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 March 31, 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
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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.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
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Assets
March 31, 2002 December 31, 2001
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(Unaudited)
Rental properties, at cost:
Land $ 338,251 $ 465,454
Buildings and improvements 9,087,470 8,941,775
Furniture and fixtures 152,055 170,548
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9,577,776 9,577,777
Less - accumulated depreciation (6,948,187) (6,891,195)
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2,629,589 2,686,582
Cash and cash equivalents 43,912 24,568
Restricted cash 100,142 125,703
Accounts and notes receivable 37,504 103,775
Investment in affiliate 192,494 181,003
Other assets (net of amortization
of $266,848 and $259,565) 200,969 227,223
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Total $3,204,610 $3,348,854
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $9,040,494 $8,996,269
Accounts payable:
Trade 1,196,906 1,208,816
Related parties 884,993 873,567
Real estate taxes 165 21,174
Interest payable 3,143,038 2,994,518
Other liabilities 40,971 62,468
Tenant security deposits 61,338 30,681
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Total liabilities 14,367,905 14,187,493
Partners' deficit (11,163,295) (10,838,639)
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Total $3,204,610 $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
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(Unaudited)
Three months ended
March 31,
2002 2001
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Revenues:
Rental income $233,957 $253,715
Interest income 290 827
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Total revenues 234,247 254,542
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Costs and expenses:
Rental operations 175,881 178,878
Bad debt expense 65,038 0
Interest 265,200 265,711
Depreciation and amortization 64,275 123,537
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Total costs and expenses 570,394 568,126
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Loss before equity in affiliate (336,147) (313,584)
Equity in income of affiliate 11,491 14,001
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Net loss ($324,656) ($299,583)
======== ========
Net loss per limited
partnership unit:
Loss before equity in affiliate ($ 23.80) ($ 22.20)
Equity in income of affiliate .81 .99
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Net loss ($ 22.99) ($ 21.21)
======== ========
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)
Three months ended
March 31,
2002 2001
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Cash flows from operating activities:
Net loss ($324,656) ($299,583)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 64,275 123,537
Equity in income of affiliate (11,491) (14,001)
Changes in assets and liabilities:
Decrease in restricted cash 25,561 72,275
Decrease (increase) in accounts
receivable 66,271 (4,832)
Decrease (increase) in other assets 18,972 (3,593)
Decrease in accounts payable - trade (11,911) (17,154)
Increase in accounts payable - related
parties 11,426 11,425
Increase in interest payable 148,520 117,976
Decrease in real estate tax payable (21,008) 0
Increase in accrued liabilities 10,290 4,195
(Decrease) increase in tenant
security deposits (1,131) 9,645
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Net cash used in operating activities (24,882) (110)
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Cash flows from financing activities:
Proceeds from debt obligations 48,964 0
Principal payments (4,738) (4,449)
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Net cash provided by (used in)
financing activities 44,226 (4,449)
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Increase (decrease) in cash and cash
equivalents 19,344 (4,559)
Cash and cash equivalents at beginning
of period 24,568 28,338
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Cash and cash equivalents at end of
period $ 43,912 $ 23,779
======== ========
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 in Form 10-K of the
Registrant, and notes thereto, 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
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
from the sale was used to pay 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.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(1) Liquidity
As of March 31, 2002, Registrant had cash of $43,912.
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 March 31, 2002, Registrant had restricted cash of
$100,142 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
inability of the properties owned by the Registrant to generate
sufficient cash flow to pay their operating expenses and debt service.
At the present time Registrant has feasible loan modifications in
place for 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 from the sale were used to pay 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 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
has agreed to fund capital expenditures at terms similar to the first
mortgage.
(3) Results of Operations
During the first quarter of 2002, Registrant incurred a
net loss of $324,656 ($22.99 per limited partnership unit) compare to
a loss of $299,583 ($21.21 per limited partnership unit) for the same
period in 2001.
Rental income decreased $19,758 from $253,715 during the
first quarter of 2001 to $233,957 during the same period in 2002. The
decrease in rental income from the first quarter of 2001, compared to
the same period in 2002, is due to a decrease in average occupancy at
the Loewy Building (60% to 45%), partially offset by an increase in
average occupancy at Lincoln Court (92% to 97%).
Rental operations expense decreased $2,997 from $178,878
during the first quarter of 2001 to $175,881 during the same period in
2002. The decrease in rental operations expense is due to a decrease
in maintenance expense and leasing commission expense, partially
offset by an increase in real estate tax expense, utility expense and
insurance expense. The decrease in maintenance expense is due to a
decrease in apartment preparation expense at Lincoln Court. The
decrease in leasing commission expense is due to a decrease in the
turnover of apartment units at Lincoln Court and the Green Street
Apartments. The increase in real estate tax expense is due to an
increase in Lincoln Court's assessed value. The increase in utilities
expense is due to an increase in electricity charges at the Green
Street Apartments. Insurance expense increased at the Green Street
Apartments and the Loewy Building due to insurance market conditions.
Interest expense decreased $511 from $265,711 in the
first quarter of 2001 to $265,200 in the same period in 2002. The
decrease in interest expense is due to a decrease in principal balance
upon which the interest expense is calculated at Lincoln Court.
Losses incurred at the Registrants three properties
during the first quarter of 2002 were approximately $321,000 compared
to losses of $298,000 during the same period in 2001.
In the first quarter of 2002, Registrant incurred a loss
of $85,000 at Lincoln Court including $41,000 of depreciation and
amortization expense, compared to a loss of $92,000, including $40,000
of depreciation and amortization expense in the first quarter of 2001.
The decrease in loss from the first quarter of 2001, compared to the
same period in 2002, is due to an increase in rental income and a
decrease in maintenance expense and leasing commission expense,
partially offset by an increase in real estate tax expense. The
increase in rental income is due to an increase in average occupancy
(92% to 97%). The decrease in maintenance expense is due to a decrease
in apartment preparation expense and the decrease in leasing
commission expense is due to the decrease in turnover of apartment
units. The increase in real estate tax expense is due to an increase
in the property's assessed value.
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 first quarter of 2002, Registrant incurred a loss
of $48,000 at the Green Street Apartments, including $15,000 of
depreciation expense, compared to a loss of $47,000 including $15,000
of depreciation expense in the first quarter of 2001. The increase in
loss from the first quarter of 2001, compared to the same period in
2002, is due to a decrease in rental income and an increase in
utilities expense and insurance expense, partially offset by a
decrease in leasing commission expense. The decrease in rental income
is due to a decrease in tenant parking income. The increase in
utilities expense is due to an increase in electricity charges.
Insurance expense increased due to insurance market conditions. The
decrease in leasing commission expense is due to the decrease in
turnover of apartment units.
On October 1, 2002, the Green Street Apartments was
foreclosed by the mortgage holder.
In the first quarter of 2002, Registrant incurred a loss
of $188,000 at the Loewy Building, including $5,000 of amortization
expense, compared to a loss of $159,000 including $64,000 of
depreciation and amortization expense in the first quarter of 2001.
The increase in loss from the first quarter of 2001, compared to the
same period in 2002, is due to a decrease in rental income and an
increase in insurance expense and bad debt expense, partially offset
by a decrease in parking expense. The decrease in rental income is due
to a decrease in average occupancy (60% to 45%). The increase in
insurance expense is due to insurance market conditions. 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
In the first quarter of 2002, the Registrant recognized
a net income of $11,491 at Magazine Place compared to an income of
$14,001 in the first quarter of 2001. The Registrant accounts for this
investment on the equity method.
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 a 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
31 reference.
32 General Partners Opinion
Certification
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 March 31, 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 2, 2004 By: /s/ Spencer Wertheimer
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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 March 31, 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 2, 2004 /s/ Spencer Wertheimer
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Name: Spencer Wertheimer
Title: Treasurer (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 March 31,
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 2, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: Treasurer (principal executive
officer, principal financial
officer) of the registrant's
managing partner, EPK, Inc.