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, 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
- ----------------------------------------------------------------------
(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 - June 30, 1999 (unaudited)
and December 31, 1998
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 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 June 30, 1999, Registrant had cash of
$33,138. 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, 1999, Registrant had restricted
cash of $154,876 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
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 Apartments 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 1999 at the three properties.
(3) Results of Operations
During the second quarter of 1999, Registrant
incurred a net loss of $273,989 ($19.54 per limited partnership unit)
compared to a net loss of $226,241 ($16.02 per limited partnership
unit) for the same period in 1998. For the first six months of 1999,
the Registrant incurred a net loss of $567,315 ($40.19 per limited
partnership unit) compared to a net loss of $477,538 ($33.81 per
limited partnership unit) for the same period in 1998.
Rental income decreased $26,624 from $327,740 in
the second quarter of 1998 to $301,116 in the same period in 1999.
The decrease from the second quarter of 1998 to the same period in
1999 is the result of decreases in the average occupancy at the Loewy
Building (100% to 90%), Green Street Apartments (98% to 91%), and
Lincoln Court (87% to 82%).
Rental income decreased $25,998 from $632,653 for
the first six months of 1998 to $606,655 in the same period in 1999.
The decrease from the first six months of 1998 to the same period in
1999 is the result of decreases in the average occupancy at Lincoln
Court (89% to 85%) and Green Street Apartments (96% to 93%) partially
offset by an increase in the average rental rates at the Loewy
Building.
Expense for rental operations decreased by $16,008
from $150,805 in the second quarter of 1998 to $134,797 in the same
period in 1999 and decreased by $18,713 from $327,247 for the first
six months of 1998 to $308,534 in the same period in 1999. The
decrease in rental operations for both the second quarter and the
first six months in 1999 are due to a decrease in maintenance expense
at the Loewy Building partially offset by an increase in maintenance
expense at Lincoln Court. At the Loewy Building, maintenance expense
decreased due to repairs made to the air conditioning system in the
second quarter of 1998, while no repairs were made in 1999. The
increase in maintenance expense at Lincoln Court is due to the
recarpeting and painting of several units.
Interest expense increased by $35,837 from
$231,823 in the second quarter of 1998 to $267,660 in the same period
in 1999 and increased $88,155 from $447,678 for the first six months
of 1998 to $535,833 in the same period in 1999. The increase for both
the second quarter and the first six months is due to an adjustment
made to properly calculate interest on the mortgage loan at the Loewy
Building in 1998 combined with an increase at Lincoln Court due to an
increase in the interest rate.
Depreciation and amortization expense decreased
$3,066 from $129,906 in the second quarter of 1998 to $126,840 in the
same period in 1999 and decreased $7,331 from $261,012 for the first
six months of 1998 to $253,681 in the same period in 1999. The
decrease for both the second quarter and the first six months is due
to the amortization of leasing commissions incurred during 1998 at the
Loewy Building that was not repeated in 1999.
Losses incurred during the quarter at the
Registrant's properties amounted to $214,000, compared to a loss of
approximately $171,000 for the same period in 1998. For the first six
months of 1999 the Registrant's properties recognized a loss of
$459,000 compared to approximately $365,000 for the same period in
1998.
In the second quarter of 1999, Registrant incurred
a loss of $113,000 at Lincoln Court including $40,000 of depreciation
and amortization expense, compared to a loss of $65,000 in the second
quarter of 1998, including $40,000 of depreciation and amortization
expense. For the first six months of 1999, Registrant incurred a loss
of $250,000 at Lincoln Court including $80,000 of depreciation and
amortization expense, compared to a loss of $135,000 for the same
period in 1998, including $81,000 of depreciation and amortization
expense. The increase in loss for both the second quarter and the
first six months is due to a decrease in rental income combined with
an increase in maintenance and interest expense. The decrease in
rental income is due to a decrease in average occupancy for the second
quarter (87% to 82%) and for the first six months (89% to 85%). The
increase in maintenance expense is due to the recarpeting and painting
of several apartment units. The increase in interest expense is due
to an increase in interest rate on the second mortgage as a result of
a refinancing in the fourth quarter of 1998.
In the second quarter of 1999, Registrant incurred
a loss of $31,000 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 second quarter of 1998 and for the
first six months of 1999, Registrant incurred a loss of $77,000
including $29,000 of depreciation expense, compared to a loss of
$73,000 for the same period in 1998, including 29,000 of depreciation
expense. The increase in the loss from the second quarter and the
first six months of 1998 to the same periods in 1999 is the result of
a decrease in rental income due to a decrease in the average occupancy
in the second quarter (98% to 91%) and for the first six months (96%
to 93%).
In the second quarter of 1999, Registrant incurred
a loss of $70,000 at the Loewy Building, including $69,000 of
depreciation and amortization expense, compared to a loss of $77,000
including $71,000 of depreciation and amortization expense in the
second quarter of 1998. The decrease in loss from the second quarter
of 1998 to the same period in 1999 is the result of a decrease in
maintenance and amortization expense partially offset by a decrease in
rental income and an increase in interest expense. 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.
Amortization expense decreased due to the amortization of leasing
commissions incurred during 1998 at the Loewy Building which did not
recur in 1999. The decrease in rental income is due to a decrease in
occupancy rate (100% to 90%) and the increase in interest expense is
due to an adjustment made to properly calculate interest on the
mortgage loan in 1998.
For the first six months of 1999, Registrant
incurred a loss of $132,000 at the Loewy Building including $137,000
of depreciation and amortization expense, compared to a loss of
$157,000 for the same period in 1998, including $144,000 of
depreciation and amortization expense. The decreased loss from the
first six months of 1998 to the same period in 1999 is the result of
an increase in rental income combined with a decrease in maintenance
and amortization expense partially offset by an increase in interest
expense. The increase in rental income is due to an increase in
average rental rates. 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. Amortization expense decreased due
to the amortization of leasing commissions incurred during 1998 at the
Loewy Building which did not recur in 1999. Interest expense
increased due to an adjustment made to properly calculate interest on
the mortgage loan in 1998.
Summary of Minority Interests
In the second quarter of 1998, the Registrant
incurred a loss of $15,011 at Magazine Place compared to a loss of
$10,774 in the second quarter of in 1998 and for the first six months
of 1999 the Registrant incurred a loss of $15,011 compared to a loss
of $12,311 for the same period in 1998. The Registrant accounts for
this investment on the equity method. The increase in the loss from
the second quarter and the first six months of 1998 to the same
periods in 1999 is due to a decrease in rental income due to a
decrease in the average rental rates.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
June 30, 1999 December 31, 1998
(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 12,006,574 12,006,574
Furniture and fixtures 98,729 98,729
---------- ----------
12,570,757 12,570,757
Less - Accumulated depreciation (5,686,124) (5,442,634)
---------- ----------
6,884,633 7,128,123
Cash and cash equivalents 33,188 31,981
Restricted cash 154,876 168,344
Accounts and notes receivable 41,166 25,307
Investment in affiliate 166,195 181,206
Other assets (net of amortization of
$220,128 and $209,937 at June 30, 1999
and December 31, 1998, respectively) 228,616 223,627
---------- ----------
Total $ 7,508,674 $ 7,758,588
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,963,261 $ 8,970,613
Accounts payable:
Trade 1,081,753 996,758
Related parties 759,308 736,458
Interest payable 1,487,568 1,290,951
Other liabilities 39,268 45,773
Tenant security deposits 61,349 34,553
---------- ----------
Total liabilities 12,392,507 12,075,106
---------- ----------
Partners' equity (4,883,833) (4,316,518)
---------- ----------
Total $ 7,508,674 $ 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 Six Months Ended June 30, 1999 and 1998
(Unaudited)
Three months Six months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Revenues:
Rental income $ 301,116 $ 327,740 $ 606,655 $ 632,653
Interest income 703 827 2,089 1,057
------- ------- --------- ---------
Total revenues 301,819 328,567 608,744 633,710
------- ------- --------- ---------
Costs and expenses:
Rental operations 134,797 150,805 308,534 327,247
General and
Administrative 31,500 31,500 63,000 63,000
Interest 267,660 231,823 535,833 447,678
Depreciation and
Amortization 126,840 129,906 253,681 261,012
------- ------- --------- ---------
Total costs and expenses 560,797 544,034 1,161,048 1,098,937
------- ------- --------- ---------
Loss before equity in affiliate(258,978) (215,467) (552,304) (465,227)
Equity in income of affiliate (15,011) (10,774) (15,011) (12,311)
------- ------- --------- ---------
Net loss ($ 273,989) ($ 226,241) ($ 567,315) ($ 477,538)
======= ======= ========= =========
Net loss per limited partnership
unit:
Loss before equity in affiliate($ 18.48) ($ 15.26) ($ 39.13) ($ 32.94)
Equity in income of affiliate (1.06) (.76) (1.06) (.87)
------ -------- --------- ---------
Net loss ($ 19.54) ($ 16.02) ($ 40.19) ($ 33.81)
====== ======== ========= =========
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, 1999 and 1998
(Unaudited)
Six months ended
June 30,
1999 1998
Cash flows from operating activities:
Net loss ($ 567,315) ($ 477,538)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 253,681 261,012
Equity in loss of affiliate 15,011 12,311
Changes in assets and liabilities:
Decrease in restricted cash 13,468 17,834
Increase in accounts receivable (15,859) (12,405)
(Increase) decrease in other assets (15,180) 2,383
Increase in accounts payable - trade 84,995 50,881
Increase in accounts payable - related parties 22,850 22,851
Increase in interest payable 196,617 128,095
Increase in tenant security deposits 15,576 23,467
Increase in accrued liabilities 4,715 4,506
------- -------
Net cash provided by operating activities 8,559 33,397
------- -------
Cash flows from investing activities:
Capital expenditures 0 (18,650)
------- -------
Net cash used in investing activities 0 (18,650)
------- -------
Cash flows from financing activities:
Proceeds from debt financing 0 20,786
Principal payments (7,352) (11,183)
------- -------
Net cash (used in) provided by financing activities (7,352) 9,603
------- -------
Increase in cash and cash equivalents 1,207 24,350
Cash and cash equivalents at beginning of period 31,981 308
------- -------
Cash and cash equivalents at end of period $ 33,188 $ 24,658
======= =======
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 June 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: September 2, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 33,188
<SECURITIES> 0
<RECEIVABLES> 41,166
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,570,757
<DEPRECIATION> 5,686,757
<TOTAL-ASSETS> 7,508,674
<CURRENT-LIABILITIES> 1,081,753
<BONDS> 8,963,261
0
0
<COMMON> 0
<OTHER-SE> (4,883,833)
<TOTAL-LIABILITY-AND-EQUITY> 7,508,674
<SALES> 0
<TOTAL-REVENUES> 606,655
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 308,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 535,833
<INCOME-PRETAX> (567,315)
<INCOME-TAX> 0
<INCOME-CONTINUING> (567,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (567,315)
<EPS-BASIC> 0
<EPS-DILUTED> (40.19)
</TABLE>
