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, 2003
----------------------------------
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.)
1521 Locust Street, Philadelphia, PA 19102
- -----------------------------------------------------------------
(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
------ ------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
Assets
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
Rental properties, at cost:
Land $ 200,000 $ 847,082
Buildings and improvements 10,365,244 39,014,097
Furniture and fixtures 855,612 3,627,465
----------- -----------
11,420,856 43,488,644
Less - accumulated depreciation (6,896,583) (26,361,987)
----------- -----------
4,524,273 17,126,657
Cash and cash equivalents 7,881 119,481
Restricted cash 27,660 1,639,334
Accounts and notes receivable 220,255 252,319
Other assets (net of amortization
of $113,312 and $550,675) 133,163 1,709,045
----------- -----------
Total $ 4,913,232 $20,846,836
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 9,073,790 $32,608,543
Accounts payable:
Trade 4,086,317 4,003,547
Related parties 1,604,881 3,008,831
Interest payable 2,508,694 13,968,150
Accrued liabilities 1,674,007 1,735,498
Tenant security deposits 13,986 323,436
----------- -----------
Total liabilities 18,961,675 55,648,005
Partners' deficit (14,048,443) (34,801,169)
----------- -----------
Total $ 4,913,232 $20,846,836
=========== ===========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $ 1,503,700 $1,423,502 $ 2,863,085 $2,748,504
Hotel income 468,940 505,928 790,880 906,470
Gain on sale 21,777,364 0 21,777,364 0
Interest income 2,950 2,061 6,004 3,937
----------- ---------- ----------- ----------
Total revenues 23,752,954 1,931,491 25,437,333 3,658,911
----------- ---------- ----------- ----------
Costs and
expenses:
Rental operations 579,135 529,635 1,099,880 1,023,413
Hotel operations 396,716 305,597 680,956 642,128
Interest 930,696 1,079,655 2,042,814 2,109,178
Depreciation and
amortization 434,472 437,223 860,954 875,188
----------- ---------- ----------- ----------
Total costs and
expenses 2,341,019 2,352,110 4,684,604 4,649,907
----------- ---------- ----------- ----------
Net income
(loss) $21,411,935 ($ 420,619)$20,752,729 ($ 990,996)
=========== ========== =========== ==========
Net income (loss)
per limited
partnership
unit: $ 1,029.35 ($ 20.22)$ 997.66 ($ 47.64)
=========== ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six months ended
June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) $20,752,729 ($990,996)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 860,954 875,188
Gain on sale of Tindeco Wharf (21,777,364) 0
Increase in restricted cash (619,973) (891,319)
Decrease (increase) in accounts
receivable 9,903 (68,475)
Decrease in other assets 239,138 923,154
(Decrease) increase in accounts
payable - trade (7,747) 114,579
Increase in accounts payable -
related parties 221,727 145,737
Increase (decrease) in interest payable 411,489 (155,226)
(Decrease) increase in accrued
liabilities (15,444) 145,675
Increase in tenant security deposits 10,670 34,473
----------- --------
Net cash provided by operating activities 86,082 132,790
----------- --------
Cash flow from investing activities:
Gross proceeds - sale of Tindeco Wharf 25,000 0
Capital expenditures (152,172) (23,820)
----------- --------
Net cash used in investing activities (127,172) (23,820)
----------- --------
Cash flows from financing activities:
Principal payments under debt
obligations (70,511) (63,986)
----------- --------
Net cash used in financing activities (70,511) (63,986)
----------- --------
(Decrease) increase in cash and cash
equivalents (111,601) 44,984
Cash and cash equivalents at beginning
of period 119,481 175,264
----------- --------
Cash and cash equivalents at
end of period $ 7,880 $220,248
=========== ========
The accompanying notes are an integral part of these financial statements.
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, and notes thereto,
in Form 10-K of the Registrant for the year ended December 31, 2002.
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.
NOTE 2 - GAIN ON SALE
On June 30, 2003 Tindeco Wharf was sold. The Registrant transferred
its interest in Tindeco Wharf to an affiliate of the owner of the
second mortgage loan secured by the property of Tindeco Wharf. At
transfer, the liabilities of Tindeco Wharf exceeded the value of
Registrant's interest in Tindeco Wharf. In exchange for such interest,
Registrant's cost of dissolution, up to $100,000, will be paid by the
holder of such second mortgage loan. The Registrant recognized a gain
on sale in the amount of $21,777,364.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(1) Liquidity
As of June 30, 2003, Registrant had cash of $7,880. 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, 2003, Registrant had restricted cash of
$27,660 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 two properties, due to the
properties' inability to generate sufficient cash flow to pay their
operating expenses and debt service, and the sale of a third property.
At the present time, the remaining property is able to pay its
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. Tindeco Wharf was sold on June 30, 2003.
Washington Square was foreclosed by the holder of the mortgage and a
judgment on March 22, 2001. In the legal proceeding involving
Morrison Clark Inn, if Capital Bank executes its $1,800,000 judgment
against 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 property. See Part II. Item 1. Legal
Proceedings.
The Registrant has determined that it is insolvent
because (i) the amount of its liabilities exceeds the fair market
value of its assets and (ii) it is unable to pay its debts as they
become due. Accordingly, pursuant to its partnership agreement,
Registrant has begun the process of dissolution. In connection
therewith, on June 30, 2003, the Registrant transferred its interest
in Tindeco Wharf to an affiliate of the owner of the second mortgage
loan secured by the property of Tindeco Wharf. At transfer, the
liabilities of Tindeco Wharf exceeded the value of Registrant's
interest in Tindeco Wharf. In exchange for such interest, Registrant's
cost of dissolution, up to $100,000, will be paid by the holder of
such second mortgage loan.
(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 2003, Registrant recognized
income of $21,411,935 ($1,029.35 per limited partnership unit)
compared to a net loss of $420,618 ($20.22 per limited partnership
unit) for the same period in 2002. For the first six months of 2003,
the Registrant recognized income of $20,752,729 ($997.66 per limited
partnership unit) compared to a net loss of $990,996 ($47.64 per
limited partnership unit) for the same period in 2002. Included in the
net income for the second quarter and the first six months of 2003 is
a gain on the sale of Tindeco Wharf of $21,777,364.
Rental income increased $80,446 from $1,423,254 in the
second quarter of 2002 to $1,503,700 in the same period in 2003 and
increased $115,429 from $2,747,656 for the first six months of 2002 to
$2,863,085 in the same period of 2003. The increase in rental income
from the second quarter and the first six months of 2002 to the same
period in 2003 is due to an increase in average commercial rental
rates at the River Street Inn/Factor's Walk and an increase in average
commercial and residential rental rates at Tindeco Wharf.
Hotel income decreased $36,988 from $505,928 in the
second quarter of 2002 to $468,940 in the same period in 2003 and
decreased $115,590 from $906,470 for the first six months of 2002 to
$790,880 for the same period in 2003. The decrease in hotel income for
the second quarter and the first six months of 2003 compared to the
same periods in 2002 is due to a decrease in average room occupancy
for the second quarter (82% to 77%) and for the first six months (75%
to 65%).
Rental operations expense increased $49,500 from $529,635
in the second quarter of 2002 to $579,135 in the same period in 2003
and increased $76,467 from $1,023,413 for the first six months of 2002
to $1,099,880 for the same period in 2003. For the second quarter and
the first six months of 2002 compared to the same periods in 2003
rental operations expense increased at Tindeco Wharf due to an
increase in utilities expense and wages and salaries expense. The
increase in utilities expense is due to an increase in electricity and
gas charges. The increase in wages and salaries expense is due to a
vacant building management position filled in 2003.
Hotel operations expense increased $91,120 from $305,597
in the second quarter of 2002 to $396,717 in the same period in 2003
and for the six months increased $38,829 from $642,128 in the first
six months of 2002 to $680,957 in the same period in 2003. The
increase in hotel operations expense from the second quarter of 2002
to the same period in 2003 is due to an increase in wages and salaries
expense, miscellaneous operating expense and real estate taxes. The
increase in wages and salaries expense is due to an increase in
housekeepers and inn managers salaries. The increase in miscellaneous
operating expense is due to an increase in computer and marketing
expenses. The increase in real estate taxes is due to an increase in
the property's assessed value. The increase in hotel operations
expense from the first six months of 2002 to the same period in 2003
is due to an increase in wages and salaries, food and beverage
expense, utilities expense, and real estate taxes. The increase in
wages and salaries is due to an increase in inn managers and sales
managers salaries. The increase in food and beverage expense is due to
an increase in complimentary food and beverage, liquor costs and food
costs. The increase in utilities expense is due to an increase in
electricity charges. The increase in real estate taxes is due to an
increase in the property's assessed value.
Interest expense decreased $148,959 from $1,079,655 in
the second quarter of 2002 to $930,696 during the same period in 2003
and decreased $66,364 from $2,109,178 from the first six months of
2002 to $2,042,814 during the same period in 2003. The decrease in
interest expense from the second quarter and the first six months of
2002, compared to the same period in 2003 is due to the timing of
interest expense recognition at Factors Walk.
Income recognized during the second quarter of 2003 at
the Registrant's properties was approximately $9,200 compared to
losses in 2002 of approximately $332,000. For the first six months of
2003 losses at the Registrant's properties was approximately $825,000
compared to losses in 2002 of approximately $806,000.
In the second quarter of 2003, Registrant recognized
income of $183,900 at Tindeco Wharf including $325,000 of depreciation
and amortization expense, compared to a loss of $227,000 in the second
quarter of 2002, including $319,000 of depreciation and amortization
expense. For the first six months of 2003, Registrant incurred a loss
of $338,000 including $641,000 of depreciation and amortization
expense, compared to a loss of $459,000 including $638,000 of
depreciation and amortization expense for the same period in 2002. The
increase in income from the second quarter and the decrease in loss
from the first six months of 2002 compared to the same periods in 2003
are due to an increase in rental income and a decrease in management
fees, maintenance expense and advertising expense, partially offset by
an increase in wages and salaries expense. The increase in rental
income is due to an increase in residential and commercial average
monthly rental rates. The decrease in management fees is due to a
decrease in the percentage used to calculate the fee. The decrease in
maintenance expense is due to a decrease in plumbing and electrical
expense. The decrease in advertising expense is due to the one time
advertising charges in 2002. The increase in wages and salaries
expense is due to a vacant building management position filled in
2003.
On June 30, 2003 Tindeco Wharf was sold. The Registrant
transferred its interest in Tindeco Wharf to an affiliate of the owner
of the second mortgage loan secured by the property of Tindeco Wharf.
At transfer, the liabilities of Tindeco Wharf exceeded the value of
Registrant's interest in Tindeco Wharf. In exchange for such interest,
Registrant's cost of dissolution, up to $100,000, will be paid by the
holder of such second mortgage loan. The Registrant recognized a gain
on sale in the amount of $21,777,364.
In the second quarter of 2003, Registrant incurred a
loss of $193,000 at The River Street Inn/Factor's Walk including
$106,000 of depreciation and amortization expense, compared to a loss
of $106,000 including $105,000 of depreciation expense in the second
quarter of 2002. For the first six months of 2003, Registrant incurred
a loss of $479,000 including $211,000 of depreciation and amortization
expense compared to a loss of $347,000 including $205,000 of
depreciation and amortization expense. The increase in the loss from
the second quarter and first six months of 2002 to the same periods in
2003 is due to a decrease in hotel income and an increase in hotel
operations expense, partially offset by a decrease in interest
expense. The decrease in hotel income is due to a decrease in average
occupancy (82% to 77%). The increase in hotel operations expense is
due to an increase in wages and salaries expense, miscellaneous
operation expense and real estate taxes. The increase in wages and
salaries expense is due to an increase in housekeepers and inn
managers salaries. The increase in miscellaneous operating expense is
due to an increase in computer and marketing expenses. The increase
in real estate taxes is due to an increase in the property's assessed
value. The decrease in interest expense is due to the timing of
interest expense recognition at Factors Walk.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
All of our assets and liabilities are denominated in
U.S. dollars, and as a result, we do not have exposure to currency
exchange risks.
We do not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions, and as a
result, we do not have exposure to derivatives risk.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our
Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and
communicated to our management, including our managing partner's
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
Under the supervision of our managing partner's
principal executive officer and principal financial officer we have
carried out an evaluation of the effectiveness of our adopted
disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, our managing partner's
president and treasurer concluded that our disclosure controls and
procedures are effective.
There have been no significant changes in our internal
controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting during our most recent fiscal quarter.
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 partnership's 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. This judgement has not been
executed by the lender.
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.
31 General Partners Opinion
Certification
32 Certification Pursuant to 18
U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIVERSIFIED HISTORIC INVESTORS II
By: Dover Historic Advisors, its general
partner
By: EPK, Inc., managing partner
Date: August 18, 2004 By: /s/ Spencer Wertheimer
--------------- -----------------------
SPENCER WERTHEIMER
President (principal executive
officer, principal financial
officer)
Exhibit 31
CERTIFICATION
I, Spencer Wertheimer, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the
quarterly period ended June 30, 2003 of Diversified Historic
Investors II;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-
8238, 34-47986 and IC-26068 (June 5, 2003)] for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to me by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Omitted in accordance with SEC Release Nos. 33-8238, 34-
47986 and IC-26068 (June 5, 2003)];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. I have disclosed, based on my most recent evaluation of
internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 18, 2004 /s/ Spencer Wertheimer
--------------- ----------------------
Name: Spencer Wertheimer
Title: President (principal
executive officer,
principal financial
officer) of the
registrant's managing
partner, EPK, Inc.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diversified Historic
Investors II on Form 10-Q for the quarterly period ended June 30, 2003
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Spencer Wertheimer, President and Treasurer
of the Company's managing partner, EPK, Inc., certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: August 18, 2004 /s/ Spencer Wertheimer
--------------- ----------------------
Name: Spencer Wertheimer
Title: President (principal
executive officer,
principal financial
officer) of the
registrant's managing
partner, EPK, Inc.