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, 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 - June 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 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 June 30, 1997, Registrant had cash of
$209,860. Such funds are expected to be used to pay the liabilities
and general and administrative expenses 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, 1997, Registrant had restricted
cash of $991,616 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 second quarter of 1997, Registrant
incurred a net loss of $975,562 ($46.90 per limited partnership unit)
compared to a net loss of $517,182 ($24.86 per limited partnership
unit) for the same period in 1996. For the first six months of 1997,
the Registrant incurred a net loss of $1,652,234 ($79.43 per limited
partnership unit) compared to a net loss of $1,328,469 ($63.86 per
limited partnership unit) for the same period in 1996.
Rental income increased $27,777 from $1,086,957 in
the second quarter of 1996 to $1,114,734 in the same period in 1997
and increased $84,112 from $2,107,857 for the first six months of 1996
to $2,191,969 in the same period on 1997. The increase in rental
income in both the second quarter and the first six months of 1997 as
compared to the same periods in 1996 is 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 $21,005 from $364,458 in
the second quarter of 1996 to $343,453 in the same period in 1997 and
decreased $20,310 from $661,401 for the first six months of 1996 to
$641,091 for the same period in 1997. The decreases are due to
decreases in occupancy in the second quarter (88% to 80%) and for the
first six months (81% to 75%) of 1997 partially offset by increases in
average room rates in the second quarter ($103.77 to $105.96) and for
the first six months ($99.18 to $104.22) of 1997 as compared to the
same periods in 1996.
Expense for rental operations increased by $47,283
from $424,046 in the second quarter of 1996 to $471,329 in the same
period in 1997 and increased $32,367 from $865,515 for the first six
months of 1996 to $898,182 for the same period in 1997. Rental
operations expense increased for both the second quarter and the first
six months of 1997 as compared to the same periods in 1996 due to an
increase in legal fees at Tindeco Wharf resulting from a review of the
underlying loan documents partially offset by a decrease in
maintenance and utilities expense at Washington Square as these
expenses returned to more normal levels from those in the comparable
levels of 1996 resulting from inclement weather in the winter of 1996.
Hotel operations expense increased $231,926 from
$311,677 in the second quarter of 1996 to $543,603 in the same period
in 1997. The increase in hotel operations was due to an increase in
administrative expense partially offset by a decrease in rent expense.
Administrative expense increased due to a misapplication of payments
on a note payable where the payments should have been classified as
administrative expenses while rent expense decreased due to the
assignment of the lease to another entity which will develop the
adjacent property.
Hotel operations expense increased $44,870 from
$770,652 for the first six months of 1996 to $815,522 for the same
period in 1997. The increase in hotel operations was due to an
increase in administrative expense partially offset by a decrease in
commissions and rent expense. Administrative expense increased due to
a misapplication of payments on a note payable where the payments
should have been classified as administrative expenses. Commissions
expense decreased due to the execution of a lease in the first quarter
of 1996, between Factor's Walk Partners ("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 to
another entity which will develop the adjacent property.
Interest expense increased $183,416 from $771,985
in the second quarter of 1996 to $955,401 in the same period in 1997
and increased $312,825 from $1,538,031 for the first six months of
1996 to $1,850,856 for the same period in 1997. Interest expense
increased 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 $888,000, compared to a loss
of approximately $405,000 for the same period in 1996. For the first
six months of 1997 the Registrant's three properties recognized a loss
of $1,433,000 compared to approximately $1,100,000 for the same period
in 1996.
In the second quarter of 1997, Registrant incurred
a loss of $436,000 at Tindeco Wharf including $288,000 of depreciation
and amortization expense, compared to a loss of $369,000 in the second
quarter of 1996, including $288,000 of depreciation and amortization
expense. The increased loss from the second quarter of 1996 to the
same period in 1997 is the result of an increase in legal fees
partially offset by an increase in residential rental income due to an
increase in the average rental rates. Legal fees increased due to
fees incurred in connection with a review of the underlying loan
documents.
For the first six months of 1997, Registrant
incurred a loss of $806,000 at Tindeco Wharf including $565,000 of
depreciation and amortization expense, compared to a loss of $786,000
for the same period in 1995, including $576,000 of depreciation and
amortization expense. The increase in the loss from the first six
months of 1996 to the same period in 1997 is the result of an increase
in interest expense and legal fees partially offset by an increase in
residential rental income due to an increase in the average rental
rates and a decrease in depreciation expense. 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.
Depreciation expense decreased due to the fact that some personal
property became fully depreciation in the first quarter of 1997.
In the second quarter of 1997, Registrant incurred
a loss of $460,000 at The River Street Inn including $93,000 of
depreciation expense, compared to a loss of $32,000 including $88,000
of depreciation expense in the second quarter of 1996. The increased
loss from the second quarter 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 commercial rental income combined with a decrease in
commissions and rent expense. Hotel income decreased due to a
decrease in occupancy (88% to 80%) partially offset by an increase in
the average room rates ($103.77 to $105.96) 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 occupancy of the commercial space (90%
to 93%). 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 to
another entity which will develop the adjacent property.
For the first six months of 1997, Registrant
incurred a loss of $632,000 at The River Street Inn including $185,000
of depreciation expense, compared to a loss of $294,000 for the same
period in 1996, including $177,000 of depreciation expense. The
increased loss from the first six 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 combined with a
decrease in commissions and rent expense. Hotel income decreased due
to a decrease in occupancy (81% to 75%) partially offset by an
increase in the average room rates ($99.18 to $104.22) 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 occupancy of the commercial space (90%
to 93%). 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 to
another entity which will develop the adjacent property.
In the second quarter of 1997, Registrant
recognized income of $8,000 at Washington Square, including $28,000 of
depreciation expense, compared to a loss of $4,000 including $27,000
of depreciation expense in the second quarter of 1996 and for the
first six months of 1997, Registrant recognized income of $5,000 at
Washington Square including $55,000 of depreciation expense, compared
to a loss of $20,000 for the same period in 1996, including $55,000 of
depreciation expense. The decrease in the loss from the second
quarter and the first six months of 1996 to the same periods 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 as a result of the inclement weather
experienced in the winter of 1996.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
June 30, 1997 December 31, 1996
(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,682,568 39,577,198
Furniture and fixtures 2,740,645 2,740,645
---------- ----------
43,357,795 43,252,425
Less - Accumulated depreciation (18,661,246) (17,857,486)
---------- ----------
24,585,549 25,394,939
Cash and cash equivalents 209,860 79,567
Restricted cash 991,616 1,300,767
Accounts and notes receivable 42,911 47,497
Other assets (net of amortization of
$268,282 and $239,940 at June 30, 1997 and
December 31, 1996, respectively)
1,639,793 1,811,146
---------- ----------
Total $27,580,729 $28,633,916
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,446,089 $33,087,679
Accounts payable:
Trade 2,460,957 2,208,559
Related parties 794,701 611,243
Interest payable 9,172,992 8,313,125
Accrued liabilities 1,214,216 1,278,532
Tenant security deposits 245,907 236,677
---------- ----------
Total liabilities 46,334,862 45,735,815
---------- ----------
Partners' equity (18,754,133) (17,101,899)
---------- ----------
Total $27,580,729 $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 Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Rental income $1,114,734 $1,086,957 $2,191,969 $2,107,857
Hotel income 343,453 364,458 641,091 661,401
Interest income 7,501 6,182 11,026 10,888
--------- --------- --------- ---------
Total revenues 1,465,688 1,457,597 2,844,086 2,780,146
--------- --------- --------- ---------
Costs and expenses:
Rental operations 471,329 424,046 898,182 865,815
Hotel operations 543,603 311,677 815,522 770,652
General and
administrative 49,500 49,500 99,000 99,000
Interest 955,401 771,985 1,850,856 1,538,031
Depreciation and
amortization 422,417 417,571 832,760 835,117
--------- --------- --------- ---------
Total costs and
expenses 2,442,250 1,974,779 4,496,320 4,108,615
--------- --------- --------- ---------
Net loss ($ 975,562) ($ 517,182) ($1,652,234) ($1,328,469)
========= ========= ========= =========
Net loss per limited
partnership unit ($ 46.90) ($ 24.86) ($ 79.43) ($ 63.86)
========= ========= ========= =========
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 Six Months Ended June 30, 1997 and 1996
(Unaudited)
Six months ended
June 30,
1997 1996
------ ------
Cash flows from operating activities:
Net loss ($1,652,234) ($1,328,469)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 832,760 835,117
Changes in assets and liabilities:
Decrease (increase) in restricted cash 309,151 (448,685)
Decrease in accounts receivable 4,586 14,244
Decrease in other assets 142,353 259,478
Increase in accounts payable - trade 252,398 168,087
Increase (decrease) in accounts payable -
related parties 183,458 (32,832)
Increase in interest payable 859,867 714,216
(Decrease) increase in accrued liabilities (64,316) 20,150
Increase in tenant security deposits 9,230 5,445
--------- ---------
Net cash provided by operating activities 877,253 206,751
--------- ---------
Cash flows from investing activities:
Capital expenditures (105,370) (169,199)
--------- ---------
Net cash used in investing activities (105,370) (169,199)
--------- ---------
Cash flows from financing activities:
Principal payments (641,590) (84,729)
--------- ---------
Net cash used in financing activities (641,590) (84,729)
--------- ---------
Increase (decrease) in cash and cash equivalents 130,293 (47,177)
Cash and cash equivalents at beginning of period 79,567 114,922
--------- ---------
Cash and cash equivalents at end of period $ 209,860 $ 67,745
========= =========
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 in order to forestall foreclosure by a lender on the
property owned by it. In addition, the lender filed a claim against
the Registrant on its guaranty of payment of its debt. 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
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 June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 209,860
<SECURITIES> 0
<RECEIVABLES> 42,911
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,357,795
<DEPRECIATION> 18,662,246
<TOTAL-ASSETS> 27,580,729
<CURRENT-LIABILITIES> 3,255,658
<BONDS> 32,446,089
0
0
<COMMON> 0
<OTHER-SE> (18,754,133)
<TOTAL-LIABILITY-AND-EQUITY> 27,580,729
<SALES> 0
<TOTAL-REVENUES> 2,844,086
<CGS> 0
<TOTAL-COSTS> 898,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,850,856
<INCOME-PRETAX> (1,652,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,652,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,652,234)
<EPS-PRIMARY> (79.43)
<EPS-DILUTED> 0
</TABLE>
