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, 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
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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, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 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 June 30, 1998, Registrant had cash of
$24,658. 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, 1998, Registrant had restricted
cash of $108,850 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
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
1998 at the three properties.
(3) Results of Operations
During the second quarter of 1998, Registrant
incurred a net loss of $226,241 ($16.02 per limited partnership unit)
compared to a net loss of $219,938 ($15.58 per limited partnership
unit) for the same period in 1997. For the first six months of 1998,
the Registrant incurred a net loss of $477,538 ($33.81 per limited
partnership unit) compared to a net loss of $483,777 ($34.26 per
limited partnership unit) for the same period in 1997.
Rental income increased $26,331 from $301,409 in
the second quarter of 1997 to $327,740 in the same period in 1998.
The increase from the second quarter of 1997 to the same period in
1998 is the result of an increase in the average occupancy (78% to
100%) at the Loewy Building and at Green Street Apartments (92% to
98%) and an increase in the average rental rates at Lincoln Court.
Rental income increased $14,825 from $617,828 for
the first six months of 1997 to $632,653 in the same period in 1998.
The increase from the first six months of 1997 to the same period in
1998 is the result of an increase in the average occupancy (82% to
100%) at the Loewy Building and at Green Street Apartments (90% to
96%) and an increase in the average rental rates and occupancy (84% to
89%) at Lincoln Court.
Expense for rental operations increased by $20,895
from $129,910 in the second quarter of 1997 to $150,805 in the same
period in 1998. The increase from the second quarter 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
expense at Lincoln Court. At the Loewy Building, maintenance expense
increased due to repairs made to the air conditioning system and at
Lincoln Court maintenance expense decreased due to a decrease in the
turnover of apartment units.
Expense for rental operations increased by $4,361
from $322,886 for the first six months of 1997 to $327,247 in the same
period in 1998. The increase from the first six 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 air
conditioning system and at Lincoln Court, while maintenance and
commissions expense decreased due to a decrease in the turnover of
apartment units.
Interest expense decreased by $3,484 from $235,307
in the second quarter of 1997 to $231,823 in the same period in 1998
and decreased $22,549 from $470,227 for the first six months of 1997
to $447,678 in the same period in 1997. The decrease for the six-
month period is due to an adjustment made to properly calculate
interest on the mortgage loan at the Loewy Building.
Depreciation and amortization expense increased
$5,149 from $124,757 in the second quarter of 1997 to $129,906 in the
same period in 1998 and increased $11,499 from $249,513 for the first
six months of 1997 to $261,012 in the same period in 1998. The
increases are the result of an increase in amortization expense at the
Loewy Building due to the amortization of leasing fees incurred in
1997.
Losses incurred during the quarter at the
Registrant's properties amounted to $171,000, compared to a loss of
approximately $174,000 for the same period in 1997. For the first six
months of 1998 the Registrant's properties recognized a loss of
$365,000 compared to approximately $392,000 for the same period in
1997.
In the second quarter of 1998, Registrant incurred
a loss of $65,000 at Lincoln Court including $40,000 of depreciation
and amortization expense, compared to a loss of $71,000 in the second
quarter of 1997, including $40,000 of depreciation and amortization
expense. The decrease in the loss from the second 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 rental rates combined with a
decrease in maintenance expense due to a decrease in the turnover of
apartment units.
For the first six months of 1998, Registrant
incurred a loss of $135,000 at Lincoln Court including $81,000 of
depreciation and amortization expense, compared to a loss of $166,000
for the same period in 1997, including $80,000 of depreciation and
amortization expense. The decrease in the loss from the first six
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
89%) 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 second quarter of 1998, 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 second quarter of 1997 and for the
first six months of 1998, Registrant incurred a loss of $73,000
including $29,000 of depreciation expense, compared to a loss of
$78,000 for the same period in 1997, including $29,000 of depreciation
expense. The decrease in the loss from the first six months of 1997
to the same period in 1998 is the result of an increase in rental
income due to an increase in occupancy in the second quarter (92% to
98%) and for the first six months (90% to 96%).
In the second quarter of 1998, Registrant incurred
a loss of $77,000 at the Loewy Building, including $71,000 of
depreciation and amortization expense, compared to a loss of $72,000
including $66,000 of depreciation and amortization expense in the
second quarter of 1997. The increased loss is the result of an
increase in maintenance and amortization expense partially offset by
an increase in rental income due to an increase in average occupancy
(78% to 100%). Maintenance expense increased due to repairs made to
the air conditioning system and amortization expense increased due to
the amortization of leasing commissions incurred during 1997.
For the first six months of 1998, Registrant
incurred a loss of $157,000 at the Loewy Building including $144,000
of depreciation and amortization expense, compared to a loss of
$148,000 for the same period in 1997, including $133,000 of
depreciation and amortization expense. The increased loss from the
first six months of 1997 to the same period in 1998 is the result of
an increase in maintenance, amortization and interest expense
partially offset by an increase in rental income due to an increase in
the average occupancy (90% to 96%). Maintenance expense increased due
to repairs made to the air conditioning system and amortization
expense increased due to the amortization of leasing commissions
incurred during 1997. Interest expense decreased due to an adjustment
made to properly calculate interest on the mortgage loan.
Summary of Minority Interests
In the second quarter of 1998, the Registrant
incurred a loss of $10,774 at Magazine Place compared to a loss of $10
in the second quarter of in 1997. For the first six months of 1998
the Registrant incurred a loss of $12,311 compared to income of $3,765
for the same period in 1997. The Registrant accounts for this
investment on the equity method. The increase in the loss from the
first six months of 1997 to the same period in 1998 is due to an
increase in legal fees incurred in connection with a proposed
refinancing of the property.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
June 30, 1997 December 31, 1997
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 12,004,324 11,985,674
Furniture and fixtures 95,447 95,447
---------- ----------
12,565,225 12,546,575
Less - Accumulated depreciation (5,199,145) (4,956,401)
---------- ----------
7,366,080 7,590,174
Cash and cash equivalents 24,658 308
Restricted cash 108,850 126,684
Accounts and notes receivable 29,071 16,666
Investment in affiliate 222,879 235,190
Other assets (net of amortization of
$132,606 and $114,337 at June 30, 1998 and
December 31, 1997, respectively) 206,625 227,277
---------- ----------
Total $ 7,958,163 $ 8,196,299
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,427,745 $ 8,418,142
Accounts payable:
Trade 924,892 874,012
Related parties 647,457 624,606
Interest payable 1,367,671 1,239,576
Other liabilities 31,382 7,915
Tenant security deposits 55,535 51,029
---------- ----------
Total liabilities 11,454,682 11,215,280
---------- ----------
Partners' equity (3,496,519) (3,018,981)
---------- ----------
Total $ 7,958,163 $ 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 Six Months Ended June 30, 1998 and 1997
(Unaudited)
Three months Six months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Revenues:
Rental income $ 327,740 $ 301,409 $ 632,653 $ 617,828
Interest income 827 137 1,057 256
------- ------- --------- ---------
Total revenues 328,567 301,546 633,710 618,084
------- ------- --------- ---------
Costs and expenses:
Rental operations 150,805 129,910 327,247 322,886
General and
Administrative 31,500 31,500 63,000 63,000
Interest 231,823 235,307 447,678 470,227
Depreciation and
Amortization 129,906 124,757 261,012 249,513
------- ------- --------- ---------
Total costs and expenses 544,034 521,474 1,098,937 1,105,626
------- ------- --------- ---------
Loss before equity in affiliate (215,467) (219,928) (465,227) (487,542)
Equity in income of affiliate (10,774) (10) (12,311) 3,765
-------- ------- --------- ---------
Net loss ($ 226,241) ($ 219,938) ($ 477,538) ($ 483,777)
======= ======= ========= =========
Net loss per limited partnership
unit:
Loss before equity in affiliate($ 15.26) ($ 15.57) ($ 32.94) ($ 34.53)
Equity in income of affiliate (.76) (.01) (.87) .27
------- ------- --------- --------
Net loss ($ 16.02) ($ 15.58) ($ 33.81) ($ 34.26)
======= ======= ========= ========
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, 1998 and 1997
(Unaudited)
Six months ended
June 30,
1998 1997
Cash flows from operating activities:
Net loss ($ 477,538) ($ 483,777)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 261,012 249,513
Equity in loss (income) of affiliate 12,311 (3,765)
Changes in assets and liabilities:
Decrease in restricted cash 17,834 30,854
(Increase) decrease in accounts receivable (12,405) 585
Decrease (increase) in other assets 2,383 (7,470)
Increase in accounts payable - trade 50,881 59,397
Increase in accounts payable - related parties 22,851 22,851
Increase in interest payable 128,095 148,590
Increase (decrease) in accrued liabilities 23,467 (220)
Increase (decrease) in tenant security deposits 4,506 (8,578)
------- -------
Net cash provided by operating activities 33,397 7,980
------- -------
Cash flows from investing activities:
Capital expenditures (18,650) (4,062)
------- -------
Net cash used in investing activities (18,650) (4,062)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 20,786 0
Principal payments (11,183) (7,509)
-------- -------
Net cash used in financing activities 9,603 (7,509)
-------- -------
Increase (decrease) in cash and cash equivalents 24,350 (3,591)
Cash and cash equivalents at beginning of period 308 20,862
-------- --------
Cash and cash equivalents at end of period $ 24,658 $ 17,271
======== ========
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 June 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: August 20, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,658
<SECURITIES> 0
<RECEIVABLES> 29,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,565,225
<DEPRECIATION> 5,199,145
<TOTAL-ASSETS> 7,958,163
<CURRENT-LIABILITIES> 1,572,349
<BONDS> 8,427,745
0
0
<COMMON> 0
<OTHER-SE> (3,496,519)
<TOTAL-LIABILITY-AND-EQUITY> 7,958,163
<SALES> 0
<TOTAL-REVENUES> 632,653
<CGS> 0
<TOTAL-COSTS> 327,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 447,678
<INCOME-PRETAX> (477,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (477,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (477,538)
<EPS-PRIMARY> (33.81)
<EPS-DILUTED> 0
</TABLE>
