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 0-14645
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DIVERSIFIED HISTORIC INVESTORS II
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2361261
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(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
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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 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
As of September 30, 1996, Registrant had cash of
$47,173. Such funds are expected to be used to pay the liabilities of
the 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 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, 1996, Registrant had
restricted cash of $999,528 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, all
three remaining properties are able to pay their operating expenses
and debt service but it is unlikely that any cash will be available to
the Registrant to pay its general and administrative expenses. In the
legal proceeding involving Factor's Walk, if the final outcome were to
be adverse to the Registrant, the property could be foreclosed. If a
foreclosure were to occur, it is not likely to have a significant
impact on the Registrant's liquidity, as this property has generated
little or no cash flow to the Registrant. In addition, if Capital
Bank executes on its judgment against the Registrant, it is expected
to have significant impact on the Registrant's liquidity since the
judgment amount is substantially in excess of the Registrant's
available cash See Part II. Item 1. Legal Proceedings.
It is the Registrant's intention to continue to
hold the properties until they can no longer meet their 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).
(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. In the first quarter of 1996, the
Registrant's wholly-owned affiliate, Factor's Walk Partners ("FWP")
entered into a lease with the owner of the building adjacent to the
River Street Inn (owned by FWP) with the intention of expanding the
inn. The source of financing for this expansion has not yet been
identified and the expansion has been deferred until financing can be
arranged. 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
for the foreseeable future.
(3) Results of Operations
During the third quarter of 1996, Registrant
incurred a net loss of $682,498 ($32.81 per limited partnership unit)
compared to a net loss of $632,288 ($30.40 per limited partnership
unit) for the same period in 1995. For the first nine months of 1996,
the Registrant incurred a net loss of $2,010,967 ($96.68 per limited
partnership unit) compared to a net loss of $1,827,804 ($87.87 per
limited partnership unit) for the same period in 1995.
Rental income increased $58,746 from $1,063,643 in
the third quarter of 1995 to $1,122,119 in the same period in 1996 and
increased $152,699 from $3,077,277 for the first nine months of 1995
to $3,229,976 in the same period on 1996. The increase in rental
income in both the third quarter and the first nine months of 1996 as
compared to the same periods in 1995 is mainly the result of an
increase in residential rental income at Tindeco Wharf due to an
increase in the average rental rates. Also, in the third quarter,
rental income at Washington Square increased due to an increase in the
average rental rates.
Hotel income increased $26,446 from $295,947 in
the third quarter of 1995 to $322,393 in the same period in 1996 and
increased $51,476 from $932,318 for the first nine months of 1995 to
$983,794 for the same period in 1996. The increases are due to
increases in the average room rates ($94.55 to $103.68) in the third
quarter and ($93.20 to $100.66) for the first nine months while
occupancy remained constant.
Expense for rental operations increased by $1,861
from $465,985 in the third quarter of 1995 to $467,846 in the same
period in 1996 and increased $91,456 from $1,242,205 for the first
nine months of 1995 to $1,333,661 for the same period in 1996. The
increases from both the third quarter and the first nine months of
1995 to the same periods in 1996 is the result of an increase in
rental operations expense such as maintenance and utilities expense at
Washington Square resulting from the inclement weather experienced in
the winter of 1996 and an increase in management and legal fees at
Tindeco Wharf. Management fees increased due to the increase in
rental income and legal fees increased due to fees incurred in
connection with the approval by the Department of Housing and Urban
Development of a new management agreement.
Hotel operations expense increased $136,514 from
$276,680 in the third quarter of 1995 to $413,194 in the same period
in 1996 and increased $287,771 from $896,075 for the first nine months
of 1995 to $1,183,846 for the same period in 1996. The increase from
the third quarter and the first nine months of 1995 to the same
periods in 1996 is the result of an increase in rent, commissions, and
management fees expense. Rent expense increased due to the execution
of a lease between FWP and the building adjacent to it with the
intention of expanding the River Street Inn. Commissions expense
increased due to commissions incurred as a result of the extension of
several of the commercial tenants' leases and the execution of the
lease of the adjacent building and management fees increased due to an
increase in hotel income.
Interest expense decreased $4,406 from $786,472 in
the third quarter of 1995 to $782,066 in the same period in 1996 due
to a decrease in the variable interest rate (4.4% to 3.9%) at Factor's
Walk.
Interest expense increased $3,985 from $2,316,112
for the first nine months of 1995 to $2,320,097 for the same period in
1996. The increase in interest expense for the first nine months of
1996 as compared to the same period in 1995 is due to an increase in
the principal balance upon which interest is calculated at Tindeco
Wharf, partially offset by the decreased interest rate at Factor's
Walk as referred to above.
Losses incurred during the quarter at the
Registrant's three properties amounted to $557,000, compared to a loss
of approximately $518,000 for the same period in 1995. For the first
nine months of 1996 the Registrant's three properties recognized a
loss of $1,657,000 compared to approximately $1,485,000 for the same
period in 1995.
In the third quarter of 1996, Registrant incurred
a loss of $368,000 at Tindeco Wharf including $288,000 of depreciation
and amortization expense, compared to a loss of $383,000 in the third
quarter of 1995, including $287,000 of depreciation and amortization
expense and for the first nine months of 1996, Registrant incurred a
loss of $1,154,000 including $864,000 of depreciation and amortization
expense, compared to a loss of $1,182,000 for the same period in 1995,
including $863,000 of depreciation and amortization expense. The
decreased loss from both the third quarter and the first nine months
of 1995 to the same periods in 1996 is the result of an increase in
residential rental income due to an increase in the average rental
rates partially offset by an increase in management fees, legal and
interest expense. Management fees increased due to the increase in
rental income. and legal fees increased due to fees incurred in
connection with the approval by HUD of a new management agreement.
Interest expense increased due to an increase in the principal balance
upon which interest is calculated.
In the third quarter of 1996, Registrant incurred
a loss of $186,000 at The River Street Inn including $89,000 of
depreciation expense, compared to a loss of $101,000 including $89,000
of depreciation expense in the third quarter of 1995 and for the first
nine months of 1996, Registrant incurred a loss of $480,000 including
$266,000 of depreciation expense, compared to a loss of $285,000 for
the same period in 1995, including $266,000 of depreciation expense.
The increased loss from the third quarter and the first nine months of
1995 to the same periods in 1996 is the result of an increase in
commissions, rent, and management fees expense partially offset by an
increase in hotel income and a decrease in interest expense due to a
decrease in the variable interest rate (4.4% to 3.9%). Commissions
expense increased due to commissions incurred as a result of the
extension of several of the commercial tenant leases and the execution
of the lease in the first quarter of 1996. Rent expense increased due
to the execution of a lease between FWP and the building adjacent to
it with the intention of expanding the River Street Inn. Management
fees increased due to the increase in hotel income while hotel income
increased due to an increase in the average room rates ($94.55 to
$103.68) in the third quarter and ($93.20 to $100.66) for the first
nine months while occupancy remained constant.
In the third quarter of 1996, Registrant incurred
a loss of $3,000 at Washington Square, including $28,000 of
depreciation expense, compared to a loss of $34,000 including $28,000
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 rental rates combined with a decrease in maintenance expense.
For the first nine months of 1996, Registrant
incurred a loss of $23,000 at Washington Square including $83,000 of
depreciation expense, compared to a loss of $18,000 for the same
period in 1995, including $83,000 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 rental operations expense such
as maintenance and utilities expense resulting from the inclement
weather experienced in the winter of 1996.
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
<CAPTION>
September 30, 1996 December 31, 1995
(Unaudited)
------------------ -----------------
Rental properties, at cost:
<S> <C> <C>
Land $ 934,582 $ 934,582
Buildings and improvements 39,628,844 39,414,132
Furniture and fixtures 2,650,472 2,650,472
------------ -------------
43,213,898 42,999,186
Less - Accumulated depreciation (17,435,531) (16,210,001)
------------ -------------
25,778,367 26,789,185
Cash and cash equivalents 47,173 114,922
Restricted cash 999,528 692,027
Accounts and notes receivable 28,805 50,030
Other assets (net of amortization of
$207,154 and $180,216 at September 30,
1996 and December 31, 1995, respectively)
1,781,293 1,772,484
----------- -----------
Total $ 28,635,166 $ 29,418,648
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $33,046,916 $33,161,299
Accounts payable:
Trade 2,102,338 866,737
Related parties 633,052 678,569
Interest payable 7,999,076 6,928,557
Accrued liabilities 1,461,809 2,381,497
Tenant security deposits 242,657 241,704
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Total liabilities 45,485,848 44,258,363
Partners' equity (16,850,682) (14,839,715)
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Total $ 28,635,166 $ 29,418,648
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS II
(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 $1,122,119 $1,063,643 $3,229,976 $3,077,277
Hotel income 322,393 295,947 983,794 932,318
Interest income 3,322 4,288 14,210 18,001
--------- --------- --------- ---------
Total revenues 1,447,834 1,363,878 4,227,980 4,027,596
Costs and expenses:
Rental operations 467,846 465,985 1,333,661 1,242,205
Hotel operations 413,194 276,680 1,183,846 896,075
General and
administrative 49,500 49,500 148,500 148,500
Interest 782,066 786,472 2,320,097 2,316,112
Depreciation and
amortization 417,726 417,529 1,252,843 1,252,508
--------- --------- --------- ---------
Total costs and
expenses 2,130,332 1,996,166 6,238,947 5,855,400
--------- --------- --------- ---------
Net loss ($ 682,498) ($ 632,288) ($2,010,967) ($1,827,804)
========= ========= ========= =========
Net loss per limited
partnership unit ($ 32.81) ($ 30.40) ($ 96.68) ($ 87.87)
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DIVERSIFIED HISTORIC INVESTORS II
(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 ($2,010,967) ($1,827,804)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,252,843 1,252,508
Changes in assets and liabilities:
(Increase) decrease in restricted cash (307,501) 43,752
Decrease (increase) in accounts receivable 21,225 (8,992)
Increase in other assets (36,122) (28,727)
Increase in accounts payable - trade 1,235,601 99,110
Decrease in accounts payable - related parties (45,517) (154,357)
Increase in interest payable 1,070,519 783,970
(Decrease) increase in accrued liabilities (919,688) 279,128
Increase (decrease) in tenant security deposits 953 (3,533)
--------- --------
Net cash provided by operating activities 261,346 435,035
--------- --------
Cash flows from investing activities:
Capital expenditures (214,712) (157,371)
--------- --------
Net cash used in investing activities (214,712) (157,371)
--------- --------
Cash flows from financing activities:
Principal payments (114,383) (270,408)
--------- --------
Net cash used in financing activities (114,383) (270,408)
--------- --------
(Decrease) increase in cash and cash equivalents (67,749) 7,256
Cash and cash equivalents at beginning of period 114,922 101,340
--------- --------
Cash and cash equivalents at end of period $ 47,173 $ 108,596
========= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $1,067,470 $1,132,130
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Diversified
Historic Investors II (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
The Registrant has been involved in two legal proceedings as discussed
below:
(a) J. A. Jones Construction Company ("Jones")
contracted with Factor's Walk Partners ("FWP") for the renovation of
what was originally a warehouse, into the River Street Inn/Factor's
Walk. During construction, numerous disputes arose between the
parties. As a result of those disputes, Jones abandoned the project
prior to completion and filed suit in the matter of J.A. Jones
Construction Company v. Factor's Walk Partners in the United States
District Court for the Northern District of Georgia. On January 1,
1994, the court entered a judgment in favor of Jones and against FWP
in the amount of $1,069,017 (including pre-judgment interest of
$420,999). The judgment accrues interest at 9.5% and $46,171 of
interest was accrued in the first nine months of 1996. FWP filed an
appeal and this appeal is currently held in abeyance while FWP and
Jones participate in a court sponsored settlement program. Because of
the complexity of the factual and legal issues involved, it is
impossible to predict with any reasonable degree of certainty the
outcome of the appeal. A final outcome adverse to FWP is a reasonable
probability. However, FWP continues to participate in negotiations
with Jones, which the Registrant believes will lead to a settlement
that will allow FWP to retain ownership of the property. If no
settlement occurs and an adverse appellate ruling is handed down, the
property could be foreclosed.
(b) In May 1992, a Partnership 69% owned by the
Registrant filed a reorganization petition pursuant to Chapter 11 of
the U.S. Bankruptcy Code to forestall foreclosure on the property
owned by it by a lender. In addition, the lender filed a claim
against the Registrant on its guaranty of payment of both notes. In
February 1993, the lender, with permission of the bankruptcy court,
foreclosed on the property. In November 1993, the lender obtained a
deficiency judgment in the matter of Capital Bank, N.A. v. Diversified
Historic Investors II in the amount of $1,800,000. In return for
payment of $20,000, Capital Bank has agreed to forebear from executing
on the judgment until July 6, 1997.
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 II
By: Dover Historic Advisors,
General Partner
By: DHP, 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> 47,173
<SECURITIES> 0
<RECEIVABLES> 28,805
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,213,898
<DEPRECIATION> 17,435,531
<TOTAL-ASSETS> 28,635,166
<CURRENT-LIABILITIES> 2,735,390
<BONDS> 33,046,916
0
0
<COMMON> 0
<OTHER-SE> (16,850,682)
<TOTAL-LIABILITY-AND-EQUITY> 28,635,166
<SALES> 0
<TOTAL-REVENUES> 4,227,980
<CGS> 0
<TOTAL-COSTS> 2,517,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,320,097
<INCOME-PRETAX> (2,010,967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,010,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,010,967)
<EPS-PRIMARY> (96.68)
<EPS-DILUTED> 0
</TABLE>
