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, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-15843
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DIVERSIFIED HISTORIC INVESTORS III
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391927
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
------ ------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
Assets
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
Rental properties, at cost:
Land $ 338,251 $ 465,454
Buildings and improvements 9,087,470 8,941,775
Furniture and fixtures 152,056 170,548
----------- -----------
9,577,777 9,577,777
Less - accumulated depreciaton (7,062,171) (6,891,195)
----------- -----------
2,515,606 2,686,582
Cash and cash equivalents 13,915 24,568
Restricted cash 147,740 125,703
Accounts and notes receivable 106,467 103,775
Investment in affiliate 0 181,003
Other assets (net of amortization
of $157,004 and $259,565) 173,937 227,223
----------- -----------
Total $ 2,957,665 $ 3,348,854
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,691,447 $ 8,996,269
Accounts payable:
Trade 1,095,442 1,208,816
Taxes 0 21,174
Related parties 805,344 873,567
Interest payable 2,739,460 2,994,518
Other liabilities 18,160 30,681
Tenant security deposits 53,619 62,468
----------- -----------
Total liabilities 13,403,472 14,187,493
Partners' deficit (10,445,807) (10,838,639)
----------- -----------
Total $ 2,957,665 $ 3,348,854
=========== ===========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Rental income $216,268 $222,055 $ 689,608 $ 703,650
Interest income 667 595 1,310 1,923
Gain on sale 0 0 271,576 0
-------- -------- ---------- ----------
Total revenues 216,935 222,650 962,494 705,573
-------- -------- ---------- ----------
Costs and expenses:
Rental operations 207,190 160,145 514,933 495,383
Interest 557,461 267,906 1,091,754 801,124
Bad debt 0 0 65,037 0
Depreciation and
amortization 124,772 125,969 253,329 370,612
-------- -------- ---------- ----------
Total costs and
expenses 889,423 554,020 1,925,053 1,667,119
-------- -------- ---------- ----------
Loss before equity in
affiliate and
minority interest (672,488) (331,370) (962,559) (961,546)
Minority interest 2,323 0 2,323 0
Equity in (loss)
income of
affiliate 0 (1,705) 12,532 18,126
-------- -------- ---------- ----------
Net loss ($670,165) ($333,075) ($ 947,704) ($ 943,420)
======== ======== ========== ==========
Net loss per limited
partnership unit:
Loss before equity
in affiliate ($ 47.61) ($ 23.46) ($ 68.15) ($ 68.08)
Minority interest .16 0 .16 0
Equity in (loss)
income of
affiliate $ 0 ($ .12) .89 1.28
-------- -------- ---------- ----------
Net Loss ($ 47.45) ($ 23.58) ($ 67.10) ($ 66.80)
======== ======== ========== ==========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine months ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss ($ 947,704) ($943,420)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 253,329 370,613
Gain on sale of Magazine Place (271,576) 0
Equity in loss of affiliate -
Magazine Place (12,532) (18,126)
Minority interest - Lincoln Court (2,323) 0
Changes in assets and liabilities:
(Increase) decrease in restricted cash (22,036) 43,695
Increase in accounts receivable (2,693) (13,950)
Increase in other assets (29,068) (48,508)
(Decrease) increase in accounts
payable - trade (113,374) 53,712
(Decrease) increase in accounts
payable - taxes (21,174) 21,174
(Decrease) increase in accounts
payable - related parties (68,223) 34,277
(Decrease) increase in interest payable (255,058) 482,007
Decrease in accrued liabilities (12,518) (1,890)
(Decrease) increase in tenant
security deposits (8,851) 2,774
---------- --------
Net cash used in operating activities (1,513,801) (17,642)
---------- --------
Cash flows from investing activities:
Cash proceeds - Sale of Magazine Place 465,111 0
---------- --------
Net cash provided by investing activities 465,111 0
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Cash flows from financing activities:
Proceeds from debt obligations 3,135,464 32,765
Principal payments (2,097,427) (12,435)
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Net cash provided by financing
activities 1,038,037 20,330
---------- --------
(Increase) decrease in cash and cash
equivalents (10,653) 2,688
Cash and cash equivalents at
beginning of period 24,568 28,338
---------- --------
Cash and cash equivalents at end of
period $ 13,915 $ 31,026
========== ========
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, 2001.
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.
NOTE 2 - SUBSEQUENT EVENTS
On October 1, 2002, the Green Street Apartments was foreclosed by the
mortgage holder.
On April 29, 2003, the Loewy Building was foreclosed by the mortgage
holder.
NOTE 3 - GAIN ON SALE
On June 26, 2002, Magazine Place was sold. As a result, the Registrant
recognized a gain on the sale in the amount of $271,576. The net
proceeds from the sale were used to pay accrued expenses of the
Registrant.
NOTE 4 - MINORITY INTEREST IN LINCOLN COURT
On September 26, 2002, the Lincoln Court first mortgage was refinanced
and the net proceeds were used to partially repay the second mortgage
on the property. In exchange for a 20% ownership interest in Lincoln
Court, the second mortgagee contributed the balance of the second
mortgage to capital and cancelled its loan.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Liquidity
As of September 30, 2002, Registrant had cash of $13,915.
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, 2002, Registrant had restricted cash
of $147,740 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.
At Lincoln Court, Green Street Apartments and the Loewy Building 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).
Magazine Place was sold on June 26, 2002. As a result,
the Registrant recognized a gain on sale in the amount of $271,576.
The net proceeds received from the sale were used to pay the accrued
expenses of the Registrant.
On September 26, 2002, the Lincoln Court first mortgage
was refinanced and the net proceeds were used to partially repay the
second mortgage on the property. In exchange for a 20% ownership
interest in Lincoln Court, the second mortgagee contributed the
balance of the second mortgage to capital and cancelled its loan.
On October 1, 2002, the Green Street Apartments was
foreclosed by the mortgage holder.
On April 29, 2003 the Loewy Building was foreclosed by
the mortgage holder.
(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 holder for Lincoln Court
has agreed to fund capital expenditures at terms similar to the first
mortgage.
(3) Results of Operations
During the third quarter of 2002, the Registrant incurred
a net loss of $670,165 ($47.45 per limited partnership unit) compared
to a net loss of $333,075 ($23.58 per limited partnership unit) in the
same period of 2001. For the first nine months of 2002, the
Registrant incurred a net loss of 947,704 ($67.10 per limited
partnership unit) compared to a net loss of $943,420 ($66.80 per
limited partnership unit) in the same period of 2001. Included in the
net loss for the first nine months of 2002 is a gain on the sale of
Magazine Place of $271,576.
Rental income decreased $5,786 from $222,054 during the
third quarter of 2001 to $216,268 in the same period of 2002. The
decrease is due to a decrease at Lincoln Court, partially offset by an
increase at the Green Street Apartments and the Loewy Building. The
decrease in rental income at Lincoln Court is due to a decrease in
average occupancy (93% to 79%). The increase in rental income at the
Green Street Apartments is due to an increase in average occupancy
(77% to 97%). The increase in rental income at the Loewy Building is
due to an increase in commercial rental rates.
Rental income decreased $14,042 from $703,650 during the
first nine months of 2001 to $689,608 in the same period of 2002. The
decrease is due to a decrease at Lincoln Court and the Loewy Building,
partially offset by an increase at the Green Street Apartments. The
decrease in rental income at Lincoln Court is due to a decrease in
average occupancy (94% to 89%). The decrease in rental income at the
Loewy Building is due to a decrease in average occupancy (36% to 35%).
The increase in rental income at the Green Street Apartments is due to
an increase in average occupancy (77% to 96%).
Rental operations expense increased by $47,045 from
$160,145 during the third quarter of 2001 to $207,190 in the same
period of 2002. The increase is due to an increase in maintenance
expense and leasing commission expense. The increase in maintenance
expense at Lincoln Court is due to an increase in apartment
preparation expenses. The increase in maintenance expense at the Green
Street Apartments is due to the upgrade of the fire alarm system. The
increase in leasing commission expense is due to the increase in
turnover of apartment units at Lincoln Court and the Green Street
Apartments.
Rental operations expense increased by $19,550 from
$495,383 during the first nine months of 2001 to $514,933 in the same
period in 2002. The increase in rental operations expense is due to an
increase in insurance expense at the Registrants three properties,
partially offset by a decrease in parking expense at the Loewy
Building. The increase in insurance expense is due to insurance market
conditions, and the decrease in parking expense is due to a decrease
in occupancy at the Loewy Building (36% to 35%).
Interest expense increased $289,555 from $267,906 during
the third quarter of 2001 to $557,461 in the same period of 2002, and
increased $290,621 from $801,124 during the first nine months of 2001
to $1,091,745 in the same period of 2002. The increase in interest
expense from both the third quarter and the first nine months of 2001,
compared to the same periods in 2002, is due to the repayment penalty
paid upon refinance of the first mortgage at Lincoln Court on
September 26, 2002.
Losses incurred during the quarter at the Registrant's
three properties were approximately $646,000, compared to a loss of
approximately $316,000 for the same period in 2001. For the first nine
months of 2002 the Registrant's properties incurred a loss of
approximately $1,177,000 compared to a loss of approximately $915,000
for the same period in 2001.
In the third quarter of 2002, Registrant incurred a loss
of $465,000 at Lincoln Court including $100,000 of depreciation and
amortization expense, compared to a loss of $67,000 including $40,000
of depreciation and amortization expense in the same period of 2001.
For the first nine months of 2002, Registrant incurred a loss of
$625,000 including $182,000 of depreciation and amortization expense,
compared to a loss of $233,000 including $122,000 of depreciation and
amortization in the same period of 2001. The increase in loss from
both the third quarter and the first nine months of 2001, compared to
the same periods in 2002 is due to a decrease in rental income and
increases in interest expense, insurance expense and maintenance
expense. The decrease in rental income is due to a decrease in average
occupancy during the third quarter (93% to 79%) and during the first
nine months (94% to 89%). The increase in insurance expense is due to
insurance market conditions. The increase in maintenance expense is
due to an increase in apartment preparation expenses due to an
increase in the turnover of apartment units. The increases in interest
expense and amortization expense are due to the refinance of the first
mortgage on September 26, 2002.
On September 26, 2002, the Lincoln Court first mortgage
was refinanced and the net proceeds were used to partially repay the
second mortgage on the property. In exchange for a 20% ownership
interest in Lincoln Court, the second mortgagee contributed the
balance of the second mortgage to capital and cancelled its loan.
In the third quarter of 2002, Registrant incurred a loss
of $52,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $34,000 including $15,000
of depreciation expense in the same period of 2001, and for the first
nine months of 2002 incurred a loss of $124,000 including $44,000 of
depreciation expense, compared to a loss of $113,000 including $44,000
of depreciation expense. The increase in loss from both the third
quarter and the first nine months of 2001, compared to the same period
in 2002, is due an increase in maintenance expense, insurance expense
and leasing commission expense, partially offset by an increase in
rental income. The increase in maintenance expense is due to the
upgrade of the fire alarm system. The increase in insurance expense is
due to insurance market conditions. The increase in leasing commission
expense is due to an increase in the turnover of apartment units. The
increase in rental income is due to an increase in average occupancy
for the third quarter (82% to 96%) and the first nine months (77% to
97%).
On October 1, 2002, the Green Street Apartments was
foreclosed by the mortgage holder.
In the third quarter of 2002, Registrant incurred a loss
of $129,000 at the Loewy Building, including $6,000 of amortization
expense, compared to a loss of $216,000 including $67,000 of
depreciation and amortization expense in the third quarter of 2001.
The decrease in loss from the third quarter of 2001, compared to the
same period in 2002, is due to an increase in rental income and a
decrease in parking expense, partially offset by an increase in
insurance expense. The increase in rental income is due to an increase
in rental rates per square foot. The decrease in parking expense is
due to a decrease in average occupancy (36% to 35%) for both the third
quarter and the first nine months. The increase in insurance expense
is due to insurance market conditions.
For the first nine months of 2002, Registrant incurred a
loss of $428,000 at the Loewy Building including $16,000 of
amortization expense, compared to a loss of $569,000 for the same
period in 2001, including $193,000 of depreciation and amortization
expense. The increase in loss from the first nine months of 2001,
compared to the same period in 2002, is due to a decrease in rental
income combined with a bad debt expense that was incurred during the
period, partially offset by a decrease in parking expense. The
decrease in rental income is due to a decrease in average occupancy
(36% to 35%). The bad debt expense was due to the default of a
commercial tenant.
On April 29, 2003, the Loewy Building was foreclosed by
the mortgage holder.
Summary of Minority Interests
Magazine Place was sold on June 26, 2002. As a result,
the Registrant recognized a gain on sale in the amount of $271,576.
The net proceeds received from the sale were used to pay accrued
expenses of the Registrant.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
All of our assets and liabilities are denominated in U.S.
dollars, and as a result, we do not have exposure to currency exchange
risks.
We do not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions, and as a
result, we do not have exposure to derivatives risk.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our
Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and
communicated to our management, including our managing partner's
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
Under the supervision of our managing partner's principal
executive officer and principal financial officer we have carried out
an evaluation of the effectiveness of our adopted disclosure controls
and procedures as of the end of the period covered by this report.
Based upon that evaluation, our managing partner's president and
treasurer concluded that our disclosure controls and procedures are
effective.
There have been no significant changes in our internal
controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting during our most recent fiscal quarter.
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.
31 General Partners Opinion
Certification
32 Certification Pursuant to 18
U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIVERSIFIED HISTORIC INVESTORS III
By: Dover Historic Advisors II, its
general partner
By: EPK, Inc., managing partner
Date: June 4, 2004 By: /s/ Spencer Wertheimer
------------ ----------------------
SPENCER WERTHEIMER
President (principal executive
officer, principal financial
officer)
Exhibit 31
CERTIFICATION
I, Spencer Wertheimer, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the
quarterly period ended September 30, 2002, of Diversified Historic
Investors III;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-
8238, 34-47986 and IC-26068 (June 5, 2003)] for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to me by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Omitted in accordance with SEC Release Nos. 33-8238, 34-
47986 and IC-26068 (June 5, 2003)];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. I have disclosed, based on my most recent evaluation of
internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: June 4, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: President (principal executive
officer, principal financial
officer) of the registrant's
managing partner, EPK, Inc.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diversified Historic
Investors III on Form 10-Q for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Spencer Wertheimer, President and
Treasurer of the Company's managing partner, EPK, Inc., certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the , financial condition and results of operations
of the Company.
Date: June 4, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: President (principal executive
officer, principal financial
officer) of the registrant's
managing partner, EPK, Inc.