UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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[ ] 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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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: 20,593.3 Units
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UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of Class)
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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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of Units held by non-affiliates of the
Registrant: Not Applicable*
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* Securities not quoted in any trading market to Registrant's
knowledge.
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
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PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors II ("Registrant") is a
limited partnership formed in 1984 under Pennsylvania law. As of
December 31, 2001, Registrant had outstanding 20,593.3 units of
limited partnership interest (the "Units").
Registrant is presently in its operating stage. It
originally owned four properties or interests therein. Its interest
in two properties have been lost through foreclosure. It currently
owns two properties or interests therein. See Item 2. Properties, for
a description thereof. For a discussion of the operations of the
Registrant, see Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
c. Narrative Description of Business
Registrant is in the business of operating, holding,
selling, exchanging and otherwise dealing in and with real properties
containing improvements which are "Certified Historic Structures," as
such term is defined in the Internal Revenue Code (the "Code"), or
which are eligible for designation as such, for use as apartments,
offices, hotels and commercial spaces, or any combination thereof, or
low income housing eligible for the tax credit provided by Section 42
of the Code, and such other uses as the Registrant's general partner
may deem appropriate.
Since the Registrant's inception, all the properties
acquired either by the Registrant, or the subsidiary partnerships in
which it has an interest, have been rehabilitated and certified as
historic structures and have received the related investment tax
credit. One of the properties is held for rental operations and one is
operated as a hotel. As of the date hereof it is anticipated that all
the properties will continue to be held for these purposes. At such
time as real property values begin to increase, the Registrant will re-
evaluate its investment strategy regarding the properties.
As of December 31, 2001, Registrant owned two properties
(or interests therein), one each located in Maryland and Georgia. In
total, the two properties contain 240 apartment units, 64,361 square
feet ("sf") of commercial/retail space and 44 hotel rooms. As of
December 31, 2001, 218 of the apartment units were under lease at
monthly rental rates ranging from $920 to $2,250 and approximately
52,688 sf of commercial space was under lease at annual rental rates
ranging from $5.33 per sf to $30.69 per sf. Throughout 2001, all of
the hotel rooms were available for use. During 2001, the hotel
maintained an average nightly room rate of $125.05 and average
occupancy of 70%. Rental of the apartments and commercial space is
not expected to be seasonal. However, the hotel does experience
seasonal changes, with the busiest months being March, April and
October and the slowest months being January and December.
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.
The Registrant is affected by and subject to the
general competitive conditions of the residential and commercial real
estate industry. In the Historic District of the Inner Harbor in
Baltimore, the competition for tenants remains stiff and several
similar buildings exist. The apartment market remains stable although
the availability of favorable home financing has placed pressure on
the rental tenant base.
The hotel is located in Savannah, Georgia and is one of
several historic buildings which have been converted into hotels and
inns. The hotel relies heavily on the tourist trade which is on the
upswing in Savannah. The hotel is generally considered to be a market
leader, due to its location on River Street, the main shopping and
entertainment area on the river, and the fact that it provides a full
array of hotel amenities, not just a bed and breakfast atmosphere.
Registrant has no employees. Registrant's activities are
overseen by Brandywine Construction & Management, Inc., ("BCMI"), a
real estate management firm.
d. Financial Information About Foreign and
Domestic Operations and Export Sales.
See Item 8. Financial Statements and Supplementary Data.
Item 2. Properties
As of the date hereof, Registrant owned two properties or
interests therein. A summary description of each property held at
December 31, 2001 is given below.
a. Tindeco Wharf - consists of 240 apartment units and
approximately 41,802 sf of commercial space located at 2809 Boston
Street in the Fell's Point-Canton Historic District of Baltimore,
Maryland. In October 1985, Registrant was admitted with an 85%
interest to Tindeco Wharf Partnership ("TWP"), a Maryland general
partnership, for a cash contribution of $7,271,300. Registrant
subsequently increased its ownership interest in TWP to 90% by
purchasing an additional 5% interest for $262,500. TWP acquired and
rehabilitated this Property at an approximate cost of $28,600,000 ($66
per sf), funded by the equity contribution and mortgage financing of
$21,869,600. The mortgage financing is comprised of mortgage revenue
bonds and an Urban Development Action Grant ("UDAG") loan. Other
financing includes a loan from the developer of $2,300,000 and
operating deficit loans from both the property manager and D, LTD in
the original principal amounts of $300,000 and $200,000 respectively.
The operating deficit loans were repaid during 1999. The excess of
equity and mortgage financing over the acquisition and rehabilitation
costs was utilized to provide various escrow deposits and required
reserves.
The City of Baltimore issued mortgage revenue refunding
bonds, Series 1992, (GNMA collateralized) for the purpose of providing
permanent financing for TWP. The bonds are backed by a HUD-insured
mortgage ("the note"). The note, held by GNMA as lender, bears
interest at a rate of 9.75% per annum and is secured by a first
mortgage on the property. Principal and interest is payable in
monthly installments of $143,801. The note matures December 2028.
The refunding issue bears interest at an average rate of 6.62%. The
difference in the interest on the mortgage and the refunding bonds is
returned to TWP for operations.
The principal balance of the bonds was $16,412,435 at
December 31, 2001. The bonds are comprised of both serial and term
bonds. The serial bonds bear interest at rates ranging from 4.6% to
6.1% and mature semi-annually from June 1999 through December 2006.
The term bonds bear interest at rates ranging from 6.5% to 6.7% and
mature in 2012, 2024, and 2028. The UDAG loan (which has a balance of
$4,953,471 at December 31, 2001 bore interest at 4% through August
1994 and at 7 1/2% thereafter. This loan is due in 2004. The
developer's loan (principal balance of $2,300,000 at December 31,
2001) bears interest at 12% and is payable on a pro-rata basis out of
cash flow from the property. The developer's loan is due in 2005, or
upon earlier sale or refinancing of the property.
The property is managed by BCMI. As of December 31,
2001, 218 apartment units (91%) and 37,708 sf of commercial space
(90%) were under lease. Monthly rental rates range from $920 to
$2,250 for apartments and annual rental rates range from $5.33 to
$21.57 per sf for commercial space. All residential leases are
renewable, one-year leases. The occupancy for the residential units
for the previous four years was 94% for 2000, 96% for 1999, 98% for
1998, and 98% for 1997. The occupancy for the commercial space for
the previous four years has been 92% for 2000, 98% for 1999, 97% for
1998, and 100% for 1997. The range for annual commercial rents has
been $5.33 to $21.57 per sf for 2000, $5.33 to $20.55 per sf for 1999,
$5.33 to $25.34 per sf for 1998, and $5.33 to $19.47 per sf for 1997.
There are four tenants who each occupy ten percent or more of the
commercial rentable square footage. They operate principally as a
medical office, a restaurant, a fitness club and a travel agency.
The following is a table showing commercial lease
expirations at Tindeco Wharf for the next five years.
Total annual
Number of Total sf of rental covered % of gross
leases expiring by expiring annual rental
Year expiring leases leases from property
2002 2 5,619 109,609 20%
2003 2 7,645 153,512 28%
2004 1 1,944 38,880 7%
2005 1 4,500 23,985 4%
2006 1 950 19,000 4%
Thereafter 1 17,050 198,121 37%
For tax purposes, this property has a federal tax basis
of $27,850,496 and is depreciated using the straight-line method with
a useful life of 27.5 years. The annual real estate taxes are
$458,412 which is based on an assessed value of $19,508,200, taxed at
a rate of $2.26 per $100. It is the opinion of the management of the
Registrant that the property is adequately covered by insurance.
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.
b. River Street Inn/Factor's Walk - consists of 44 hotel
rooms and 22,559 sf of commercial space located at 115 E. River Street
in Savannah, Georgia. In August 1985, Registrant was admitted with a
99% interest in Factor's Walk Partners ("FWP") a Georgia general
partnership, for $3,600,409. FWP acquired and rehabilitated the
property for $8,900,409 ($127 per sf), including financing through an
issuance by a governmental agency of tax-exempt bonds in the principal
amount of $5,800,000. The excess of equity and mortgage financing over
the acquisition and rehabilitation costs was utilized to provide
working capital reserves of $500,000. The bonds bore interest at TENR
(a rate based on yields of high quality, short-term tax exempt
obligations) plus 0.5% until December 30, 1996 and were guaranteed by
a private corporation. On December 30, 1996, both the bonds and the
guarantee were sold. The new holder of the bonds exercised its right
to convert the interest rate from the variable rate to 14% due to the
credit rating of the new guarantor. The principal balance of the
bonds at December 31, 2001 was $5,980,376 and are due on December 31,
2015.
The property is managed by BCMI. As of December 31,
2001, 15,542 sf of the commercial space (69%) was under lease at
annual rental rates ranging from $9.63 to $31.00 per sf. The property
also maintains 44 operating hotel rooms at an average nightly rate of
$125.05. The average occupancy for 2001 was approximately 69%. The
hotel occupancy rate for the previous four years was 61% for 2000, 66%
for 1999, 75% for 1998, and 74% for 1997. The average room rates were
$124.23 for 2000, $126.45 for 1999, $128.06 for 1998, and $106.06 for
1997. The occupancy for the commercial space was 74% from 1998 to
2000, and 96% for 1997. The range for annual rents was $9.63 to
$30.00 per sf for 2000, $7.89 to $26.83 per sf for 1999, $7.11 to
$26.26 per sf for 1998, and $7.11 to $25.82 per sf for 1997. There
are two tenants who each occupy ten percent or more of the rentable
square footage. They operate principally as a restaurant and a retail
store.
The following is a table showing commercial lease
expirations at Factor's Walk for the next five years.
Total annual
Number of Total sf of rental covered % of gross
leases expiring by expiring annual rental
Year expiring leases leases from property
2002 2 400 8,700 3%
2003 3 2,640 40,690 16%
2004 0 0 0 0%
2005 4 3,856 68,810 26%
2006 4 8,646 145,674 56%
Thereafter - - - -
For tax purposes, this property has a federal tax basis
of $10,726,719 and is depreciated using the straight-line method with
a useful life of 27.5 years. The annual real estate taxes are $59,445
which is based on an assessed value of $1,304,800, taxed at a rate of
$3.05 per $100. It is the opinion of the management of the Registrant
that the property is adequately covered by insurance.
Item 3. Legal Proceedings
For a description of legal proceedings involving
Registrant's properties, see Part II, Item 7. River Street
Inn/Factor's Walk Partners.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal years covered
by this report to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
a. There is no established public trading market for the
Units. Registrant does not anticipate any such market will develop.
Trading in the Units occurs solely through private transactions. The
Registrant is not aware of the prices at which trades occur.
Registrant's records indicate that 128.5 Units of record were sold or
exchanged in 2001.
b. As of December 31, 2001, there are 2,571 record holders
of Units.
c. Registrant did not declare any cash dividends in 2001 or
2000.
Item 6. Selected Financial Data
The following selected financial data are for the five
years ended December 31, 2001. The data should be read in conjunction
with the consolidated financial statements included elsewhere herein.
This data is not covered by the independent auditors' report.
2001 2000 1999 1998 1997
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Rental
income $ 5,340,239 $ 5,462,332 $ 5,015,476 $ 4,623,527 $ 4,463,462
Hotel
revenues 1,535,825 1,305,660 1,384,057 1,582,824 1,282,525
Interest
income 41,165 45,742 23,336 35,575 29,636
Net loss (2,294,872) (2,474,642) (4,292,936) (2,980,282) (3,457,494)
Net loss per
Unit (110.32) (118.97) (206.38) (143.27) (166.22)
Total assets
(net of
depreciation
and amort-
ization) 22,043,707 25,074,714 25,880,800 26,503,288 27,143,753
Debt obliga-
tions 32,739,177 33,792,649 33,306,221 32,808,014 32,712,165
Note: See Part II, Item 7(3) Results of Operations for a discussion of
factors which materially affect the comparability of the information
reflected in the above table.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(1) Liquidity
At December 31, 2001, Registrant had cash of $175,264.
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 and to
defer administrative costs. The Registrant is not aware of any
additional sources of liquidity.
As of December 31, 2001, Registrant had restricted cash
of $564,456 consisting primarily of funds held as security deposits,
replacement reserves and escrows for taxes. As a consequence of these
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. In the
legal proceeding involving the Morrison Clark Inn (see "Results of
Operations" below in this Item 7), a property formerly owned by the
Registrant, if Capital Bank executes upon its $1,800,000 judgment with
respect to the Registrant, it is expected to have significant adverse
impact on the Registrant since there is insufficient available cash to
pay the judgment. Any such execution could result in a forced sale of
the Registrant's remaining properties.
It is the Registrant's intention to continue to hold the
properties until they can no longer meet their debt service
requirements 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 expenditures 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 2001, Registrant incurred a net loss of $2,294,872
($110.32 per limited partnership unit), compared to a loss $2,474,642
($118.97 per limited partnership unit) in 2000, and a net loss of
$4,292,936 ($206.38 per limited partnership unit), in 1999.
Rental and hotel income was $6,876,064 in 2001,
$6,767,992 in 2000, and 6,399,533 in 1999. The increase from 2000 to
2001 is due to an increase in hotel income at Factors Walk and an
increase in rental income at Tindeco Wharf partially offset by a
decrease in rental income at Washington Square. The increase in hotel
income at Factors Walk is due to an increase in average occupancy (61%
to 66%). The increase in rental income at Tindeco Wharf is due to an
increase in average occupancy for commercial units (92% to 95%). The
decrease in rental income at Washington Square due to the foreclosure
of the property on March 22, 2001. The increase in rental and hotel
income from 1999 to 2000 is due to an increase in residential rental
income at Tindeco Wharf, offset by a decrease at Washington Square.
The increase in rental income at Tindeco Wharf is due to an increase
in average rental rates. Rental income decreased at Washington Square
due to a decrease in average occupancy (95% to 65%).
Interest income was $41,165 in 2001, $45,742 in 2000, and
$23,336 in 1999. The decrease from 2000 to 2001 is due to a decrease
in the interest bearing restricted cash balance at Tindeco Wharf. The
increase from 1999 to 2000 is the result of an increase in the
interest bearing restricted cash balance at Tindeco Wharf.
Rental operations expense was $2,028,376 in 2001,
$2,102,470 in 2000, and $2,055,706 in 1999. The decrease in rental
operations expense form 2000 to 2001 is due to the foreclosure of
Washington Square on March 22, 2001. The decrease in rental operations
expense at Washington Square is partially offset by an increase at
Tindeco Wharf. The increase is due to an increase in miscellaneous
operating expense and wages and salaries expense, partially offset by
a decrease in maintenance expense. The increase in miscellaneous
operating expense is due to an increase in general and administrative
expenses at the property. The increase in wages and salaries expense
is due to an increase in janitorial salaries. The decrease in
maintenance expense is due to a decrease in decorating expense,
grounds maintenance, outside cleaning service, and exterminating
expenses. The increase in rental operations expenses from 1999 to 2000
is due to an increase in management fees at Washington Square and
Tindeco Wharf, and payroll expense at Tindeo Wharf, partially offset
by a decrease in maintenance expense at both Washington Square and
Tindeco Wharf. The increase in management fees at Washington Square is
due to a change in management company during 2000. The increase in
management fees at Tindeco Wharf is due to an increase in rental
income and the increase in payroll expense is due to an increase in
marketing and leasing, and maintenance payroll. The decrease in
maintenance expense at Washington Square due to a decrease in
apartment preparation expense caused by a lower turnover of apartment
units in 2000 as compared to 1999. The decrease in maintenance expense
at Tindeco Wharf is due to completion of planned repairs at the
property.
Hotel operations expense was $1,257,784 in 2001,
$1,122,156 in 2000, and $1,215,631 in 1999. The increase from 2000 to
2001 is due to an increase in wages and salaries expense, and
utilities expense, partially offset by a decrease in legal and
accounting expense. The increase in wages and salaries expense is due
to an increase in administrative salaries. The increase in utilities
expense is due to an increase in electricity and gas charges. The
decrease in legal and accounting expense is due to a decrease in legal
services rendered in 2001. The decrease from 1999 to 2000 is due to a
decrease in food and beverage and maintenance expense as a result of a
decrease in occupancy throughout the year.
Partnership administration fees incurred in the amount of
$1,333,786 during 1999 are due to the termination of the management
agreement with Signature Management Services at Tindeco Wharf.
General and administrative expense was $0 in 2000 and
2001, and $198,000 in 1999. The Registrant ceased accruing partnership
administration fees in 2000. The cash flow and debt of the Registrant
make it unlikely that these fees will be paid.
Interest expense was $4,216,229 in 2001, $4,240,944 in
2000 and, $4,122,243 and in 1999. The decrease from 2000 to 2001 at
Tindeco Wharf is due to a decrease in interest expense on the
development fee note due to payments made against accrued current
interest partially offset by an increase in interest expense at
Tindeco Wharf is due to a decrease in interest returned to the
property by the trustee of the City of Baltimore refunding bonds. The
increase from 1999 to 2000 is due to an increase in interest expense
at the River Street Inn and Tindeco Wharf. The increase in interest
expense at the River Street Inn is due to an increase in the principal
balance due to advances made by the first mortgage holder to fund
building renovations. Interest expense increased at Tindeco Wharf due
to the accrual of interest on a higher average balance on the second
mortgage. The balance increased due to the capitalization of interest
accrued but not paid on certain loans, as described below.
Depreciation and amortization was $1,781,784 in 2001,
$1,822,805 in 2000, and $1,790,439 in 1999. The decrease from 2000 to
2001 is due to the foreclosure of Washington Square on March 22, 2001.
The increase from 1999 to 2000 and from 1998 to 1999 is due to an
increase at the River Street Inn and Tindeco Wharf due to the
depreciation of fixed asset additions.
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.
In 2001, a loss of approximately $2,008,000 was incurred
at the Registrant's three properties compared to a loss of
approximately $2,131,000 in 2000 and a loss of approximately
$3,768,000 in 1999. Included in the loss for 2001, the Registrant
recognized an extraordinary gain on the extinguishment of debt in the
amount of $68,458. A discussion of property operations/activities
follows:
In 2001, Tindeco Wharf sustained a loss of $1,150,000
including $1,274,000 of depreciation and amortization expense compared
to a loss of $1,203,000 including $1,235,000 of depreciation and
amortization expense in 2000 and a loss of $2,824,000 including
$1,235,000 of depreciation and amortization expense and $418,000 of
deferred interest (reflecting interest accrued but not paid on the
developer's and operating deficit loans) in 1999. The decrease in the
loss from 2000 to 2001 is due to an increase in rental income and a
decrease in maintenance expense, partially offset by an increase in
miscellaneous operating expense, wages and salaries expense and
interest expense. The increase in rental income is due to the increase
in commercial unit occupancy (92% to 95%). The decrease in maintenance
expense is due to a decrease in decorating expense, grounds
maintenance, outside cleaning service, and exterminating expenses. The
increase in miscellaneous operating expense is due to an increase in
miscellaneous general and administrative expenses at the property. The
increase in wages and salaries expense is due to an increase in
janitorial salaries. The increase in interest expense is due to a
decrease in interest returned to the property by the trustee of the
City of Baltimore refunding bonds, partially offset by a decrease in
interest expense on the development fee note due to payments made
against accrued current interest. The decrease in the loss from 1999
to 2000 is due to an increase in residential rental income combined
with a decrease in maintenance expense and the one time partnership
administration fee in 1999 partially offset by an increase in interest
expense and management fees. Residential rental income increased due
to an increase the average rental rates and interest income increased
due to an increase in the balance of the interest bearing restricted
cash. Maintenance expense decreased due to the completion of planned
repairs at the property. Interest expense increased due to an increase
in the principal balance upon which interest is calculated. Management
fees increased due to an increase in rental income.
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 2001, the River Street Inn sustained a loss of
$936,440 including $424,000 of depreciation and amortization expense
compared to a loss of $928,000 including $407,000 of depreciation and
amortization expense in 2000 and a loss of $936,000 including $382,000
of depreciation and amortization expense in 1999. The increase in
loss from 2000 to 2001 is due to an increase in hotel operations
expense, partially offset by an increase in hotel income. The increase
in hotel operations expense is due to an increase in wages and
salaries expense, and utilities expense, partially offset by a
decrease in legal and accounting expense. The increase in wages and
salaries expense is due to an increase in administrative salaries. The
increase in utilities expense is due to an increase in electricity and
gas charges. The decrease in legal and accounting expense is due to a
decrease in legal services rendered in 2001. The increase in hotel
income is due to an increase in average occupancy (61% to 66%). The
decrease in the loss from 1999 to 2000 is due to an increase in
commercial rental income combined with a decrease in food and
maintenance expense. The increase in commercial rental income is due
to an increase in the annual rental rates. The decrease in food and
maintenance expense is a result of a decrease in occupancy throughout
the year.
FWP is involved in one legal proceeding as discussed below:
J. A. Jones Construction Company ("Jones") contracted
with FWP for the renovation of what was originally a warehouse into
the River Street Inn/Factor's Walk. During construction, numerous
disputes arose between the parties. As a result of those disputes,
Jones abandoned the project prior to completion and filed suit in the
matter of J.A. Jones Construction Company v. Factor's Walk Partners in
the United States District Court for the Northern District of Georgia.
On January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1994 and
1995. FWP filed an appeal and this appeal was held in abeyance while
FWP and Jones participated in a court sponsored settlement program.
On November 8, 1996, a settlement agreement was reached whereby a note
in the amount of $1,000,000 was issued. The note calls for 6%
interest until September 1, 1997, with the rate increasing .5% on each
August 1 thereafter to a maximum rate of prime plus 2% (therefore, 8%
at December 31, 2001) and is due on October 1, 2011. Interest is due
quarterly.
On June 30, 1992, Dover Historic Properties, Inc.
assigned to Dover Limited a note receivable, from FWP to the
Registrant that had been assigned to Dover Historic Properties, Inc.
The note was in the stated amount of $55,951 and bore interest at 10%;
the note was due on June 30, 1997. On January 13, 1994 Dover Limited
obtained a judgment on this note in the amount of $73,184 in Common
Pleas Court for Philadelphia County, Pennsylvania. The judgment
accrues interest at 15%. On March 31, 2000 the note was sold. Interest
accrued during 2001 was $30,023. The balance of the note at December
31, 2001 was $197,409.
In 2001, Washington Square recognized income of $80,000
including $30,000 of depreciation and amortization expense compared to
a loss of $1,000 including $126,000 of depreciation expense in 2000,
and a loss of $8,000 including $122,000 of depreciation expense in
1999. Included in income for 2001 is extraordinary income of $68,458
related to the foreclosure of Washington Square effective as of March
22, 2001. The decrease in the loss from 1999 to 2000 is due to an
increase in rental income due to an increase in average occupancy (95%
to 100%), and an increase in average rental rates combined with a
decrease in maintenance expense. Maintenance expense decreased due to
a lower turnover of apartment units in 2000 compared to 1999. The
loss in 1999 is due to a decrease in rental income combined with an
increase in maintenance expense. The decrease in rental income is due
to a decrease in rental occupancy rates (97% to 95%). The increase in
maintenance expense is due to an increase in apartment preparation
expense caused by a higher turnover of apartment units.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note
receivable from the Registrant in the stated amount of $404,046. The
note bore interest at 10% and was due on June 30, 1997. On March 23,
1993 D, LTD obtained a judgment on this note in the amount of $454,299
in Common Pleas Court for Philadelphia County, Pennsylvania. The
judgment accrues interest at 15%. Interest accrued during 2001 and
2000 was $168,668 and $163,654, respectively. Payments on the
judgment are to be made from available cash flow before any
distribution can be made to the limited partners. The balance of the
note at December 31, 2001 is $1,195,205.
In February 1993, one of the Registrant's properties, the
Morrison-Clark Inn, was foreclosed by the lender. 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. If
capital bank executes upon its $1,800,000 judgment with respect to the
registrant, it is expected to have significant adverse impact on the
Registrant since there is insufficient available cash to pay the
judgment. Any such execution could result in a forced sale of the
registrants remaining properties.
Item 7A. 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 8. Financial Statements and Supplementary Data
Registrant is not required to furnish the supplementary
financial information referred to in Item 302 of Regulations S-K.
Independent Auditor's Report
To the Partners of
Diversified Historic Investors II
We have audited the accompanying consolidated balance sheet of
Diversified Historic Investors II (a Pennsylvania limited partnership)
and subsidiaries as of December 31, 2001 and 2000 and the related
statements of operations and changes in partners' equity and cash
flows for the years ended December 31, 2001, 2000 and 1999. These
consolidated financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit. We did
not audit the financial statements of Tindeco Wharf Partnership, which
statements reflect total assets of $16,168,452, $17,449,441, and
$18,324,708 as of December 31, 2001, 2000 and 1999 respectively, and
total revenues of $4,875,326, $4,656,945, and $4,306,834 respectively
for the years then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Tindeco Wharf
Partnership, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of
Diversified Historic Investors II and subsidiaries as of December 31,
2001 and 2000, and the results of operations and cash flows for the
years ended December 31, 2001, 2000 and 1999 in conformity with U.S.
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule of Real
Estate and Accumulated Depreciation on page 28 is presented for the
purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, which insofar as it relates
to Tindeco Wharf Partnership is based solely on the report of other
auditors, such information is fairly stated in all material respects
in relation to the basic financial statements taken as a whole.
As discussed in Note C of the financial statements, Diversified
Historic Investors II is liable for payment of a $1,800,000 guarantee
resulting from the foreclosure on a property in 1993. In the past the
partnership has been able to continue the forbearance when the period
ends in July, 2000. If the lender executes judgment it is expected to
have significant adverse impact on the partnership and could result in
a forced sale of the remaining properties.
Gross, Kreger & Passio
Philadelphia, Pennsylvania
May 21, 2002
Independent Auditor's Report
To the Partners of
Tindeco Wharf Partnership
We have audited the accompanying balance sheet of Tindeco Wharf
Partnership as of December 31, 2001, and the related statements of
profit and loss, partners' deficit and cash flows for the year then
ended. The financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller
General of the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tindeco
Wharf Partnership as of December 31, 2001, and the results of its
operations, the changes in partners' deficit and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Reznick, Fedder & Silverman
Baltimore, Maryland
March 1, 2002
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated financial statements: Page
Consolidated Balance Sheets at December 31, 2001 and 2000 17
Consolidated Statements of Operations for the Years
Ended December 31, 2001, 2000, and 1999 18
Consolidated Statements of Changes in Partners'
Equity for the Years Ended December 31, 2001, 2000, and 1999 19
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000, and 1999 20
Notes to consolidated financial statements 21-27
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 29
Notes to Schedule XI 30
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2001 and 2000
Assets
2001 2000
---- ----
Rental properties at cost:
Land $ 847,082 $ 934,582
Buildings and improvements 38,847,686 41,596,269
Furniture and fixtures 3,664,871 3,633,054
----------- -----------
43,359,639 46,163,905
Less - accumulated depreciation (24,658,035) (24,737,850)
----------- -----------
18,701,604 21,426,055
Cash and cash equivalents 175,264 23,681
Restricted cash 564,456 1,767,238
Accounts receivable 195,916 200,441
Other assets (net of accumulated
amortization of $495,163 and
$445,407) 2,406,467 1,657,299
----------- -----------
Total $22,043,707 $25,074,714
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations 32,739,177 33,792,649
Accounts payable:
Trade 3,776,209 3,681,307
Related parties 2,751,080 2,879,080
Interest payable 13,459,354 13,260,609
Tenant security deposits 284,087 277,730
Other liabilities 1,635,925 1,490,592
----------- -----------
Total liabilities 54,645,832 55,381,967
Partners' deficit (32,602,125) (30,307,253)
----------- -----------
Total $22,043,707 $25,074,714
=========== ===========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Revenues:
Rental income $5,340,239 $5,462,332 $ 5,015,476
Hotel income 1,535,825 1,305,660 1,384,057
Interest income 41,165 45,742 23,336
Other income 3,614 0 0
---------- ---------- -----------
Total revenues 6,920,843 6,813,734 6,422,869
---------- ---------- -----------
Costs and expenses:
Rental operations 2,028,376 2,102,471 2,055,706
Hotel operations 1,257,784 1,122,156 1,215,631
General and administrative 0 0 198,000
Partnership administrative fee 0 0 1,333,786
Interest 4,216,229 4,240,944 4,122,243
Depreciation and amortization 1,781,784 1,822,805 1,790,439
---------- ---------- -----------
Total costs and expenses 9,284,173 9,288,376 10,715,805
---------- ---------- -----------
Net loss before extraordinary item($2,363,330)($2,474,642)($ 4,292,936)
Extraordinary gain on
extinguishment of debt 68,458 0 0
---------- ---------- -----------
Net loss ($2,294,872)($2,474,642)($ 4,292,936)
========== ========== ===========
Net loss per limited partnership
unit:
Loss before extraordinary item ($ 113.61)($ 118.97) ($ 206.38)
Extraordinary item 3.29 0 0
---------- ---------- -----------
Total loss per limited
partnership unit ($ 110.32)($ 118.97) ($ 206.38)
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
------------------------------------------------------
For the years ended December 31, 2001, 2000 and 1999
Dover
Historic Limited
Advisors Partners
(1) (2) Total
-------- -------- -----
Percentage participation in
profit or loss 1% 99% 100%
== === ====
Balance at December 31, 1997 ($377,014) ($20,182,379) ($20,559,393)
Net loss (29,803) (2,950,479) (2,980,282)
-------- ----------- -----------
Balance at December 31, 1998 (406,817) (23,132,858) (23,539,675)
Net loss (42,929) (4,250,007) (4,292,936)
-------- ----------- -----------
Balance at December 31, 1999 (449,746) (27,382,865) (27,832,611)
Net loss (24,746) (2,449,896) (2,474,642)
-------- ----------- -----------
Balance at December 31, 2000 (474,492) (29,832,761) (30,307,253)
Net loss (22,949) (2,271,923) (2,294,872)
-------- ----------- -----------
Balance at December 31,2001 ($497,441) ($32,104,684) ($32,602,125)
======== =========== ===========
(1) General Partner.
(2) 20,593.3 limited partnership units outstanding at December 31,
2001, 2000, and 1999.
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the years ended December 31, 2001, 2000, and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating
activities:
Net loss ($2,294,872)($2,474,642)($4,292,936)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 1,781,784 1,822,805 1,790,439
Extraordinary gain (68,458) 0 0
Changes in assets and liabilities:
Decrease (increase) in restricted
cash 1,202,781 (258,714) (413,151)
Decrease (increase) in accounts
receivable 4,525 (67,168) (61,690)
(Increase) decrease in other assets (805,007) 60,552 19,934
Increase in accounts payable -
trade 94,903 440,072 413,783
Increase (decrease) in accounts
payable - related parties 123,251 (84,354) 1,441,700
Increase in interest payable 198,745 807,247 1,109,954
Increase in tenant security deposits 6,357 27,792 804
Increase (decrease) in other
liabilities 145,333 (8,629) 206,000
---------- ---------- ----------
Net cash provided by operating
activities: 389,342 264,961 214,837
---------- ---------- ----------
Cash flows from investing
activities:
Capital expenditures (248,415) (765,817) (894,188)
---------- ---------- ----------
Net cash used in investing
activities: (248,415) (765,817) (894,188)
---------- ---------- ----------
Cash flows from financing
activities:
Borrowings under debt obligations 157,472 1,694,430 1,387,108
Payments of principal under debt
obligations (146,816) (1,208,003) (888,901)
---------- ---------- ----------
Net cash provided by
financing activities: 10,656 486,427 498,207
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 151,583 (14,429) (181,144)
Cash and cash equivalents at
beginning of year 23,681 38,110 219,254
---------- ---------- ----------
Cash and cash equivalents at end
of year $ 175,264 $ 23,681 $ 38,110
========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for
interest $3,689,055 $3,433,697 $3,012,289
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
NOTE A - ORGANIZATION
Diversified Historic Investors II (the "Partnership") was formed in
December 1984 to acquire, rehabilitate, and manage real properties
which are certified historic structures as defined in the Internal
Revenue Code (the "Code"), or which are eligible for designation as
such, utilizing mortgage financing and the net proceeds from the sale
of limited partnership units. Rehabilitations undertaken by the
Partnership were done with a view to obtaining certification of
expenditures therefore as "qualified rehabilitation expenditures" as
defined in the Code. The General Partner, Dover Historic Advisors,
has the exclusive responsibility for all aspects of the Partnership's
operations
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows:
1. Principles of Consolidation
The accompanying consolidated financial statements of the Partnership
include the accounts of two subsidiary partnerships (the "Ventures"),
in which the Partnership has controlling interests, with appropriate
elimination of inter-partnership transactions and balances. These
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of the
Partnership's General Partner, are necessary for a fair statement of
the results for the years presented.
2. Depreciation
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Buildings and improvements are
depreciated over 25 years and furniture and fixtures over five years.
3. Finance Costs
Loan fees have been incurred with respect to certain loans. Such fees
are being amortized over the terms of the related loans (18 to 40
years) and being charged to amortization expense.
The Partnership prepaid all amounts due under a ground lease for one
of its properties. Such prepayment is being amortized over the term
of the lease (75 years) and being charged to amortization expense.
Tindeco Wharf Partnership ("TWP") incurred $818,465 of settlement fees
in conjunction with a bond refinancing. These settlement fees are
included in other assets and are being amortized over the term of the
bond issue. Accumulated amortization was $211,319 and $188,663 at
December 31, 2001 and 2000, respectively.
4. Cash and Cash Equivalents
The Partnership considers all highly liquid instruments purchased with
a maturity of less than three months to be cash equivalents.
5. Net Income per Limited Partnership Unit
The net income per limited partnership unit is based on the weighted
average number of limited partnership units outstanding during the
period (20,593.3 in 2001, 2000 and 1999).
6. Income Taxes
Income taxes or credits resulting from earnings or losses are payable
by or accrue to the benefits of the partners; accordingly, no
provision has been made for income taxes in these financial
statements.
7. Restricted Cash
Restricted cash includes amounts held for tenant security deposits,
insurance and real estate tax reserves.
8. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-
line basis. Rental payments received in advance are deferred until
earned.
9. Rental Properties
Rental properties are stated at cost. A provision for impairment of
value is recorded when a decline in value of a property is determined
to be other than temporary as a result of one or more of the
following: (1) a property is offered for sale at a price below its
current carrying value, (2) a property has significant balloon
payments due within the foreseeable future for which the Partnership
does not have sufficient resources, and anticipates it will be unable
to obtain replacement financing or debt modification sufficient to
allow it to continue to hold the property over a reasonable period of
time, (3) a property has been, and is expected to continue, generating
significant operating deficits and the Partnership is unable or
unwilling to sustain such deficits and has been unable, or anticipates
it will be unable, to obtain debt modification, financing or
refinancing sufficient to allow it to continue to hold the property
for a reasonable period of time or, (4) a property's value has
declined based on management's expectations with respect to projected
future operational cash flows and prevailing economic conditions. An
impairment loss is indicated when the undiscounted sum of estimated
future cash flows from an asset, including estimated sales proceeds,
and assuming a reasonable period of ownership up to 5 years, is less
than the carrying amount of the asset. The impairment loss is
measured as the difference between the estimated fair value and the
carrying amount of the asset. In the absence of the above
circumstances, properties and improvements are stated at cost. An
analysis is done on an annual basis at December of each year.
10. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
NOTE C - DEBT OBLIGATIONS
Debt obligations were as follows:
December 31,
2001 2000
---- ----
Mortgage loan, interest only at 14%; $ 7,273,271 $ 7,123,830
principal due December 31, 2015,
collateralized by the related rental
property
Mortgage loan, interest at 12%, due 1,800,000 1,800,000
January 1, 1992, collateralized by the
related rental property (A)
Mortgage loans, interest at the Federal 0 1,083,896
Reserve Discount rate plus 2% with a
minimum of 7% and a maximum of 15% (7% at
December 31, 2000 and 1999), principal
and interest payable monthly based on a
20-year amortization schedule; principal
due October 1, 2005; collateralized by
the related rental property (C)
Mortgage revenue bonds comprised of the 16,412,435 16,531,452
following: $1,440,000 of Serial Bonds,
interest rates ranging from 4.6% to 6.1%,
maturing semi-annually from June 20,
2000, to December 20, 2006; $1,650,000 of
Term Bonds, interest at 6.5%, maturing
December 20, 2012; $8,260,000 of Term
Bonds, interest at 6.6%, maturing
December 20, 2024; $5,605,000 of Term
Bonds, interest at 6.7%, maturing
December 20, 2028; collateralized by the
related rental property
Second mortgage loan, principal and 4,953,471 4,953,471
interest at 7.5%, payable in monthly
installments of $36,606 to July 2005
based upon available cash flow, at which
time the balance is due; collateralized
by the related rental property (B)
Note payable to a developer, interest
accrues at 12%, of which 6% interest is
payable annually; deferred interest is
payable out of cash flow after a
preference return to the Partnership with
interest accruing on the unpaid amount;
principal and unpaid interest due at the
earlier of sale or refinancing of the
property or 2005; unsecured 2,300,000 2,300,000
----------- -----------
$32,739,177 $33,792,649
=========== ===========
(A) Interest payments were not made after August 1991. Lender
declared default and accelerated payment of the note in February
1992. The partnership which owns the property filed a petition
of reorganization in May 1992. In November 1992, the automatic
stay was lifted and the property which collateralizes this loan
was foreclosed by the lender in February 1993. However, the
partnership guaranteed $1,800,000 of the original note balance,
which is included in debt obligations.
(B) Interest and principal after August 1, 1990 due only to the
extent of available cash flow. Any unpaid principal and interest is
deferred. Additional interest equal to 20% of net cash flow from
operations, as defined, in excess of $1,075,000 is payable annually.
The lender is also entitled to receive 10% of the net proceeds from
the sale of the property as defined. No interest was paid during
2001, 2000 or 1999.
(C) This property was foreclosed as of March 22, 2001.
Approximate maturities of mortgage loan obligations, at December 31,
2001 for each of the succeeding five years are as follows:
Year ending December 31,
2002 $ 1,931,154
2003 144,528
2004 159,267
2005 7,428,980
2006 193,406
Thereafter 22,881,842
-----------
$32,739,177
===========
NOTE D - ACQUISITIONS
The Partnership acquired one property and three general partnership
interests in Ventures during the period August 1985 to October 1985,
as discussed below.
In August 1985, the Partnership was admitted, with a 99% general
partner interest, to a Pennsylvania general partnership, which owns a
building located in Savannah, Georgia, consisting of 22,559 commercial
square feet and a 44 room hotel, for a cash capital contribution of
$3,600,409.
In October 1985, the Partnership was admitted, with an 85% general
partner interest, to a Pennsylvania general partnership, which owned a
54-room hotel located in Washington, D.C., for a cash capital
contribution of $1,820,100. The Partnership's interest was
subsequently reduced to 69% when an affiliate of the Partnership
acquired a 19% interest. The lender foreclosed in 1993.
In October 1985, the Partnership purchased a three-story building,
consisting of 29 residential apartments and 9,500 square feet of
commercial space, for a cash consideration of $1,320,883. The lender
foreclosed on March 22, 2001.
In October 1985, the Partnership was admitted, with an 85% general
partner interest, to a Maryland general partnership, which owns a
building located in Baltimore, Maryland, consisting of 240 residential
units and 41,307 square feet of commercial space, for a cash capital
contribution of $7,271,300. The Partnership subsequently purchased an
additional 5% interest for $262,500. On June 30, 2003, the Registrant
transferred its interest in TWP to an affiliate of the owner of the
second mortgage loan secured by the property of TWP. At transfer, the
liabilities of TWP exceeded the value of Registrant's interest in TWP.
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.
NOTE E- COMMITMENTS AND CONTINGENCIES
Pursuant to certain agreements, the developers of and lenders to the
properties are entitled to share in the following:
1. 15% of net cash flow from operations (one property), and 15% to
50% of net cash flow from operations above certain specified
amounts (two properties);
2. 10% to 45% of the net proceeds, as defined, of the sale of the
respective properties (two properties). Generally, the
Partnership is entitled to a priority distribution of the net
proceeds of sale prior to any payments to developers.
J. A. Jones Construction Company ("Jones") contracted with Factor's
Walk Partners ("FWP"), a subsidiary of the Partnership, for the
renovation of what was originally a warehouse, into the River Street
Inn/Factor's Walk. During construction, numerous disputes arose
between the parties. As a result of those disputes, Jones abandoned
the project prior to completion and filed suit in the matter of J.A.
Jones Construction Company v. Factor's Walk Partners in the United
States District Court for the Northern District of Georgia. On
January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1995 and
1994. FWP filed an appeal which was held in abeyance while FWP and
Jones participated in a court sponsored settlement program. On
November 8, 1996, a settlement agreement was reached whereby a note in
the amount of $1,000,000 was issued. The note calls for 6% interest
until September 1, 1997, with the rate increasing .5% on each August 1
thereafter to a maximum of prime plus 2% (therefore, 8% at December
31, 2001) and is due on October 1, 2011. Interest is due quarterly
with the first payment due September 1, 1997.
NOTE F - RELATED PARTY TRANSACTIONS
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from
FWP to the Partnership that had been assigned to DHP, Inc. The note
was in the stated amount of $55,951 and bore interest at 10%; the note
was due on June 30, 1997. On January 13, 1994 D, LTD obtained a
judgment on this note in the amount of $73,184 in Common Pleas Court
for Philadelphia County, Pennsylvania. The judgment accrues interest
at 15%. On March 31, 2000 the note was sold. Interest accrued during
2000 was $22,620. The balance of the note at December 31, 2000 was
$197,409. Interest accrued during 2001 and 2000 was $30,023 and
$22,619, respectively. The balance of the note at December 31, 2001
was $197,409.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable from
the Partnership in the stated amount of $404,046. The note bore
interest at 10% and was due on June 30, 1997. On March 23, 1993, D,
LTD obtained a judgment on this note in the amount of $454,299 in
Common Pleas Court for Philadelphia County, Pennsylvania. The
judgment accrues interest at 15%. Interest accrued during 2001 and
2000 was $168,668 and $163,654, respectively. Payments on the
judgment are to be made from available cash flow and before any
distribution can be made to the Partnership's limited partners. The
balance of the note at December 31, 2001 was $1,195,205.
Tindeco Wharf Partnership accrues to Dover Historic Advisors, an
affiliate of a partner, and Boston Street Properties, Inc., a former
partner, an annual investor service fee of $10,000 each. These fees
are paid from available cash flow subsequent to the payment of the
operating deficit loan and current interest on the development fee
note. No fees were paid during 2001. Accrued investor service fees are
$100,000 at December 31, 2001.
NOTE G - 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 this foreclosure in the amount of
$68,458 which is the difference between the debt of the property and
the net book value of the assets.
NOTE H - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of
operations in different time periods for financial reporting ("book")
purposes and for income tax ("tax") purposes. Reconciliations of net
loss and partners' equity follows:
For the years ended December 31,
2001 2000 1999
---- ---- ----
Net loss - book ($ 2,294,872) ($ 2,474,642) ($ 4,292,936)
Depreciation (262,345) 77,686 (79,205)
Interest 982,822 978,434 818,633
Other Interest (240,000) 0 0
Guarantor fees 121,800 121,800 121,800
Investor service fee 20,000 20,000 20,000
Partnership administrative fee 0 (1,333,786) 1,333,786
Other 110,692 19,252 0
Minority interest - tax only 97,016 199,521 124,189
Extraordinary gain on extinguishment
of debt (259,981) 0 0
----------- ----------- -----------
Net loss - tax ($ 1,724,868) ($ 2,391,735) ($ 1,953,733)
=========== =========== ===========
Partners' equity - book ($32,602,125) ($30,307,253) ($27,832,611)
Costs of issuance 2,471,196 2,471,196 2,471,196
Cumulative tax over book loss 8,481,727 8,436,375 8,914,091
Facade easement donation (tax only) 203,778 203,778 203,778
Prior period adjustment 48,071 48,071 48,071
Capital adjustments (tax only) (324,580) (324,580) (324,580)
----------- ----------- -----------
Partners' equity - tax ($21,721,933) ($19,472,413) ($16,520,055)
=========== =========== ===========
NOTE I - TERMINATION OF MANAGEMENT AGREEMENT
In 1999 TWP terminated its management agreement with Signature
Management Services. The termination agreement requires a buyout
totaling $1,350,000 of which $1,333,786 is included under the caption
"Partnership Administration Fee" in the Consolidated Statements of
Operations and $16,214 of which was utilized to repay outstanding
advances.
NOTE J - 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 Warf 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.
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
Cost
Capitalized
Initial Cost Subsequent
to Partnership to
(b) Acquisition
Buildings Land
and and
Encum- Improve- Improve-
Description brances Land ments ments
- ----------- ------- ---- --------- --------
(a) (f)
44 room hotel with
22,559 square
feet of commercial
space in
Savannah, GA $ 7,273,270 $200,000 $ 9,178,160 $ 2,026,310
240 apartment units
and 41,802
square feet of
commercial
space in
Baltimore, MD 23,665,907 647,082 2,000,000 29,308,087
----------- -------- ----------- -----------
$30,939,177 $847,082 $11,178,160 $31,334,397
=========== ======== =========== ===========
Gross Amount
at which
Carried at
December 31, 2001
Buildings Date
and Accumu- of Date
Improve- Total lated Constr. Acquir-
Description Land ments (c)(d) Depr.(d)(e) (a) ed
- ----------- ---- --------- ------- ----------- ------ -------
44 room hotel
with
22,559 square
feet of
commercial
space in 1985-
Savannah, GA $200,000 $11,204,470 $11,404,470 $6,256,174 1986 8/9/85
240 apartment
units and
41,802
square feet
of commercial
space in 1985-
Baltimore,MD $647,082 $31,308,088 $31,955,170 $18,401,861 1988 10/15/85
-------- ----------- ----------- -----------
$847,082 $42,512,588 $43,359,640 $24,658,035
======== =========== =========== ===========
DIVERSIFIED HISTORIC INVESTORS
(A limited partnership)
NOTES TO SCHEDULE XI
December 31, 2001
(A) All properties are certified historic structures as defined in
the Internal Revenue Code, or are eligible for designation as
such. The "date of construction" refers to the period in which
such properties were rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to
development agreements entered into when the properties were
acquired.
(C) The aggregate cost of real estate owned at December 31, 2001, for
Federal income tax purposes is $38,577,215. The depreciable basis
of buildings and improvements is reduced for federal income tax
purposes by the investment tax credit and the historic
rehabilitation credit obtained.
(D) Reconciliation of real estate:
2001 2000 1999
---- ---- ----
Balance at beginning of year $46,163,905 $45,398,088 $44,503,900
Additions during the year:
Improvements 248,415 765,817 894,188
Deductions due to foreclosure (3,052,681) 0 0
----------- ----------- -----------
Balance at end of year $43,359,639 $46,163,905 $45,398,088
=========== =========== ===========
Reconciliation of accumulated depreciation:
2001 2000 1999
---- ---- ----
Balance at beginning of year $24,737,850 $22,962,044 $21,218,232
Depreciation expense for the year 1,725,944 1,775,806 1,743,812
Decreases due to foreclosure (1,805,759) 0 0
----------- ----------- -----------
Balance at end of year $24,658,035 $24,737,850 $22,962,044
=========== =========== ===========
(E) See Note B to the financial statements for depreciation method
and lives.
(F) See Note F to the financial statements for information regarding
certain contingencies.
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure
None.
Item 9A. 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 III
Item 10. Directors and Executive Officers of Registrant
a. Identification of Directors - Registrant has no
directors.
b. Identification of Executive Officers
The General Partner of the Registrant is Dover Historic
Advisors (DoHA), a Pennsylvania general partnership. The partners of
DoHA are as follows:
Name Age Position Term of Office Period Served
- ---- --- -------- -------------- -------------
SWDHA, Inc. -- Partner in DoHA-II No fixed term Since May 1997
EPK, Inc. -- Partner in DoHA-II No fixed term Since May 1997
c. Identification of Certain Significant Employees. Registrant
has no employees. Its administrative and operational functions are
carried out by a property management and partnership administration
firm engaged by the Registrant.
d. Family Relationships. None
e. Business Experience. DoHA is a general partnership
formed in August 1985. The General Partner is responsible for the
management and control of the Registrant's affairs and will have
general responsibility and authority in conducting its operations.
On May 13, 1997, SWDHA, Inc. and EPK, Inc. were appointed
partners of DoHA. Spencer Wertheimer, the President and Sole Director
of SWDHA, Inc., is an attorney with extensive experience in real
estate activities and ventures.
EPK, Inc. is a Delaware corporation formed for the purpose of
managing properties or interests therein. EPK, Inc. is a wholly-owned
subsidiary of D, LTD, an entity formed in 1985 to act as the holding
company for various corporations engaged in the development and
management of historically certified properties and conventional real
estate as well as a provider of financial (non-banking) services.
EPK, Inc. is a partner of DoHA.
The officers and directors of EPK, Inc. are described below.
Spencer Wertheimer was appointed on May 13, 1997 as
President, Treasurer and Sole Director of EPK, Inc. Mr. Wertheimer is
an attorney with extensive experience in real estate activities and
ventures.
Donna M. Zanghi (age 44) was appointed on May 13, 1997 as
Vice President and Secretary of EPK, Inc. Ms. Zanghi previously
served as Secretary and Treasurer of DHP, Inc. since June 14, 1993
and as a Director and Secretary/Treasurer of D, LTD. She was
associated with DHP, Inc. and its affiliates since 1984 except for the
period from December 1986 to June 1989 and the period from November 1,
1992 to June 14, 1993.
Michele F. Rudoi (age 36) was appointed on May 13, 1997 as
Assistant Secretary of EPK, Inc. Ms. Rudoi previously served as
Assistant Secretary and Director of both D, LTD and DHP, Inc. since
January 27, 1993.
Item 11. Executive Compensation
a. Cash Compensation - During 2001, Registrant has paid no
cash compensation to DoHA, any partner therein or any person named in
paragraph c. of Item 10. Certain fees have been paid to DHP, Inc. by
Registrant.
b. Compensation Pursuant to Plans - Registrant has no plan
pursuant to which compensation was paid or distributed during 2001, or
is proposed to be paid or distributed in the future, to DoHA, any
partner therein, or any person named in paragraph c. of Item 10 of
this report.
c. Other Compensation - No compensation not referred to in
paragraph a. or paragraph b. of this Item was paid or distributed
during 2001 to DoHA, any partner therein, or any person named in
paragraph c. of Item 10.
d. Compensation of Directors - Registrant has no directors.
e. Termination of Employment and Change of Control
Arrangement - Registrant has no compensatory plan or arrangement, with
respect to any individual, which results or will result from the
resignation or retirement of any individual, or any termination of
such individual's employment with Registrant or from a change in
control of Registrant or a change in such individual's
responsibilities following such a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners - No
person is known to Registrant to be the beneficial owner of more than
five percent of the issued and outstanding Units.
b. Security Ownership of Management - None.
c. Changes in Control - Registrant does not know of any
arrangement, the operation of which may at a subsequent date result in
a change in control of Registrant.
Item 13. Certain Relationships and Related Transactions
Pursuant to Registrant's Amended and Restated Agreement of
Limited Partnership, DoHA is entitled to 10% of Registrant's
distributable cash from operations in each year. There was no such
share allocable to DoHA for fiscal years 1997 through 2001.
a. Certain Business Relationships - Registrant has no
directors.
b. Indebtedness of Management - No executive officer or
significant employee of Registrant, Registrant's general partner (or
any employee thereof), or any affiliate of any such person, is or has
at any time been indebted to Registrant.
PART IV
Item 14. (A) Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
1. Financial Statements:
a. Consolidated Balance Sheets at
December 31, 2001 and 2000.
b. Consolidated Statements of Operations
for the Years Ended December 31, 2001, 2000 and
1999.
c. Consolidated Statements of Changes in
Partners' Equity for the Years Ended December 31,
2001, 2000 and 1999.
d. Consolidated Statements of Cash Flows
for the Years Ended December 31, 2001, 2000 and
1999.
e. Notes to consolidated financial
statements.
2. Financial statement schedules:
a. Schedule XI- Real Estate and
Accumulated Depreciation.
b. Notes to Schedule XI.
3. Exhibits:
(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 of this
Form 10-K.
31 General Partners Opinion
Certification
32 Certification Pursuant to
18 U.S.C. Section 1350, As
Adopted Pursuant to Sectio
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 December 31, 2001.
(c) Exhibits:
See Item 14(A)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities 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 1, 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)
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 1, 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 annual report on Form 10-K for the period
ended December 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: June 1, 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 Annual Report of Diversified Historic
Investors II (the "Company") on Form 10-K for the period ended
December 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: June 1, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: President
(principal executive officer,
principal financial officer)
of the registrant's
managing partner, EPK, Inc.