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, 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
------------------------------------------
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, 1999 (unaudited)
and December 31, 1998
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 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 June 30, 1999, Registrant had cash of
$162,873. 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, 1999, Registrant had restricted cash
of $1,276,711 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 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 second quarter of 1999, Registrant
incurred a net loss of $643,008 ($30.91 per limited partnership
unit) compared to a net loss of $691,705 ($33.25 per limited
partnership unit) for the same period in 1998. For the first six
months of 1999, the Registrant incurred a net loss of $1,472,693
($70.79 per limited partnership unit) compared to a net loss of
$1,297,451 ($62.37 per limited partnership unit) for the same
period in 1998.
Rental income increased $105,202 from $1,119,098 in
the second quarter of 1998 to $1,224,300 in the same period in
1999 and increased $154,908 from $2,260,055 for the first six
months of 1998 to $2,414,963 in the same period on 1999. The
increase in rental income for both the second quarter and the
first six months of 1999 as compared to the same periods in 1998
is the result of an increase at Tindeco Wharf partially offset by
decreases at Washington Square and Factors Walk. The increase at
Tindeco Wharf is due to an increase in the average rental rates.
The decrease at Factor's Walk is due to a decrease in the average
occupancy of the commercial space (86% to 64%). The decrease at
Washington Square is due to a decrease in the average occupancy
of the residential units (97% to 95%) and the loss of one
commercial tenant.
Hotel income decreased $25,163 from $435,163 in the
second quarter of 1998 to $410,000 in the same period in 1999 and
decreased $20,814 from $814,173 for the first six months of 1998
to $793,359 for the same period in 1999. The decrease in hotel
income for both the second quarter and the first six months of
1998 as compared to the same periods in 1998 is the result of
decreases in the average room rates and average occupancy.
Average room rates decreased ($134.96 to $134.72) for the second
quarter and ($129.67 to $123.07) for the first six months.
Average occupancy rates decreased (79% to 74%) for the second
quarter and (73% to 67%) for the first six months.
Expense for rental operations increased by $47,120
from $461,036 in the second quarter of 1998 to $508,156 in the
same period in 1999 and increased $150,734 from $892,027 for the
first six months of 1998 to $1,042,761 for the same period in
1999. The increase in rental operations during the second quarter
and first six months of 1999 is due to the planned renovations at
the Tindeco Wharf and an increase in apartment preparation
expense at Washington Square. The planned renovations at Tindeco
Wharf include painting and repairs of the roof, electrical and
plumbing systems. The increase in maintenance expense at
Washington Square was caused by an increase in the apartment
preparation expense caused by a high turnover of apartment units.
Hotel operations expense decreased $117,329 from
$373,024 in the second quarter of 1998 to $255,695 in the same
period in 1999 and decreased $39,234 from $656,257 for the first
six months of 1998 to $617,023 for the same period in 1999. The
decrease in hotel operations expense at the River Street Inn was
due to an overall decrease in hotel occupancy from the second
quarter (79% to 74%) and the first six months (73% to 67%)
partially offset by an increase in maintenance expense.
Maintenance expense increased due to general building repairs
such as elevator, painting, and heating/air conditioning repairs.
Interest expense increased $79,586 from $948,126 in
the second quarter of 1998 to $1,027,712 in the same period in
1999, and increased $152,439 from $1,896,031 for the first six
months of 1998 to $2,048,470 for the same period in 1999. The
increase from the second quarter and first six months of 1998 to
the same period in 1999 is due to an increase in the principal
balance upon which interest is calculated at both Tindeco Wharf
and Factor's Walk.
Losses incurred during the quarter at the
Registrant's three properties amounted to $518,000, compared to a
loss of approximately $563,000 for the same period in 1998. For
the first six months of 1999, the Registrant's three properties
recognized a loss of $1,216,000 compared to approximately
$1,041,000 for the same period in 1998.
In the second quarter of 1999, Registrant incurred a
loss of $390,000 at Tindeco Wharf including $306,000 of
depreciation and amortization expense, compared to a loss of
$376,000 in the second quarter of 1998, including $288,000 of
depreciation and amortization expense and, for the first six
months of 1999, incurred a loss of $822,000 including $613,000 of
depreciation and amortization expense, compared to a loss of
$693,000 for the same period in 1998, including $576,000 of
depreciation and amortization expense. The increased loss from
the second quarter and the first six months of 1998 to the same
periods in 1999 is the result of an increase in maintenance,
interest, and depreciation expense combined with a decrease in
interest income, partially offset by an increase in rental
income. The increase in maintenance expense is due to planned
renovations at the property including roof repairs, electrical
and plumbing repairs, and painting. Interest expense increased
due to the increase in principal balance upon which interest is
calculated. Depreciation expense increased due to improvements
made at the property in the last six months of 1998. The
decrease in interest income is due to a decrease in the cash
balances that generate the interest income. The increase in
rental income is due to an increase in average rental rates of
the residential units.
In the second quarter of 1999, Registrant incurred a
loss of $123,000 at The River Street Inn including $93,000 of
depreciation expense, compared to a loss of $197,000 including
$93,000 of depreciation expense in the second quarter of 1998.
The decrease in the loss from the second quarter of 1998 to the
same period in 1999 is the result of a decrease in overall hotel
expenses partially offset by an increase in maintenance expense
and a decrease in hotel revenue and rental income. The decrease
in overall hotel expenses is a result of a decrease in occupancy
(79% to 74%). The increase in the maintenance expense is due to
an increase in the general building repairs and increases in
elevator, painting, and heating/air conditioning repairs. The
decrease in hotel and rental income is due to a decrease in
occupancy at the hotel (79% to 74%) and commercial units (86% to
64%).
For the first six months of 1999, Registrant
incurred a loss of $378,000 at The River Street Inn including
$184,000 of depreciation expense, compared to a loss of $367,000
for the same period in 1998, including $185,000 of depreciation
expense. The increase in the loss from the first six months of
1998 to the same period in 1999 is the result of a decrease in
rental and hotel income combined with an increase in interest and
maintenance expense. Rental income decreased due to a decrease
in the average occupancy of commercial space (86% to 64%). The
decrease in hotel income is due to a decrease in the average
occupancy (73% to 67%) and a decrease in the average room rates
($129.67 to $123.07). Interest expense increased due to an
increase in the principal balance upon which interest is accrued.
Maintenance expense increased due to an increase in the general
building repairs and increases in elevator, painting, and
heating/air conditioning repairs made to the property.
In the second quarter of 1999, Registrant incurred a
loss of $5,000 at Washington Square, including $30,000 of
depreciation expense, compared to income of $10,000 including
$29,000 of depreciation expense in the second quarter of 1998
and, for the first six months of 1999, incurred a loss of $16,000
including $60,000 of depreciation expense, compared to income of
$19,000 for the same period in 1998, including $57,000 of
depreciation expense. The change from income recognized to a
loss from the second quarter and the first six months of 1998 to
the same periods 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%) of the apartment units combined with 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
June 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 (22,078,540) (21,218,232)
---------- ----------
22,538,987 23,285,668
Cash and cash equivalents 162,873 219,254
Restricted cash 1,276,711 1,095,373
Accounts and notes receivable 127,501 71,582
Other assets (net of amortization
of $375,056 and $351,780 at
June 30, 1999 and December 31,
1998, respectively) 1,553,634 1,831,411
---------- ----------
Total $25,659,706 $26,503,288
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,760,540 $32,808,014
Accounts payable:
Trade 3,084,034 2,827,452
Related parties 1,573,979 1,521,734
Interest payable 11,584,880 11,343,408
Accrued liabilities 1,418,883 1,293,221
Tenant security deposits 249,758 249,134
---------- ----------
Total liabilities 50,672,074 50,042,963
---------- ----------
Partners' equity (25,012,368) (23,539,675)
---------- ----------
Total $25,659,706 $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 Six Months Ended June 30, 1999 and 1998
(Unaudited)
Three months Six months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Revenues:
Rental income $1,224,300 $1,119,098 $2,414,963 $2,260,055
Hotel income 410,000 435,163 793,359 814,173
Interest income 5,547 8,180 9,824 16,415
--------- --------- --------- ---------
Total revenues 1,639,847 1,562,441 3,218,146 3,090,643
--------- --------- --------- ---------
Costs and expenses:
Rental operations 508,156 461,036 1,042,762 892,027
Hotel operations 255,695 373,024 617,023 656,257
General and
Administrative 49,500 49,500 99,000 99,000
Interest 1,027,712 948,126 2,048,470 1,896,031
Depreciation and
Amortization 441,792 422,460 883,584 844,779
--------- --------- --------- ---------
Total costs and
expenses 2,282,855 2,554,146 4,690,839 4,388,094
--------- --------- --------- ---------
Net loss ($ 643,008) ($ 691,705) ($1,472,693) ($1,297,451)
========= ========= ========= =========
Net loss per limited
partnership unit ($ 30.91) ($ 33.25) ($ 70.79) ($ 62.37)
========= ========= ========= =========
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, 1999 and 1998
(Unaudited)
Six months ended
June 30,
1999 1998
Cash flows from operating activities:
Net loss ($1,472,693) ($1,297,451)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 883,584 844,779
Changes in assets and liabilities:
Increase in restricted cash (181,338) (416,700)
Increase in accounts receivable (55,919) (14,205)
Decrease in other assets 254,500 147,701
Increase in accounts payable - trade 256,582 181,317
Increase in accounts payable - 52,245 1,029,498
related parties
Increase in interest payable 241,472 800,686
Increase (decrease) in accrued liabilities 125,663 (922,933)
Increase in tenant security deposits 624 10,514
---------- ----------
Net cash provided by operating activities 104,720 363,206
---------- ----------
Cash flows from investing activities:
Capital expenditures (113,627) (162,666)
---------- ----------
Net cash used in investing activities (113,627) (162,666)
---------- ----------
Cash flows from financing activities:
Principal payments (47,474) (98,434)
---------- ----------
Net cash used in financing activities (47,474) (98,434)
---------- ----------
(Decrease) increase in cash and cash (56,381) 102,106
equivalents
Cash and cash equivalents at beginning 219,254 71,023
of period ---------- ----------
Cash and cash equivalents at end of $ 162,873 $ 173,129
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 the partnerships 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 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, 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: November 3, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 162,873
<SECURITIES> 0
<RECEIVABLES> 127,501
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 44,617,527
<DEPRECIATION> 22,078,540
<TOTAL-ASSETS> 25,659,706
<CURRENT-LIABILITIES> 3,084,034
<BONDS> 32,760,540
0
0
<COMMON> 0
<OTHER-SE> (25,012,368)
<TOTAL-LIABILITY-AND-EQUITY> 25,659,706
<SALES> 0
<TOTAL-REVENUES> 3,218,146
<CGS> 0
<TOTAL-COSTS> 1,659,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,048,470
<INCOME-PRETAX> (1,472,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,472,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,472,693)
<EPS-BASIC> 0
<EPS-DILUTED> (70.79)
</TABLE>
