UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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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
- -----------------------------------------------------------------
(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
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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
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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
March 31, 2001 December 31, 2000
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(Unaudited)
Rental properties, at cost:
Land $ 847,082 $ 934,582
Buildings and improvements 38,847,686 41,596,269
Furniture and fixtures 3,429,420 3,633,054
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43,124,188 46,163,905
Less - accumulated depreciation (23,379,888) (24,737,850)
----------- -----------
19,744,300 21,426,055
Cash and cash equivalents 37,672 23,681
Restricted cash 1,800,041 1,767,238
Accounts and notes receivable 239,788 200,441
Other assets (net of amortization
of $454,212 and $445,407) 1,588,615 1,657,299
----------- -----------
Total $23,410,416 $25,074,714
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,820,014 $33,792,649
Accounts payable:
Trade 3,621,759 3,681,307
Related parties 2,669,466 2,879,080
Interest payable 13,261,100 13,260,609
Accrued liabilities 1,584,799 1,490,592
Tenant security deposits 263,565 277,730
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Total liabilities 54,220,703 55,381,967
Partners' deficit (30,810,287) (30,307,253)
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Total $23,410,416 $25,074,714
=========== ===========
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 ended
March 31,
2001 2000
---- ----
Revenues:
Rental income $1,337,395 $1,261,401
Hotel income 379,648 303,286
Interest income 9,610 2,997
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Total revenues 1,726,653 1,567,684
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Costs and expenses:
Rental operations 505,860 530,019
Hotel operations 302,870 261,094
General and administrative 0 49,500
Interest 1,026,729 1,038,698
Depreciation and amortization 462,686 441,270
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Total costs and expenses 2,298,145 2,320,581
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Net loss before
extraordinary item (571,492) (752,897)
Extraordinary gain on
extinguishment of debt 68,458 0
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Net loss ($ 503,034) ($ 752,897)
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Net loss per limited
partnership unit:
Loss before extraordinary item ($ 27.47) ($ 36.19)
Extraordinary item 3.29 0
---------- ----------
Total loss per limited
partnership unit ($ 24.18) ($ 36.19)
========== ==========
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)
Three months ended
March 31,
2001 2000
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Cash flows from operating activities:
Net loss ($503,034) ($752,897)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 462,686 441,270
Extraordinary gain on extinguishment
of debt (68,458) 0
Changes in assets and liabilities:
Increase in restricted cash (32,803) (490,055)
Increase in accounts receivable (39,347) (17,015)
Decrease (increase) in other assets 53,797 (26,071)
(Decrease) increase in accounts
payable - trade (59,547) 189,272
Increase in accounts payable -
related parties 41,636 177,844
Increase in interest payable 491 462,431
Increase in accrued liabilities 94,206 23,978
(Decrease) increase in tenant
security deposits (14,165) 11,412
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Net cash (used in) provided by
operating activities (64,538) 20,169
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Cash flows from investing activities:
Capital expenditures (12,964) 0
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Net cash used in investing activities (12,964) 0
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Cash flows from financing activities:
Borrowings under debt obligations 147,972 93,250
Principal payments (56,479) (118,525)
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Net cash provided by (used in)
financing activities 91,493 (25,275)
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Increase (decrease) in cash and cash
equivalents 13,991 (5,106)
Cash and cash equivalents at
beginning of period 23,681 38,110
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Cash and cash equivalents at
end of period $ 37,672 $ 33,004
======== ========
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, 2000.
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 - EXTRAORDINARY GAIN
Effective as of March 22, 2001 Washington Square was foreclosed
by the holder of the mortgage and a judgment. As a result, the
Registrant recognized an extraordinary gain on the extinguishment
of debt in the amount of $68,458 which is the difference between
the debt of the property and the net book value of the assets.
NOTE 3 - SUBSEQUENT EVENT
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.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(1) Liquidity
As of March 31, 2001, Registrant had cash of
$37,672. 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 March 31, 2001, Registrant had restricted cash
of $1,800,041 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. At the present
time, the two 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. Washington Square was foreclosed by the
holder of the mortgage and a judgment on March 22, 2001. In the
legal proceeding involving Morrison Clark, 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 properties. See Part II. Item 1. Legal
Proceedings.
It is the Registrant's intention to continue to
hold the remaining 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).
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, other than the above, which would cause historical
capital expenditure levels not to be indicative of capital
requirements in the future and accordingly, does not believe that
it will have to commit material resources to capital investment
for the foreseeable future.
(3) Results of Operations
During the first quarter of 2001, Registrant
incurred a net loss of $503,034 ($24.18 per limited partnership
unit) compared to a net loss of $752,897 ($36.19 per limited
partnership unit) for the same period in 2000.
Rental income increased $75,994 from $1,261,401 in
the first quarter of 2000 to $1,337,395 in the same period in
2001. The increase in rental income is due to an increase in both
residential and commercial rental rates at Tindeco Wharf.
Hotel income increased $76,362 from $303,286 in the
first quarter of 2000 to $379,648 in the same period in 2001.
The increase in hotel income is due to an increase in occupancy
(56% to 66%) at the River Street Inn/Factor's Walk.
Interest income increased $6,613 from $2,997 in the
first quarter of 2000 to $9,610 in the same period in 2001. The
increase in interest income is due to additional interest
received by Tindeco Wharf from the maturity of a CD during the
first quarter of 2001.
Rental operations expense decreased $24,159 from
$530,019 in the first quarter of 2000 to $505,860 in the same
period in 2001. The decrease in rental operations expense is due
to a decrease in maintenance expense, partially offset by an
increase in insurance expense and utilities expense at Tindeco
Wharf, combined with an increase in legal and accounting expense
at Washington Square. Maintenance expense decreased at Tindeco
Wharf due to a decrease maintenance service and supply, partially
offset by an increase in appliance repairs. The increase in
insurance expense at Tindeco Wharf is due to a rise in insurance
premiums, and the increase in utilities expense is due to an
increase in natural gas charges. The increase in legal and
accounting expense at Washington Square is due to additional
expenses related to the property's foreclosure on March 22, 2001.
Hotel operations expense increased $41,776 from
$261,094 in the first quarter of 2000 to $302,870 in the same
period of 2001. The increase in hotel operations expense is due
to the increase in payroll and related expenses due to additional
positions added to the payroll during the first quarter of 2001.
Interest expense decreased $11,969 from $1,038,698
in the first quarter of 2000 to $1,026,729 in the same period in
2001. The decrease in interest expense is due to a decrease in
the first mortgage principal balance at Tindeco Wharf.
Effective as of March 22, 2001 Washington Square was
foreclosed by the holder of the mortgage and a judgment. As a
result, the Registrant recognized an extraordinary gain on the
extinguishment of debt in the amount of $68,458 which is the
difference between the debt of the property and the net book
value of the assets.
Losses incurred during the first quarter of 2001 at
the Registrant's three properties were approximately $414,000
compared to a loss of approximately $614,000 for the same period
in 2000. Included in the loss for the first quarter of 2001 is
extraordinary income of $68,458 related to the foreclosure of
Washington Square on March 22, 2001.
In the first quarter of 2001, Registrant incurred a
loss of $234,000 at Tindeco Wharf including $315,000 of
depreciation and amortization expense, compared to a loss of
$347,000 in the first quarter of 2000, including $295,000 of
depreciation and amortization expense. The decrease in the loss
from the first quarter of 2000 to the same period in 2001 is due
to an increase in rental income combined with a decrease in
maintenance expense and interest expense partially offset by an
increase in insurance expense and utilities expense. The increase
in rental income is due to an increase in both residential and
commercial rental rates. Maintenance expense decreased due to a
decrease in maintenance service and supply, partially offset by
an increase in appliance repairs. The increase in insurance
expense is due to an increase in insurance premiums, and the
increase in utilities expense is due to an increase in natural
gas charges.
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.
In the first quarter of 2001, Registrant incurred a
loss of $259,000 at The River Street Inn/Factor's Walk including
$105,000 of depreciation expense, compared to a loss of $259,000
including $96,000 of depreciation expense in the first quarter of
2000. Included in the loss in the first quarter of 2001 is wages
and salaries expense, partially offset by an increase in hotel
revenue. The increase in wages and salaries expense is due to
additional positions added to the payroll during the first
quarter of 2001. Hotel revenue increased due to an increase in
occupancy (56% to 66%).
In the first quarter of 2001, Registrant recognized
income of $79,000 at Washington Square including $30,000 of
depreciation and amortization expense, compared to a loss of
$8,500 including $31,000 of depreciation and amortization
expense, in the first quarter of 2000. Included in income for the
first quarter of 2001 is extraordinary gain of $68,458 related to
the foreclosure of Washington Square on March 22, 2001.
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. The 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
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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
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 March 31, 2001.
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.
Date: May 28, 2004 DIVERSIFIED HISTORIC INVESTORS II
------------
By: Dover Historic Advisors, its General
Partner
By: EPK, Inc., Managing Partner
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 March 31, 2001 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: May 28, 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 March 31, 2001 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: May 28, 2004 /s/ Spencer Wertheimer
------------ Name: ----------------------
Spencer Wertheimer
Title: President(principal executive
officer, principal financial
officer) of the registrant's
managing partner, EPK, Inc.