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, 1996
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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
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Commission file number 0-14934
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DIVERSIFIED HISTORIC INVESTORS
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2312037
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 500, 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) 735-5001
----------------
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 No X
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 1996
(unaudited) and December 31, 1995
Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 1996 and 1995
(unaudited)
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(1) Liquidity
At September 30, 1996, Registrant had cash of
approximately $3,569. Such funds are expected to be used to pay
liabilities of Registrant and to fund cash deficits of the
properties. 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 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, 1996, Registrant had
restricted cash of $75,803 consisting primarily of funds held as
security deposits, replacement reserves and escrows for taxes. As
a consequence of these restrictions as to use, Registrant does not
deem these funds to be a source of liquidity. Should the first
mortgage holder of the eleven units at Smythe Stores be successful
in its attempts to foreclose, it is not expected to have a
significant impact on the Registrant's liquidity, as these units
have generated little or no positive cash flow. See Part II, Item
1 for additional information.
In recent years the Registrant has realized
significant losses, including the foreclosure of five properties,
due to the properties' inability to generate sufficient cash flow
to pay their operating expenses and debt service. The Registrant
currently owns three properties at the present time, with the
exception of the eleven units at Smythe Stores, where the
Registrant will either be able to negotiate a loan modification or
the units will be foreclosed, the Registrant has feasible loan
modifications in place on its properties. However, the loan
modifications have resulted in the mortgage loans encumbering the
property thus becoming "cash-flow" mortgages, requiring that all
available cash after payment of operating expenses must be paid to
the first mortgage holder as debt service. 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, 1995.
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.
(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 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 for the foreseeable future. If
the need for capital expenditures does arise, the first mortgage
holder for Third Quarter and Wistar Alley and nine units at Smythe
Stores 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 of 1996.
(3) Results of Operations
During the third quarter of 1996, Registrant
incurred a net loss of $284,767 ($24.28 per limited partnership
unit) compared to a net income of $644,692 ($54.97 per limited
partnership unit) for the same period in 1995. For the first nine
months of 1996, the Registrant incurred a net loss of $1,397,663
($119.18 per limited partnership unit) compared to a net income of
$39,058 ($3.33 per limited partnership unit) for the same period
in 1995.
Rental income decreased $6,203 from $144,980
in the third quarter of 1995 to $138,777 in the same period in
1996. The decrease resulted from the foreclosure of one of the
Registrant's properties ("Centre Park") in July 1995 partially
offset by an increase in rental income at Smythe Stores due to
higher average rental rates combined with increases in occupancy
at both Third Quarter (84% to 99%) and Wistar Alley (87% to 93%).
Rental income decreased $144,070 from $513,643
for the first nine months of 1995 to $369,573 for the same period
in 1996. The decrease resulted from the foreclosure of one of the
Registrant's properties ("Centre Park") in July 1995 and a
decrease at Wistar Alley due to the loss of one commercial tenant
partially offset by an increase in rental income due to an
increase in occupancy at Third Quarter (86% to 93%).
Expense for rental operations decreased by
$34,839 from $121,204 in the third quarter of 1995 to $86,365 in
the same period in 1996. Expenses for rental operations decreased
due to the foreclosure of Centre Park in July 1995 combined with a
decrease in maintenance expense at Smythe Stores partially offset
by an increase in management fees at Wistar Allay and legal and
condominium fees at Smythe Stores, as discussed below.
Expense for rental operations decreased by
$107,691 from $437,447 for the first nine months of 1995 to
$329,756 for the same period in 1996. Expenses for rental
operations decreased due to the foreclosure of Centre Park in July
1995 combined with a decrease in maintenance expense at Smythe
Stores partially offset by increases in maintenance expense at
both Third Quarter and Wistar Alley, an increase in commissions
expense at Wistar Alley and an increase in legal and condominium
fees at Smythe Stores, as discussed below.
Depreciation and amortization expense
decreased $12,038 from $90,933 in the third quarter of 1995 to
$78,895 in the same period in 1996 and decreased $78,741 from
$316,088 for the first nine months of 1995 to $237,347 in the same
period in 1996. The decreases are the result of the foreclosure
of Centre Park in July 1995.
Interest expense increased by $70,838 from
$147,123 in the third quarter of 1995 to $217,961 in the same
period in 1996. The increase is due to an increase in the
principal balance, due to the capitalization of past due interest
by the mortgage holder, upon which interest is accrued at Smythe
Stores, partially offset by the foreclosure of Centre Park in July
1995.
Interest expense increased by $579,657 from
$499,325 for the first nine months of 1995 to $1,078,982 in the
same period in 1996. The increase is the result of the accrual of
default interest in the second quarter of 1996 that should have
been accrued in prior years at Smythe Stores combined with an
increase in the principal balance upon which interest is accrued
at Smythe Store, partially offset by the foreclosure of Centre
Park in July 1995.
Losses incurred during the third quarter at
the Registrant's properties amounted to $225,000, compared to
income of approximately $849,000 for the same period in 1995. For
the first nine months of 1996 the Registrant's properties
recognized a loss of $1,254,000 compared to income of
approximately $302,000 for the same period in 1995.
In the third quarter of 1996, Registrant
incurred a loss of $168,000 at the Smythe Stores Condominium
complex including $40,000 of depreciation expense, compared to a
loss of $81,000 in the third quarter of 1995, including $41,000 of
depreciation expense. The increase in the loss in the second
quarter from the same period in 1996 is mainly the result of an
increase in interest expense and legal and condominium fees
partially offset by an increase in rental income and a decrease in
maintenance expense. Interest expense increased due to an
increase in the principal balance upon which interest is accrued
and legal fees increased due to the modification of 9 of the 20
mortgage loans. Condominium fees increased due to a special
assessment charged by the condominium association for capital
improvements of the building. Rental income increased due to an
increase in the average monthly rental rates while maintenance
expense decreased pursuant to a change in the management contract
which was required by the new mortgage holder.
For the first nine months of 1996, Registrant
incurred a loss of $994,000 at the Smythe Stores Condominium
complex including $121,000 of depreciation expense, compared to a
loss of $265,000 for the same period in 1995, including $123,000
of depreciation expense. The increase in the loss for the first
nine months of 1995 from the same period in 1996 is mainly the
result of an increase in interest expense and legal and
condominium fees. Interest expense increased due to the accrual
in the second quarter of 1996 of default interest that should have
been accrued in prior years. Legal fees increased due to the
modification of 9 of the 20 mortgage loans. Condominium fees
increased due to a special assessment charged by the condominium
association for capital improvements of the building.
In the third quarter of 1996, Registrant
incurred a loss of $33,000 at Third Quarter Apartments, including
$17,000 of depreciation expense, compared to a loss of $49,000
including $18,000 of depreciation expense in the third quarter of
1995. The decrease in the loss from the third quarter of 1995 to
the same period in 1996 is the result of an increase in rental
income due to an increase in average occupancy (84% to 99%).
For the first nine months of 1996, Registrant
incurred a loss of $140,000 at Third Quarter Apartments, including
$52,000 of depreciation expense, compared to a loss of $137,000
for the same period in 1995, including $53,000 of depreciation
expense. The increase in the loss from the first nine months of
1995 to the same period in 1996 is due to an increase in
maintenance and interest expense partially offset by an increase
in rental income. Maintenance expense increased pursuant to a
change in the management contract which increased the hourly rates
charged for maintenance personnel and interest expense increased
due to an increase in the principal balance upon which interest is
accrued. Rental income increased due to an increase in average
occupancy (86% to 93%).
In the third quarter of 1996, Registrant
incurred a loss of $24,000 at Wistar Alley, including $21,000 of
depreciation expense, compared to a loss of $28,000 including
$22,000 of depreciation expense in the third quarter of 1995. The
decrease in the loss from the third quarter of 1995 to the same
period in 1996 is due to an increase in average occupancy (87% to
93%) partially offset by the loss of one commercial tenant
combined with an increase in the management fee due to the overall
increase in rental income.
For the first nine months of 1996, Registrant
incurred a loss of $120,000 at Wistar Alley, including $64,000 of
depreciation expense, compared to a loss of $91,000 for the same
period in 1995, including $64,000 of depreciation expense. The
increase in the loss from the first nine months of 1995 to the
same period in 1996 is due to a decrease in rental income combined
with an increase in maintenance and commissions expense.
Maintenance expense increased pursuant to a change in the
management contract which increased the hourly rates charged for
maintenance personnel and commissions expense increased due to a
higher turnover of units. Rental income decreased due to the loss
of one commercial tenant.
In the third quarter of 1996, Registrant
incurred a loss of $0 at Centre Park Place, compared to income of
$1,007,000 including $11,000 of depreciation expense in the third
quarter of 1995 and for the first nine months of 1996, Registrant
incurred a loss of $0 compared to income of $795,000 for the same
period in 1995, including $76,000 of depreciation expense. The
decrease in the loss from the third quarter and the first nine
months of 1995 to the same periods in 1996 is due to the fact that
the property was foreclosed by the lender in July 1995.
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
<CAPTION>
September 30, 1996 December 31, 1995
------------------ ----------------- (Unaudited)
Rental properties, at cost:
<S> <C> <C>
Land $ 331,362 $ 331,362
Buildings and improvements 7,924,100 7,896,078
Furniture and fixtures 149,151 149,151
---------- ----------
8,404,613 8,376,591
Less - Accumulated depreciation (3,850,359) (3,614,119)
---------- ----------
4,554,254 4,762,472
Cash and cash equivalents 3,569 4,571
Restricted cash 75,803 40,882
Accounts receivable 86,799 93,259
Other assets (net of amortization of
$55,527 and $54,420 at September 30, 1996
and December 31, 1995, respectively)
43,773 44,880
---------- ----------
Total $ 4,764,198 $ 4,946,064
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 7,143,783 $ 5,607,067
Accounts payable:
Trade 476,235 491,919
Related parties 333,112 94,540
Taxes 138,519 313,032
Interest payable 1,775,255 2,140,747
Accrued liabilities 1,400 19,687
Tenant security deposits 53,423 38,938
---------- ----------
Total liabilities 9,921,727 8,705,930
Partners' equity (5,157,529) (3,759,866)
---------- ----------
Total $ 4,764,198 $ 4,946,064
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1996 and
1995
(Unaudited)
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Rental income $ 138,777 $ 144,980 $ 369,573 $ 513,643
Interest income 177 91 349 394
------- ------- ------- -------
Total revenues 138,954 145,071 369,922 514,037
------- ------- ------- -------
Costs and expenses:
Rental operations 86,365 121,204 329,756 437,447
General and
administrative 40,500 40,500 121,500 121,500
Interest 217,961 147,123 1,078,982 499,325
Depreciation and
amortization 78,895 90,933 237,347 316,088
------- ------- --------- ---------
Total costs and
expenses 423,721 399,760 1,767,585 1,374,360
------- ------- --------- ---------
Loss before extraordinary (284,767) (254,689) (1,397,663) (860,323)
item
Extraordinary gain on 0 899,381 0 899,381
extinguishment of debt
-------- -------- --------- ----------
Net (loss) income ($ 284,767) $ 644,692 ($1,397,663) $ 39,058
======== ======== ========= ==========
Net (loss) income per
limited partnership unit ($ 24.28) $ 54.97 ($ 119.18) $ 3.33
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Nine months ended
September 30,
1996 1995
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income ($1,397,663) $ 39,058
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary gain on extinguishment of debt 0 (899,381)
Depreciation and amortization 237,347 316,088
Minority interests 0 (11,504)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (34,921) 45,199
Decrease (increase) in accounts receivable 6,460 (20,238)
(Decrease) increase in accounts payable - trade (15,682) 150,474
Increase (decrease) in accounts payable - related 238,572 (4,298)
parties
(Decrease) increase in accounts payable - taxes (174,513) 16,542
(Decrease) increase in interest payable (365,492) 352,059
Decrease in accrued liabilities (18,287) (1,637)
Increase (decrease) in tenant security deposits 14,483 (15,964)
--------- -------
Net cash used in operating activities (1,509,696) (25,006)
--------- -------
Cash flows from investing activities:
Capital expenditures (28,022) (11,347)
--------- --------
Net cash used in investing activities (28,022) (11,347)
--------- --------
Cash flows from financing activities:
Proceeds from debt financing 1,536,716 32,435
--------- -------
Net cash provided by financing activities 1,536,716 32,435
--------- -------
Decrease in cash and cash equivalents (1,002) (3,918)
Cash and cash equivalents at beginning of period 4,571 7,789
--------- -------
Cash and cash equivalents at end of period $ 3,569 $ 3,871
========= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $124,431 $120,929
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Net assets transferred for liability reduction:*
Net assets transferred 0 $3,549,860
Liability reduction 0 4,615,984
* As a result of foreclosures on properties owned by the Partnership.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DIVERSIFIED HISTORIC INVESTORS
(a Pennsylvania limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Diversified
Historic Investors (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, 1995.
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
Due to insufficient cash flow at Smythe Stores, the
Registrant ceased making debt service payments. In 1990, the
lender was placed in receivership by the Resolution Trust
Corporation ("RTC"). The entities which purchased the mortgages
from the RTC each filed complaints for foreclosure due to non-
payment; foreclosure proceedings on nine units were filed in the
Court of Common Pleas, Philadelphia County in the matters of Bruin
Holdings, Inc. ("Bruin") v Diversified Historic Investors and
foreclosure proceedings on eleven units were filed in the Court of
Common Pleas, Philadelphia County in the matters of EMC Mortgage
Corporation v. Diversified Historic Investors. In March 1996, the
Bruin cases were settled and the nine mortgages were sold. The
Registrant is in the process of negotiating a modification with
the new holder of the mortgage. It is anticipated that the new
terms will call for monthly payments of interest in an amount
equal to net operating income, with a minimum monthly payment. A
hearing occurred in early May where EMC's motion to have a
receiver appointed was denied. The next hearing date has not yet
been set. The Registrant is pursuing settlement negotiations;
however if no settlement is reached it is expected that the eleven
associated units will be foreclosed by the lender.
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
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, 1996.
<PAGE>
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 1, 1996 DIVERSIFIED HISTORIC INVESTORS
By: Diversified Historic
Advisors, General Partner
By: Diversified Historic
Properties, Inc., Partner
By: /s/ Donna M. Zanghi
DONNA M. ZANGHI,
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,569
<SECURITIES> 0
<RECEIVABLES> 86,799
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,404,613
<DEPRECIATION> 3,850,359
<TOTAL-ASSETS> 4,764,198
<CURRENT-LIABILITIES> 947,866
<BONDS> 7,143,783
0
0
<COMMON> 0
<OTHER-SE> (5,157,529)
<TOTAL-LIABILITY-AND-EQUITY> 4,764,198
<SALES> 0
<TOTAL-REVENUES> 369,922
<CGS> 0
<TOTAL-COSTS> 329,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,078,982
<INCOME-PRETAX> (1,397,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,397,663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,397,663)
<EPS-PRIMARY> (119.18)
<EPS-DILUTED> 0
</TABLE>
