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, 2003
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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.)
1521 Locust Street, Philadelphia, PA 19102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 557-9800
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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
------ ------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
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Assets
September 30, 2003 December 31, 2002
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(Unaudited)
Rental properties, at cost:
Land $ 200,000 $ 847,082
Buildings and improvements 10,365,244 39,014,097
Furniture and fixtures 855,612 3,627,466
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11,420,856 43,488,645
Less - accumulated depreciation (7,003,241) (26,361,987)
----------- -----------
4,417,615 17,126,658
Cash and cash equivalents 3,019 119,481
Restricted cash 57,932 1,639,333
Accounts and notes receivable 206,300 252,319
Other assets (net of amortization
of $116,417 and $550,675) 130,059 1,709,045
----------- -----------
Total $ 4,814,925 $20,846,836
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 9,073,790 $32,608,543
Accounts payable:
Trade 4,214,508 4,003,547
Related parties 1,663,081 3,008,831
Interest payable 2,708,947 13,968,150
Tenant security deposits 15,606 323,436
Accrued liabilities 1,600,575 1,735,498
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Total liabilities 19,276,507 55,648,005
Partners' deficit (14,461,582) (34,801,169)
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Total $ 4,814,925 $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 Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $124,460 $1,458,932 $ 2,987,545 $4,206,588
Hotel income 355,041 343,789 1,145,921 1,251,107
Gain on sale 0 0 21,777,364 0
Interest income 0 3,244 6,004 7,181
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Total revenues 479,501 1,805,965 25,916,834 5,464,876
-------- ---------- ----------- ----------
Costs and
expenses:
Rental operations 0 542,136 1,096,077 1,565,549
Hotel operations 397,769 311,310 1,082,526 953,438
Interest 385,115 1,046,164 2,427,928 3,155,342
Depreciation and
amortization 109,762 438,568 970,716 1,313,756
-------- ---------- ----------- ----------
Total costs and
expenses 892,646 2,338,178 5,577,248 6,988,085
-------- ---------- ----------- ----------
Net loss ($413,145)($ 532,213) ($20,339,587) ($1,523,209)
======== ========== =========== ==========
Net loss per
limited
partnership unit: ($ 19.86)($ 25.59) ($ 977.80) ($ 75.75)
======== ========== =========== ==========
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)
Nine months ended
September 30,
2003 2002
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Cash flows from operating activities:
Net income (loss) $20,339,587 ($1,523,209)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 970,716 1,313,756
Gain on sale - Tindeco Wharf (21,777,364) 0
Changes in assets and liabilities:
Increase in restricted cash (650,245) (862,516)
Increase in accounts receivable (51,142) (15,150)
Decrease in other assets 239,138 599,608
Increase in accounts payable - trade 66,570 166,391
Increase (decrease) in accounts
payable - related parties 337,557 (1,191,415)
Increase in interest payable 611,741 102,238
(Decrease) increase in accrued liabilities (92,626) 1,475,987
Increase in tenant security deposits 12,290 40,004
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Net cash provided by operating activities 6,222 105,694
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Net cash used in investing activities:
Cash proceeds - sale of Tindeco Wharf 100,000 0
Capital expenditures (152,172) (55,222)
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Net cash used in investing activities (52,172) (55,222)
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Cash flows from financing activities:
Principal payments under debt obligations (70,512) (97,162)
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Net cash used in financing activities (70,512) (97,162)
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Decrease in cash and cash equivalents (116,462) (46,690)
Cash and cash equivalents at beginning
of period 119,481 175,264
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Cash and cash equivalents at end
of period $ 3,019 $ 128,574
=========== ==========
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, 2001.
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 September 30, 2003, Registrant had cash of $3,019.
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, 2003, Registrant had restricted cash
of $57,932 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 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 a 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 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. See Part II. Item 1.
Legal Proceedings.
In 2003, the Registrant 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 third quarter of 2003, Registrant incurred a
net loss of $413,145 ($19.86 per limited partnership unit) compared to
a net loss of $532,213 ($25.59 per limited partnership unit) for the
same period in 2002. For the first nine months of 2003, the
Registrant recognized a net income of $20,339,587 ($977.80 per limited
partnership unit) compared to a net loss of $1,523,209 ($73.23 per
limited partnership unit) for the same period in 2002. Included in the
net income for the first nine months of 2003 is a gain on sale of
Tindeco Wharf of $21,777,364.
Rental income decreased $1,334,472 from $1,458,932 in the
third quarter of 2002 to $124,460 in the same period of 2003, and
decreased $1,219,043 from $4,206,588 in the first nine months of 2002
to $2,987,545 in the same period of 2003. Rental income decreased from
the third quarter and the first nine months of 2002, compared to the
same periods in 2003 due to the sale of Tindeco Wharf on June 30,
2003. During the third quarter of 2003, commercial rental income
increased at Factors Walk due to an increase in average occupancy (57%
to 61%). For the first nine months, rental income decreased at Factors
Walk due to a decrease in average occupancy (61% to 59%).
Hotel income increased $11,252 from $343,789 in the third
quarter of 2002 to $355,041 in the same period in 2003. The increase
in hotel income from the third quarter of 2002 to the same period in
2003 is due to an increase in average room occupancy (61% to 63%).
Hotel income decreased $105,187 from $1,251,108 in the
first nine months of 2002 to $1,145,921 in the same period of 2003.
The decrease in hotel income from the first nine months of 2002 to the
same period in 2003 is due to a decrease in average room occupancy
(70% to 64%).
Rental operations expense is no longer incurred due to
the sale of Tindeco Wharf on June 30, 2003.
Hotel operations expense increased $90,259 from $311,310
in the third quarter of 2002 to $401,569 in the same period of 2003
and increased $129,088 from $953,438 for the first nine months of 2002
to $1,082,526 for the same period in 2003. The increase in hotel
operations expense from the third quarter and the first nine months of
2002 compared to the same period in 2003 is due to an increase in
maintenance expense and professional fees. The increase in maintenance
expense is due to an increase in HVAC repairs and the increase in
professional fees is due to an increase in mechanical engineering
services.
Interest expense decreased $661,049 from $1,046,164 in
the third quarter of 2002 to $385,115 for the same period in 2003 and
decreased $727,414 from $3,155,342 in the first nine months of 2002 to
$2,427,928 for the same period in 2003. The decrease in interest
expense is due to the sale of Tindeco Wharf on June 30, 2003.
Losses incurred during the quarter at the Registrant's
properties were approximately $328,000 compared to a loss of
approximately $441,000 for the same period in 2002. For the first
nine months of 2003, the Registrant's properties incurred a loss of
approximately $1,438,000 compared to a loss of approximately
$1,247,000 for the same period in 2002.
In the third quarter of 2003, Registrant incurred a loss
of $328,000 at The River Street Inn/Factors Walk including $106,000 of
depreciation expense, compared to a loss of $257,000 including
$105,000 of depreciation expense in the third quarter of 2002. The
increase in loss from the third quarter of 2002 to the same period in
2003 is due to an increase in maintenance expense and professional
fees, partially offset by an increase in hotel income. The increase in
maintenance expense is due to an increase in HVAC repairs and the
increase in professional fees is due to mechanical engineering
services. The increase in hotel income is due to an increase in
average room occupancy (61% to 63%).
For the first nine months of 2002, Registrant incurred a
loss of $807,000 at The River Street Inn/Factors Walk including
$317,000 of depreciation expense, compared to a loss of $604,000,
including $315,000 of depreciation expense, for the same period in
2002. The increase in loss from the first nine months of 2002
compared to the same period in 2003 is due to a decrease in hotel
income and an increase in maintenance expense and professional fees.
The decrease in hotel income is due to a decrease in average occupancy
(70% to 64%) The increase in maintenance expense is due to an increase
in HVAC repairs and the increase in professional fees is due to
mechanical engineering services.
On June 30, 2003 Tindeco Wharf was sold. In the third
quarter of 2002, the Registrant incurred a loss of $257,000 including
$320,000 of depreciation and amortization expense. For the first nine
months of 2003, with exception to the gain on sale in the amount of
$21,777,364, Registrant incurred a loss of $337,800 at Tindeco Wharf
including $641,000 of depreciation and amortization expense, compared
to a loss of $604,000, including $958,000 of depreciation and
amortization expense, for the same period in 2002. The decrease in
loss is 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 both 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 (6% to 4%). 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.
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 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. This judgment 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
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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
31 reference.
General Partners Opinion
32 Certification
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 September 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
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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 September 30th, 2002 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 (the "Company") on Form 10-Q for the quarterly period
ended September 30th, 2002 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.