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, 1999
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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
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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.)
1609 Walnut Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 557-9800
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 X No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998
Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 (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, 1999, Registrant had cash of
$94,634. 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, 1999, Registrant had restricted
cash of $1,617,388 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 2000. 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
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 1999, Registrant
incurred a net loss of $829,685 ($39.89 per limited partnership unit)
compared to a net loss of $605,746 ($29.12 per limited partnership
unit) for the same period in 1998.
Rental and hotel income combined increased $54,055
from $1,519,967 in the first quarter of 1998 to $1,574,022 in the same
period in 1999. This increase resulted from an increase of $49,706 in
rental income and an increase of $4,349 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
partially offset by both a decrease of rental income at Washington
Square due to a decrease in the average occupancy (96% to 95%) and a
decrease in rental income of the commercial space at Factor's Walk due
to a decrease in the average occupancy (86% to 64%). Hotel income
increased due to an increase in average occupancy (72% to 76%)
partially offset by a decrease in the average room rates ($125.17 to
$121.60).
Interest income decreased from $8,235 in the first
quarter of 1998 to $4,277 in the same period in 1999. The decrease is
the result of a decrease in the cash balances held in interest bearing
accounts in the first quarter of 1999 as compared to the same period
in 1998.
Expense for rental operations increased by
$103,615 from $430,991 in the first quarter of 1998 to $534,606 in the
same period in 1999. The increase in rental operations is due to an
increase in maintenance expense at both Tindeco Wharf and Washington
Square and an increase in management fees and legal fees at Tindeco
Wharf. The increase in maintenance expense at Tindeco Wharf is due to
planned renovations at the property. Management fees expense increased
due to the increase in rental income and legal fees increased due to
negotiations with the previous management company. The increase at
Washington Square is due to a higher turnover of apartment units.
Hotel operations expense increased $78,095 from
$283,233 in the first quarter of 1998 to $361,328 in the same period
of 1999. 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 and
an increase in maintenance expense due to various building repairs
performed in the first quarter of 1999.
Interest expense increased $72,853 from $947,905
in the first quarter of 1998 to $1,020,758 in the same period in 1999.
Interest expense increased due to an increase in the principal balance
upon which interest is calculated at both Tindeco Wharf and Factor's
Walk.
Depreciation and amortization expense increased
$19,473 from $422,319 in the first quarter of 1998 to $441,792 in the
same period in 1999 due to the depreciation of fixed asset additions
in 1998 at Tindeco Wharf.
Losses incurred during the quarter at the
Registrant's three properties amounted to $699,000, compared to a loss
of approximately $478,000 for the same period in 1998.
In the first quarter of 1999, Registrant incurred
a loss of $432,000 at Tindeco Wharf including $306,000 of depreciation
and amortization expense, compared to a loss of $317,000 in the first
quarter of 1998, including $288,000 of depreciation expense. The
increased loss from the first quarter of 1998 to the first quarter of
1999 is the result of an increase in interest, management fees,
maintenance, depreciation and legal expense and a decrease in the
interest income partially offset by an increase in rental income due
to an increase in the average rental rates. The increase in interest
expense is due to the increase in principal balance upon which
interest is calculated. The increase in management fees is due to the
increase in rental income. The increase in maintenance expense is due
to planned renovations at the property including roof repairs,
appliance replacement, and painting. Depreciation expense increased
due to the depreciation of fixed asset additions in 1998. Interest
income decreased due to a decrease in the cash balances which generate
the interest income. Legal fees increased due to negotiations with
the previous management company in connection with the termination of
their management contract.
In the first quarter of 1999, Registrant incurred
a loss of $255,000 at The River Street Inn (Factor's Walk) including
$92,000 of depreciation expense, compared to a loss of $170,000
including $93,000 of depreciation expense in the first quarter of
1998. The increased loss from the first quarter of 1998 to the same
period in 1999 is the result of a decrease in commercial rental
income, an increase in maintenance expense, interest expense and hotel
operating expenses (rooms, wages and salaries, and administrative
expenses) partially offset by an increase in hotel income. Rental
income decreased due to a decrease in the average occupancy of the
commercial space (86% to 64%) due to the loss of a tenant.
Maintenance expense increased due to an increase in general building
repairs and increases in electrical, mechanical, fire protection, and
heating/air conditioning repairs made to the property. Interest
expense increased due to an increase in the principal balance upon
which interest is accrued. Hotel operating expenses increased due to
the increase in the average occupancy. Hotel income increased due to
an increase in the average occupancy (72% to 76%) partially offset by
a decrease in the average room rates ($125.17 to $121.60).
In the first quarter of 1999, Registrant incurred
a loss of $12,000 at Washington Square, including $30,000 of
depreciation expense, compared to income of $9,000 including $29,000
of depreciation expense in the first quarter of 1998. The change from
income recognized in the first quarter of 1998 to a loss incurred in
the first quarter of 1999 is due to a decrease in rental income
combined with an increase in maintenance expense. The decrease in
rental income is due to a decrease in the average occupancy (96% to
95%) of the residential apartment units and the loss of one commercial
tenant. The increase in maintenance expense is due to an increase in
the apartment preparation expense caused by a higher turnover of
apartment units.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
March 31, 1999 December 31, 1998
(Unaudited)
Rental properties, at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 40,542,742 40,542,742
Furniture and fixtures 3,129,456 3,026,576
---------- ----------
44,606,780 44,503,900
Less - Accumulated depreciation (21,648,386) (21,218,232)
---------- ----------
22,958,394 23,285,668
Cash and cash equivalents 94,634 219,254
Restricted cash 1,617,388 1,095,373
Accounts and notes receivable 96,031 71,582
Other assets (net of amortization of
$363,418 and $351,780 at March 31, 1999
and December 31, 1998, respectively) 1,674,560 1,831,411
---------- ----------
Total $26,441,007 $26,503,288
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,784,397 $32,808,014
Accounts payable:
Trade 3,009,093 2,827,452
Related parties 1,576,911 1,521,734
Interest payable 11,785,597 11,343,408
Accrued liabilities 1,400,805 1,293,221
Tenant security deposits 253,564 249,134
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Total liabilities 50,810,367 50,042,963
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Partners' equity (24,369,360) (23,539,675)
---------- ----------
Total $26,441,007 $26,503,288
========== ==========
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, 1999 and 1998
(Unaudited)
Three months Three months
Ended Ended
March 31, March 31,
1999 1998
Revenues:
Rental income $1,190,663 $1,140,957
Hotel income 383,359 379,010
Interest income 4,277 8,235
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Total revenues 1,578,299 1,528,202
--------- ---------
Costs and expenses:
Rental operations 534,606 430,991
Hotel operations 361,328 283,233
General and administrative 49,500 49,500
Interest 1,020,758 947,905
Depreciation and amortization 441,792 422,319
--------- ---------
Total costs and expenses 2,407,984 2,133,948
--------- ---------
Net loss ($ 829,685) ($ 605,746)
========= =========
Net loss per limited partnership unit($ 39.89) ($ 29.12)
========= =========
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, 1999 and 1998
(Unaudited)
Three months ended
March 31,
1999 1998
Cash flows from operating activities:
Net loss ($829,685) ($605,746)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 441,792 422,319
Changes in assets and liabilities:
Increase in restricted cash (522,015) (288,392)
(Increase) decrease in accounts receivable (24,449) 12,273
Decrease in other assets 145,213 157,091
Increase in accounts payable - trade 181,641 81,098
Increase in accounts payable - related parties 55,177 983,100
Increase in interest payable 442,189 417,943
Increase (decrease) in accrued liabilities 107,584 (947,767)
Increase in tenant security deposits 4,430 3,938
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Net cash provided by operating activities 1,877 235,857
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Cash flows from investing activities:
Capital expenditures (102,880) (71,801)
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Net cash used in investing activities (102,880) (71,801)
------- -------
Cash flows from financing activities:
Principal payments (23,617) (74,397)
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Net cash used in financing activities (23,617) (74,397)
------- -------
(Decrease) increase in cash and cash equivalents (124,620) 89,659
Cash and cash equivalents at beginning of period 219,254 71,023
------- -------
Cash and cash equivalents at end of period $ 94,634 $160,682
======= =======
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, 1998.
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, 1999. 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, 1999.
<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: September 17, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 94,634
<SECURITIES> 0
<RECEIVABLES> 96,031
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 44,606,780
<DEPRECIATION> 21,648,386
<TOTAL-ASSETS> 26,441,007
<CURRENT-LIABILITIES> 3,009,093
<BONDS> 32,784,397
0
0
<COMMON> 0
<OTHER-SE> (24,369,360)
<TOTAL-LIABILITY-AND-EQUITY> 26,441,007
<SALES> 0
<TOTAL-REVENUES> 1,578,299
<CGS> 0
<TOTAL-COSTS> 895,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,020,758
<INCOME-PRETAX> (829,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> (829,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (829,685)
<EPS-BASIC> 0
<EPS-DILUTED> (39.89)
</TABLE>
