UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: 13,981.5 Units
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Units held by non-affiliates of the
Registrant: Not Applicable*
* Securities not quoted in any trading market to Registrant's
knowledge.
<PAGE>
PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors III ("Registrant") is a
limited partnership formed in 1986 under Pennsylvania Law. As of
December 31, 1998, Registrant had outstanding 13,981.5 units of
limited partnership interest (the "Units").
Registrant is presently in its operating stage. It
originally owned five properties or interests therein. One property
has been lost through foreclosure. See Item 2. Properties, for a
description thereof. It currently owns four properties or interests
therein. For a discussion of the operations of the Registrant, See
Part II, Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
c. Narrative Description of Business
Registrant is in the business of operating,
holding, selling, exchanging and otherwise dealing in and with real
properties containing improvements which are "Certified Historic
Structures," as such term is defined in the Internal Revenue Code (the
"Code"), for use as apartments, offices, hotels and commercial spaces,
or any combination thereof, or low income housing eligible for the tax
credit provided by Section 42 of the Code, and such other uses as the
Registrant's general partner may deem appropriate.
Since the Registrant's inception, all the
properties acquired either by the Registrant, or the subsidiary
partnerships in which it has an interest, have been rehabilitated and
certified as historic structures and have received the related
investment tax credit. All four properties are held for rental
operations. At this time it is anticipated that all the properties
will continue to be held for this purpose. At such time as real
property values begin to increase, the Registrant will re-evaluate its
investment strategy regarding the properties.
As of December 31, 1998, Registrant owned four
properties (or interests therein), located in Pennsylvania (two),
Louisiana (one), and North Carolina (one). Three properties are
operating as apartment buildings and one property is operating as a
commercial/office building. In total, the four properties contain 133
apartment units and 62,091 square feet ("sf") of commercial/retail
space. As of December 31, 1998, 119 of the apartment units were under
lease at monthly rental rates ranging from $460 to $1,565. In
addition, 60,671 sf of the commercial space was under lease at annual
rates ranging from $6.00 per sf to $16.44 per sf. Rental of the
apartments and commercial space is not expected to be seasonal. For
further discussion of the properties, see Item 2. Properties.
The Registrant is affected by and subject to the
general competitive conditions of the residential and commercial real
estate industries. As a result of the overbuilding that occurred in
the 1980's, the competition for both residential and commercial
tenants in the local markets where the Registrant's properties are
located is generally strong. As a result, the Registrant is forced to
keep its rent levels competitively low in order to maintain moderate
to high occupancy levels. Two of the residential properties are
located in Philadelphia, PA and the other is located in the Warehouse
District of New Orleans, LA. The commercial/office building is
located in Winston-Salem, NC. One of the Philadelphia properties is
located very close to the "city line", ie. the boundary between
Philadelphia and a neighboring suburb. Many potential residents would
prefer to live on the non-city side, to avoid paying the city wage
tax. The Registrant attempts to keep its rents at a level that is low
enough to offset the difference. In all the locations, the
competition for tenants remains stiff and several similar buildings
exist. The apartment and commercial market remains stable and new
construction remains virtually nonexistent although the availability
of favorable home financing has placed pressure on the rental tenant
base.
Registrant has no employees. Registrant's
activities are overseen by Brandywine Construction & Management, Inc.,
("BCMI"), a real estate management firm.
d. Financial Information About Foreign and Domestic
Operations and Export Sales.
See Item 8. Financial Statements and Supplementary
Data.
Item 2. Properties
As of the date hereof, Registrant owned four
properties, or interests therein. A summary description of each
property held at December 31, 1998 is given below.
a. Lincoln Court - consists of 58 apartment units in
three buildings located at 5351 Overbrook Avenue in Philadelphia,
Pennsylvania. In March 1987, the Registrant acquired the buildings
and is the 100% equity owner of this property. Registrant acquired
and rehabilitated the Property for $3,417,640 ($64 per sf) (such
amount is exclusive of $158,985 of capitalized fees incurred, which
were funded by Registrant's equity contributions), including mortgage
financing of $1,730,000 and a note payable of $10,000 (total balance
due of $10,000 at December 31, 1998). The note payable bears interest
at 10% payable interest only on a quarterly basis; the principal was
due in 1994. In 1988, a $95,000 second mortgage loan was obtained.
In 1991, an $100,000 third mortgage loan was obtained which was due in
1994. Due to decreased cash flow, the Registrant stopped making
scheduled debt service payments to the holder of the first, second and
third mortgages. Notice of default was received from the lender on
November 29, 1993. The Registrant pursued settlement discussions with
the lender; however, in December 1994 the mortgage notes were sold.
The Registrant entered into an agreement with the new holder of the
mortgages whereby the maturities of the notes were extended to 1999
and monthly payments of interest are to be made to the new note holder
in an amount equal to net operating income. In June 1996, the
Registrant refinanced $1,268,000 of the first mortgage. In November
1998, the Registrant restructured the mortgage notes. The first
mortgage was refinanced with a $1,540,000 mortgage ($1,540,000
principal balance at December 31, 1998) which bears interest at 6.83%,
is payable in monthly installments of principal and interest of
$10,070 and is due in November 2008. The three mortgage notes were
consolidated and a new note (principal balance of $1,935,993 at
December 31, 1998 including accrued but unpaid interest) was
structured which extends the maturity date to December 2, 2008, bears
interest at 15% and monthly payments of interest are to be made in an
amount equal to net operating income.
The property is managed by BCMI. As of December 31,
1998, 51 residential units were under lease (88%) at monthly rents
ranging from $460 to $1,565. All leases are renewable, one-year
leases. The occupancy for the previous four years was 87% for 1997
84% for 1996, 81% for 1995 and 58% for 1994 The monthly rental range
has been approximately the same since 1994. For tax purposes, this
property has a federal tax basis of $3,739,913 and is depreciated
using the straight-line method with a useful life of 27.5 years. The
annual real estate taxes are $30,226 which is based on assessed value
of $365,760 taxed at a rate of $8.264 per $100. No one tenant
occupies ten percent or more of the building. It is the opinion of
the management of the Registrant that the property is adequately
covered by insurance.
b. The Green Street Apartments - consists of 18
apartment units in three adjoining buildings located at 1826-1828-1830
Green Street in Philadelphia, Pennsylvania. In July 1987, Registrant
acquired its interest in this property by purchasing a 99% general
partnership interest in 18th & Green Associates General Partnership
("18th & Green"), a Pennsylvania general partnership, for $800,000.
18th & Green contracted to acquire and rehabilitate the Property for
$1,600,000 ($100 per sf). Additionally, $100,000 of cash/marketing
reserves were provided. The total cost of the project was funded by
Registrant's equity contribution and mortgage financing of $900,000
(principal balance of $1,314,181 at December 31, 1998) which bears
interest at 12%. During 1990, Registrant defaulted on its mortgage
loan and the lender obtained a confession of judgment pursuant to the
loan documents. Registrant petitioned the court to open the judgment
and negotiated a settlement with the lender. The settlement required
the Registrant to make payments toward delinquent interest in December
1990 and April 1991. Registrant did not make the April 1991 payment;
however, no notice of default was received from the lender. In 1992,
the Resolution Trust Corporation ("RTC") took over control of the
lender. The Registrant received notice in 1993 that the RTC had sold
the loan. The purchaser of the note contacted the Registrant who
attempted to negotiate a loan modification. In September 1994, the
mortgage note was sold again. The Registrant entered into an
agreement with the new holder of the mortgage whereby the note
maturity was extended to 1999 with monthly payments of interest to be
made in an amount equal to net operating income, with a minimum of
$5,750 per month. The property is managed by BCMI.
As of December 31, 1998, 17 apartments were under lease
(94%) at monthly rents ranging from $495 to $725. All leases are
renewable, one-year leases. The occupancy for the previous four years
was 94% for 1997, 92% for 1996, 92% for 1995 and 99% for 1994. The
monthly rental range has been approximately the same since 1994. For
tax purposes, this property has a federal tax basis of $1,480,897 and
is depreciated using the straight-line method with a useful life of
27.5 years. The annual real estate taxes are $15,470 which is based
on assessed value of $187,200 taxed at a rate of $8.264 per $100. No
one tenant occupies ten percent or more of the building. It is the
opinion of the management of the Registrant that the property is
adequately covered by insurance.
c. The Loewy Building - consists of two adjoining
buildings located at 505 West Fourth Street in Winston-Salem, North
Carolina. The buildings consist of 62,091 sf of commercial space. In
November 1986, the Registrant acquired its interest in this Property
by purchasing a 99% interest in Triad Properties General Partnership
("Triad"), a Pennsylvania general partnership, for a cash contribution
of $2,250,000. Triad contracted to acquire and rehabilitate the
Property for $5,690,000 ($88 per sf). Additionally, $560,000 of
working capital/marketing reserves were provided. The total cost of
the project was funded by Registrant's equity contribution, mortgage
financing of $3,560,000 (principal balance of $3,811,828 at December
31, 1998) and a $500,000 note payable to the Developer (Cwood
Properties, Inc., Thomas L. Kummer and Gail R. Citron; all of whom are
general partners of Triad). The first mortgage bears interest at
11.5% and is due in January 2012. The note was sold in September
1997. The Registrant entered into an agreement with the new holder of
the note whereby monthly payments of interest are to be made to the
new note holder in an amount equal to net operating income with a
minimum monthly payment of $27,500. Triad obtained $200,000 of
additional financing in 1987 to fund cost overruns resulting from
delays and changes in rehabilitation and construction plans,
(principal balance due of $200,000 at December 31, 1998) and interest
at prime with a minimum of 6% and a maximum of 8% adjusting annually
on January 2, (the rate was 8% at December 31, 1998 and 1997) and the
Registrant advanced an additional $1,098,000. The property is managed
by BCMI. As of December 31, 1998, 60,671 sf were rented (98%) at
annual rates ranging from $6.00 to $16.44 per sf.
The occupancy for the previous four years has been 88%
for 1997, 88% for 1996, 95% for 1995 and 93% for 1994. The range for
annual rents has been $6.00 to $16.21 per sf for 1997, $6.00 to $14.16
per sf for 1996, $6.00 to $12.93 per sf for 1995, $6.95 to $14.08 per
sf for 1994. There are two tenants who each occupy ten percent or
more of the rentable square footage. They operate principally as a
bank and a law firm.
The following is a table showing commercial lease
expirations at Loewy Building for the next five years.
Total annual % of gross
Number of Total sf of rental covered annual rental
Years leases expiring expiring leases by expiring leases from property
1999 6 42,303 $486,196 66%
2000 4 10,673 137,652 19%
2001 0 0 0 0%
2002 1 7,695 87,723 12%
2003 0 0 0 0%
There are 6 commercial leases which expire in 1999.
The first lease is for 200 sf and, although no negotiations have taken
place, the Registrant expects the tenant to renew at the current
rental rate. The second lease is for 3,061 sf and the Registrant
expects the tenant to exercise the renewal option in its lease. The
third lease is for 2,302 sf and the Registrant expects the tenant to
renew at current market rates. The fourth and fifth leases (33,121
sf) are with the same tenant and expired December 31, 1998. The
Registrant is in the process of negotiating a lease extension and
expects the tenant to renew at current market rates. The sixth lease
is for 5,039 sf and the Registrant expects the tenant to renew at
current market rates. For tax purposes of depreciation, this property
has federal tax basis of $6,155,916 and is depreciated using the
straight-line method with a useful life of 27.5 years. The annual
real estate taxes are $19,776 which is based on an assessed value of
$1,680,900 taxed at a rate of $1.1765 per $100. It is of the opinion
of the management of the Registrant that the property is adequately
covered by insurance.
d. Magazine Place - is a four story building
consisting of 57 apartment units located at 730 Magazine Street in New
Orleans, Louisiana. In October 1986, the Registrant was admitted with
a 60% general partnership interest in Magazine Place Limited
Partnership ("MPP"), a Louisiana partnership, for a cash contribution
of $600,000. Registrant believes that its acquisition of a majority
general partnership interest in MPP, though technically non-compliant
with the provisions of Registrant's partnership agreement disapproving
of investments in limited partnerships, will have no adverse impact on
Registrant's limited partners. Registrant subsequently made an
additional equity contribution of $142,393 to fund certain fees
incurred by MPP. MPP acquired and rehabilitated the property for
$4,091,393 ($51 per sf), including mortgage financing of $3,050,000
(principal balance of $2,808,515 at December 31, 1998) and cash
contributions by limited partners of $344,000. The mortgage note
bears interest at 10%, is payable in monthly installments of principal
and interest of $26,766, and is due in 1999. The excess proceeds from
equity investments and mortgage financing over the acquisition and
rehabilitation costs were utilized to provide working capital
reserves. In 1987, Registrant made an equity contribution of $7,000
(MPP's other partners contributed cash in the amount of $28,000 in
1987) to fund operating deficits incurred during the lease-up period.
According to the Amended and Restated Partnership Agreement, the
Registrant's interest in MPP will be reduced from 60% to 40% as of the
First Conversion Date. The First Conversion Date is the date on which
the Registrant will have received a return of its initial capital
contribution. For purposes of determining the First Conversion Date,
the Registrant will be deemed to have received a return of its initial
capital contribution when the sum of the following amounts equals
$600,000: (i) cash distributions from MPP; (ii) investment tax credit
allocable to the Registrant; and (iii) 50% of the aggregate of MPP's
net losses and deductions allocable to the Registrant. As of December
31, 1994, the Registrant had received a return of its initial capital
and the Registrant's interest in the MPP was reduced to 40%. Since
that date, the Registrant has accounted for its investment in MPP on
the equity basis.
The property is managed by an independent property
management firm. As of December 31, 1998, 51 residential units were
under lease (89%) at monthly rents ranging from $620 to $1,300. All
leases are renewable, one-year leases. The occupancy for the previous
four years was 91% for 1997, 96% for 1996, 91% for 1995 and 89% for
1994. The monthly rental range has been approximately the same since
1994. For tax purposes, this property has a federal tax basis of
$2,500,448 and is depreciated using the straight-line method with a
useful life of 27.5 years. The annual real estate taxes are $14,077
which is based on assessed value of $79,000 taxed at a rate of $17.819
per $100. No one tenant occupies ten percent or more of the building.
It is the opinion of the management of the Registrant that the
property is adequately covered by insurance.
Item 3. 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 fiscal years covered
by this report to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
a. There is no established public trading market for
the Units. Registrant does not anticipate any such market will
develop. Trading in the Units occurs solely through private
transactions. The Registrant is not aware of the prices at which
trades occur. Registrant's records indicate that 61 Units of record
were sold or exchanged in 1998.
b. As of December 31, 1998, there were 1,581 record
holders of Units.
c. Registrant did not declare any cash dividends in
1998 or 1997.
Item 6. Selected Financial Data
The following selected financial data are for the five
years ended December 31, 1998. The data should be read in conjunction
with the consolidated financial statements included elsewhere herein.
This data is not covered by the independent auditors' report.
1998 1997 1996 1995 1994
Rental income $1,251,911 $1,251,764 $1,254,573 $1,658,031 $2,016,023
Interest income 2,113 441 1,229 840 1,005
Net loss (1,297,537) (1,017,497) (1,017,308) (533,933) (1,756,104)
Net loss per Unit (91.88) (72.05) (72.03 (37.80) (124.35)
Total assets (net of7,758,588 8,196,299 8,711,971 8,887,472 18,771,092
depreciation and
amortization)
Debt obligations 8,970,613 8,418,142 8,414,901 7,776,693 15,216,724
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
(1) Liquidity
At December 31, 1998, Registrant had cash of
approximately $31,981. 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
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 December 31, 1998, Registrant had restricted
cash of $168,344 consisting primarily of funds held as security
deposits, replacement reserves and escrows for taxes. As a
consequence of these 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
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.
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 18th and Green has agreed to fund capital
expenditures at terms similar to the first mortgage.
Results of Operations
During 1998, Registrant incurred a net loss of
$1,297,537 ($91.88 per limited partnership unit), compared to a net
loss of $1,017,497 ($72.05 per limited partnership unit) in 1997 and a
net loss of $1,017,308 ($72.03 per limited partnership unit) in 1996.
Rental income decreased from $1,254,573 in 1996 to
$1,251,764 in 1997 and increased to $1,251,911 in 1998. The increase
from 1997 to 1998 is due to an increase at the Green Street Apartmants
due to an increase in the average occupancy and an increase in the
average rental rates partially offset by a decrease at Lincoln Court
due to a decrease in the average occupancy. The decrease from 1996 to
1997 is the result of a decrease in rental income at Loewy Building
due to a decrease in the average rental rates partially offset by an
increase in rental income at Lincoln Court due to an increase in the
average rental rates.
Rental operations expenses decreased from $661,589
in 1996 to $614,679 in 1997 and increased to $627,719 in 1998. The
increase from 1997 to 1998 is due to an increase in maintenance
expense at the Loewy Building due to extraordinary repairs made to the
heating system. The decrease from 1996 to 1997 is mainly the result
of a decrease in maintenance expense at Lincoln Court due to
improvements made at the property in 1996 and a decrease in management
fees expense at Loewy Building due to the decrease in rental income.
Interest expense decreased from $983,145 in 1996
to $968,397 in 1997 and increased to $1,162,024 in 1998. The increase
from 1997 to 1998 is due to an increase in interest expense at Lincoln
Court due to a prepayment penalty incurred for the refinancing of the
mortgage notes partially offset by a decrease at the Loewy Building.
Depreciation and amortization increased from
$478,758 in 1996 to $531,057 in 1997 and to $581,834 in 1998. The
increase from 1997 to 1998 is due to an increase at Lincoln Court due
to the amortization of loan costs from the refinanced loan. The
increase from 1996 to 1997 is the result of an increase at Lincoln
Court due to the depreciation of the capital improvements made at the
property in 1996 and an increase in amortization expense at the Loewy
Building due to the amortization of leasing fees incurred in 1996.
In 1998, a loss of $1,046,000 was incurred at the
Registrant's four properties or interests therein compared to a loss
of $792,000 in 1997 and a loss of $812,000 in 1996. A discussion of
property operations/activities follows:
In 1997, Registrant sustained a loss of $562,000
at Lincoln Court including $220,000 of depreciation and amortization
expense compared to a loss of $288,000 including $167,000 of
depreciation expense in 1997 and a loss of $366,000 including $144,000
of depreciation expense in 1996. The increase in the loss from 1997
to 1998 is mainly the result of the refinancing of the mortgages
combined with a decrease in rental income. The refinancing resulted
in an increase in interest expense due to a prepayment penalty
incurred in connection with the refinancing and an increase in
amortization expense due to the amortization of the loan costs from
the refinanced loan. Rental income decreased due to a decrease in the
average occupancy (87% to 85%). The decrease in the loss from 1996 to
1997 is the result of an increase in rental income due to an increase
in the average rental rates and a decrease in maintenance expense
partially offset by an increase in depreciation expense. Maintenance
expense decreased due to improvements made at the property in 1996 and
depreciation expense increased due to the depreciation of the capital
improvements made at the property in 1996.
On June 30, 1992 DHP, Inc. assigned to D, LTD a
note receivable from the Registrant in the amount of $432,103 which
bears interest at 10% with the entire principal and accrued interest
due on June 30, 1997. Interest accrued was $45,703 during both 1997
and 1998. Payments on the note are to be made from available cash
flow and before any distribution can be made to the Registrant's
limited partners. The balance of the note (including accrued but
unpaid interest) at December 31, 1998 was $670,308.
In 1998, the Green Street Apartments sustained a
loss of $141,000 including $59,000 of depreciation expense compared to
a loss of $146,000 in 1997 including $59,000 of depreciation expense
and a loss of $146,000 in 1996 including $59,000 of depreciation
expense. The decrease in the loss from 1997 to 1998 is due to an
increase in rental increase due to an increase in the average
occupancy (94% to 95%) and an increase in the average rental rates.
On June 30, 1992, DHP, Inc. assigned to D, LTD a
note receivable from 18th and Green to the Registrant, that had been
assigned to it, in the amount of $63,493 which bears interest at 10%
with the entire principal and accrued interest due on June 30, 1997.
On December 6, 1993 D, LTD obtained a judgment in the amount of
$78,171 on this note in Common Pleas Court for Philadelphia County.
The judgment accrues interest at 15%. Interest accrued was $5,055
during 1997 and 1998. Payments on the judgment are to be made from
available cash flow from 18th and Green. The balance of the note at
December 31, 1998 was $55,179.
In 1998, the Loewy Building sustained a loss of
$343,000 including $288,000 of depreciation and amortization expense
compared to a loss of $358,000 including $290,000 of depreciation
expense in 1997 and a loss of $300,000 including $260,000 of
depreciation expense in 1996. The decrease in the loss from 1997 to
1998 is due to a decrease in interest expense partially offset by an
increase in maintenance expense due to extraordinary repairs made to
the heating system.. The increase in the loss from 1996 to 1997 is
due to a decrease in rental income combined with an increase in
interest and amortization expense partially offset by a decrease in
management fees expense. The decrease in rental income is due to a
decrease in the average rental rates and interest expense increased
due to default interest accrued on the loan as a result of non-payment
of the minimum monthly payment. Amortization expense increased due to
the amortization of leasing fees incurred in 1996 while management
fees decreased due to the decrease in rental income.
Summary of Minority Interests
In 1998, the Registrant incurred a net loss of
$54,000 at Magazine Place compared to a loss of $30,000 in 1997
compared to $11,000 in 1996. This investment is accounted for by the
equity method. The decrease from 1997 to 1998 is due to a decrease in
rental income due to a decrease in the average occupancy (91% to 89%)
and a decrease in the average rental rates and an increase in legal
fees due to legal fees incurred in connection with a proposed
refinancing of the first mortgage debt. The increase from 1996 to
1997 is due mainly to an increase in real estate tax expense due to
the expiration of the tax abatement period.
Item7A. Quantitative and Qualitative Disclosures about Market
Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Registrant is not required to furnish the
supplementary financial information referred to in Item 302 of
Regulations S-K.
<PAGE>
Independent Auditor's Report
To the Partners of
Diversified Historic Investors III
We have audited the accompanying consolidated balance sheet of
Diversified Historic Investors III (a Pennsylvania Limited
Partnership) and subsidiaries as of December 31, 1998 and 1997 and the
related statements of operations, changes in partners' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996. These
consolidated statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above presents fairly, in all material respects, the financial
position of Diversified Historic Investors III and subsidiaries as of
December 31, 1998 and 1997, and the results of operations and cash
flows for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule of Real
Estate and Accumulated Depreciation on page 25 is presented for the
purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a
whole.
Gross, Kreger & Passio, L.L.C.
Philadelphia, Pennsylvania
February 10, 1999
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated financial statements: Page
Consolidated Balance Sheets at December 31, 1998 and 1997 13
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 14
Consolidated Statements of Changes in Partners' Equity for
the Years Ended December 31, 1998, 1997, and 1996 15
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 16
Notes to consolidated financial statements 17-23
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 25
Notes to Schedule XI 26
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
Assets
1998 1997
Rental properties at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 12,006,574 11,985,674
Furniture and fixtures 98,729 95,447
---------- ----------
12,570,757 12,546,575
Less - accumulated depreciation (5,442,634) (4,956,401)
---------- ----------
7,128,123 7,590,174
Cash and cash equivalents 31,981 308
Restricted cash 168,344 126,684
Accounts receivable 25,307 16,666
Investment in affiliate 181,206 235,190
Other assets (net of accumulated
amortization of $209,937 and $114,337) 223,627 227,277
---------- ----------
Total $ 7,758,588 $ 8,196,299
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,970,613 $ 8,418,142
Accounts payable:
Trade 996,758 874,012
Related parties 736,458 624,606
Interest payable 1,290,951 1,239,576
Tenant security deposits 45,773 51,029
Other liabilities 34,553 7,915
---------- ----------
Total liabilities 12,075,106 11,215,280
---------- ----------
Partners' equity (4,316,518) (3,018,981)
---------- ----------
Total $ 7,758,588 $ 8,196,299
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Revenues:
Rental income $ 1,251,911 $ 1,251,764 $ 1,254,573
Interest income 2,113 441 1,229
--------- --------- ---------
Total revenues 1,254,024 1,252,205 1,255,802
--------- --------- ---------
Costs and expenses:
Rental operations 627,719 614,679 661,589
General and administrative 126,000 126,000 138,200
Interest 1,162,024 968,397 983,145
Depreciation and amortization 581,834 531,057 478,758
--------- --------- ---------
Total costs and expenses 2,497,577 2,240,133 2,261,692
--------- --------- ---------
Loss before equity in affiliate (1,243,553) (987,928) (1,005,890)
Equity in net loss of affiliate (53,984) (29,569) (11,418)
--------- --------- ---------
Net loss ($1,297,537) ($1,017,497) ($1,017,308)
========= ========= =========
Net loss per limited partnership unit:
Loss before equity in affiliate ($ 88.06) ($ 69.96) ($ 71.22)
Equity in net loss of affiliate (3.82) (2.09) (.81)
--------- --------- ---------
($ 91.88) ($ 72.05) ($ 72.03)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
Dover
Historic Limited
Advisors II(1) Partners (2) Total
Percentage participation in profit or loss 1% 99% 100%
Balance at December 31, 1995 ($122,881) ($ 861,295) ($ 984,176)
Net loss (10,173) (1,007,135) (1,017,308)
------- --------- ---------
Balance at December 31, 1996 (133,054) (1,868,430) (2,001,484)
Net loss (10,175) (1,007,322) (1,017,497)
------- --------- ---------
Balance at December 31, 1997 (143,229) (2,875,752) (3,018,981)
Net loss (12,975) (1,284,562) (1,297,537)
------- --------- ---------
Balance at December 31, 1998 ($156,204) ($4,160,314) ($4,316,518)
======= ========= =========
(1) General Partner.
(2) 13,981.5 limited partnership units outstanding at December 31,
1998, 1997, and 1996.
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net loss ($1,297,537) ($1,017,497) ($1,017,308)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 581,834 531,057 478,748
Equity in loss of affiliate 53,984 29,569 11,418
Changes in assets and liabilities:
(Increase) decrease in restricted cash (41,660) 77,112 (95,508)
Increase in accounts receivable (8,641) (8,608) (673)
Increase in other assets (91,951) (108,765) (96,087)
Increase in accounts payable - trade 122,746 121,755 172,594
Increase in accounts payable - related
parties 111,852 45,703 45,703
Decrease in accounts payable - taxes 0 0 (155,907)
Increase in interest payable 51,375 350,712 132,998
Decrease in tenant security deposits (5,256) (1,477) (2,413)
Increase (decrease) in other liabilities 26,638 (18,109) 10,625
Net cash used in provided by operating-------- ------- -------
activities: (496,616) 1,452 (515,810)
--------- ------- -------
Cash flows from investing activities:
Capital expenditures (24,182) (25,247) (112,221)
--------- ------- -------
Net cash used in investing activities: (24,182) (25,247) (112,221)
--------- ------- -------
Cash flows from financing activities:
Proceeds from debt obligations 1,540,000 0 638,208
Payments of principal under debt
obligations (987,529) 3,241 0
--------- ------- -------
Net cash provided by financing
activities: 552,471 3,241 638,208
--------- ------- -------
Increase (decrease) in cash and cash
equivalents 31,673 (20,554) 10,177
Cash and cash equivalents at beginning of year 308 20,862 10,685
--------- ------- -------
Cash and cash equivalents at end of year $ 31,981 $ 308 $ 20,862
========= ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $1,221,356 $617,685 $558,411
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Diversified Historic Investors III (the "Partnership") was formed in
February 1986 under the laws of the Commonwealth of Pennsylvania. The
Partnership was formed to acquire, rehabilitate, and manage real
properties which were certified historic structures as defined in the
Internal Revenue Code of 1986 (the "Code"), or which were eligible for
designation as such, utilizing mortgage financing and the net proceeds
from the sale of limited partnership units. Any rehabilitations
undertaken by the Partnership were done with a view to obtaining
certification of expenditures therefore as "qualified rehabilitations
expenditures" as defined in the Code.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows:
1. Principles of Consolidation
The accompanying financial statements of the Partnership include the
accounts of three subsidiary partnerships (the "Ventures"), in which
the Partnership has a controlling interest with appropriate
elimination of inter-partnership transactions and balances. In
addition, the Partnership owns a minority interest of 40% in one
partnership which it accounts for on the equity method. These
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of the
Partnership's General Partner, are necessary for a fair statement of
the results for those years.
2. Depreciation
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Buildings and improvements are
depreciated over 25 years and furniture and fixtures over five years.
3. Costs of Issuance
Costs incurred in connection with the offering and sale of limited
partnership units were charged against partners' equity as incurred.
4. Cash and Cash Equivalents
The Partnership considers all highly liquid instruments purchased with
a maturity of less than three months to be cash equivalents.
5. Interest Payable
Interest payable includes all accrued and unpaid interest on the debt
obligations, as well as interest in arrears.
6. Net Loss Per Limited Partnership Unit
The net loss per limited partnership unit is based on the weighted
average number of limited partnership units outstanding during the
period (13,891.5 in 1998, 1997, and 1996).
7. Income Taxes
Federal and state income taxes are payable by the individual partners;
accordingly, no provision or liability for income taxes is reflected
in the annual financial statements.
8. Restricted Cash
Restricted cash includes amounts held for tenant security deposits,
real estate tax reserves and other cash restricted as to use.
9. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-
line basis. Rental payments received in advance are deferred until
earned.
10. Rental Properties
Rental properties are stated at cost. A provision for impairment of
value is recorded when a decline in value of property is determined to
be other than temporary as a result of one or more of the following:
(1) a property is offered for sale at a price below its current
carrying value, (2) a property has significant balloon payments due
within the foreseeable future for which the Partnership does not have
the resources to meet, and anticipates it will be unable to obtain
replacement financing or debt modification sufficient to allow it to
continue to hold the property over a reasonable period of time, (3) a
property has been, and is expected to continue, generating significant
operating deficits and the Partnership is unable or unwilling to
sustain such deficit results of operations, and has been unable to, or
anticipates it will be unable to, obtain debt modification, financing
or refinancing sufficient to allow it to continue to hold the property
for a reasonable period of time or, (4) a property's value has
declined based on management's expectations with respect to projected
future operational cash flows and prevailing economic conditions. An
impairment loss is indicated when the undiscounted sum of estimated
future cash flows from an asset, including estimated sales proceeds,
and assuming a reasonable period of ownership up to 5 years, is less
than the carrying amount of the asset. The impairment loss is
measured as the difference between the estimated fair value and the
carrying amount of the asset. In the absence of the above
circumstances, properties and improvements are stated at cost. An
analysis is done on an annual basis at December 31 of each year.
11. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
NOTE C - GOING CONCERN
In recent years the Partnership 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 Partnership has
feasible loan modifications in place at Lincoln Court, Green Street
and 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
Partnership to pay its general and administrative expenses.
It is the Partnership'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 Partnership
believes it is appropriate to continue presenting the financial
statements on a going concern basis.
NOTE D - PARTNERSHIP AGREEMENT
The significant terms of the Agreement of Limited Partnership (the
"Agreement"), as they relate to the financial statements, follow:
All distributable cash from operations (as defined in the Agreement of
Limited Partnership) will be distributed 90% to the limited partners
and 10% to the General Partner.
All distributable cash from sales or dispositions (as defined) will be
distributed to the limited partners up to their adjusted invested
capital (as defined) plus an amount equal to the sum of the greater of
a 6% cumulative, noncompounded annual return on the average after-
credit invested capital, less amounts previously distributed (as
defined); thereafter, after receipt by the General Partner or its
affiliates of any accrued but unpaid real estate brokerage
commissions, the balance will be distributed 15% to the General
Partner and 85% to the limited partners.
Net income or loss from operations of the Partnership is allocated 1%
to the General Partner and 99% to the limited partners.
NOTE E - ACQUISITIONS
The Partnership acquired five controlling or limited partnership
interests in Ventures during the period October 1986 to July 1987, as
discussed below.
In October 1986, the Partnership was admitted, with a 60% general
partnership interest, to a Louisiana limited partnership which owns a
building located in Louisiana consisting of 57 residential units, for
a cash capital contribution of $600,000. Pursuant to the Amended and
Restated Partnership Agreement, the Partnership's interest was reduced
to 40% effective January 1, 1995.
In November 1986, the Partnership was admitted, with a 99% general
partnership interest, to a Pennsylvania general partnership which owns
a building located in North Carolina consisting of 64,000 square feet
of commercial space, for a cash contribution of $2,450,000.
In December 1986, the Partnership was admitted, with a 99% general
partnership interest, to a Maryland general partnership which owned a
property located in Maryland consisting of 55 residential units and
14,800 square feet of commercial space, for a cash contribution of
$3,508,700. The lender on the property foreclosed in January 1996.
In March 1987, the Partnership purchased a property consisting of
three buildings (58 residential units) located in Pennsylvania for a
cash capital contribution of $500,000.
In July 1987, the Partnership was admitted, with a 99% general
partnership interest, to a Pennsylvania general partnership which owns
a building located in Pennsylvania consisting of 18 residential units,
for a cash capital contribution of $800,000.
NOTE F- DEBT OBLIGATIONS
Debt obligations are as follows:
December 31,
1998 1997
------ ------
Mortgage loan, interest accrues at 11 1/2%, interest $3,811,828 $3,788,541
only payable monthly to the extent of net operating
income; principal due January 2012; collateralized by
the related rental property
Note, interest payable monthly at prime, with a minimum 200,000 200,000
6% and a maximum of 8%, adjusting annually on January 2
(8% at December 31, 1998 and 1997); due in 1997;
collateralized by the related rental property (A)
Allowed unsecured claims in the amount of $268,042; 158,612 165,246
non-interest bearing
Note payable, interest only at 10%, payable quarterly; 10,000 10,000
principal due in 1994 (A)
Mortgage loan, interest at 6.83%, payable in monthly 1,540,000 0
principal and interest installments of $10,071;
principal due in November 2008; collateralized by the
related rental property (B)
Mortgage loan, interest at 9.125%, payable in monthly 0 1,256,565
principal and interest installments of $10,317;
principal due in September 2003; collateralized by the
related rental property (B)
Mortgage loan, interest accrues at 15%, interest only 1,935,993 0
payable monthly to the extent of net operating income;
principal due December 2008; collateralized by the
related rental property (C)
Mortgage loan, interest at prime plus 1 1/4% with a 0 1,476,212
minimum of 9.5% and a maximum of 14 1/2%, (9.75% at
December 31, 1997), respectively, principal due in
1999; collateralized by the related rental property (C)
Mortgage loan, interest at 11% per annum; principal 0 107,120
due in 1999; collateralized by the related rental
property (C)
Note, interest at prime plus 1 1/4% (9.75% at December 0 100,278
31, 1997); principal due in 1999; collateralized by
the related rental property (C)
Mortgage loan, interest at 12%; payable interest only
to the extent of net operating income with a minimum
monthly payment of $5,750; principal due in 1999;
collateralized by the related rental property 1,314,180 1,314,180
--------- ---------
$8,970,613 $8,418,142
========= =========
(A) Although this obligation has matured, the lenders have not made
any demand for payment.
(B) In November 1998, the first mortgage loan at Lincoln Court was
refinanced.
(C) In November 1998, the three loans were combined and restated.
Approximate maturities of the mortgage loan obligations at December
31, 1998, for each of the succeeding five years are as follows:
1999 $1,701,158
2000 18,705
2001 20,042
2002 21,475
2003 23,010
Thereafter 7,186,223
---------
$8,970,613
=========
NOTE G - COMMITMENTS AND CONTINGENCIES
Pursuant to certain agreements, the developers of the properties and
limited partners in the Ventures are entitled to share in the
following:
a. 15% to 50% of net cash flow from operations above certain
specified amounts (three properties)
b. 30% of the net proceeds, as defined, from the sale or
refinancing of one property. The Partnership is entitled to a
priority distribution of such proceeds prior to any payment to the
developer.
According to the Amended and Restated Partnership Agreement, the
Partnership's interest in Magazine Place Limited Partnership ("MPP")
was reduced from 60% to 40% as of the First Conversion Date. The
First Conversion Date was the date on which the Partnership received a
return of its initial capital contribution as referred to in the
Partnership Agreement. For purposes of determining the First
Conversion Date, the Partnership was deemed to have received a return
of its initial capital contribution when the sum of the following
amounts equalled $600,000: (i) cash distributions to the Partnership
from MPP; (ii) investment tax credit allocable to the Partnership; and
(iii) 50% of the aggregate of MPP's net losses and deductions
allocable to the Partnership. As of December 31, 1994, the
Partnership had received a return of its initial capital and the
Partnership's interest in the MPP was reduced to 40%. Since that
date, the Partnership has accounted for its investment in MPP on the
equity basis.
NOTE H - TRANSACTIONS WITH RELATED PARTIES
Included in debt obligations for 1998, 1997 and 1996 is $140,000 owed
to an affiliate of the General Partner by one of the Partnership's
Ventures for additional amounts advanced for working capital needs.
On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable from
the Partnership in the amount of $432,103 which bears interest at 10%
with the entire principal and accrued interest which was due on June
30, 1997. Interest accrued was $45,703 during both 1997 and 1998.
Payments on the judgment are to be made from available cash flow and
before any distribution can be made to the Partnership's limited
partners. The balance of the judgment at December 31, 1998 was
$670,308.
On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable, from
18th and Green to the Partnership, that had been assigned to it, in
the amount of $63,493 which bears interest at 10% with the entire
principal and accrued interest which was due on June 30, 1997. On
December 6, 1993 D, LTD confessed judgment in the amount of $78,171
against 18th and Green in Common Pleas Court for Philadelphia County.
The judgment accrues interest at 15%. Interest accrued was $5,055
during both 1997 and 1998. Payments on the judgment are to be made
from available cash flow from 18th and Green. The balance of the
judgment at December 31, 1998 was $55,179.
In Juen 1998, the General Partner advanced the Partnership $66,150 to
pay certain outstanding liabilities of the Partnership. The advance
is non-interest bearing and will be paid out of available cash flow.
NOTE I - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of
operations in different time periods for financial reporting ("book")
purposes and for income tax ("tax") purposes. Reconciliations of net
loss and partners' equity follow:
For the Years Ended December 31,
1998 1997 1996
------ ------ ------
Net loss - book ($1,297,537) ($1,017,497) ($1,017,308)
Excess of tax over book depreciation 138,784 108,515 89,414
Other timing differences 0 (207) 21,739
Minority interest (84,494) (5,094) (21,859)
--------- --------- ---------
Net loss - tax ($1,243,247) ($ 914,283) ($ 928,014)
========= ========= =========
Partners' equity - book ($4,316,518) ($3,018,981) ($2,001,484)
1987 distribution of interest on escrow (39,576) (39,576) (39,576)
deposits to limited partners
Costs of issuance 1,697,342 1,697,342 1,697,342
Cumulative tax over (under) book loss 405,733 351,443 248,230
--------- --------- ---------
Partners' equity - tax ($2,253,019) ($1,009,772) ($ 95,488)
========= ========= =========
<PAGE>
SUPPLEMENTAL INFORMATION
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
Cost
Capitalized
Initial Cost to Partnership (b) Subsequent to
Acquisition
Buildings
and Date of Date
Description (a) Encumbrances Land Improvements Imprmnts Constr. Acquired
(f) (a)
64,000 square feet
of commmercial space 1986-
in Winston-Salem, NC $4,170,440 $308,624 $6,290,125 $476,976 1988 11/14/86
58 apartment
units in 1986-
Philadelphia, PA 3,485,993 86,187 3,490,437 - 1987 9/9/86
18 apartment units
in Philadelphia,
PA 1,314,180 70,643 1,559,017 - 1987
--------- ------- ---------- -------
TOTAL $8,970,613 $465,454 $11,339,579 $476,976
========= ======= ========== =======
Gross Amount at which Carried at
December 31, 1998
Buildings
and Accumulated
Description Land Improvements Total (c)(d) Depreciation
(d) (e)
64,000 square feet
of commercial
space in
Winston-Salem, NC $308,624 $6,799,879 $7,108,503 $3,006,569
58 apartment
units in
Philadelphia, PA 86,187 3,739,324 3,825,511 1,720,015
18 apartment units
in Philadelphia,
PA 70,643 1,566,100 1,636,743 716,050
------- ---------- ---------- ---------
TOTAL $465,454 $12,105,303 $12,570,757 $5,442,634
======= ========== ========== =========
<PAGE>
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
NOTES TO SCHEDULE XI
December 31, 1998
(A) All properties are certified historic structures as defined in
the Internal Revenue Code. The "date of construction" refers to
the period in which such properties were rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to
turnkey development agreements entered into when the properties
were acquired.
(C) The aggregate cost of real estate owned at December 31, 1998,
for Federal income tax purposes is approximately $13,877,174.
However, the depreciable basis of buildings and improvements is
reduced for Federal income tax purposes by the investment tax
credit and the historic rehabilitation credit obtained.
(D) Reconciliation of real estate:
1998 1997 1996
------ ------ ------
Balance at beginning of year: $12,546,575 $12,521,328 $12,409,107
Additions during the year:
Improvements 24,182 25,247 112,221
---------- ---------- ----------
Balance at end of year $12,570,757 $12,546,575 $12,521,328
========== ========== ==========
Reconciliation of accumulated depreciation:
1998 1997 1996
------ ------ ------
Balance at beginning of year $4,956,401 $4,461,992 $3,991,148
Depreciation expense for the year 486,233 494,409 470,844
--------- --------- ---------
Balance at end of year $5,442,634 $4,956,401 $4,461,992
========= ========= =========
(E) See Note B to the financial statements for depreciation method
and lives.
(F) See Note E to the financial statements for further information.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
a. Identification of Directors - Registrant has no
directors.
b. Identification of Executive Officers
The General Partner of the Registrant is Dover
Historic Advisors II (DoHA-II), a Pennsylvania general partnership.
The partners of DoHA-II are as follows:
Name Age Position Term of Office Period Served
SWDHA, Inc. -- Partner in DoHA-II No fixed term Since May 1997
EPK, Inc. -- Partner in DoHA-II No fixed term Since May 1997
For further description of DHP, Inc., see paragraph e.
of this Item. There is no arrangement or understanding between either
person named above and any other person pursuant to which any person
was or is to be selected as an officer.
c. Identification of Certain Significant Employees.
Registrant has no employees. Its administrative and operational
functions are carried out by a property management and partnership
administration firm engaged by the Registrant.
d. Family Relationships. There is no family
relationship between or among the executive officers and/or any person
nominated or chosen by Registrant to become an executive officer.
e. Business Experience. DoHA-II is a general
partnership formed in February 1986. The partners of DoHA-II are EPK,
Inc. and SWDHA, Inc. The General Partner is responsible for the
management and control of the Registrant's affairs and has general
responsibility and authority in conducting its operations.
On May 13, 1997, SWDHA, Inc. replaced Gerald Katzoff
and EPK, Inc. replaced DHP, Inc. as partners of DoHA-II. Spencer
Wertheimer, the President of SWDHA, Inc., is an attorney with
extensive experience in real estate activities ventures.
EPK, Inc. is a Delaware corporation formed for the
purpose of managing properties or interests therein. EPK, Inc. is a
wholly-owned subsidiary of D, LTD, an entity formed in 1985 to act as
the holding company for various corporations engaged in the
development and management of historically certified properties and
conventional real estate as well as a provider of financial (non-
banking) services. EPK, Inc. is an affiliate of DoHA-II.
The officers and directors of EPK, Inc. are described
below.
Spencer Wertheimer was appointed on May 13, 1997 as
President, Treasurer and Sole Director of EPK, Inc. Mr. Wertheimer is
an attorney with extensive experience in real estate activities
ventures.
Donna M. Zanghi (age 41) was appointed on May 13, 1997
as Vice President and Secretary of EPK, Inc. Ms. Zanghi previously
served as Secretary and Treasurer of DHP, Inc. since June 14, 1993
and as a Director and Secretary/Treasurer of D, LTD. She was
associated with DHP, Inc. and its affiliates since 1984 except for the
period from December 1986 to June 1989 and the period from November 1,
1992 to June 14, 1993.
Michele F. Rudoi (age 33) was appointed on May 13, 1997
as Assistant Secretary of EPK, Inc. Ms. Rudoi previously served as
Assistant Secretary and Director of both D, LTD and DHP, Inc. since
January 27, 1993.
Item 11. Executive Compensation
a. Cash Compensation - During 1998, Registrant has
paid no cash compensation to DoHA-II, any partner therein or any
person named in paragraph c. of Item 10. Certain fees have been paid
to DHP, Inc. by Registrant.
b. Compensation Pursuant to Plans - Registrant has no
plan pursuant to which compensation was paid or distributed during
1998, or is proposed to be paid or distributed in the future, to DoHA-
II, any partner therein, or any person named in paragraph c. of Item
10 of this report.
c. Other Compensation - No compensation not referred
to in paragraph a. or paragraph b. of this Item was paid or
distributed during 1998 to DoHA-II, any partner therein, or any person
named in paragraph c. of Item 10.
d. Compensation of Directors - Registrant has no
directors.
e. Termination of Employment and Change of Control
Arrangement - Registrant has no compensatory plan or arrangement, with
respect to any individual, which results or will result from the
resignation or retirement of any individual, or any termination of
such individual's employment with Registrant or from a change in
control of Registrant or a change in such individual's
responsibilities following such a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners -
No person is known to Registrant to be the beneficial owner of more
than five percent of the issued and outstanding Units.
b. Security Ownership of Management - No equity
security of Registrant are beneficially owned by any person named in
paragraph c. of Item 10.
c. Changes in Control - Registrant does not know of
any arrangement, the operation of which may at a subsequent date
result in a change in control of Registrant.
Item 13. Certain Relationships and Related Transactions
Pursuant to Registrant's Amended and Restated Agreement
of Limited Partnership, DoHA-II is entitled to 10% of Registrant's
distributable cash from operations in each year. There was no such
share allocable to DoHA-II for fiscal years 1996 through 1998.
a. Certain Business Relationships - Registrant has no
directors.
b. Indebtedness of Management - No executive officer
or significant employee of Registrant, Registrant's general partner
(or any employee thereof), or any affiliate of any such person, is or
has at any time been indebted to Registrant.
<PAGE>
PART IV
Item 14. (A) Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
1. Financial Statements:
a. Consolidated Balance Sheets at December 31, 1998
and 1997.
b. Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.
c. Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1998, 1997 and 1996.
d. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.
e. Notes to consolidated financial statements.
2. Financial statement schedules:
a. Schedule XI - Real Estate and Accumulated Depreciation.
b. Notes to Schedule XI.
3. Exhibits:
(a) Exhibit Number Document
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 of this
Form 10-K.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the
quarter ended December 31, 1998.
(c) Exhibits:
See Item 14(A)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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: April 26, 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
By: /s/ Michele F. Rudoi
-----------------------
MICHELE F. RUDOI,
Assistant Secretary
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of Registrant and in the capacities and on the dates
indicated.
Signature Capacity Date
DOVER HISTORIC ADVISORS II General Partner
By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer
----------------------
SPENCER WERTHEIMER
President and Treasurer
By: /s/ Michele F. Rudoi
----------------------
MICHELE F. RUDOI,
Assistant Secretary
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,981
<SECURITIES> 0
<RECEIVABLES> 25,307
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,570,757
<DEPRECIATION> 5,442,634
<TOTAL-ASSETS> 7,758,588
<CURRENT-LIABILITIES> 996,758
<BONDS> 8,970,613
0
0
<COMMON> 0
<OTHER-SE> (4,316,518)
<TOTAL-LIABILITY-AND-EQUITY> 7,758,588
<SALES> 0
<TOTAL-REVENUES> 1,251,911
<CGS> 0
<TOTAL-COSTS> 627,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,162,024
<INCOME-PRETAX> (1,297,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,297,537)
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<EXTRAORDINARY> 0
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<NET-INCOME> (1,297,537)
<EPS-PRIMARY> (91.88)
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