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, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-15843
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DIVERSIFIED HISTORIC INVESTORS III
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391927
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street, Philadelphia, PA 19102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 557-9800
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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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30,2001 (unaudited)
and December 31, 2000
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2001 and 2000 (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, 2001, Registrant had cash of $12,391.
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, 2001, Registrant had restricted cash
of $123,318 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 and the Green Street Apartments. However, in all
three cases, the mortgages are 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 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
holders for Lincoln Court, Loewy Building and Green Street
Apartments have agreed to fund capital expenditures at terms
similar to the first mortgage.
(3) Results of Operations
During the second quarter of 2001, Registrant
incurred a net loss of $310,762 ($22.00 per limited partnership
unit) compared to a net loss of $340,159 ($24.09 per limited
partnership unit) for the same period in 2000. For the first six
months of 2001, the Registrant incurred a net loss of $610,345
($43.21 per limited partnership unit) compared to a net loss of
$698,192 ($49.43 per limited partnership unit) for the same
period in 2000.
Rental income increased $828 from $227,052 in the
second quarter of 2000 to $227,880 in the same period of 2001 and
increased $14,541 from $467,054 in the first six months of 2000
to $481,595 in the same period of 2001. The increase in rental
income for the second quarter occurred at Lincoln Court due to an
increase in average occupancy (84% to 95%), partially offset by a
decrease in rental income at the Loewy Building due to a decrease
in average occupancy (41% to 36%). The increase in rental income
for the first six months occurred at Lincoln Court due to an
increase in average occupancy (88% to 94%), partially offset by a
decrease in rental income at the Loewy Building due to a decrease
in occupancy (41% to 33%).
Expense for rental operations increased by $6,407
from $149,952 in the second quarter of 2000 to $156,359 in the
same period in 2001 and increased $27,057 from $308,180 for the
first six months of 2000 to $335,237 in the same period in
2001.The increase in rental operations expense for the second
quarter and the first six months of 2001 is due to an increase in
maintenance expense at the Loewy Building. The increase in
maintenance expense is due to an increase in commercial unit
preparation, due to the increase in turnover of commercial units.
Interest expense increased by $6,548 from $260,960
in the second quarter of 2000 to $267,508 in the same period in
2001 and decreased $1,718 from $534,936 for the first six months
of 2000 to $533,218 in the same period in 2001. The increase in
interest expense from the second quarter of 2000 to the same
period in 2001 occurred at Lincoln Court and Green Street due to
increases in principal balance upon which the interest is
calculated. The decrease from the first six months of 2000 to the
same period in 2001 occurred at the Loewy Building and Lincoln
Court and is due to a decrease in the interest payments made
during the period.
Losses incurred during the quarter at the
Registrant's three properties were approximately $301,000
compared to a loss of approximately $296,000 for the same period
in 2000. For the first six months of 2001, the Registrant's
properties incurred a loss of $610,000 compared to approximately
$599,000 for the same period in 2000.
In the second quarter of 2001, Registrant incurred a
loss of $75,000 at Lincoln Court including $40,000 of
depreciation and amortization expense, compared to a loss of
$82,000 in the second quarter of 2000, including $40,000 of
depreciation and amortization expense. For the first six months
of 2001, Registrant incurred a loss of $167,000 at Lincoln Court
including $80,000 of depreciation and amortization expense,
compared to a loss of $188,000 for the same period in 2000,
including $80,000 of depreciation and amortization expense. The
decrease in the loss for both the second quarter and the first
six months is due to an increase in rental income, partially
offset by an increase in interest expense. The increase in rental
income is due to an increase in average occupancy for the second
quarter (85% to 95%) and for the first six months (88% to 94%).
Interest expense increased due to an increase in principal
balance upon which the interest is calculated.
In the second quarter of 2001, Registrant incurred a
loss of $33,000 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 2000.
For the first six months of 2001, Registrant incurred a loss of
$79,000 including $29,000 of depreciation expense, compared to a
loss of $72,000 for the same period in 2000 including $29,000 of
depreciation expense. The increase in the loss from the second
quarter and the first six months of 2000 to the same periods in
2001 is due to an increase in commission expense. The increase in
commission expense is due to the increase in the turnover of
apartment units during 2001.
In the second quarter of 2001, Registrant incurred a
loss of $194,000 at the Loewy Building, including $62,000 of
depreciation and amortization expense, compared to a loss of
$185,000 including $69,000 of depreciation and amortization
expense in the second quarter of 2000. For the first six months
of 2001, Registrant incurred a loss of $353,000 at the Loewy
Building including $126,000 of depreciation and amortization
expense, compared to a loss of $340,000 for the same period in
2000, including $139,000 of depreciation and amortization
expense. The increase in the loss for both the second quarter and
the first six months of 2000 to the same period in 2001 is due to
a decrease in rental income and an increase in maintenance
expense, partially offset by a decrease in depreciation expense.
Rental income decreased due to a decrease in average occupancy
(41% to 33%) for the quarter and (41% to 36%) for the first six
months. The increase in maintenance expense is due to an increase
in the preparation of commercial space, due to the increase in
the turnover of units. The decrease in depreciation expense is
due to the impairment loss taken in the fourth quarter of 2000,
which decreased the depreciable basis of the building.
Summary of Minority Interests
In the second quarter of 2001, the Registrant
recognized income of $5,830 at Magazine Place compared to an
income of $2,202 in the second quarter of 2000 and for the first
six months of 2001, the Registrant recognized an income of
$19,831 compared to a loss of $5,420 for the same period in 2000.
The Registrant accounts for this investment on the equity method.
The increase in the income from the second quarter and the first
six months of 2000 to the same periods in 2001 is due to an
increase in rental income due to an increase in average occupancy
(94% to 100%) and a decrease in rental operating expense.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
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Assets
June 30, 2001 December 31, 2000
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(Unaudited)
Rental properties, at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,170,423 11,170,423
Furniture and fixtures 157,259 157,259
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11,793,136 11,793,136
Less - accumulated depreicaiton (6,657,017) (6,424,759)
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5,136,119 5,368,377
Cash and cash equivalents 12,391 28,338
Restricted cash 123,318 181,556
Accounts and notes receivable 100,703 90,688
Investment in affiliate 183,077 163,246
Other assets (net of amortization
of $242,806 and $230,421 at
June 30, 2001 and December 31,
2000, respectively) 181,781 191,837
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Total $ 5,737,389 $ 6,024,042
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Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,996,958 $ 8,972,599
Accounts payable:
Trade 1,154,655 1,180,280
Related parties 850,711 827,860
Interest payable 2,639,818 2,345,061
Other liabilities 29,523 34,729
Tenant security deposits 70,441 57,884
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Total liabilities 13,742,106 13,418,413
Partners' deficit (8,004,717) (7,394,371)
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Total $ 5,737,389 $ 6,024,042
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The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
Three months Six months
Ended June 30, Ended June 30,
2001 2000 2001 2000
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Revenues:
Rental income $227,880 $227,052 $ 481,595 $ 467,054
Interest income 501 1,007 1,328 2,305
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Total revenues 228,381 228,059 482,923 469,359
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Costs and expenses:
Rental operations 156,359 149,952 335,237 308,180
General and
administrative 0 31,500 0 63,000
Interest 267,508 260,960 533,218 534,936
Depreciation and
amortization 121,106 128,008 244,644 256,015
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Total costs and
expenses 544,973 570,420 1,113,099 1,162,131
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Loss before equity in
affiliate (316,592) (342,361) (630,176) (692,772)
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Equity in income (loss)
of affiliate 5,830 2,202 19,831 (5,420)
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Net loss ($310,762)($340,159)($ 610,345)($ 698,192)
======== ======== ========== ==========
Net loss per limited
partnership unit:
Loss before equity in
affiliate ($ 22.41)($ 24.24)($ 44.62)($ 49.05)
Equity in income
(loss) of affiliate .41 .15 1.41 (.38)
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Net loss ($ 22.00)($ 24.09)($ 43.21)($ 49.43)
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The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
Six months ended
June 30,
2001 2000
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Cash flows from operating activities:
Net loss ($610,345) ($698,191)
Adjustments to reconcile net loss to
net cash provided by
operating activities:
Depreciation and amortization 244,643 256,015
Equity in loss of affiliate (19,831) 5,420
Changes in assets and liabilities:
Decrease in restricted cash 58,238 6,024
(Increase) in accounts receivable (10,016) (3,159)
(Increase) decrease in other assets (2,329) 4,559
(Decrease) increase in accounts
payable - trade (25,625) 93,945
Increase in accounts payable -
related parties 22,851 22,850
Increase in interest payable 294,757 296,640
Increase (decrease) in tenant
security deposits 12,557 (7,648)
(Decrease) increase in accrued
liabilities (5,205) 3,609
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Net cash provided by operating
activities (40,305) (19,936)
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Cash flows from financing activities:
Principal payments 24,358 (4,573)
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Net cash (used in) provided by
financing activities 24,358 (4,573)
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(Decrease) increase in cash and cash
equivalents (15,947) (24,509)
Cash and cash equivalents at
beginning of period 28,338 54,241
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Cash and cash equivalents at end of
period $ 12,391 $ 29,732
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The accompanying notes are an integral part of these financial statements.
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, 2000.
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 Number Document
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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, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 4, 2002 DIVERSIFIED HISTORIC INVESTORS III
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By: Dover Historic Advisors II,
General Partner
By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer
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SPENCER WERTHEIMER
President and Treasurer