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, 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
---------------------------
Assets
June 30, 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 152,056 170,548
----------- -----------
9,577,777 9,577,777
Less - accumulated
depreciation (7,005,179) (6,891,195)
----------- -----------
2,572,598 2,686,582
Cash and cash equivalents 375,463 24,568
Restricted cash 139,921 125,703
Accounts and notes receivable 150,793 103,775
Investment in affiliate 0 181,003
Other assets (net of
amortization of
$274,138 and $259,565) 192,415 227,223
----------- -----------
Total $ 3,431,190 $ 3,348,854
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,877,625 $ 8,996,269
Accounts payable:
Trade 1,374,684 1,208,816
Related parties 896,418 873,567
Real estate taxes 0 21,174
Interest payable 3,309,780 2,994,518
Other liabilities 22,716 62,468
Tenant security deposits 66,146 30,681
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Total liabilities 14,547,369 14,187,493
Partners' deficit (11,116,179) (10,838,639)
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Total $ 3,431,190 $ 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 Six months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Rental income $239,383 $227,880 $ 473,340 $ 481,595
Interest income 352 501 642 1,328
Gain on sale 271,576 0 271,576 0
-------- -------- ---------- ----------
Total revenues 511,311 228,381 745,558 482,923
-------- -------- ---------- ----------
Costs and expenses:
Rental operations 131,861 156,359 307,742 335,237
Interest 269,093 267,508 534,293 533,218
Bad debt 0 0 65,038 0
Depreciation and
amortization 64,282 121,106 128,557 244,644
-------- -------- ---------- ----------
Total costs and
expenses 465,236 544,973 1,035,630 1,113,099
-------- -------- ---------- ----------
Loss before equity
in affiliate 46,075 (316,592) (290,072) (630,176)
Equity in income of
affiliate 1,041 5,830 12,532 19,831
-------- -------- ---------- ----------
Net income (loss) $ 47,116 ($310,762)($ 277,540)($ 610,345)
======== ======== ========== ==========
Net income (loss) per
limited partnership
unit:
Income (loss)
before equity in
affiliate $ 3.26 ($ 22.42)($ 20.54)($ 44.62)
Equity in income of
affiliate .08 .42 .89 1.41
-------- -------- ---------- ----------
Net income (loss) $ 3.34 ($ 22.00)($ 19.65)($ 43.21)
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six months ended
June 30,
2002 2001
Cash flows from operating activities:
Net loss ($277,540) ($610,345)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 128,557 244,643
Gain on sale of Magazine Place (271,576) 0
Equity in income of affiliate (12,532) (19,831)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (14,218) 58,238
Increase in accounts receivable (47,018) (10,016)
Decrease (increase) in other assets 20,235 (2,329)
Increase (decrease) in accounts
payable - trade 7,256 (25,625)
Increase in accounts payable -
related parties 22,851 22,851
Increase in interest payable 315,263 294,757
Increase in tenant security deposits 3,679 12,557
Decrease in accounts payable -
real estate taxes (21,175) 0
Decrease in accrued liabilities (7,966) (5,205)
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Net cash used in operating activities (154,184) (40,305)
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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 48,964 32,764
Principal payments (8,996) (8,406)
-------- --------
Net cash provided by financing activities 39,968 24,358
-------- --------
Increase (decrease) in cash and cash
equivalents 350,895 (15,947)
Cash and cash equivalents at
beginning of period 24,568 28,338
-------- --------
Cash and cash equivalents at end of
period $375,463 $ 12,391
======== ========
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 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.
NOTE 3 - GAIN ON SALE
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 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Liquidity
As of June 30, 2002, Registrant had cash of $375,463.
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, 2002, Registrant had restricted cash of
$139,921 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 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 second quarter of 2002, Registrant recognized
net income of $47,116 ($3.34 per limited partnership unit) compared to
a net loss of $310,762 ($22.00 per limited partnership unit) for the
same period in 2001. For the first six months of 2002, the Registrant
incurred a net loss of $277,540 ($19.65 per limited partnership unit)
compared to a net loss of $610,345 ($43.21 per limited partnership
unit) for the same period in 2001. Included in net income for the
second quarter of 2002 and the net loss for the first six months of
2002 is a gain on the sale of Magazine Place of $271,576.
Rental income increased $11,503 from $227,880 in the
second quarter of 2001 to $239,383 in the same period of 2002 and
decreased $8,255 from $481,595 in the first six months of 2001 to
$473,340 in the same period of 2002. The increase in rental income
from the second quarter of 2002, compared to the same period in 2001,
is due to an increase in average occupancy at the Green Street
Apartments (83% to 98%) and the Loewy Building (33% to 36%), partially
offset by a decrease in average occupancy at Lincoln Court (95% to
92%). The decrease in rental income from the first six months of 2001,
compared to the same period in 2002, is due to a decrease in average
occupancy at the Loewy Building (37% to 35%) and a decrease in average
rental rates. This decrease is offset by an increase in average
occupancy at Green Street (85% to 96%) and an increase in monthly
rental rates at Lincoln Court.
Rental operations expense decreased by $24,498 from
$156,359 in the second quarter of 2001 to $131,861 in the same period
of 2002 and decreased $27,495 from $335,237 from the first six months
of 2001 to $307,742 in the same period of 2002. The decrease in rental
operations expense for both the second quarter and the first six
months of 2001, compared to the same periods in 2002, is due to a
decrease in leasing commissions expense and miscellaneous operating
expense. The decrease in leasing commissions is due to a decrease in
the turnover of apartment units at Lincoln Court. The decrease in
miscellaneous operating expense is due to a decrease in office related
expenses.
Interest expense increased $1,585 from $267,508 in the
second quarter of 2001 to $269,093 in the same period of 2002 and
increased $1,075 from $533,218 for the first six months of 2001 to
$534,293 in the same period of 2002. The increase in interest expense
from both the second quarter and first six months of 2001, compared to
the same periods in 2002, is due to an increase at the Loewy Building,
partially offset by a decrease at Lincoln Court. The increase in
interest expense at the Loewy Building is due to an increase in
principal balance. The decrease in interest expense at Lincoln Court
is due to a decrease in principal balance.
Losses incurred during the second quarter of 2002 at the
Registrant's three properties were approximately $210,000 compared to
a loss of approximately $301,000 for the same period in 2001. For the
first six months of 2002, the Registrant's properties incurred a loss
of approximately $531,000 compared to a loss of approximately $610,000
for the same period in 2001.
In the second quarter of 2002, Registrant incurred a loss
of $74,000 at Lincoln Court including $41,000 of depreciation and
amortization expense, compared to a loss of $75,000 including $40,000
of depreciation and amortization expense in the second quarter of
2001. For the first six months of 2002, Registrant incurred a loss of
$159,000 at Lincoln Court including $82,000 of depreciation and
amortization expense, compared to a loss of $167,000 including $80,000
of depreciation and amortization expense for the same period in 2001.
The decrease in net loss for both the second quarter and the first six
months of 2001, compared to the same periods in 2002, is due to an
increase in rental income and a decrease in leasing commission
expense, partially offset by an increase in maintenance expense. The
increase in rental income is due to an increase in monthly rental
rates. The decrease in leasing commission expense is due to the
decrease in turnover of apartment units. The increase in maintenance
expense is due to an increase in grounds maintenance and cleaning
service expense.
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 second quarter of 2002, Registrant incurred a loss
of $25,000 at the Green Street Apartments including $15,000 of
depreciation expense, compared to a loss of $33,000 including $15,000
of depreciation expense in the second quarter of 2001. For the first
six months of 2002, Registrant incurred a loss of $73,000 including
$29,000 of depreciation expense, compared to a loss of $79,000 for the
same period in 2001 including $29,000 of depreciation expense. The
decrease in net loss from both the second quarter and the first six
months of 2001, compared to the same periods in 2002, is due to an
increase rental income due to an increase in average occupancy (83% to
98%) for the second quarter and (85% to 96%) for the first six months.
On October 1, 2002, the Green Street Apartments was
foreclosed by the mortgage holder.
In the second quarter of 2002, Registrant incurred a loss
of $112,000 at the Loewy Building, including $5,000 of amortization
expense, compared to a loss of $194,000 including $62,000 of
depreciation and amortization expense in the second quarter of 2001.
The decrease in loss from the second quarter of 2002 compared to the
same period in 2001 is due to an increase in rental income. Rental
income increased due to an increase in average occupancy (33% to 36%).
For the first six months of 2002, Registrant incurred a
loss of $300,000 at the Loewy Building including $10,000 of
amortization expense, compared to a loss of $353,000 for the same
period in 2001, including $126,000 of depreciation and amortization
expense. The increase in loss from the first six months of 2001,
compared to the same period in 2002 is due to a decrease in rental
income and an increase in bad debt expense. The decrease in rental
income is due to a decrease in average occupancy (37% to 35%) and a
decrease in average rental rates. 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 second quarter of 2002, the Registrant recognized
income of $1,041 compared to an income of $5,830 in the same period of
2001, and for the first six months of 2002 recognized income of
$12,532, compared to an income of $19,831 for the same period in 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 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 June 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 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 June 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 2, 2004 /s/ Spencer Werthiemer
------------ ----------------------
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 June 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 2, 2004 /s/ Spencer Werthiemer
------------ ----------------------
Name: Spencer Wertheimer
Title: President (principal
executive officer,
principal financial
officer) of the
registrant's managing
partner, EPK, Inc.