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 March 31, 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
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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.)
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
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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 - March 31, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 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 March 31, 1998, Registrant had cash of
$6,784. 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 March 31, 1998, Registrant had restricted
cash of $80,890 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 inability of the properties owned by the Registrant to generate
sufficient cash flow to pay their operating expenses and debt service.
At the present time Registrant has feasible loan modifications in
place for its three properties: 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.
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,
Green Street and the Loewy Building has agreed to fund capital
expenditures at terms similar to the first mortgage.
(3) Results of Operations
During the first quarter of 1998, Registrant
incurred a net loss of $251,297 ($17.79 per limited partnership unit)
compared to a net loss of $263,839 ($18.68 per limited partnership
unit) for the same period in 1997.
Rental income decreased $11,506 from $316,419 in
the first quarter of 1997 to $304,913 in the same period in 1998. The
decrease from the first quarter of 1997 to the same period in 1998 is
the result of a decrease the average rental rates at the Loewy
Building (discussed below) partially offset by increases in average
occupancy at Lincoln Court (86% to 91%) and Green Street (89% to 94%).
Expense for rental operations decreased by $16,534
from $192,976 in the first quarter of 1997 to $176,442 in the same
period in 1998. The decrease from the first quarter of 1997 to the
same period in 1998 is mainly the result of an decrease in management
fee expense due to a change in the management contract at Lincoln
Court partially offset by an increase in maintenance expense due to
repairs made to the heating system in January of 1998 at the Loewy
Building.
Interest expense decreased by $19,065 from
$234,920 in the first quarter of 1997 to $215,855 in the same period
in 1998. The decrease is due to an adjustment made to properly
calculate interest on the mortgage loan at the Loewy Building.
Depreciation and amortization expense increased
$6,350 from $124,756 in the first quarter of 1997 to $131,106 in the
same period in 1998. The increase from the first quarter of 1997 to
the same period in 1998 is due to the amortization of leasing
commissions incurred during 1997 at the Loewy Building.
Losses incurred during the quarter at the
Registrant's properties amounted to $203,000, compared to a loss of
approximately $217,000 for the same period in 1997.
In the first quarter of 1998, Registrant incurred
a loss of $70,000 at Lincoln Court including $40,000 of depreciation
and amortization expense, compared to a loss of $95,000 in the first
quarter of 1997, including $40,000 of depreciation expense. The
decrease in the loss from the first quarter 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 (86% to 91%) combined with a
decrease in management fee expense due to a change in the management
contract.
In the first quarter of 1998, Registrant incurred
a loss of $44,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $47,000 including $15,000
of depreciation expense in the first quarter of 1997. The decreased
loss is the result of an increase in rental income due to an increase
in the average occupancy (89% to 94%) from the first quarter of 1997
to the same period in 1998.
In the first quarter of 1998, Registrant incurred
a loss of $89,000 at the Loewy Building, including $72,000 of
depreciation and amortization expense, compared to a loss of $75,000
including $67,000 of depreciation expense in the first quarter of
1997. The increased loss from the first 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 rental rates combined with an increase in
maintenance and amortization expense partially offset by a decrease in
interest expense. Maintenance expense increased due to repairs made
to the heating system in January of 1998 and interest expense
decreased due to an adjustment made to properly calculate interest on
the mortgage loan. Amortization expense increased due to the
amortization of leasing commissions incurred during 1997.
Summary of Minority Interests
In the first quarter of 1998, the Registrant
incurred a loss of $1,537 at Magazine Place compared to a loss of
$3,775 in the first quarter of 1997. The Registrant accounts for this
investment on the equity method. The difference from the first
quarter of 1997 to the same period in 1998 is due to an increase in
rental income due to an increase in the average rental rates.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
March 31, 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
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12,562,825 12,546,575
Less - accumulated depreciation (5,077,773) (4,956,401)
---------- ----------
7,485,052 7,590,174
Cash and cash equivalents 6,784 308
Restricted cash 80,890 126,684
Accounts and notes receivable 27,518 16,666
Investment in affiliate 233,653 235,190
Other assets (net of amortization of
$124,071 and $114,337 at March 31, 1998
and December 31, 1997, respectively) 216,423 227,277
---------- ----------
Total $ 8,050,320 $ 8,196,299
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,429,130 $ 8,418,142
Accounts payable:
Trade 895,909 874,012
Related parties 636,031 624,606
Interest payable 1,297,200 1,239,576
Other liabilities 49,564 51,029
Tenant security deposits 12,767 7,915
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Total liabilities 11,320,601 11,215,280
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Partners' equity (3,270,281) (3,018,981)
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Total $ 8,050,320 $ 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 Ended March 31, 1998 and 1997
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
1998 1997
Revenues:
Rental income $ 304,913 $ 316,419
Interest income 230 119
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Total revenues 305,143 316,538
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Costs and expenses:
Rental operations 176,442 192,976
General and administrative 31,500 31,500
Interest 215,855 234,920
Depreciation and amortization 131,106 124,756
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Total costs and expenses 554,903 584,152
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Loss before equity in affiliate (249,760) (267,614)
Equity in (loss) income of affiliate (1,537) 3,775
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Net loss ($ 251,297) ($ 263,839)
======= =======
Net loss per limited partnership unit:
Loss before equity in affiliate ($ 17.68) ($ 18.96)
Equity in (loss) income of affiliate ( .11) .28
------- -------
Net loss ($ 17.79) ($ 18.68)
======= =======
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 Three Months Ended March 31, 1998 and 1997
(Unaudited)
Three months ended
March 31,
1998 1997
Cash flows from operating activities:
Net loss ($ 251,297) ($ 263,839)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 131,106 124,756
Equity in loss (income) of affiliate 1,537 (3,775)
Changes in assets and liabilities:
Decrease in restricted cash 45,794 62,594
(Increase) decrease in accounts receivable (10,852) 4,320
Decrease (increase) in other assets 1,117 (8,734)
Increase in accounts payable - trade 21,897 11,587
Increase in accounts payable - related parties 11,425 11,425
Increase in interest payable 57,624 71,366
(Decrease) increase in accrued liabilities (1,465) 26,510
Increase in tenant security deposits 4,852 6,018
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Net cash provided by operating activities 11,738 42,228
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Cash flows from investing activities:
Capital expenditures (16,250) (2,728)
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Net cash used in investing activities (16,250) (2,728)
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Cash flows from financing activities:
Proceeds from debt financing 15,833 0
Principal payments (4,845) (4,652)
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Net cash provided by (used in) financing activities 10,988 (4,652)
------- -------
Increase in cash and cash equivalents 6,476 34,848
Cash and cash equivalents at beginning of period 308 20,862
------- -------
Cash and cash equivalents at end of period $ 6,784 $ 55,710
======= =======
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, 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 March 31, 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: May 29, 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
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,784
<SECURITIES> 0
<RECEIVABLES> 27,518
<ALLOWANCES> 0
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<PP&E> 12,562,825
<DEPRECIATION> 5,077,773
<TOTAL-ASSETS> 8,050,320
<CURRENT-LIABILITIES> 895,909
<BONDS> 8,429,130
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<TOTAL-REVENUES> 305,143
<CGS> 0
<TOTAL-COSTS> 176,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,855
<INCOME-PRETAX> (251,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (251,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (251,297)
<EPS-PRIMARY> 0
<EPS-DILUTED> (17.79)
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