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, 1999
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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
- ------------------------------- ---------------------
(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 - September 30, 1999 (unaudited) and
December 31, 1998
Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended September
30, 1999 and 1998 (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 $33,344.
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, 1999, Registrant had restricted
cash of $171,493 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, 1998.
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 expenditure 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 1999 at the three properties.
(3) Results of Operations
During the third quarter of 1999, Registrant incurred a net
loss of $275,814 ($19.53 per limited partnership unit) compared to a net
loss of $228,343 ($16.17 per limited partnership unit) for the same period in
1998. For the first nine months of 1999, the Registrant incurred
a net loss of $831,926 ($58.91 per limited partnership unit) compared
to a net loss of $705,881 ($49.98 per limited partnership unit) for the
same period in 1998.
Rental income increased $13,469 from $309,762 in the third
quarter of 1998 to $323,231 in the same period in 1999. The increase
from the third quarter of 1998 to the same period in 1998 is the result
of an increase in the average occupancy at Lincoln Court (85% to 87%)
partially offset by a decrease in occupancy at Green Street
Apartments (94% to 87%) and the Loewy Building (100% to 85%).
Rental income decreased $12,529 from $942,415 for the first
nine months of 1998 to $929,886 in the same period in 1999. The decrease
from the first nine months of 1998 to the same period in 1999 is the result
of an decrease in the average occupancy at Green Street Apartments
(95% to 91%), at Lincoln Court (88% to 86%), and at the Loewy Building
(100% to 88%).
Expense for rental operations increased by $43,100 from
$129,962 in the third quarter of 1998 to $173,062 in the same period in 1999.
The increase from the third quarter of 1998 to the same period in 1999 is
due to an increase in maintenance expense at the Lincoln Court due to an
increase in the turnover of apartment units partially offset by a decrease
in management fee expense at Green Street Apartments due to a decrease
in rental income and a decrease in maintenance expense at the Loewy
Building as a result of a decrease in occupancy.
Expense for rental operations increased by $24,386 from
$457,209 for the first nine months of 1998 to $481,595 in the same
period in 1999. The increase from the first nine months of 1998 to the
same period in 1999 is due to an increase in maintenance and commissions
expense at Lincoln Court partially offset by a decrease in maintenance
expense at Loewy Building. At the Lincoln Court, maintenance and
commissions expense increased due to an increase in the turnover of apartment
units. The decrease in maintenance expense at the Loewy Building is due to
repairs made to the air conditioning systems in the second quarter of
1998, which did not recur in 1999.
Interest expense increased by $22,337 from $240,585 in
the third quarter of 1998 to $262,922 in the same period in 1999. The
increase is due to a refinancing in the fourth quarter of 1998 at Lincoln
Court.
Interest expense increased by $22,337 from $240,585 in the
third quarter of 1998 to $262,922 in the same period in 1999 and increased
$110,492 from $688,263 for the first nine months of 1998 to $798,755 in
the same period in 1999. The increase for the third quarter and
nine-month period is due to an adjustment made in 1997 to properly
calculate interest on the mortgage loan at the Loewy Building and an
increase in interest rate on the second mortgage as a result of a
refinancing at Lincoln Court.
Losses incurred during the quarter at the Registrant's properties
amounted to $225,000, compared to a loss of approximately $173,000 for the
same period in 1998. For the first nine months of 1999 the Registrant's
properties recognized a loss of $683,000 compared to approximately
$545,000 for the same period in 1998.
In the third quarter of 1999, Registrant incurred a loss of
$101,000 at Lincoln Court including $40,000 of depreciation and amortization
expense, compared to a loss of $60,000 in the third quarter of 1998, including
$38,000 of depreciation and amortization expense. The increase in the loss
from the third quarter of 1998 to the same period in 1999 is the result
of an increase in interest expense and maintenance expense partially
offset by an increase in rental income. The increase in interest expense
is due to an increase in the interest rate on the second mortgage due
to a refinancing in the fourth quarter of 1998. The increase in the
maintenance expense and the increase in rental income is due to the increase
in the turnover of units as a result of the increase in occupancy
(85% to 87%).
For the first nine months of 1999, Registrant incurred a loss of
$351,000 at Lincoln Court including $119,000 of depreciation and amortization
expense, compared to a loss of $196,000 for the same period in 1998,
including $119,000 of depreciation and amortization expense. The increase
in the loss from the first nine months of 1998 to the same period in 1999
is the result of a decrease in rental income due to an decrease in the average
occupancy (88% to 86%) combined with an increase in interest, commissions,
and maintenance expense. Interest expense increased due to an increase in
the interest rate on the second mortgage as a result of a refinancing in
the fourth quarter of 1998. Maintenance and commissions expense increased
due to an increase in the turnover of apartments units.
In the third quarter of 1999, Registrant incurred a loss of
$33,000 at the Green Street Apartments, including $15,000 of depreciation
expense, compared to a loss of $33,000 including $15,000 of depreciation
expense in the third quarter of 1998. Although there was no overall change
from the third quarter of 1998 to the same period in 1999, there was a
decrease in rental income due to a decrease in the average occupancy
(94% to 87%) partially offset by a decrease in management fee expense as
a result of the decrease in rental income.
For the first nine months of 1999, Registrant incurred a loss of
$109,000 at the Green Street Apartments including $44,000 of depreciation
expense, compared to a loss of $105,000 for the same period in 1998,
including $44,000 of depreciation expense. The increase in the loss from
the first nine months of 1998 to the same period in 1999 is the result of a
decrease in rental income due to a decrease in the average occupancy
(95% to 91%).
In the third quarter of 1999, Registrant incurred a loss of
$91,000 at the Loewy Building, including $72,000 of depreciation and
amortization expense, compared to a loss of $80,000 including $72,000 of
depreciation and amortization expense in the third quarter of 1998. The
increased loss is the result of a decrease in rental income due to a
decrease in average occupancy (100% to 85%) partially offset by a
decrease in maintenance and management fee expense as a result of the
decrease in the occupancy.
For the first nine months of 1999, Registrant incurred a loss
of $223,000 at the Loewy Building including $206,000 of depreciation and
amortization expense, compared to a loss of $244,000 for the same period
in 1998, including $216,000 of depreciation and amortization expense.
The decreased loss from the first nine months of 1998 to the same
period in 1999 is the result of an increase in rental income and a decrease
in maintenance expense partially offset by an increase in interest
expense. The increase in rental income is due to an increase in average
rental rates while rental occupancy decreased (100% to 88%). The decrease in
maintenance expense is due to repairs made to the air conditioning
systems in the second quarter of 1998, which did not recur in 1999.
The increase in interest expense is due to an adjustment made in the
calculation of the interest accruing on the mortgage loan in 1997.
Summary of Minority Interests
In the third quarter of 1999, the Registrant incurred a loss
of $5,601 at Magazine Place compared to a loss of $7,974 in the third
quarter of in 1998 and for the first nine months of 1999, incurred a loss of
$9,410 compared to a loss of $20,285 for the same period in 1998. The
Registrant accounts for this investment on the equity method. The
decrease in the loss from the third quarter and the first nine months of
1998 to the same periods in 1999 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
September 30, 199 December 31, 1998
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 12,006,576 12,006,574
Furniture and fixtures 98,729 98,729
---------- ----------
12,570,759 12,570,757
Less - Accumulated depreciation (5,807,869) (5,442,634)
---------- ----------
6,762,890 7,128,123
Cash and cash equivalents 33,344 31,981
Restricted cash 171,493 168,344
Accounts and notes receivable 52,398 25,307
Investment in affiliate 171,796 181,206
Other assets (net of
amortization of $225,223 and
$209,937 at September 30, 1999
and December 31, 1999,
respectively) 223,518 223,627
---------- ----------
Total $ 7,415,439 $ 7,758,588
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,966,079 $ 8,970,613
Accounts payable:
Trade 1,127,047 996,758
Taxes 19,540 0
Related parties 770,733 736,458
Interest payable 1,583,678 1,290,951
Other liabilities 40,387 45,773
Tenant security deposits 56,419 34,553
---------- ----------
Total liabilities 12,563,883 12,075,106
---------- ----------
Partners' equity (5,148,444) (4,316,518)
---------- ----------
Total $ 7,415,439 $ 7,758,588
========== ==========
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, 1999 and 1998
(Unaudited)
Three months Nine months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Revenues:
Rental income $323,231 $309,762 $ 929,886 $ 942,415
Interest income 881 524 2,970 1,581
------- ------- --------- ---------
Total revenues 324,112 310,286 932,856 943,996
------- ------- --------- ---------
Costs and expenses:
Rental operations 173,062 129,962 481,595 457,209
General and 31,500 31,500 94,500 94,500
administrative
Interest 262,922 240,585 798,755 688,263
Depreciation and
amortization 126,841 128,608 380,522 389,620
------- ------- --------- ---------
Total costs and 594,325 530,655 1,755,372 1,629,592
expenses ------- ------- --------- ---------
Loss before equity in (270,213) (220,369) (822,516) (685,596)
affiliate
Equity in loss of
affiliate (5,601) (7,974) (9,410) (20,285)
------- ------- --------- ---------
Net loss ($275,814) ($228,343) ($ 831,926) ($ 705,881)
======= ======= ========= =========
Net loss per limited
partnership unit:
Loss before equity in ($ 19.13) ($ 15.60) ($ 58.25) ($ 48.55)
affiliate
Equity in loss of
affiliate (.40) (.57) (.66) (1.43)
------- ------- --------- ---------
($ 19.53) ($ 16.17) ($ 58.91) ($ 49.98)
======= ======= ========= =========
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, 1999 and 1998
(Unaudited)
Nine months ended
September 30,
1999 1998
Cash flows from operating activities:
Net loss ($831,922) ($705,881)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 380,522 389,620
Equity in loss of affiliate 9,410 20,285
Changes in assets and liabilities:
Increase in restricted cash (3,149) (28,960)
Increase in accounts receivable (27,091) (8,741)
Increase in other assets (15,184) (295,936)
Increase in accounts payable - trade 130,289 97,459
Increase in accounts payable - tax 19,540 0
Increase in accounts payable - 34,275 34,277
related parties
Increase in interest payable 292,727 186,575
Increase in accrued liabilities 5,834 37,263
Increase (decrease) in tenant 10,646 (4,941)
security deposits ------- -------
Net cash provided by (used by) 5,897 (278,980)
operating activities ------- -------
Cash flows from investing activities:
Capital expenditures 0 (16,250)
------- -------
Net cash used in investing activities 0 (16,250)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 0 360,459
Principal payments (4,534) (12,771)
------- -------
Net cash (used in) provided by (4,534) 347,688
financing activities ------- -------
Increase in cash and cash equivalents 1,363 52,458
Cash and cash equivalents at 31,981 308
beginning of period ------- -------
Cash and cash equivalents at end of $ 33,344 $ 52,766
period ======= =======
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, 1998.
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, 1999.
<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 20, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,344
<SECURITIES> 0
<RECEIVABLES> 52,398
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,570,759
<DEPRECIATION> 5,807,869
<TOTAL-ASSETS> 7,415,439
<CURRENT-LIABILITIES> 1,127,047
<BONDS> 8,966,079
0
0
<COMMON> 0
<OTHER-SE> (5,148,444)
<TOTAL-LIABILITY-AND-EQUITY> 7,415,439
<SALES> 0
<TOTAL-REVENUES> 929,886
<CGS> 0
<TOTAL-COSTS> 481,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 798,755
<INCOME-PRETAX> (831,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (831,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (831,926)
<EPS-BASIC> 0
<EPS-DILUTED> (58.91)
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