UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - March 31, 1996 (unaudited) and
December 31, 1995
Consolidated Statements of Operations - Three Months Ended March
31, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - Three Months Ended March
31, 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 March 31, 1996, Registrant had cash of $97,727.
Such funds are expected to be used to pay liabilities and general and
administrative expenses 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 loan modifications with the various lenders
in order to remain current on all obligations. The Registrant is not aware of
any additional sources of liquidity.
As of March 31, 1996, Registrant had restricted cash of
$754,178 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 as no cash will be available to pay the operating expenses of the
properties. 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 the debt service requirements and
the properties are foreclosed, or the market value of the properties increases
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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 executed a lease between Factor's Walk
Partners ("FWP") and the building adjacent to it with the intention of expanding
the River Street Inn. The source of financing for this expansion has not yet
been identified. 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 first quarter of 1996, Registrant incurred a
net loss of $811,287 ($39.00 per limited partnership unit) compared to a net
loss of $643,334 ($30.93 per limited partnership unit) for the same period in
1995.
Rental and hotel income combined increased $48,000 from
$1,270,000 in the first quarter of 1995 to $1,318,000 in the same period in
1996. This increase resulted from an increase of $33,000 in rental income and an
increase of $15,000 in hotel income. The increase in rental income is the result
of an increase in residential rental income at Tindeco Wharf due to an increase
in the average rental rates in the first quarter of 1996 as compared to the
first quarter of 1995. Hotel income increased due to an increase in occupancy
(71% to 75%) and an increase in average room rates ($86.23 to $94.52).
Interest income decreased from $9,000 in the first
quarter of 1995 to $5,000 in the same period in 1996. The decline is the result
of less cash held in interest bearing accounts in the first quarter of 1996 as
compared to the same period in 1995.
Expense for rental operations increased by $57,000 from
$385,000 in the first quarter of 1995 to $442,000 in the same period in 1996.
Rental operations expense increased due to increased maintenance and utilities
expense at Washington Square resulting from inclement weather in the winter of
1995 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 $140,000 from $319,000 in the first quarter of 1995
to $459,000 in the same period in 1996. The increase in hotel operations was due
to an increase in commissions and maintenance expense partially offset by a
decrease in legal fees. Commissions expense increased due to the execution of a
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<PAGE>
lease between Factor's Walk Partners and the building adjacent to it with the
intention of expanding the River Street Inn. Maintenance expense increased due
to repairs made to the air conditioning unit at the River Street Inn. Legal fees
decreased due to a retainer paid in connection with the filing of an appeal to a
lawsuit in 1994.
Interest expense increased $15,000 from $751,000 in the
first quarter of 1995 to $766,000 in 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 $697,000, compared to a loss of approximately
$529,000 for the same period in 1995.
In the first quarter of 1996, Registrant incurred a
loss of $417,000 at Tindeco Wharf including $288,000 of depreciation and
amortization expense, compared to a loss of $419,000 in the first quarter of
1995, including $288,000 of depreciation expense. The decreased loss from the
first quarter of 1995 to the first quarter of 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 and a decrease in interest income. 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 and interest income decreased due the result of less cash
held in interest bearing accounts. Registrant anticipates that operating results
in the following quarters will be similar to those experienced in the first
quarter of 1996.
In the first quarter of 1996, Registrant incurred a
loss of $263,000 at The River Street Inn including $89,000 of depreciation
expense, compared to a loss of $117,000 including $89,000 of depreciation
expense in the first quarter of 1995. The increased loss from the first quarter
of 1995 to the same period in 1996 is the result of an increase in commissions
and maintenance expense partially offset by a decrease in legal fees and an
increase in hotel income. Commissions expense increased due to the execution of
a lease between Factor's Walk Partners and the building adjacent to it with the
intention of expanding the River Street Inn. Maintenance expense increased due
to repairs made to the air conditioning unit. Hotel income increased due to an
increase in occupancy (71% to 75%) and an increase in average room rates ($86.23
to $94.52). Legal fees decreased due to a retainer paid in connection with the
filing of an appeal to a lawsuit in 1994.
In the first quarter of 1996, Registrant incurred a
loss of $16,000 at Washington Square, including $28,000 of depreciation expense,
compared to income of $6,000 including $28,000 of depreciation expense in the
first quarter of 1995. Rental operations expense increased due to an increase in
maintenance and utilities expense due to the inclement weather experienced in
the winter of 1996. Registrant anticipates that the results in the following
quarters will be more favorable to those experienced in the first quarter of
1996.
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DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
March 31, 1996 December 31, 1995
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(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,484,131 39,414,132
Furniture and fixtures 2,650,472 2,650,472
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43,069,185 42,999,186
Less - Accumulated depreciation (16,618,512) (16,210,001)
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26,450,673 26,789,185
Cash and cash equivalents 97,004 114,922
Restricted cash 908,846 692,027
Accounts and notes receivable 52,090 50,030
Other assets (net of amortization of
$189,195 and $180,216 at March 31,
1996 and December 31, 1995,
respectively)
1,630,934 1,772,484
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Total $ 29,139,547 $ 29,418,648
============ ============
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 33,106,104 $ 33,161,299
Accounts payable:
Trade 1,081,942 866,737
Related parties 664,409 678,569
Interest payable 7,336,470 6,928,557
Accrued liabilities 2,368,936 2,381,497
Tenant security deposits 232,688 241,704
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Total liabilities 44,790,549 44,258,363
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Partners' equity (15,651,002) (14,839,715)
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Total $ 29,139,547 $ 29,418,648
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The accompanying notes are an integral part of these financial statements.
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DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
1996 1995
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Revenues:
Rental income $ 1,020,900 $ 987,900
Hotel income 296,943 281,616
Interest income 4,706 9,350
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Total revenues 1,322,549 1,278,866
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Costs and expenses:
Rental operations 441,769 385,228
Hotel operations 458,975 318,616
General and administrative 49,500 49,500
Interest 766,046 751,366
Depreciation and amortization 417,546 417,490
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Total costs and expenses 2,133,836 1,922,200
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Net loss ($ 811,287) ($ 643,334)
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Net loss per limited partnership unit ($ 39.00) ($ 30.93)
=========== ===========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three months ended
March 31,
1996 1995
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Cash flows from operating activities:
Net loss ($811,287) ($643,334)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 417,546 417,490
Changes in assets and liabilities:
Increase in restricted cash (216,819) (147,139)
Increase in accounts receivable (2,060) (1,108)
Decrease in other assets 132,515 123,631
Increase in accounts payable - trade 215,205 90,163
Decrease in accounts payable - related parties (14,160) (137,762)
Increase in interest payable 407,913 209,976
(Decrease) increase in accrued liabilities (12,561) 165,833
(Decrease) increase in tenant security deposits (9,016) 271
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Net cash provided by operating activities 107,276 78,021
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Cash flows from investing activities:
Capital expenditures (69,999) (23,240)
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Net cash used in investing activities (69,999) (23,240)
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Cash flows from financing activities:
Principal payments (55,195) (58,394)
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Net cash used in financing activities (55,195) (58,394)
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Decrease in cash and cash equivalents (17,918) (3,163)
Cash and cash equivalents at beginning of period 114,922 101,340
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Cash and cash equivalents at end of period $ 97,004 $ 97,727
========= =========
The accompanying notes are an integral part of these financial statements.
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<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.
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<PAGE>
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 $15,390 of interest was
accrued in the first quarter 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 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,
1996. Although there have been no discussions, the Registrant anticipates that
it will be able to extend the forbearance agreement for several years for
similar consideration.
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.
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<PAGE>
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 March 31, 1996.
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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: May 13, 1996 DIVERSIFIED HISTORIC INVESTORS II
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By: Dover Historic Advisors, General Partner
By: DHP, Inc., Partner
By: /s/ Donna M. Zanghi
---------------------------------
DONNA M. ZANGHI,
Secretary and Treasurer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 97,004
<SECURITIES> 0
<RECEIVABLES> 52,090
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,630,934
<PP&E> 46,069,185
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0
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<TOTAL-LIABILITY-AND-EQUITY> 29,139,547
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<TOTAL-REVENUES> 1,322,549
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<TOTAL-COSTS> 950,244
<OTHER-EXPENSES> 417,546
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<INTEREST-EXPENSE> 766,046
<INCOME-PRETAX> (811,287)
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