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, 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 - June 30, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 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 June 30, 1998, Registrant had cash of
$173,129. 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, 1998, Registrant had restricted
cash of $1,710,571 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 Inn, if Capital Bank
executes upon its $1,800,000 judgment with respect to 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
1999. 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, 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 1998, Registrant
incurred a net loss of $691,705 ($33.25 per limited partnership unit)
compared to a net loss of $976,562 ($46.95 per limited partnership
unit) for the same period in 1997. For the first six months of 1998,
the Registrant incurred a net loss of $1,297,451 ($62.37 per limited
partnership unit) compared to a net loss of $1,652,234 ($79.43 per
limited partnership unit) for the same period in 1997.
Rental income increased $4,364 from $1,114,734 in
the second quarter of 1997 to $1,119,098 in the same period in 1998
and increased $68,086 from $2,191,969 for the first six months of 1997
to $2,260,055 in the same period on 1998. The increase in rental
income for both the second quarter and the first six months of 1998 as
compared to the same periods in 1997 is the result of an increase in
residential rental income at both Tindeco Wharf and Washington Square
due to an increase in the average rental rates partially offset by a
decrease in rental income of the commercial space at Factor's Walk due
to a decrease in the average rental rates of the commercial space.
Hotel income increased $91,710 from $343,453 in
the second quarter of 1997 to $435,163 in the same period in 1998 and
increased $173,082 from $641,091 for the first six months of 1997 to
$814,173 for the same period in 1998. The increase in hotel income
for both the second quarter and the first six months of 1998 as
compared to the same periods in 1997 is the result of increases in the
average room rates for the second quarter ($105.96 to $134.16) and for
the first six months ($104.22 to $129.67).
Expense for rental operations decreased by $10,293
from $471,329 in the second quarter of 1997 to $461,036 in the same
period in 1998 and increased $6,155 from $898,182 for the first six
months of 1997 to $892,027 for the same period in 1998. Rental
operations expense decreased from the second quarter of 1997 to the
same period in 1998 due to a decrease at Tindeco Wharf due to
operational efficiencies achieved at the property partially offset by
an overall increase in rental operations expense at Washington Square
due to the increase in the average occupancy.
Hotel operations expense decreased $170,579 from
$543,603 in the second quarter of 1997 to $373,024 in the same period
in 1998 and decreased $159,265 from $815,522 for the first six months
of 1997 to $656,257 for the same period in 1998. The decrease in
hotel operations expense was due to a misclassification of payments on
a note payable where the payments should have been classified as
administrative expenses. The misapplication was corrected in the
second quarter of 1997.
Interest expense decreased $7,275 from $955,401 in
the second quarter of 1997 to $948,126 in the same period in 1998, and
increased $45,175 from $1,850,856 for the first six months of 1997 to
$1,896,031 for the same period in 1998. The increase from the first
six months of 1997 to the same period in 1998 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 $563,000, compared to a loss
of approximately $888,000 for the same period in 1997. For the first
six months of 1998, the Registrant's three properties recognized a
loss of $1,041,000 compared to approximately $1,433,000 for the same
period in 1997.
In the second quarter of 1998, Registrant incurred
a loss of $376,000 at Tindeco Wharf including $288,000 of depreciation
and amortization expense, compared to a loss of $436,000 in the second
quarter of 1997, including $288,000 of depreciation and amortization
expense and, for the first six months of 1998, incurred a loss of
$693,000 including $565,000 of depreciation and amortization expense,
compared to a loss of $806,000 for the same period in 1997, including
$565,000 of depreciation and amortization expense. The decreased loss
from the second quarter and the first six months of 1997 to the same
periods in 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, a decrease in legal
fees partially offset by an increase in interest expense. Legal fees
decreased due to fees incurred in the first six months of 1997 in
connection with a review of the underlying loan documents. Interest
expense increased due to an increase in the principal balance upon
which interest is calculated at Tindeco Wharf.
In the second quarter of 1998, Registrant incurred
a loss of $197,000 at The River Street Inn including $93,000 of
depreciation expense, compared to a loss of $460,000 including $93,000
of depreciation expense in the second quarter of 1997. The decreased
loss from the second quarter of 1997 to the same period in 1998 is the
result of an increase in hotel income combined with a decrease in
administrative expenses partially offset by a decrease in rental
income relating to the commercial space. Hotel income increased due
to an increase in the average room rates ($105.96 to $134.16).
Administrative expense decreased due to a misclassification of
payments on a note payable where the payments should have been
classified as administrative expenses. The misclassification was
corrected in the second quarter of 1997. Rental income decreased due
to a decrease in the average rental rates of the commercial space.
For the first six months of 1998, Registrant
incurred a loss of $367,000 at The River Street Inn including $185,000
of depreciation expense, compared to a loss of $632,000 for the same
period in 1997, including $185,000 of depreciation expense. The
decrease in the loss from the first six months of 1997 to the same
period in 1998 is the result of an increase in hotel income combined
with a decrease in administrative expenses partially offset by a
decrease in rental income relating to the commercial space. Hotel
income increased due to an increase in the average room rates ($104.22
to $129.67). Administrative expense decreased due to a
misclassification of payments on a note payable where the payments
should have been classified as administrative expenses. The
misclassification was corrected in the second quarter of 1997. Rental
income decreased due to a decrease in the average rental rates of the
commercial space.
In the second quarter of 1998, Registrant
recognized income of $10,000 at Washington Square, including $29,000
of depreciation expense, compared to a income of $8,000 including
$27,000 of depreciation expense in the second quarter of 1997 and, for
the first six months of 1998, recognized income of $19,000 including
$57,000 of depreciation expense, compared to income of $5,000 for the
same period in 1997, including $55,000 of depreciation expense. The
decrease in the loss from the second quarter and the first six months
of 1997 to the same periods in 1998 is due to an increase in rental
income due to an increase in the average rental rates 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
June 30, 1998 December 31, 1997
(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,801,960 39,666,989
Furniture and fixtures 2,894,295 2,866,600
---------- ----------
43,630,837 43,468,171
Less - Accumulated depreciation (20,321,224) (19,522,725)
---------- ----------
23,309,613 23,945,446
Cash and cash equivalents 173,129 71,023
Restricted cash 1,710,571 1,293,871
Accounts and notes receivable 63,116 48,911
Other assets (net of amortization of
$335,066 and $288,791 at June 30, 1998
and December 31, 1997, respectively) 1,590,521 1,784,502
---------- ----------
Total $26,846,950 $27,143,753
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,613,731 $32,712,165
Accounts payable:
Trade 2,747,120 2,565,803
Related parties 1,375,101 345,603
Interest payable 10,377,088 9,576,402
Accrued liabilities 1,337,553 2,260,486
Tenant security deposits 253,201 242,687
---------- ----------
Total liabilities 48,703,794 47,703,146
---------- ----------
Partners' equity (21,856,844) (20,559,393)
---------- ----------
Total $26,846,950 $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 and Six Months Ended June 30, 1998 and 1997
(Unaudited)
Three months Six months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Revenues:
Rental income $1,119,098 $1,114,734 $2,260,055 $2,191,969
Hotel income 435,163 343,453 814,173 641,091
Interest income 8,180 7,501 16,415 11,026
--------- --------- --------- ---------
Total revenues 1,562,441 1,465,688 3,090,643 2,844,086
--------- --------- --------- ---------
Costs and expenses:
Rental operations 461,036 471,329 892,027 898,182
Hotel operations 373,024 543,603 656,257 815,522
General and
Administrative 49,500 49,500 99,000 99,000
Interest 948,126 955,401 1,896,031 1,850,856
Depreciation and
Amortization 422,460 422,417 844,779 832,760
--------- --------- --------- ---------
Total costs and
Expenses 2,554,146 2,442,250 4,388,094 4,496,320
--------- --------- --------- ---------
Net loss ($ 691,705) ($ 976,562) ($1,297,451) ($1,652,234)
========= ========= ========= =========
Net loss per limited
Partnership unit ($ 33.25) ($ 46.95) ($ 62.37) ($ 79.43)
========= ========= ========= =========
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, 1998 and 1997
(Unaudited)
Six months ended
June 30,
1998 1997
Cash flows from operating activities:
Net loss ($1,297,451) ($1,652,234)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 844,779 832,760
Changes in assets and liabilities:
(Increase) decrease in restricted cash (416,700) 309,151
(Increase) decrease in accounts receivable (14,205) 4,586
Decrease in other assets 147,701 142,353
Increase in accounts payable - trade 181,317 252,398
Increase in accounts payable - related parties 1,029,498 183,458
Increase in interest payable 800,686 859,867
Decrease in accrued liabilities (922,933) (64,316)
Increase in tenant security deposits 10,514 9,230
--------- ---------
Net cash provided by operating activities 363,206 877,253
--------- ---------
Cash flows from investing activities:
Capital expenditures (162,666) (105,370)
--------- ---------
Net cash used in investing activities (162,666) (105,370)
--------- ---------
Cash flows from financing activities:
Principal payments (98,434) (641,590)
--------- ---------
Net cash used in financing activities (98,434) (641,590)
--------- ---------
Increase in cash and cash equivalents 102,106 130,293
Cash and cash equivalents at beginning of period 71,023 79,567
--------- ---------
Cash and cash equivalents at end of period $ 173,129 $ 209,860
========= =========
The accompanying notes are an integral part if 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 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, 1999.
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 June 30, 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: August 20, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 173,129
<SECURITIES> 0
<RECEIVABLES> 63,116
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,630,837
<DEPRECIATION> 20,321,224
<TOTAL-ASSETS> 26,846,950
<CURRENT-LIABILITIES> 4,122,221
<BONDS> 32,613,731
0
0
<COMMON> 0
<OTHER-SE> (21,856,844)
<TOTAL-LIABILITY-AND-EQUITY> 26,846,950
<SALES> 0
<TOTAL-REVENUES> 3,090,643
<CGS> 0
<TOTAL-COSTS> 1,548,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,896,031
<INCOME-PRETAX> (1,297,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,297,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,297,451)
<EPS-PRIMARY> 0
<EPS-DILUTED> (62.37)
</TABLE>
