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, 1998
---------------------------------------
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
-----------------------------------------------
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.)
1609 Walnut Street, Philadelphia, PA 19103
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 557-9800
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 - March 31, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 (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, 1998, Registrant had cash of
$160,682. 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 and to defer administrative costs. The Registrant is
not aware of any additional sources of liquidity.
As of March 31, 1998, Registrant had restricted
cash of $1,582,263 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
its judgment against the Registrant, it is expected to have
significant adverse impact on the Registrant since there is
insufficient available cash to pay the judgment. Any such execution
could result in a forced sale of the Registrant's remaining
properties. However, the Registrant has in the past been able to
obtain forebearance on execution for several years upon payment of a
$20,000 fee to the judgment creditor and believes it may be able to do
so when the current forebearance period ends in July 1998. 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 (or, as described above, Capital Bank executes its
judgment against the Registrant), 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, other than the above, 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 1998, Registrant
incurred a net loss of $605,746 ($29.12 per limited partnership unit)
compared to a net loss of $675,672 ($32.48 per limited partnership
unit) for the same period in 1997.
Rental and hotel income combined increased
$145,094 from $1,374,873 in the first quarter of 1997 to $1,519,967 in
the same period in 1998. This increase resulted from an increase of
$64,000 in rental income and an increase of $81,000 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, an increase at Washington Square due to an
increase in the average occupancy (90% to 96%) partially offset by a
decrease in rental income of the commercial space at Factor's Walk due
to a decrease in the average occupancy (97% to 86%). Hotel income
increased due to an increase in the average room rates ($102.47 to
$125.17) and an increase in average occupancy (70% to 72%).
Interest income increased from $3,525 in the first
quarter of 1997 to $8,235 in the same period in 1998. The increase is
the result of additional cash held in interest bearing accounts in the
first quarter of 1998 as compared to the same period in 1997.
Expense for rental operations increased by $4,138
from $426,853 in the first quarter of 1997 to $430,991 in the same
period in 1998. Rental operations expense increased at Washington
Square due to the increase in the average occupancy partially offset
by a decrease at Tindeco Wharf due to operational efficiencies
achieved at the property. Hotel operations expense increased $11,314
from $271,919 in the first quarter of 1997 to $283,233 in the same
period in 1998. The increase in hotel operations expense was due to
an increase in certain operating expenses (rooms, wages and salaries,
and administrative expenses) due to the increase in average occupancy.
Interest expense increased $52,450 from $895,455
in the first quarter of 1997 to $947,905 in the same period in 1998.
Interest expense increased due to an increase in the principal balance
upon which interest is calculated at Factor's Walk.
Losses incurred during the quarter at the
Registrant's three properties amounted to $478,000, compared to a loss
of approximately $545,000 for the same period in 1997.
In the first quarter of 1998, Registrant incurred
a loss of $317,000 at Tindeco Wharf including $288,000 of depreciation
and amortization expense, compared to a loss of $370,000 in the first
quarter of 1997, including $288,000 of depreciation expense. The
decreased loss from the first quarter of 1997 to the first quarter of
1998 is the result of an increase in residential rental income due to
an increase in the average rental rates combined with an increase in
interest income due to higher cash balances maintained by the property
and an overall decrease in operating expenses due to operational
efficiencies obtained at the property.
In the first quarter of 1998, Registrant incurred
a loss of $170,000 at The River Street Inn (Factor's Walk) including
$93,000 of depreciation expense, compared to a loss of $172,000
including $92,000 of depreciation expense in the first quarter of
1997. The decreased loss from the first quarter of 1997 to the same
period in 1998 is the result of an increase in hotel income partially
offset by a decrease in rental income, an increase in interest expense
and an increase in certain operating expenses (rooms, wages and
salaries, and administrative expenses) due to the increase in average
occupancy. Hotel income increased due to an increase in the average
occupancy (70% to 72%) and an increase in the average room rates
($102.47 to $125.17). Rental income decreased due to a decrease in
the average occupancy of the commercial space (97% to 86%) due to the
loss of a tenant. Interest expense increased due to an increase in
the principal balance upon which interest is accrued.
In the first quarter of 1998, Registrant
recognized income of $9,000 at Washington Square, including $29,000 of
depreciation expense, compared to a loss of $3,000 including $28,000
of depreciation expense in the first quarter of 1997. The change form
loss to income producing status from the first quarter of 1997 to the
same period in 1998 is due to an increase in rental income due to an
increase in the average rental rates and an increase in the average
occupancy (90% to 96%) partially offset by an overall increase in
rental operations expense due to the increase in the average
occupancy.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
March 31, 1998 December 31, 1997
(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,738,790 39,666,989
Furniture and fixtures 2,866,600 2,866,600
---------- ----------
43,539,972 43,468,171
Less - Accumulated depreciation (19,911,248) (19,522,725)
---------- ----------
23,628,724 23,945,446
Cash and cash equivalents 160,682 71,023
Restricted cash 1,582,263 1,293,871
Accounts and notes receivable 36,638 48,911
Other assets (net of amortization of
$322,589 and $288,791 at March 31, 1998
and December 31, 1997, respectively)
1,593,615 1,784,502
---------- ----------
Total $27,001,922 $27,143,753
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,637,768 $32,712,165
Accounts payable:
Trade 2,646,901 2,565,803
Related parties 1,328,703 345,603
Interest payable 9,994,345 9,576,402
Accrued liabilities 1,312,719 2,260,486
Tenant security deposits 246,625 242,687
---------- ----------
Total liabilities 48,167,061 47,703,146
---------- ----------
Partners' equity (21,165,139) (20,559,393)
---------- ----------
Total $27,001,922 $27,143,753
========== ==========
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 Ended March 31, 1998 and 1997
(Unaudited)
Three months Three months
Ended ended
March 31, March 31,
1998 1997
Revenues:
Rental income $ 1,140,957 $ 1,077,235
Hotel income 379,010 297,638
Interest income 8,235 3,525
--------- ---------
Total revenues 1,528,202 1,378,398
--------- ---------
Costs and expenses:
Rental operations 430,991 426,853
Hotel operations 283,233 271,919
General and administrative 49,500 49,500
Interest 947,905 895,455
Depreciation and amortization 422,319 410,343
--------- ---------
Total costs and expenses 2,133,948 2,054,070
--------- ---------
Net loss ($ 605,746) ($ 675,672)
========= =========
Net loss per limited partnership unit ($ 29.12) ($ 32.48)
========= =========
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 Three Months Ended March 31, 1998 and 1997
(Unaudited)
Three months ended
March 31,
1998 1997
Cash flows from operating activities:
Net loss ($ 605,746) ($ 675,672)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 422,319 410,343
Changes in assets and liabilities:
Increase in restricted cash (288,392) (295,920)
Decrease (increase) in accounts receivable 12,273 (933)
Decrease in other assets 157,091 98,686
Increase in accounts payable - trade 81,098 150,437
Increase in accounts payable - related parties 983,100 7,112
Increase in interest payable 417,943 470,075
(Decrease) increase in accrued liabilities (947,767) 38,848
Increase in tenant security deposits 3,938 7,799
------- -------
Net cash provided by operating activities 235,857 210,775
------- -------
Cash flows from investing activities:
Capital expenditures (71,801) (40,819)
------- -------
Net cash used in investing activities (71,801) (40,819)
------- -------
Cash flows from financing activities:
Principal payments (74,397) (99,766)
------- -------
Net cash used in financing activities (74,397) (99,766)
------- -------
Increase in cash and cash equivalents 89,659 70,190
Cash and cash equivalents at beginning of period 71,023 79,567
------- -------
Cash and cash equivalents at end of period $ 160,682 $ 149,757
======= =======
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, 1997.
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. Although there have been no discussions, the
Registrant anticipates that it will be able to extend the forbearance
agreement. See Part I, Item 2(1).
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 March 31, 1998.
<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: May 29, 1998 DIVERSIFIED HISTORIC INVESTORS II
------------
By: Dover Historic Advisors, General Partner
By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer
-----------------------
SPENCER WERTHEIMER,
President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 160,682
<SECURITIES> 0
<RECEIVABLES> 36,638
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,539,972
<DEPRECIATION> 19,911,248
<TOTAL-ASSETS> 27,001,922
<CURRENT-LIABILITIES> 2,646,901
<BONDS> 32,637,768
0
0
<COMMON> 0
<OTHER-SE> (21,165,139)
<TOTAL-LIABILITY-AND-EQUITY> 27,001,922
<SALES> 0
<TOTAL-REVENUES> 1,528,202
<CGS> 0
<TOTAL-COSTS> 714,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 947,905
<INCOME-PRETAX> (605,746)
<INCOME-TAX> 0
<INCOME-CONTINUING> (605,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (605,746)
<EPS-PRIMARY> 0
<EPS-DILUTED> (29.12)
</TABLE>
