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, 2002
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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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIVERSIFIED HISTORIC INVESTORS II
(a Pennsylvania limited partnership)
CONSOLIDATED BALANCE SHEETS
Assets
September 30, 2002 December 31, 2001
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(Unaudited)
Rental properties, at cost:
Land $ 847,082 $ 847,082
Buildings and improvements 38,847,686 38,847,686
Furniture and fixtures 3,720,093 3,664,871
----------- -----------
43,414,861 43,359,639
Less - accumulated depreciation (25,932,482) (24,658,035)
----------- -----------
17,482,379 18,701,604
Cash and cash equivalents 128,574 175,264
Restricted cash 1,426,972 564,456
Accounts and notes receivable 211,066 195,916
Other assets (net of amortization
of $534,472 and $495,163) 1,767,550 2,406,467
----------- -----------
Total $21,016,541 $22,043,707
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,642,015 $32,739,177
Accounts payable:
Trade 3,942,601 3,776,209
Related parties 1,559,665 2,751,080
Interest payable 13,561,592 13,459,354
Tenant security deposits 324,090 284,087
Accrued liabilities 3,111,912 1,635,925
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Total liabilities 55,141,875 54,645,832
Partners' deficit (34,125,334) (32,602,125)
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Total $21,016,541 $22,043,707
=========== ===========
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,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Rental income $1,458,932 $1,372,966 $4,206,588 $4,039,395
Hotel income 343,789 352,119 1,251,107 1,197,037
Interest income 3,244 13,517 7,181 32,865
---------- ---------- ---------- ----------
Total revenues 1,805,965 1,738,602 5,464,876 5,269,297
---------- ---------- ---------- ----------
Costs and
expenses:
Rental operations 542,136 549,855 1,565,549 1,530,007
Hotel operations 311,310 288,611 953,438 931,773
Interest 1,046,164 1,128,846 3,155,342 3,190,325
Depreciation and
amortization 438,568 439,377 1,313,756 1,337,448
---------- ---------- ---------- ----------
Total costs and
expenses 2,338,178 2,406,689 6,988,085 6,989,553
---------- ---------- ---------- ----------
Net loss
extraordinary
item (532,213) (668,087) (1,523,209) (1,720,256)
Extraordinary gain
on extinguishment
of debt 0 0 0 68,458
---------- ---------- ---------- ----------
Net loss ($ 532,213) ($ 668,087) ($1,523,209) ($1,651,798)
========== ========== =========== ==========
Net loss per
limited
partnership unit:
Before
extraordinary
item ($ 25.59) ($ 32.12) ($ 75.75) ($ 82.69)
Extraordianry
gain on
extinguishment
of debt 0 0 0 3.29
---------- ---------- ---------- ----------
Net loss ($ 25.59) ($ 32.12) ($ 75.75) ($ 79.40)
========== ========== =========== ==========
The accompanying notes arean 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,
2002 2001
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Cash flows from operating activities:
Net loss ($1,523,209) ($1,651,798)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 1,313,756 1,337,447
Extraordinary gain on extinguishment
of debt 0 (68,458)
Changes in assets and liabilities:
Increase in restricted cash (862,516) (248,230)
(Increase) decrease in accounts
receivable (15,150) 5,769
Decrease (increase) in other assets 599,608 (167,825)
Increase in accounts payable - trade 166,391 83,963
(Decrease) increase in accounts
payable - related parties (1,191,415) 73,205
Increase in interest payable 102,238 720,157
Increase in accrued liabilities 1,475,987 79,672
Increase in tenant security deposits 40,004 18,051
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Net cash provided by operating activities 105,694 181,953
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Net cash used in investing activities:
Capital expenditures (55,222) (201,551)
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Net cash used in investing activities (55,222) (201,551)
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Cash flows from financing activities:
Borrowings under debt obligations 0 147,972
Principal payments under debt obligations (97,162) (115,969)
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Net cash (used in) provided by
financing activities (97,162) 32,003
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(Decrease) increase in cash and cash
equivalents (46,690) 12,405
Cash and cash equivalents at beginning
of period 175,264 23,681
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Cash and cash equivalents at end of
period $ 128,574 $ 36,086
========== ==========
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 - EXTRAORDINARY GAIN
Effective as of March, 22 2001 Washington Square was foreclosed by the
holder of the mortgage and the 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 September 30, 2002, Registrant had cash of
$128,574. 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, 2002, Registrant had restricted cash
of $1,426,972 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, 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 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.
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 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 2002, Registrant incurred a
net loss of $532,213 ($25.59 per limited partnership unit) compared to
a net loss of $668,087 ($32.12 per limited partnership unit) for the
same period in 2001. For the first nine months of 2002, the
Registrant incurred a net loss of $1,523,209 ($73.23 per limited
partnership unit) compared to a net loss of $1,651,798 ($79.40 per
limited partnership unit) for the same period in 2001.
Rental income increased $85,966 from $1,372,966 in the
third quarter of 2001 to $1,458,932 in the same period of 2002, and
for the first nine months increased $167,193 from $4,039,395 in 2001
to $4,206,588 in the same period of 2002. The increase in rental
income from the third quarter and the first nine months of 2001 to the
same period in 2002 is due to an increase in average occupancy at
Tindeco Wharf for the third quarter (90% to 95%) and for the first
nine months (90% to 94%). Rental income from commercial units
increased at the River Street Inn/Factors Walk during the first nine
months due to an increase in average rental rates.
Hotel income decreased $8,330 from $352,119 in the third
quarter of 2001 to $343,789 in the same period in 2002. The decrease
in hotel income is due to a decrease in average occupancy (65% to
61%).
Hotel income increased $54,071 from $1,197,037 in the
first nine months of 2001 to $1,251,108 in the same period of 2002.
The increase in hotel income from the first nine months of 2001 to the
same period in 2002 is due to an increase in average nightly room
rates.
Rental operations expense decreased $7,719 from $549,855
in the third quarter of 2001 to $542,136 in the same period of 2002.
The decrease in rental operations expense from the third quarter of
2001 to the same period in 2002 is due to a decrease in maintenance
expense and accounting services, partially offset by an increase in
insurance expense at Tindeco Wharf. The decrease in maintenance
expense is due to a decrease in HVAC repairs combined with an increase
in plumbing and electrical expenses. The decrease in accounting
services is due to a decrease in accounting software expense. The
increase in insurance expense is due to insurance market conditions.
Rental operations expense increased $35,542 from
$1,530,007 for the first nine months of 2001 to $1,565,549 for the
same period in 2002. The increase in rental operations expense from
the first nine months of 2001 to the same period in 2002 is due to an
increase in maintenance expense, insurance expense and advertising
expense, partially offset by a decrease in accounting services.
Hotel operations expense increased $22,699 from $288,611
in the third quarter of 2001 to $311,310 in the same period of 2002
and increased $21,665 from $931,773 for the first nine months of 2001
to $953,438 for the same period in 2002. The increase in hotel
operations expense is due to an increase in wages and salaries expense
and an increase in insurance expense, partially offset by a decrease
in utility charges. The increase in wages and salaries expense is due
to an increase in housekeeping salaries. The increase in insurance
expense is due to insurance market conditions. The decrease in utility
charges is due to a decrease in commercial unit average occupancy (54%
to 57%) for the third quarter and (64% to 61%) for the first nine
months.
Interest expense decreased $82,682 from $1,128,846 in the
third quarter of 2001 to $1,046,164 for the same period in 2002 and
decreased $34,983 from $3,190,325 in the first nine months of 2001 to
$3,155,342 for the same period in 2002. The decrease in interest
expense at Tindeco Wharf is due to a decrease in the prime rate used
to calculate interest expense on a note payable.
Losses incurred during the quarter at the Registrant's
properties were approximately $441,000 compared to a loss at the
Registrants properties of approximately $585,000 for the same period
in 2001. For the first nine months of 2002, the Registrant's
properties incurred a loss of approximately $1,247,000 compared to a
loss at the Registrants properties of approximately $1,460,000 for the
same period in 2001.
In the third quarter of 2002, Registrant incurred a net
loss of $257,000 at Tindeco Wharf including $320,000 of depreciation
and amortization expense, compared to a loss of $354,000, including
$321,000 of depreciation and amortization expense, in the third
quarter of 2001. For the first nine months of 2002, Registrant
incurred a loss of $604,000 at Tindeco Wharf including $958,000 of
depreciation and amortization expense, compared to a loss of $883,000,
including $952,000 of depreciation and amortization expense, for the
same period in 2001. The decrease in net loss for the third quarter
and the first nine months of 2001 to the same period in 2002 is due to
an increase in rental income and a decrease in interest expense,
partially offset by an increase in rental operations expense. The
increase in rental income is due to an increase in average occupancy.
Average occupancy increased (90% to 95%) for the third quarter and
(90% to 94%) for the first nine months. The decrease in interest
expense at Tindeco Wharf is due to a decrease in the prime rate used
to calculate interest expense on a note payable.
The increase in rental operations expense is due to an increase in
insurance expense and adverting expense, partially offset by a
decrease in accounting services. Advertising expense increased due to
the increase in marketing at the building. Accounting services
decreased due to a decrease in accounting software expense. The
increase in insurance expense is due to insurance market conditions.
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 third quarter of 2002, Registrant incurred a loss
of $257,000 at The River Street Inn/Factor's Walk including $105,000
of depreciation expense, compared to a loss of $231,000 including
$105,000 of depreciation expense in the third quarter of 2001. The
increase in loss from the third quarter of 2001 to the same period in
2002 is due to a decrease in hotel income and rental income combined
with an increase in hotel operations expense. The decrease in hotel
income is due to a decrease in average occupancy (65% to 61%). The
decrease in rental income is due to a decrease commercial unit average
occupancy (64% to 57%). The increase in hotel operations expense is
due to an increase in wages and salaries expense and insurance
expense, partially offset by a decrease in utility charges. The
increase in wages and salaries expense is due to an increase in
housekeeping salaries. The increase in insurance expense is due to
insurance market conditions. The decrease in utility charges is due to
a decrease in average occupancy for both hotel rooms and commercial
units at the property.
For the first nine months of 2002, Registrant incurred a
loss of $604,000 at The River Street Inn/Factor's Walk including
$315,000 of depreciation expense, compared to a loss of $656,000,
including $315,000 of depreciation expense, for the same period in
2001. The decrease in the loss from the first nine months of 2001 to
the same period in 2002 is due to an increase in rental income. The
increase in rental income is due to an increase in commercial unit
average rental rates.
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
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 September 30, 2002.
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: June 8, 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 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: June 8, 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: June 8, 2004 /s/ Spencer Wertheimer
------------ Name: ----------------------
Spencer Wertheimer
Title: President(principal executive
officer, principal financial
officer) of the registrant's
managing partner, EPK, Inc.