UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 - September 30, 2001
(unaudited) and December 31, 2000
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 2001 and 2000
(unaudited)
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 September 30, 2001, Registrant had cash of
$31,026. Cash generated from operations is used primarily to fund
operating expenses and debt service. If cash flow proves to be
insufficient, the Registrant will attempt to negotiate loan
modifications with the various lenders in order to remain current
on all obligations. The Registrant is not aware of any
additional sources of liquidity.
As of September 30, 2001, Registrant had restricted
cash of $137,861 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. 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, 2000.
It is the Registrant's intention to continue to
hold the properties until they can no longer meet the debt
service requirements and the properties are foreclosed, or the
market value of the properties increases to a point where they
can be sold at a price which is sufficient to repay the
underlying indebtedness (principal plus accrued interest).
Since the lenders have agreed to forebear from
taking any foreclosure action as long as cash flow payments are
made, the Registrant believes it is appropriate to continue
presenting the financial statements on a going concern basis.
(2) Capital Resources
Due to the relatively recent rehabilitations of
the properties, any capital expenditures needed are generally
replacement items and are funded out of cash from operations or
replacement reserves, if any. The Registrant is not aware of any
factors which would cause historical capital expenditure levels
not to be indicative of capital requirements in the future and
accordingly does not believe that it will have to commit material
resources to capital investment in the foreseeable future. If
the need for capital expenditures does arise, the first mortgage
holder for Lincoln Court, Loewy Building and Green Street has
agreed to fund capital expenditures at terms similar to the first
mortgage. The mortgagee did not fund any capital expenditures
during the third quarter and the first nine months of 2000 at the
three properties.
(3) Results of Operations
During the third quarter of 2001, the Registrant
incurred a net loss of $333,075 ($23.58 per limited partnership
unit) compared to a net loss of $336,950 ($23.86 per limited
partnership unit) for the same period in 2000. For the first
nine months of 2001, the Registrant incurred a net loss of
$943,420 ($66.80 per limited partnership unit) compared to a net
loss of $1,038,308 ($73.52 per limited partnership unit) for the
same period in 2000.
Rental income decreased $14,599 from $236,654 during
the third quarter of 2000 to $222,055 during the same period in
2001. The decrease in rental income from the third quarter of
2000 to the same period in 2001 is due to a decrease at the Green
Street Apartments and the Loewy Building, partially offset by an
increase at Lincoln Court. The decrease in rental income at the
Green Street Apartments is due to a decrease in average (100% to
78%). Occupancy remained the same at the Loewy Building for both
periods at 36%, at the same time, actual rents collected
decreased from 2000 to 2001 due to the termination of tenant
penalty charges which were collected through the second quarter
of 2001. The increase at Lincoln Court is due to an increase in
average occupancy (76% to 93%).
Rental income decreased $58 from $703,708 during the
first nine months of 2000 to $703,650 during the same period in
2001. The small decrease from the first nine months of 2000 to
the same period in 2001 is due to a decrease in average occupancy
at the Green Street Apartments (98% to 83%), partially offset by
an increase in average occupancy at Lincoln Court (83% to 94%).
Expense for rental operations increased by $24,695
from $135,450 during the third quarter of 2000 to $160,145 during
the same period in 2001. The increase from the third quarter of
2000 to the same period in 2001 is due to an increase in
apartment preparation expense at both Lincoln Court, due to an
increase in average occupancy (83% to 94%), and the Loewy
Building due to an increase in the turnover of apartment units.
Expense for rental operations increased by $48,588
from $446,795 during the first nine months of 2000 to $495,383
during the same period in 2001. The increase from the first nine
months of 2000 to the same period in 2001 is due to an increase
in maintenance expense and commission expense at Lincoln Court
and an increase in maintenance expense at the Loewy Building. The
increase in maintenance expense and commission expense at Lincoln
Court is due to an increase in occupancy (83% to 94%). The
increase in maintenance expense at the Loewy Building is due to
an increase in the turnover of units.
Interest expense increased $125 from $267,781 for
the third quarter of 2000 to $267,906 for the same period in
2001. The increase in interest expense for the third quarter is
due to an increase at the Loewy Building, partially offset by a
decrease at Green Street. The increase in interest expense at the
Loewy Building is due to an increase in the principal balance
upon which the interest is calculated. The decrease at Green
Street is due to a decrease in principal payments made during the
quarter.
Interest expense decreased $1,593 from $802,717 for the
first nine months of 2000 to $801,124 in the same period in 2001.
The decrease in interest expense from the first nine months of
2000 to the same period in 2001 is due to a decrease at both
Lincoln Court and Green Street, partially offset by an increase
at the Loewy Building. The decrease at both Lincoln Court and
Green Street are due to a decrease in the principal payments made
during the period. The increase at the Loewy Building is due to
an increase in principal balance upon which the interest is
calculated.
Losses incurred during the quarter at the
Registrant's three properties were approximately $316,000,
compared to a loss of approximately $278,000 for the same period
in 2000. For the first nine months of 2001 the Registrant's
properties incurred a loss of approximately $915,000 compared to
approximately $880,000 for the same period in 2000.
In the third quarter of 2001, Registrant incurred a
loss of $67,000 at Lincoln Court including $40,000 of
depreciation and amortization expense, compared to a loss of
$87,000 in the third quarter of 2000, including $40,000 of
depreciation and amortization expense. The decrease in the loss
from the third quarter of 2000 to the same period in 2001 is due
to an increase in rental income due to an increase in average
occupancy (76% to 93%).
For the first nine months of 2001, Registrant
incurred a loss of $233,000 at Lincoln Court including $122,000
of depreciation and amortization expense, compared to a loss of
$275,000 for the same period in 2000, including $120,000 of
depreciation and amortization expense. The decrease in the loss
from the first nine months of 2000 to the same period in 2001 is
due to an increase in rental income. The increase in rental
income is due to an increase in average occupancy (83% to 94%).
In the third quarter of 2001, Registrant incurred a
loss of $34,000 at the Green Street Apartments, including $15,000
of depreciation expense, compared to a loss of $31,000 including
$15,000 of depreciation expense in the third quarter of 2000. The
increase in loss from the third quarter of 2000 to the same
period in 2001 is due to a decrease in rental income due to a
decrease in the average occupancy (100% to 78%).
For the first nine months of 2001, Registrant
incurred a loss of $113,000 at the Green Street Apartments
including $44,000 of depreciation expense, compared to a loss of
$105,000 for the same period in 2000, including $44,000 of
depreciation expense. The increase in the loss from the first
nine months of 2000 to the same period in 2001 is due to a
decrease in rental income due to a decrease in the average
occupancy (98% to 83%).
In the third quarter of 2001, Registrant incurred a
loss of $216,000 at the Loewy Building, including $67,000 of
depreciation and amortization expense, compared to a loss of
$160,000 including $69,000 of depreciation and amortization
expense in the third quarter of 2000. For the first nine months
of 2001, Registrant incurred a loss of $569,000 at the Loewy
Building including $193,000 of depreciation and amortization
expense, compared to a loss of $500,000 for the same period in
2000, including $208,000 of depreciation and amortization
expense. The increase in the loss is due to a decrease in rental
income, partially offset by a decrease in maintenance expense and
a decrease in depreciation expense. Occupancy remained the same
at the Loewy Building for both periods at 36%, at the same time,
actual rents collected decreased from 2000 to 2001 due to the
termination of tenant penalty charges which were collected
through the second quarter of 2001. The decrease in maintenance
expense is due to capital expenditures made at the property
during the period. 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 third quarter of 2001, the Registrant
recognized a net loss of $1,705 at Magazine Place compared to a
loss of $12,432 in the third quarter of 2000 and for the first
nine months of 2001, incurred a net income of $18,126 compared to
a net loss of $17,852 for the same period in 2000. The
Registrant accounts for this investment on the equity method.
The decrease in the net loss from the third quarter and the first
nine months of 2000 to the same periods in 2001 is due to an
increase in rental income and a decrease in rental operating
expenses due to a decrease in turnover of apartment units.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
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Assets
September 30, December 31,
2001 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
depreciation (6,773,146) (6,424,759)
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5,019,990 5,368,377
Cash and cash equivalents 31,026 28,338
Restricted cash 137,861 181,556
Accounts and notes receiable 104,637 90,688
Investment in affiliate 181,372 163,246
Other assets (net of
amortization of
$252,645 and $230,421 at
September 30, 2001 and
December 31, 2000,
respectively) 218,120 191,837
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Total $ 5,693,006 $ 6,024,042
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Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,992,929 $ 8,972,599
Accounts payable:
Trade 1,233,992 1,180,280
Taxes 21,175 0
Related parties 862,137 827,860
Interest payable 2,827,068 2,345,061
Other liabilities 32,839 34,729
Tenant security deposits 60,658 57,884
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Total liabilities 14,030,798 13,418,413
Partners' deficit (8,337,792) (7,394,371)
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Total $ 5,693,006 $ 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 Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
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Revenues:
Rental income $222,055 $236,654 $ 703,650 $ 703,708
Interest income 595 1,077 1,923 3,381
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Total revenues 222,650 237,731 705,573 707,089
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Costs and expenses:
Rental operations 160,145 135,450 495,383 446,795
General and
administrative 0 31,500 0 94,500
Interest 267,906 267,781 801,124 802,717
Depreciation and
amortization 125,969 127,518 370,612 383,533
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Total costs and
expenses 554,020 562,249 1,667,119 1,727,545
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Loss before equity in
affiliate (331,370) (324,518) (961,546) (1,020,456)
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Equity in (loss) income
of affiliate (1,705) (12,432) 18,126 (17,852)
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Net loss ($333,075) ($336,950)($ 943,420) ($1,038,308)
======== ======== ========== ==========
Net loss per limited
partnership unit:
Loss before equity in
affiliate ($ 23.46) ($ 22.98)($ 68.08) ($ 72.26)
Equity in loss of
affiliate (.12) (.88) 1.28 (1.26)
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($ 23.58) ($ 23.86)($ 66.80) ($ 73.52)
======== ======== ========== ==========
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)
Nine months ended
September 30,
2001 2000
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Cash flows from operating activities:
Net loss ($943,420) ($1,038,308)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 370,613 383,533
Equity in loss of affiliate (18,126) 17,852
Changes in assets and liabilities:
Increase (decrease) in restricted
cash 43,695 (9,977)
(Increase) in accounts receivable (13,950) (5,413)
(Increase) decrease in other assets (48,508) 1,782
Increase in accounts payable - trade 53,712 102,810
Increase in accounts payable - taxes 21,174 19,687
Increase in accounts payable -
related parties 34,277 192,886
Increase in interest payable 482,007 476,979
(Decrease) in accrued liabilities (1,890) (4,703)
Increase (decrease) in tenant
security deposits 2,774 (3,292)
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Net cash provided by operating
activities (17,642) 133,836
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Cash flows from financing activities:
Principal payments 20,330 (151,991)
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Net cash used in financing activities 20,330 (151,991)
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(Decrease) increase in cash and cash
equivalents 2,688 (18,155)
Cash and cash equivalents at
beginning of period 28,338 54,242
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Cash and cash equivalents at end of
period $ 31,026 $ 36,087
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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 September 30, 2001.
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: 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