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, 1999
------------------------------------------
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.)
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
- --------------------------------------------------------------------------
(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, 1999 (unaudited) and
December 31, 1998
Consolidated Statements of Operations - Three Months and Nine
Months Ended September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Nine Months Ended September
30, 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 September 30, 1999, Registrant had cash of
$20,884. 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, 1999, Registrant had restricted cash
of $1,333,865 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 a 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 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 1999, Registrant incurred a
net loss of $839,352 ($40.35 per limited partnership unit) compared
to a net loss of $796,560 ($38.29 per limited partnership unit) for the
same period in 1998. For the first nine months of 1999, the Registrant
incurred a net loss of $2,312,044 ($111.15 per limited partnership unit)
compared to a net loss of $2,048,836 ($98.50 per limited partnership
unit) for the same period in 1998.
Rental income increased $110,565 from $1,196,406 in the third
quarter of 1998 to $1,306,971 in the same period of 1999. The increase in
rental income is the result of an increase at Tindeco Wharf and Washington
Square partially offset by a decrease at the River Street Inn. The increase
in rental income at both Tindeco Wharf and Washington Square is due to
increases in the average rental rates. The increase in rental income
at Washington Square is due to an increase in average rental rates. The
decrease at The River Street Inn is due to a decrease in the average
occupancy (86% to 64%) of the commercial space due to the loss
of one commercial tenant.
Rental income increased $265,473 from $3,456,461 for the first
nine months of 1998 to $3,721,934 in the same period of 1999. The
ncrease in rental income is the result of an increase at Tindeco Wharf
partially offset by decreases at both Washington Square and the River
Street Inn. The increase in rental income at Tindeco Wharf is due to
an increase in the average rental rates. The decrease in rental income at
Washington Square is due to a decrease in the average occupancy (97% to 95%).
The decrease at The River Street Inn is due to a decrease in the average
occupancy for the first nine months (86% to 64%) of the commercial
space due to the loss of one commercial tenant.
Hotel income decreased $70,231 from $358,348 in the third
quarter of 1998 to $288,117 in the same period in 1999 and decreased
$91,045 from $1,172,521 for the first nine months of 1998 to $1,081,476
for the same period in 1999. The decrease in hotel income for both the
third quarter and the first nine months of 1999 as compared to the same
periods in 1998 is the result of decreases in the average room rates for the
third quarter ($130.32 to $120.66) and for the first nine months ($129.86
to $125.66) combined with decreases in the average occupancy for the third
quarter (67% to 58%) and for the first nine months (73% to 69%). The decreases
are the result of a more active than usual hurricane season.
Expense for rental operations increased by $98,581 from $480,025
in the third quarter of 1998 to $578,606 in the same period in 1999 and
increased $249,315 from $1,372,052 for the first nine months of 1998 to
$1,621,367 for the same period in 1999. Rental operations expense increased
from the third quarter and the first nine months of 1998 to the same periods
in 1999 due to an increase in maintenance expense at Tindeco Wharf due
to planned renovations at the property and at Washington Square due to an
increase in the apartment preparation expense as a result of an increase in
the turnover of apartment units.
Hotel operations expense decreased $107,239 from $395,416 in
the third quarter of 1998 to $288,177 in the same period in 1999 and
decreased $146,473 from $1,051,673 for the first nine months of 1998 to
$905,200 for the same period in 1999. The decrease in hotel operations
expense at the River Street Inn was due to the overall decrease in the
hotel occupancy partially offset by an increase in maintenance expense.
Maintenance expense increased due to general building repairs such as painting,
elevator and heating and air conditioning repairs.
Interest expense increased $62,959 from $1,015,130 in the
third quarter of 1998 to $1,078,089 in the same period in 1999 and increased
$260,573 from $2,865,986 for the first nine months of 1998 to $3,126,559
for the same period in 1999. The increase from the third quarter and the
first nine months of 1998 to the same periods in 1999 is due to an increase
in the principal balance upon which interest is calculated at both Tindeco
Wharf and The River Street Inn.
Losses incurred during the quarter at the Registrant's three
properties amounted to $710,000, compared to a loss of approximately $627,000
for the same period in 1998. For the first nine months of 1999, the
Registrant's three properties recognized a loss of $1,927,000 compared to
approximately $1,668,000 for the same period in 1998.
In the third quarter of 1999, Registrant incurred a loss of
$398,000 at Tindeco Wharf including $306,000 of depreciation and amortization
expense, compared to a loss of $330,000 in the third quarter of 1998,
including $288,000 of depreciation and amortization expense and, for the
first nine months of 1999, Registrant incurred a loss of $1,220,000 at
Tindeco Wharf including $919,000 of depreciation and amortization expense,
compared to a loss of $1,023,000 for the same period in 1998, including
$863,000 of depreciation and amortization expense. The increase in the
loss from the third quarter and first nine months of 1998 to the same
periods in 1999 is the result of an increase in maintenance and interest
expense partially offset by an increase in rental income. Maintenance
expense increased due to planned renovations at the property including roof
repairs, electrical and plumbing repairs, and painting. Interest expense
increased due to an increase in the principal balance upon which
interest is calculated at Tindeco Wharf. The increase in rental income
is due to an increase in the average rental rates of both the residential
and commercial units
In the third quarter of 1999, Registrant incurred a loss of
$302,000 at The River Street Inn including $92,000 of depreciation
expense, compared to a loss of $285,000 including $93,000 of depreciation
expense in the third quarter of 1998. The increased loss from the third
quarter of 1998 to the same period in 1999 is the result of an increase in
maintenance and interest expense combined with a decrease in hotel and
rental income partially offset by a decrease in hotel operations expense
including utilities, wages and salaries. Maintenance expense increased
due to general building repairs including painting and elevator and
heating and air conditioning repairs. Interest expense increased
due to an increase in the average principal balances of the notes upon
which interest is accrued due to advances made by the first mortgage holder
to fund the building repairs. Hotel income decreased due to a decrease
in the average room rates ($130.32 to $120.66) combined with a decrease in
the average occupancy (67% to 58%) due to a more active than usual
hurricane season. Rental income decreased due to a decrease in the average
occupancy of the commercial space (86% to 64%) due to a loss of one
commercial tenant. Hotel operations expense decreased due to the
decrease in the average occupancy.
For the first nine months of 1999, Registrant incurred a
loss of $680,000 at The River Street Inn including $276,000 of depreciation
expense, compared to a loss of $652,000 for the same period in 1998,
including $278,000 of depreciation expense. The increase in the loss from
the first nine months of 1998 to the same period in 1999 is the result of a
decrease in rental income and hotel income combined with an increase in
maintenance and interest expense. The decrease in rental income
is due to a decrease in average occupancy (86% to 64%) of the commercial
space due to the loss of one commercial tenant. Hotel income decreased due
to a decrease in the average room rates ($129.86 to $125.66) and the
average occupancy (73% to 69%) due to a more active than usual hurricane
season. The increase in maintenance expense is due to general
building repairs (such as painting, elevator and heating and air conditioning
repairs). Interest expense increased due to an increase in the principal
balance upon which interest is accrued due to advances made by the first
mortgage holder to fund the building repairs.
In the third quarter of 1999, Registrant incurred a loss of
$10,000 at Washington Square, including $30,000 of depreciation expense,
compared to a loss of $12,000 including $29,000 of depreciation expense
in the third quarter of 1998. The decrease in the loss from the third
quarter of 1998 to 1999 is due to an increase in rental income due to
an increase in the average rental rates partially offset by an increase
in maintenance expense. Maintenance expense increased due to an increase in
apartment preparation expense as a result of an increase in the turnover of
apartment units.
In the first nine months of 1999, Registrant incurred a loss
of $27,000 at Washington Square, including $90,000 of depreciation expense,
compared to income of $7,000 for the same period of 1998, including $86,000
depreciation expense. The decrease from income in the first nine months of
1998 to a loss for the same period in 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
(97% to 95%). The increase in maintenance expense is due to an increase in
apartment preparation expense caused by a higher turnover of apartment
units.
<PAGE>
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
September 30, 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 3,140,203 3,026,576
---------- ----------
44,617,527 44,503,900
Less - Accumulated depreciation (22,508,693) (21,218,232)
---------- ----------
22,108,834 23,285,668
Cash and cash equivalents 20,884 219,254
Restricted cash 1,333,865 1,095,373
Accounts and notes receivable 131,379 71,582
Other assets (net of
amortization of $386,695 and
$351,780 at September 30,
1999 and December 31, 1998,
respectively) 1,828,068 1,831,411
---------- ----------
Total $25,423,030 $26,503,288
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,736,164 $32,808,014
Accounts payable:
Trade 3,178,848 2,827,452
Related parties 1,601,435 1,521,734
Interest payable 12,134,269 11,343,408
Accrued liabilities 1,370,515 1,293,221
Tenant security deposits 253,518 249,134
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Total liabilities 51,274,749 50,042,963
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Partners' equity (25,851,719) (23,539,675)
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Total $25,423,030 $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 and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three months Nine months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Revenues:
Rental income $1,306,971 $1,196,406 $3,721,934 $3,456,461
Hotel income 288,117 358,348 1,081,476 1,172,521
Interest income 1,724 11,294 11,548 27,709
--------- --------- --------- ---------
Total revenues 1,596,812 1,566,048 4,814,958 4,656,691
--------- --------- --------- ---------
Costs and expenses:
Rental operations 578,606 480,025 1,621,367 1,372,052
Hotel operations 288,177 395,416 905,200 1,051,673
General and
Administrative 49,500 49,500 148,500 148,500
Interest 1,078,089 1,015,130 3,126,559 2,865,986
Depreciation and
Amortization 441,792 422,537 1,325,376 1,267,316
--------- --------- --------- ---------
Total costs and
Expenses 2,436,164 2,362,608 7,127,002 6,705,527
--------- --------- --------- ---------
Net loss ($ 839,352)($ 796,560) ($2,312,044) ($2,048,836)
========= ========= ========= =========
Net loss per limited
Partnership unit ($ 40.35)($ 38.29) ($ 111.15) ($ 98.50)
========= ========= ========= =========
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, 1999 and 1998
(Unaudited)
Nine months ended
September 30,
1999 1998
Cash flows from operating activities:
Net loss ($2,312,044) ($2,048,836)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 1,325,376 1,267,316
Changes in assets and liabilities:
(Increase) decrease in restricted cash (238,492) 86,959
(Increase) decrease in accounts (59,797) 3,237
receivable
Increase in other assets (31,572) (130,938)
Increase in accounts payable - trade 351,396 307,629
Increase in accounts payable - 79,701 1,009,994
related parties
Increase in interest payable 790,861 1,230,650
Increase (decrease) in accrued 77,294 (943,286)
liabilities
Increase in tenant security deposits 4,384 9,614
Net cash (used in) provided by --------- ---------
operating activities (12,893) 792,339
--------- ---------
Cash flows from investing activities:
Capital expenditures (113,627) (603,789)
--------- ---------
Net cash used in investing activities (113,627) (603,789)
--------- ---------
Cash flows from financing activities:
Principal payments (71,850) (57,991)
--------- ---------
Net cash used in financing activities (71,850) (57,991)
--------- ---------
(Decrease) increase in cash and cash (198,370) 130,559
equivalents
Cash and cash equivalents at beginning 219,254 71,023
of period
--------- ----------
Cash and cash equivalents at end of $ 20,884 $ 201,582
period ========= ==========
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 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, 2000.
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
September 30, 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: December 20, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,884
<SECURITIES> 0
<RECEIVABLES> 131,379
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 44,617,527
<DEPRECIATION> 22,508,693
<TOTAL-ASSETS> 22,108,834
<CURRENT-LIABILITIES> 3,178,848
<BONDS> 32,736,164
0
0
<COMMON> 0
<OTHER-SE> (25,851,719)
<TOTAL-LIABILITY-AND-EQUITY> 25,423,030
<SALES> 0
<TOTAL-REVENUES> 4,814,958
<CGS> 0
<TOTAL-COSTS> 2,526,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,126,559
<INCOME-PRETAX> (2,312,044)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,312,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,312,044)
<EPS-BASIC> 0
<EPS-DILUTED> (111.15)
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