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, 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_________________
Commission file number 0-14645
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DIVERSIFIED HISTORIC INVESTORS II
- -------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2361261
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 500, 1521 Locust Street, Philadelphia, PA 19102
- -------------------------------------------------------------------
(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
---- ----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 1996
(unaudited) and December 31, 1995
Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 1996 and 1995
(unaudited)
Consolidated Statements of Cash Flows - Six Months
Ended June 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 June 30, 1996, Registrant had cash of
$67,745. 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 June 30, 1996, Registrant had restricted
cash of $1,140,712 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 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 second quarter of 1996, Registrant
incurred a net loss of $517,182 ($24.86 per limited partnership
unit) compared to a net loss of $552,182 ($26.55 per limited
partnership unit) for the same period in 1995. For the first six
months of 1996, the Registrant incurred a net loss of $1,328,469
($63.86 per limited partnership unit) compared to a net loss of
$1,195,516 ($57.47 per limited partnership unit) for the same
period in 1995.
Rental income increased $61,223 from $1,025,734
in the second quarter of 1995 to $1,086,957 in the same period in
1996 and increased $94,223 from $2,013,634 for the first six months
of 1995 to $2,107,857 in the same period on 1996. The increase in
rental income in both the second quarter and the first six months
of 1996 as compared to the same periods in 1995 is the result of an
increase in residential rental income at Tindeco Wharf due to an
increase in the average rental rates.
Hotel income increased $9,703 from $354,755 in
the second quarter of 1995 to $364,458 in the same period in 1996
and increased $25,030 from $636,371 for the first six months of
1995 to $661,401 for the same period in 1996. The increases are
due to increases in occupancy in the second quarter (86% to 88%)
and for the first six months (79% to 81%) of 1996 and increases in
average room rates in the second quarter ($98.83 to $103.77) and
for the first six months ($92.53 to $99.18) of 1996 as compared to
the same periods in 1995.
Expense for rental operations increased by
$33,054 from $390,992 in the second quarter of 1995 to $424,046 in
the same period in 1996 and increased $89,595 from $776,220 for the
first six months of 1995 to $865,515 for the same period in 1996.
Rental operations expense increased for both the second quarter and
the first six months of 1996 as compared to the same periods in
1995 due to increased maintenance and utilities expense at
Washington Square resulting from inclement weather in the winter of
1996 and an increase in utilities, management fees and legal
expense at Tindeco Wharf. Utilities increased due to an increase
in average consumption while management fees increased due to the
increase in rental income. Legal fees increased due to fees
incurred in connection with the approval by the Department of
Housing and Urban Development ("HUD") of a new management
agreement.
Hotel operations expense increased $10,898 from
$300,779 in the second quarter of 1995 to $311,677 in the same
period in 1996. The increase in hotel operations was due to an
increase in rent expense partially offset by a decrease in legal
fees. 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. Legal fees in 1995 were in excess
of those for 1996 due to a retainer paid in 1995 in connection with
the filing of an appeal to a lawsuit.
Hotel operations expense increased $151,257
from $619,395 for the first six months of 1995 to $770,652 for the
same period in 1996. The increase in hotel operations was due to
an increase in commissions, rent and maintenance expense partially
offset by a decrease in legal fees. Commissions and rent expense
increased due to the execution of the lease. Maintenance expense
increased due to repairs made to the air conditioning unit. Legal
fees in 1995 were in excess of those for 1996 due to a retainer
paid in 1995 in connection with the filing of an appeal to a
lawsuit.
Interest expense decreased $6,289 from $778,274
in the second quarter of 1995 to $771,985 in the same period in
1996. Interest expense decreased due to a decrease in the interest
rate on the indebtedness of FWP partially offset by an increase in
the principal balance upon which interest is calculated at Tindeco
Wharf.
Interest expense increased $8,391 from
$1,529,640 for the first six months of 1995 to $1,538,031 for the
same period in 1996. Interest expense increased due to an increase
in the principal balance upon which interest is calculated at
Tindeco Wharf.
Losses incurred during the quarter at the
Registrant's three properties amounted to $405,000, compared to a
loss of approximately $437,000 for the same period in 1995. For
the first six months of 1996 the Registrant's three properties
recognized a loss of $1,100,000 compared to approximately $967,000
for the same period in 1995.
In the second quarter of 1996, Registrant
incurred a loss of $369,000 at Tindeco Wharf including $288,000 of
depreciation and amortization expense, compared to a loss of
$380,000 in the second quarter of 1995, including $288,000 of
depreciation and amortization expense and for the first six months
of 1996, Registrant incurred a loss of $786,000 at Tindeco Wharf
including $576,000 of depreciation and amortization expense,
compared to a loss of $799,000 for the same period in 1995,
including $576,000 of depreciation and amortization expense. The
decreased loss from both the second quarter and the first six
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 utilities,
management fees, legal and interest expense. Utilities increased
due to an increase in average consumption while management fees
increased due to the increase in rental income. 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 second quarter of 1996, Registrant
incurred a loss of $32,000 at The River Street Inn including
$88,000 of depreciation expense, compared to a loss of $67,000
including $88,000 of depreciation expense in the second quarter of
1995. The decreased loss from the second quarter of 1995 to the
same period in 1996 is the result of an increase in hotel income
and a decrease in legal fees and interest expense partially offset
by an increase in rent expense. Hotel income increased due to an
increase in occupancy (86% to 88%) and an increase in average room
rates ($98.83 to $103.77). Legal fees in 1995 were in excess of
those for 1996 due to a retainer paid in 1995 in connection with
the filing of an appeal to a lawsuit. Interest expense decreased
due to a decrease in the variable interest rate (3.86% to 3.71%) on
the financing issued with respect to the acquisition of the
property. 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.
For the first six months of 1996, Registrant
incurred a loss of $294,000 at The River Street Inn including
$177,000 of depreciation expense, compared to a loss of $184,000
for the same period in 1995, including $177,000 of depreciation
expense. The increased loss from the first six months of 1995 to
the same period in 1996 is the result of an increase in
commissions, rent and maintenance expense partially offset by a
decrease in legal fees and an increase in hotel income.
Commissions and rent expense increased due to the execution of the
lease in the first quarter of 1996 and maintenance expense
increased due to repairs made to the air conditioning unit. Legal
fees decreased due to a retainer paid in connection with the filing
of an appeal to a lawsuit in 1995. Hotel income increased due to
an increase in occupancy (79% to 81%) and an increase in average
room rates ($92.53 to $99.18).
In the second quarter of 1996, Registrant
incurred a loss of $4,000 at Washington Square, including $27,000
of depreciation expense, compared to income of $10,000 including
$27,000 of depreciation expense in the second quarter of 1995 and
for the first six months of 1996, Registrant incurred a loss of
$20,000 at Washington Square including $55,000 of depreciation
expense, compared to income of $16,000 for the same period in 1995,
including $55,000 of depreciation expense. The increase in the
loss from the first quarter and the first six months of 1995 to the
same periods in 1996 is due to an increase in rental operations
expense. The increase in rental operations expenses were due to an
increase in 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>
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
Rental properties, at cost:
<S> <C> <C>
Land $ 934,582 $ 934,582
Buildings and improvements 39,583,331 39,414,132
Furniture and fixtures 2,650,472 2,650,472
------------- -------------
43,168,385 42,999,186
Less - Accumulated depreciation (17,027,021) (16,210,001)
------------- -------------
26,141,364 26,789,185
Cash and cash equivalents 67,745 114,922
Restricted cash 1,140,712 692,027
Accounts and notes receivable 35,786 50,030
Other assets (net of amortization of
$198,175 and $180,216 at June 30, 1996 and
December 31, 1995, respectively)
1,494,908 1,772,484
----------- -----------
Total $28,880,515 $29,418,648
=========== ===========
<CAPTION>
Liabilities and Partners' Equity
Liabilities:
<S> <C> <C>
Debt obligations $33,076,570 $33,161,299
Accounts payable:
Trade 1,034,824 866,737
Related parties 645,737 678,569
Interest payable 7,642,773 6,928,557
Accrued liabilities 2,401,647 2,381,497
Tenant security deposits 247,149 241,704
----------- -----------
Total liabilities 45,048,700 44,258,363
Partners' equity (16,168,185) (14,839,715)
----------- -----------
Total $28,880,515 $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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Rental income $1,086,957 $1,025,734 $2,107,857 $2,013,634
Hotel income 364,458 354,755 661,401 636,371
Interest income 6,182 4,363 10,888 13,713
---------- ---------- ---------- ----------
Total revenues 1,457,597 1,384,852 2,780,146 2,663,718
---------- ---------- ----------
Costs and expenses:
Rental operations 424,046 390,992 865,815 776,220
Hotel operations 311,677 300,779 770,652 619,395
General and
administrative 49,500 49,500 99,000 99,000
Interest 771,985 778,274 1,538,031 1,529,640
Depreciation and
amortization 417,571 417,489 835,117 834,979
---------- ---------- ---------- ----------
Total costs and
expenses 1,974,779 1,937,034 4,108,615 3,859,234
---------- ---------- ---------- ----------
Net loss ($ 517,182) ($ 552,182) ($1,328,469) ($1,195,516)
========== ========== ========== ==========
Net loss per limited
partnership unit ($ 24.86) ($ 26.55) ($ 63.86) ($ 57.47)
========== ========== ========== ==========
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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Six months ended
June 30,
1996 1995
Cash flows from operating activities: ----------- -----------
<S> <C> <C>
Net loss ($1,328,469) ($1,195,516)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 835,117 834,979
Changes in assets and liabilities:
Increase in restricted cash (448,685) (298,061)
Decrease in accounts receivable 14,244 7,003
Decrease in other assets 259,478 266,091
Increase in accounts payable - trade 168,087 19,586
Decrease in accounts payable - related parties (32,832) (83,464)
Increase in interest payable 714,216 496,325
Increase in accrued liabilities 20,150 223,006
Increase (decrease) in tenant security deposits 5,445 (5,370)
---------- ----------
Net cash provided by operating activities 206,751 264,579
---------- ----------
Cash flows from investing activities:
Capital expenditures (169,199) (66,903)
---------- ----------
Net cash used in investing activities (169,199) (66,903)
---------- ----------
Cash flows from financing activities:
Principal payments (84,729) (176,267)
---------- ----------
Net cash used in financing activities (84,729) (176,267)
---------- ----------
(Decrease) increase in cash and cash equivalents (47,177) 21,409
Cash and cash equivalents at beginning of period 114,922 101,340
---------- ----------
Cash and cash equivalents at end of period $ 67,745 $ 122,749
========== ==========
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. The judgment accrues interest at
9.5% and $30,780 of interest was accrued in the first six 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
Exhibit Document
Number
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 June 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: August 6, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 67,745
<SECURITIES> 0
<RECEIVABLES> 35,786
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,168,385
<DEPRECIATION> 17,027,021
<TOTAL-ASSETS> 28,880,515
<CURRENT-LIABILITIES> 1,680,561
<BONDS> 33,076,570
0
0
<COMMON> 0
<OTHER-SE> (16,168,185)
<TOTAL-LIABILITY-AND-EQUITY> 28,880,515
<SALES> 0
<TOTAL-REVENUES> 2,780,146
<CGS> 0
<TOTAL-COSTS> 1,636,467
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,538,031
<INCOME-PRETAX> (1,328,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,328,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,328,469)
<EPS-PRIMARY> (63.86)
<EPS-DILUTED> 0
