Dover Historic Advisors II, General Partner
By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer
-----------------------
SPENCER WERTHEIMER
President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 52,766
<SECURITIES> 0
<RECEIVABLES> 25,407
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,562,825
<DEPRECIATION> 5,320,516
<TOTAL-ASSETS> 8,188,739
<CURRENT-LIABILITIES> 1,630,354
<BONDS> 8,765,830
0
0
<COMMON> 0
<OTHER-SE> (3,724,862)
<TOTAL-LIABILITY-AND-EQUITY> 8,188,739
<SALES> 0
<TOTAL-REVENUES> 943,996
<CGS> 0
<TOTAL-COSTS> 457,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688,263
<INCOME-PRETAX> (705,881)
<INCOME-TAX> 0
<INCOME-CONTINUING> (705,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (705,881)
<EPS-PRIMARY> (49.98)
<EPS-DILUTED> 0
</TABLE>
