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, 1997
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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
- ----------------------------------------------------------------------
(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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 1997
(unaudited) and December 31, 1996
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 (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, 1997, Registrant had cash of
$196,542. 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, 1997, Registrant had
restricted cash of $846,995 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 Morrison Clark, 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 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. 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 1997, Registrant
incurred a net loss of $566,650 ($27.24 per limited partnership unit)
compared to a net loss of $682,498 ($32.81 per limited partnership
unit) for the same period in 1996. For the first nine months of 1997,
the Registrant incurred a net loss of $2,218,885 ($106.67 per limited
partnership unit) compared to a net loss of $2,010,967 ($96.68 per
limited partnership unit) for the same period in 1996.
Rental income increased $31,873 from $1,122,119 in
the third quarter of 1996 to $1,153,992 in the same period in 1997 and
increased $115,985 from $3,229,976 for the first nine months of 1996
to $3,345,961 in the same period on 1997. The increase in rental
income in both the third quarter and the first nine months of 1997 as
compared to the same periods in 1996 is mainly the result of an
increase in residential rental income at Tindeco Wharf and Washington
Square due to an increase in the average rental rates.
Hotel income decreased $4,674 from $322,393 in the
third quarter of 1996 to $317,719 in the same period in 1997 and
decreased $24,984 from $983,794 for the first nine months of 1996 to
$958,810 for the same period in 1997. The decreases are due to
decreases in occupancy in the third quarter (76% to 74%) and for the
first nine months (79% to 74%) of 1997 partially offset by increases
in average room rates in the third quarter ($103.68 to $104.82) and
for the first nine months ($100.68 to $104.42) of 1997 as compared to
the same periods in 1996.
Expense for rental operations decreased by $10,579
from $467,846 in the third quarter of 1996 to $457,267 in the same
period in 1997. The decrease from the third quarter of 1996 to the
same period in 1997 is the result of a decrease in utilities expense
at Tindeco Wharf due to a decrease in the average consumption,
partially offset by an increase in maintenance expense at Washington
Square due to deferred maintenance performed in the third quarter of
1997.
Expense for rental operations increased $21,789
from $1,333,661 for the first nine months of 1996 to $1,355,450 for
the same period in 1997. The increase from the first nine months of
1996 to the same period in 1997 is the result an increase in legal
fees at Tindeco Wharf due to a review of the underlying loan
documents, partially offset by a decrease at Washington Square due to
decreased maintenance and utilities expense resulting from inclement
weather in the winter of 1996.
Hotel operations expense decreased $128,970 from
$413,194 in the third quarter of 1996 to $284,224 in the same period
in 1997. The decrease from the third quarter of 1996 to the same
period in 1997 is the result of a decrease in commissions, rent and
management fee expense at Factors Walk. Commissions expense decreased
due to the execution of a lease in the first quarter of 1996, between
FWP and the building adjacent to it with the intention of expanding
the River Street Inn, while rent expense decreased due to the
assignment of the lease with respect to the adjacent property to
another entity which will develop that property. Management fee
expense decreased due to a change in the management contract which
allows for a management fee based on a fixed percentage of revenues.
Hotel operations expense decreased $84,100 from
$1,183,846 for the first nine months of 1996 to $1,099,746 for the
same period in 1997. The decrease from the first nine months of 1996
to the same period in 1997 is the result of a decrease in commissions,
rent and management fee expense partially offset by an increase in
administrative expenses. Commissions expense decreased due to the
execution of a lease in the first quarter of 1996, between FWP and the
building adjacent to it with the intention of expanding the River
Street Inn, while rent expense decreased due to the assignment of the
lease with respect to the adjacent property to another entity which
will develop that property. Management fee expense decreased due to a
change in the management contract which allows for a management fee
based on a fixed percentage of revenues. Administrative expense
increased due to a misapplication of payments on a note payable where
the payments should have been classified as administrative expenses.
Interest expense increased $51,185 from $782,066
in the third quarter of 1996 to $833,251 in the same period in 1997
and increased $364,010 from $2,320,097 for the first nine months of
1996 to $2,684,107 for the same period in 1997. The increase in
interest expense for the third quarter and the first nine months of
1997 as compared to the same periods in 1996 is due to an increase in
the principal balance upon which interest is calculated at Tindeco
Wharf and an increase in the interest rate at Factor's Walk.
Losses incurred during the quarter at the
Registrant's three properties amounted to $532,000, compared to a loss
of approximately $557,000 for the same period in 1996. For the first
nine months of 1997 the Registrant's three properties recognized a
loss of $1,965,000 compared to approximately $1,657,000 for the same
period in 1996.
In the third quarter of 1997, Registrant incurred
a loss of $330,000 at Tindeco Wharf including $288,000 of depreciation
and amortization expense, compared to a loss of $368,000 in the third
quarter of 1996, including $288,000 of depreciation and amortization
expense. The decreased loss from the third quarter of 1996 to the
same period in 1997 is the result of an increase in residential rental
income due to an increase in the average rental rates combined with a
decrease in utilities expense due to a decrease in the average
consumption partially offset by an increase in interest expense.
Interest expense increased due to an increase in the principal balance
upon which interest is calculated.
For the first nine months of 1997, Registrant
incurred a loss of $1,136,000 at Tindeco Wharf including $853,000 of
depreciation and amortization expense, compared to a loss of
$1,154,000 for the same period in 1995, including $864,000 of
depreciation and amortization expense. The decrease in the loss from
the first nine months of 1996 to the same period in 1997 is the result
of an increase in residential rental income due to an increase in the
average rental rates combined with a decrease in depreciation expense
partially offset by an increase in interest expense and legal fees.
Depreciation expense decreased due to the fact that some personal
property became fully depreciation in the first quarter of 1997.
Interest expense increased due to an increase in the principal balance
upon which interest is calculated and legal fees increased due to fees
incurred in connection with a review of the underlying loan documents.
In the third quarter of 1997, Registrant incurred
a loss of $190,000 at The River Street Inn including $93,000 of
depreciation expense, compared to a loss of $186,000 including $89,000
of depreciation expense in the third quarter of 1996. The increased
loss from the third quarter of 1996 to the same period in 1997 is the
result of a decrease in hotel income combined with an increase in
interest and amortization expenses partially offset by an increase in
rental income and a decrease in commissions, rent and management fee
expense. Hotel income decreased due to a decrease in occupancy (76%
to 74%) partially offset by a slight increase in the average room
rates ($103.68 to $104.82) and interest expense increased due to an
increase in the interest rate. Amortization expense increased due to
the amortization of leasing commissions. Rental income increased due
to an increase in the average occupancy of the commercial space (90%
to 92%). Commissions expense decreased in 1997 primarily as a result
of an increase in commissions expense in 1996 due to the execution of
a lease by FWP with respect to the building adjacent to it with the
intention of expanding the River Street Inn. Rent expense decreased
due to the assignment of the lease with respect to the adjacent
property to another entity which will develop that property.
Management fee expense decreased due to a change in the management
contract which allows for a management fee based on a fixed percentage
of revenues.
For the first nine months of 1997, Registrant
incurred a loss of $822,000 at The River Street Inn including $278,000
of depreciation expense, compared to a loss of $480,000 for the same
period in 1996, including $266,000 of depreciation expense. The
increased loss from the first nine months of 1996 to the same period
in 1997 is the result of a decrease in hotel income combined with an
increase in interest, administrative and amortization expenses
partially offset by an increase in rental income and a decrease in
commissions, rent and management fee expense. Hotel income decreased
due to a decrease in occupancy (79% to 74%) partially offset by a
slight increase in the average room rates ($100.68 to $104.42) and
interest expense increased due to an increase in the interest rate.
Administrative expense increased due to a misapplication of payments
on a note payable where the payments should have been classified as
administrative expenses while amortization expense increased due to
the amortization of leasing commissions. Rental income increased due
to an increase in the average rental rates of the commercial space.
Commissions expense decreased due to the execution of a lease in the
first quarter of 1996, between FWP and the building adjacent to it
with the intention of expanding the River Street Inn, while rent
expense decreased due to the assignment of the lease with respect to
the adjacent property to another entity which will develop that
property. Management fee expense decreased due to a change in the
management contract which allows for a management fee based on a fixed
percentage of revenues.
In the third quarter of 1997, Registrant incurred
a loss of $12,000 at Washington Square, including $28,000 of
depreciation expense, compared to a loss of $3,000 including $28,000
of depreciation expense in the third quarter of 1996. The increase in
the loss from the third quarter of 1996 to the same period in 1997 is
the result of an increase in maintenance expense due to deferred
maintenance performed in the third quarter of 1997.
For the first nine months of 1997, Registrant
incurred a loss of $7,000 at Washington Square including $83,000 of
depreciation expense, compared to a loss of $23,000 for the same
period in 1996, including $83,000 of depreciation expense. The
decrease in the loss from the first nine months of 1996 to the same
period in 1997 is due to an increase in rental income due to an
increase in the average rental rates combined with a decrease in
rental operations expense. Rental operations expense decreased due to
a decrease in maintenance and utilities expense which had been higher
then normal in the winter of 1996 as a result of the inclement weather
experienced that period.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
September 30, 1997 December 31, 1996
(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,733,425 39,577,198
Furniture and fixtures 2,740,645 2,740,645
---------- ----------
43,408,652 43,252,425
Less - Accumulated depreciation (19,069,849) (17,857,486)
---------- ----------
24,338,803 25,394,939
Cash and cash equivalents 196,542 79,567
Restricted cash 846,995 1,300,767
Accounts and notes receivable 75,088 47,497
Other assets (net of amortization of
$281,092 and $239,940 at September 30,
1997 and December 31, 1996, respectively) 1,934,900 1,811,146
---------- ----------
Total $27,392,328 $28,633,916
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,409,460 $33,087,679
Accounts payable:
Trade 2,532,459 2,208,559
Related parties 883,853 611,243
Interest payable 9,418,954 8,313,125
Accrued liabilities 1,220,697 1,278,532
Tenant security deposits 247,689 236,677
---------- ----------
Total liabilities 46,713,112 45,735,815
---------- ----------
Partners' equity (19,320,784) (17,101,899)
---------- ----------
Total $27,392,328 $28,633,916
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Rental income $1,153,992 $1,122,119 $3,345,961 $3,229,976
Hotel income 317,719 322,393 958,810 983,794
Interest income 7,294 3,322 18,320 14,210
--------- --------- --------- ---------
Total revenues 1,479,005 1,447,834 4,323,091 4,227,980
--------- --------- --------- ---------
Costs and expenses:
Rental operations 457,267 467,846 1,355,450 1,333,661
Hotel operations 284,224 413,194 1,099,746 1,183,846
General and
administrative 49,500 49,500 148,500 148,500
Interest 833,251 782,066 2,684,107 2,320,097
Depreciation and
amortization 421,413 417,726 1,254,173 1,252,843
--------- --------- --------- ---------
Total costs and
expenses 2,045,655 2,130,332 6,541,976 6,238,947
--------- --------- --------- ---------
Net loss ($ 566,650) ($ 682,498) ($2,218,885) ($2,010,967)
========= ========= ========= =========
Net loss per limited
partnership unit ($ 27.24) ($ 32.81) ($ 106.67) ($ 96.68)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine months ended
September 30,
1997 1996
Cash flows from operating activities: ------ ------
Net loss ($2,218,885) ($2,010,967)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,254,173 1,252,843
Changes in assets and liabilities:
Decrease (increase) in restricted cash 453,772 (307,501)
(Increase) decrease in accounts receivable (27,591) 21,225
Increase in other assets (165,564) (36,122)
Increase in accounts payable - trade 323,900 1,235,601
Increase (decrease) in accounts payable -
related parties 272,610 (45,517)
Increase in interest payable 1,105,829 1,070,519
Decrease in accrued liabilities (57,835) (919,688)
Increase in tenant security deposits 11,012 953
--------- ---------
Net cash provided by operating activities 951,421 261,346
--------- ---------
Cash flows from investing activities:
Capital expenditures (156,227) (214,712)
--------- ---------
Net cash used in investing activities (156,227) (214,712)
--------- ---------
Cash flows from financing activities:
Principal payments (678,219) (114,383)
--------- ---------
Net cash used in financing activities (678,219) (114,383)
--------- ---------
Increase (decrease) in cash and cash equivalents 116,975 (67,749)
Cash and cash equivalents at beginning of period 79,567 114,922
--------- ---------
Cash and cash equivalents at end of period $ 196,542 $ 47,173
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $1,578,278 $1,067,470
The accompanying notes are an integral part of these financial statements.
<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, 1996.
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
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, 1998.
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 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 September 30, 1997.
<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 14, 1997 DIVERSIFIED HISTORIC INVESTORS II
-----------------
By: Dover Historic Advisors, General Partner
By: EPK, Inc., Partner
By: /s/ Donna M. Zanghi
----------------------------
DONNA M. ZANGHI,
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 196,542
<SECURITIES> 0
<RECEIVABLES> 75,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,408,652
<DEPRECIATION> 19,069,849
<TOTAL-ASSETS> 27,392,328
<CURRENT-LIABILITIES> 3,416,312
<BONDS> 32,409,460
0
0
<COMMON> 0
<OTHER-SE> (19,320,784)
<TOTAL-LIABILITY-AND-EQUITY> 27,392,328
<SALES> 0
<TOTAL-REVENUES> 4,323,091
<CGS> 0
<TOTAL-COSTS> 2,455,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,684,107
<INCOME-PRETAX> (2,218,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,218,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,218,885)
<EPS-PRIMARY> 0
<EPS-DILUTED> (106.67)
</TABLE>
