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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file 0-14934
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DIVERSIFIED HISTORIC INVESTORS
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2312037
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 500, 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) 735-5001
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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: 11,609.6 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 No X
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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. [ ]
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.
PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors ("Registrant") is a limited
partnership formed in 1984 under the Pennsylvania Uniform Limited Partnership
Act. As of December 31, 1995, Registrant had outstanding 11,609.6 units of
limited partnership interest (the "Units").
Registrant is presently in its operating stage. It originally
owned eight properties or interests therein. Interests in five properties have
been lost through foreclosure. See Item 2. Properties, for a description
thereof. It currently owns three properties. 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.
The following is a summary of significant transactions
involving the Registrant's interests:
Due to insufficient cash flow at Centre Park Associates
("CPA") from the property and the utilization of all remaining cash reserves, on
June 1, 1994 the Registrant ceased making debt service payments on the revenue
bonds. As a result, the guarantor of the bonds had to fund interest and
principal payments in the amount of $35,451. The guarantor declared an Event of
Default under the loan documents and on August 19, 1994, the guarantor exercised
its option to purchase the bonds and in accordance with the guarantor agreement,
raised the interest rate on such bonds to prime plus 2%. On October 31, 1994,
the guarantor instituted legal proceedings against CPA. The Registrant's attempt
to negotiate the terms of the loan were unsuccessful and on July 11, 1995, CPA
filed a reorganization petition pursuant to Chapter 11 of the U.S. Bankruptcy
Code. After determining that reorganization was not feasible for CPA, the
bankruptcy was dismissed and, on July 28, 1995, the lender foreclosed on the
property.
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"), 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.
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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. Each of the three
properties currently owned by the Registrant are held for rental operations. At
this time it is anticipated that all the properties will continue to be held for
this purpose. 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, 1995, Registrant owned three
properties located in Pennsylvania. In total, the three properties contain 55
apartment units and 4,500 square feet ("sf") of commercial space. As of December
31, 1995, 45 of the apartment units were under lease at monthly rental rates
ranging from $550 to $1,230. In addition, 1,700 sf of the commercial space was
under lease at an annual rate of $13.85 per sf. Rental of the apartments and
commercial space is not expected to be seasonal. For further discussion of the
properties, see Item 2. Properties.
The Registrant is affected by and subject to the
general competitive conditions of the residential and commercial real estate
industries. As a result of the overbuilding that occurred in the 1980's, the
competition for both residential and commercial tenants in the local market
where the Registrant's properties are located is generally strong. As a result,
the Registrant is forced to keep its rent levels competitively low in order to
maintain moderate to high occupancy levels. The properties currently owned by
the Registrant are all located in the Olde City Historic District (the
"District") in Philadelphia, Pennsylvania in which there are several similar
historically certified rehabilitated buildings. The Registrant's main competitor
in this market is Historic Landmarks for Living which owns several similar
residential buildings in the District. In the District, the apartment and
commercial market remains stable and new construction remains virtually
nonexistent although the availability of favorable home financing has placed
pressure on the rental tenant base.
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 three properties, or
interests therein. A summary description of each property held at December 31,
1995 is given below.
a. The Smythe Stores Condominium Complex - consists of five
adjoining buildings located at 101-111 Arch Street, in the Olde City Historic
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District (the "District") of Philadelphia, Pennsylvania. In November, 1984, the
Registrant acquired 20 residential units of the complex's 49 units and is the
100% equity owner of these units. The acquisition and rehabilitation cost was
$4,056,375 ($171 per sf) funded by the equity contribution and a series of
condominium mortgages with an original combined principal balance of $2,440,000.
The combined principal balance at December 31, 1995 is $2,440,000. Each mortgage
bears interest at the National Average Mortgage Contract rate plus 1-1/2% (8.98%
at December 31, 1995). Scheduled interest payments were made through April 1,
1988. At that time, due to insufficient cash flow, the Registrant ceased making
payments. In 1990, the lender was placed in receivership by the Resolution Trust
Corporation ("RTC"). The two entities which purchased the mortgages from the RTC
each filed complaints for foreclosure due to nonpayment, foreclosure proceedings
on nine units were filed in the Court of Common Pleas, Philadelphia County in
the matter of Bruin Holdings, Inc. ("Bruin") v. Diversified Historic Investors
and foreclosure proceedings on eleven units were filed in the Court of Common
Pleas, Philadelphia County in the matter of EMC Mortgage Corporation v.
Diversified Historic Investors. In March 1996, the Bruin cases were settled and
the nine mortgages were sold. The Registrant is in the process of negotiating a
modification with the new holder of the nine mortgages. It is anticipated that
the new terms will call for monthly payments of interest in an amount equal to
net operating income, with a minimum monthly payment. A hearing date is set for
mid-April 1996 in the EMC Mortgage Corporation cases. The Registrant is pursuing
settlement negotiations; however if no settlement is reached, it is expected
that the eleven associated units will be foreclosed by the lender. Should the
foreclosure occur, it is not expected to have a significant impact on the
Registrant's liquidity, as these units have generated little or no positive cash
flow. All twenty units are managed by BCMI. As of December 31, 1995, 17
apartment units were under lease (85%) at monthly rental rates ranging from $685
to $1,230.
All leases are renewable, one-year leases. The occupancy
for the previous four years was 82% for 1994, 74% for 1993, 77% for 1992 and 90%
for 1991. The monthly rental range has been approximately the same since 1991.
For tax purposes, this property has a federal tax basis of $4,098,126 and is
depreciated using the straight-line method with a useful life of 27.5 years. The
annual real estate taxes are $38,094 which is based on an assessed value of
$460,960 taxed at a rate of $8.264 per $100. No one tenant occupies ten percent
or more of the Registrant's units. It is the opinion of the management of the
Registrant that the property is adequately covered by insurance.
b. The Third Quarter Apartments - consists of 17 apartments
located in the District at 47 North Third Street. In November, 1984, the
Registrant acquired the building and is the 100% equity owner of the property.
The property was acquired and rehabilitated for $1,725,000 ($102 per sf), funded
by the equity contribution and two mortgage loans of $860,000 and $140,000. On
June 1, 1993, the first mortgage was modified. The terms of the modification
include the addition of all accrued and unpaid interest to the principal
balance, changing the due date to 1998 and revising the payment terms. The first
mortgage has a principal balance at December 31, 1995 of $1,192,411 and bears
interest at 12%. The new payment terms require monthly payments of interest
equal to net operating income, with a minimum of $6,833 per month. The property
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has not generated sufficient cash flow to satisfy the minimum requirement;
however, the loan has not been declared in default. The second note has a
principal balance of $138,444, bears interest at 15%, and was due in 1992. In
1991, the Registrant stopped making scheduled mortgage payments. No notice of
default has yet been received from the lender. The property is managed by BCMI.
As of December 31, 1995, 15 of the units were under lease (88%) at monthly
rental rates ranging from $550 to $975.
All leases are renewable, one-year leases. The occupancy
for the previous four years was 95% for 1994, 86% for 1993, 77% for 1992 and 82%
for 1991. The monthly rental range has been approximately the same since 1991.
For tax purposes, this property has a federal tax basis of $1,785,378 and is
depreciated using the straight-line method with a useful life of 27.5 years. The
annual real estate taxes are $23,800 which is based on an assessed value of
$288,000 taxed at a rate of $8.264 per $100. No one tenant occupies ten percent
or more of the building. It is the opinion of the management of the Registrant
that the property is adequately covered by insurance.
c. Wistar Alley - located in the District at 30-32 North Third
Street, in Philadelphia, Pennsylvania, consists of two adjoining buildings which
contain 18 residential units and 4,500 sf of commercial area. In December, 1984,
the Registrant acquired the buildings and is the 100% equity owner of the
property. The property was acquired and rehabilitated for $2,230,000 ($101 per
sf), funded by the equity contribution and three mortgage loans of $1,400,000.
On June 1, 1993, the first mortgage was modified. The terms of the modification
include the addition of all accrued and unpaid interest to the principal
balance, changing the due date to 1998 and revising the payment terms. The first
mortgage has a principal balance at December 31, 1995 of $1,359,365 and bears
interest at 2-1/2 over the Federal Home Bank Board Cost of Funds Index with a
maximum of 14-1/2% and a minimum of 8-1/2%, therefore 8-1/2% at December 31,
1995. The new payment terms require monthly payments of interest equal to net
operating income, with a minimum of $9,000 per month. The property has been
making payments in at least in the minimum amount of $9,000 per month in order
to keep the loan current. The second and third notes have principal balances at
December 31, 1995 of $380,114, and $96,689. The notes bear interest at 11%, and
prime plus 1 1/2%, therefore 10% at December 31, 1995, respectively, and are due
at the earlier of the sale of the Property or the year 2009. The property is
managed by BCMI. As of December 31, 1995, 13 residential units were under lease
(76%) at monthly rents ranging from $595 to $895 and 1,700 sf of commercial
space were under lease (38%) at an annual rental rate of $13.85 per sf.
All residential leases are renewable, one-year leases. The
occupancy for the residential units for the previous four years was 86% for
1994, 88% for 1993, 84% for 1992 and 89% for 1991. The monthly rental range has
been approximately the same since 1991. No one tenant occupies ten percent or
more of the Registrant's units.
The occupancy for the commercial space for the previous four
years has been 100% for 1994, 100% for 1993, 100% for 1992 and 100% for 1991.
The range for annual rents has been $9.28 per sf to $13.45 per sf for 1994,
$10.85 per sf for 1993, $11.18 per sf for 1992 and $9.36 per sf for 1991. There
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is one commercial tenant, a photographer, at the building which leases a total
sf of 1,700 under a lease expiring in 1996. The total annual rental covered by
this lease is $23,544 which represents 14% of the total gross annual rental. The
lease has no renewal option and there have been no negotiations regarding
renewal with the tenant. However, due to the long-standing tenancy, management
expects the tenant to renew.
For tax purposes, this property has federal tax basis of
$2,161,725 and is depreciated using the straight-line method with a useful life
of 27.5 years. The annual real estate taxes are $22,908 which is based on an
assessed value of $280,000 taxed at a rate of $8.264 per $100. It is of the
opinion of the management of the Registrant that the property is adequately
covered by insurance.
Item 3. Legal Proceedings
a. For a description of legal proceedings involving
Registrant's properties, see Part I, Item 2 and Part II, Item 7.
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 73
Units of record were sold or exchanged in 1995.
b. As of December 31, 1995, there were 1,233 record holders
of Units.
c. Registrant did not declare any cash dividends in 1995 or
1994.
Item 6. Selected Financial Data
The following selected financial data are for the five years
ended December 31, 1995. 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.
1995 1994 1993 1992 1991
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Rental income $ 634,710 $ 795,515 $ 797,966 $ 994,636 $ 1,119,216
Interest income 527 5,332 10,557 23,889 34,502
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Net loss (178,506) (966,711) (279,965) (1,534,295) (1,880,142)
Net loss per Unit (15.22) (82.44) (23.87) (130.84) (160.33)
Total assets (net of 4,946,064 7,528,198 7,995,509 12,711,570 15,640,906
depreciation and
amortization)
Debt obligations 5,607,067 7,910,843 7,874,669 11,125,799 12,626,968
Note: See Part II, Item 7.2 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
Conditions and Results of Operations
(1) Liquidity
At December 31, 1995, Registrant had cash of
approximately $4,571. Such funds are expected to be used to pay liabilities and
general and administrative expenses of Registrant and to fund cash deficits of
the properties. 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 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 December 31, 1995, Registrant had restricted cash
of $40,882 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. Should
the first mortgage holder of the eleven units at Smythe Stores be successful in
its attempts to foreclose, it is not expected to have a significant impact on
the Registrant's liquidity, as these units have generated little or no positive
cash flow.
In recent years the Registrant has realized significant
losses, including the foreclosure of five properties, due to the properties'
inability to generate sufficient cash flow to pay their operating expenses and
debt service. At the present time, with the exception of the eleven units at
Smythe Stores, where the Registrant will either be able to negotiate a loan
modification or the units will be foreclosed, the Registrant has feasible loan
modifications in place. However, in all three cases, the mortgages are basically
"cash-flow" mortgages, requiring all available cash after payment of operating
expenses to be paid to the first mortgage holder. Therefore it is unlikely that
any cash will be available to the Registrant to pay its general and
administrative expenses.
It is the Registrant's intention to continue to hold
the properties until they can no longer meet the 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.
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Since the lenders have agreed to forebear from taking
any foreclosure action as long as cash flow payments are made, the Registrant
believes it is appropriate to continue presenting the financial statements on a
going concern basis.
(2) Capital Resources
Due to the relatively recent rehabilitations of the
properties, 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. If the need for capital
expenditures does arise, the first mortgage holder for Third Quarter and Wistar
Alley and nine units at Smythe Stores has agreed to fund capital expenditures.
Results of Operations
During 1995, Registrant incurred a net loss of $178,506
($15.22 per limited partnership unit), compared to a net loss of $966,711
($82.44 per limited partnership unit), in 1994 and a net loss of $279,965
($23.87 per limited partnership unit), in 1993.
Rental income decreased from $797,966 in 1993 to
$795,515 in 1994 and to $634,710 in 1995. The decrease from 1994 to 1995 is
mainly the result of the loss of Centre Park in 1995. Additionally, rental
income decreased at two of the Registrant's other properties due to a decrease
in the average occupancy from 1994 to 1995 at Third Quarter (95% to 75%) and
Wistar Alley (86% to 83%) and the loss of one commercial tenant at Wistar Alley.
Additionally, rental income at Smythe Stores decreased due to a decrease in the
occupancy of some higher priced units while overall occupancy increased
slightly.
Other income decreased from $109,015 in 1993 to $0 in
1994 to $0 in 1995. The decrease from 1993 to 1994 and 1995 is mainly the result
of the write-off at Smythe Stores, of accounts payable which had been on the
Registrants books for several years, and through a thorough review in 1993 of
historical accounting records, was determined not to be due or payable.
As a result of a decrease in the amount of cash held by
the Registrant during 1995 and 1994, interest income declined from $10,557 in
1993 to $5,332 in 1994 to $527 in 1995.
Rental operations expenses decreased from $678,152 in
1993 to $584,003 in 1994 and to $535,597 in 1995. The overall decrease from 1994
to 1995 resulted mainly from the loss of Centre Park in 1995 and a decrease in
real estate taxes at Smythe Stores partially offset by certain operating expense
increases at all properties, such as maintenance, condominium fees, insurance
and commissions. Maintenance and commissions increased pursuant to a change in
the management contract which increased the hourly rates charged for maintenance
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personnel and allowed the accrual of commissions for properties where the
mortgage is a cash flow mortgage. The increase in condominium fees relates to a
one time decrease in 1994 based on a recalculation of condominium fees by the
condominium association for all previous years at Smythe Stores. Insurance
increased at Smythe Stores due to a reallocation of the premium between the
owner and the condominium association to better reflect the coverage provided.
Real estate taxes decreased at Smythe Stores due to a decrease in the assessed
value. The overall decrease from 1993 to 1994 resulted from the decrease of
several operating expense items at the various properties such as maintenance,
insurance, condominium fees, real estate taxes, and legal expenses partially
offset by an increase in other items such as commissions, wages and salaries.
Maintenance, insurance and taxes decreased due to operational efficiencies
achieved at the various properties. The decrease in condominium fees related to
a one time decrease based on a recalculation of condominium fees by the
condominium association for all previous years at Smythe Stores. The decrease in
legal fees is due to legal fees incurred in anticipation of the Event of Default
at Centre Park. Commissions increased due to a higher turnover of tenants than
in previous years while wages and salaries increased due to the hiring of one
additional person at Centre Park in 1994.
General and administrative expenses decreased from
$241,600 in 1993 to $162,000 in 1994 and 1995. The decrease from 1993 to 1994 is
mainly the result of a decrease in legal fees incurred in connection with the
foreclosures of several properties in 1993.
Interest expense decreased from $653,189 in 1993 to
$572,350 in 1994 and increased to $618,991 in 1995. The increase from 1994 to
1995 resulted mainly from a contractual increase in the interest rate at Centre
Park and an increase in the principal balance upon which interest is accrued at
Third Quarter. The decrease from 1993 to 1994 in interest expense is due to the
loss of several properties through foreclosure in 1993 partially offset by the
accrual of additional interest in 1993 of interest that should have been accrued
in previous years on Third Quarter combined with a significant increase in the
interest rate (3% to prime plus 2%) at Centre Park resulting from the Event of
Default.
Depreciation and amortization remained relatively
constant from $451,052 in 1993 to $449,205 in 1994 and decreased to $396,536 in
1995. The decrease from 1994 to 1995 results mainly from the loss of Centre Park
in 1995.
In 1995, income of $140,900 was recognized at the
Registrant's four properties compared to losses of $867,783 in 1994 and $56,264
in 1993. A discussion of property operations/activities follows:
In 1995, Registrant sustained a loss $334,058 at the
twenty units owned at the Smythe Stores Condominium complex including $164,572
of depreciation expense compared to a loss of $305,570 including $164,040 of
depreciation expense in 1994 and a loss of $232,223 including $165,697 of
depreciation expense in 1993. The increased loss from 1994 to 1995 is due to a
decrease in rental income, increases in certain operating expenses (such as
insurance, maintenance and condominium fees) partially offset by decreases in
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real estate taxes. Rental income decreased due to a decrease in the occupancy of
some higher priced units, although overall occupancy increased slightly.
Maintenance increased pursuant to a change in the management contract which
increased the hourly rates charged for maintenance personnel. Condominium fees
increased due to a one time decrease in 1994 due to a recalculation of
condominium fees by the condominium association for all previous years at Smythe
Stores. Insurance increased at Smythe Stores due to a reallocation of the
premium between the owner and the condominium association to better reflect the
coverage provided. Real estate taxes decreased at Smythe Stores due to a
decrease in the assessed value. The increase in the loss from 1993 to 1994 of
$73,347 is due primarily to the $109,015 write-off of accounts payable in 1993
and a decrease in certain operating expenses (such as condominium fees and
maintenance) partially offset by an increase in commissions expense. The
write-off of accounts payable relates to a payable which had been on the books
for several years which, through a thorough review in 1993 of historical
accounting records, was determined not to be due or payable. Condominium fees
decreased due to a one time decrease in 1994 due to a recalculation of
condominium fees by the condominium association for all previous years at Smythe
Stores. Maintenance decreased due to lower than usual maintenance needed at the
property. Commissions increased due to a higher turnover of tenants. Registrant
expects operating results in 1996 to approximate those experienced in 1995.
On June 30, 1992 Diversified Historic Properties, Inc.,
co-partner of the Registrant's general partner, assigned to D, LTD (its parent)
a note receivable from the Registrant in the amount of $127,418 which bears
interest at 10% with the entire principal and accrued interest due on June 30,
1997. On October 8, 1993 D, LTD obtained a judgment in the amount of $156,873 on
this note in Common Pleas Court for Philadelphia County, Pennsylvania. The
judgment accrues interest at 15%. Interest accrued in 1995 was $6,474. Payments
on the judgment are to be made from available cash flow and before any
distribution can be made to the Registrant's limited partners. The balance of
the note at December 31, 1995 is $50,716.
In 1995, Registrant sustained a loss of $189,012 at the
Third Quarter Apartments including $70,830 of depreciation expense compared to a
loss of $140,598 including $70,228 of depreciation expense in 1994 and a loss of
$200,785 including $68,743 of depreciation expense in 1993. The increased loss
from 1994 to 1995 is due to a decrease of rental income and increases in certain
operating expenses (such as maintenance, commissions and interest). Rental
income decreased due to a decrease in the average occupancy from 1994 to 1995
(95% to 75%). Maintenance and commissions increased pursuant to a change in the
management contract which increased the hourly rates charged for maintenance
personnel and allowed the accrual of commissions for properties where the
mortgage is a cash flow mortgage. Interest increased due to an increase in the
principal balance upon which interest is accrued. The decrease in the loss from
1993 to 1994 of $60,187 is due primarily to a decrease in interest expense in
1994 of $34,000, an increase in rental income of $15,000 due to an increase in
occupancy (86% to 95%) and a decrease in certain operating expenses such as
maintenance, management fees and commissions of $11,000. Interest expense
decreased due to higher than usual interest expense in 1993 due the accrual of
additional interest in 1993 of interest that should have been accrued in
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previous years. Maintenance and management fees decreased pursuant to a change
in the management contract which was required by the new mortgage holder.
Commissions decreased due to lower turnover in the units. Registrant expects
operating results in 1996 to approximate those achieved in 1995.
In 1995, Registrant sustained a loss of $130,987 at
Wistar Alley including $85,329 of depreciation expense compared to $96,742
including $84,985 of depreciation expense in 1994 and a loss of $130,378
including $83,908 of depreciation expense in 1993. The increased loss from 1994
to 1995 is due to the combination of a decrease in rental income and increases
in certain operating expenses (such as maintenance and commissions). Rental
income decreased due to a decrease in the average occupancy from 1994 to 1995
(86% to 83%) and the loss of one commercial tenant. Maintenance and commissions
increased pursuant to a change in the management contract which increased the
hourly rates charged for maintenance personnel and allowed the accrual of
commissions for properties where the mortgage is a cash flow mortgage. The
decrease in the loss from 1993 to 1994 of $33,636 is the result of an increase
in rental income of $7,000 and a decrease in operating expenses such as
maintenance, insurance, management fees, and real estate taxes of $27,000.
Rental income increased due to a increase in the average rental rates from 1993
to 1994. Maintenance and management fees decreased pursuant to a change in the
management contract which was required by the new mortgage holder. Registrant
expects operating results in 1996 to approximate those achieved in 1995.
In 1995, Registrant recognized income of $794,957 at
Centre Park Place including $75,805 of depreciation expense compared to a loss
of $324,873 including $129,952 of depreciation expense in 1994 and a loss of
$205,761 including $111,989 of depreciation expense in 1993. The 1995 loss
without the effect of the foreclosure would have been $271,166. The decrease in
the loss from 1994 to 1995 results mainly from the loss of the property in July
1995 partially offset by increased legal fees associated with the foreclosure of
the property. Included in operations from 1995 is an extraordinary gain of
$899,381 representing the difference between the fair market value of the assets
relinquished and the liabilities satisfied. The increase in the loss from 1993
to 1994 of $119,112 is due to the following changes. Interest expense increased
$93,000 due to a significant increase in the interest rate from 3% to prime plus
2% (10.5% at December 31, 1994), resulting from the Event of Default on the
mortgage loan, combined with the accrual of interest in 1994 on amounts owed to
an affiliate of the Registrant upon which interest had not been accrued in prior
years. Depreciation expense increased $18,000 due to an adjustment made in 1993
to correct a previous year's error which reduced depreciation expense to a
lower-than-usual level in 1993. This adjustment was immaterial to total
depreciation expense and thus was expensed in the current period rather than
restating prior periods. Depreciation expense for 1994 is at the usual level.
Rental income decreased $14,000 due to lower occupancy (86% to 81%) in 1994.
Interest income decreased $5,000 due to lower reserve balances on which interest
is earned. Operating expenses decreased $11,000 due to a decrease in certain
operating expenses (legal fees, administrative, and real estate taxes) offset by
an increase in other operating expenses (maintenance, commissions, wages and
salaries). Legal fees and administrative fees decreased following the Event of
Default which allowed the guarantor to resume control of the property.
Maintenance and commissions increased pursuant to a change in the management
-11-
agreement and wages and salaries increased due to the hiring of one additional
person at Centre Park in 1994.
On May 3, 1993 a contractor who had performed services
at Centre Park Place obtained and executed a judgment (due to non-payment) in
the amount of $26,028 against CPA and garnished certain partnership bank
accounts. The contractor collected $7,226 on his judgment. The balance of the
judgment at the date of foreclosure of the property was $18,802.
On June 30, 1992 Diversified Historic Properties, Inc.,
co-partner of the Registrant's general partner, assigned to D, LTD (its parent)
a note receivable, from CPA to the Registrant, that had been assigned to it, in
the amount of $246,491 which bears interest at 10% with the entire principal and
accrued interest due on June 30, 1997. On October 8, 1993 D, LTD obtained a
judgment in the amount of $299,651 on this note in Common Pleas Court for
Philadelphia County, Pennsylvania. The judgment accrues interest at 15%.
Interest accrued in 1995 was $20,950. Payments on the judgment are to be made
out of available cash flow from CPA. The balance of the judgment at the date of
foreclosure was $155,239. Due to the foreclosure of the property, no additional
payments will be made to D, LTD on account of the note from CPA.
In 1993, the Registrant recognized losses of $903,991
and $826,490 in extraordinary gains from the foreclosure of four properties. The
foreclosures were as follows:
(I) Registrant realized net income of $137,098 at No.
128-130 Chestnut Street. Due to insufficient cash flow generated by the
property, the Registrant stopped making scheduled debt service payments in 1991.
The loan was declared in default and in October 1991, the lender received a
confession of judgment from the Registrant. The Registrant negotiated an
arrangement with the lender whereby the lender would forebear from foreclosing
on the property until January 1992 in order for the Registrant to attempt to
sell the property. The Registrant was unable to sell the property and the lender
foreclosed in April 1992.
(ii) Registrant sustained a loss of $20,029 at Shore Mill.
Subsequent to September 1989, Registrant had made neither wraparound nor
underlying mortgage payments. In May 1990, Registrant converted the building to
condominium form of ownership. In June 1990, in order to forestall threatened
foreclosure by the first mortgage lender, a reorganization petition was filed.
Thereafter, the automatic stay was lifted to allow the condominiums to be sold.
On February 19, 1993, the first mortgage lender foreclosed on the property.
Included in operations for 1993 is an extraordinary loss of $134,869
representing the difference between the fair market value of the assets
relinquished and the liabilities satisfied.
(iii) Registrant sustained a loss of $858,437 including
$17,129 of depreciation expense at Catherine Place. In 1991, the mortgage loan
on this Property matured. The Registrant did not repay the loan in full but
continued to make payments equal to the excess of revenues over expenses. The
Registrant attempted to sell the units in order to repay the loan. During 1992,
-12-
four of the condominium units were sold for a total of $274,500 of which
$230,657 was applied to the outstanding loan balance. Included in operations for
1992 is a loss of $127,210 relating to the sale of the units. On July 12, 1993,
due to the inability of the Registrant to sell any additional units, the first
mortgage lender foreclosed on the property. Included in operations for 1993 is
an extraordinary gain of $966,665 representing the difference between the fair
market value of the assets relinquished and liabilities satisfied.
(iv) Registrant sustained a loss of $162,623 at the Hogan
Building. Due to insufficient cash flow generated by the property, the
Registrant had ceased making mortgage payments as of September 1, 1991. The
lender was placed in receivership by the RTC in 1991. In August 1992, Registrant
received notice from the RTC that the mortgage had been sold and then, received
a notice of default from the new mortgage holder. In order to forestall
threatened foreclosure proceedings the property was transferred to a
partnership, Hogan Building Associates (`HBA"), owned by the Registrant. In
September 1992, HBA filed a reorganization petition. In December 1992, the
bankruptcy court ordered that by January 15, 1993, the Registrant was to either
pay a specified amount or provide a deed in lieu of foreclosure to the new
mortgage holder. On January 15, 1993, the Registrant executed a deed in lieu of
foreclosure and relinquished the property to the new mortgage holder. Included
in operations for 1993 is an extraordinary loss of $160,303 representing the
difference between the fair market value of the assets relinquished and the
liabilities satisfied.
Effective January 1, 1995, the Partnership adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." There was no cumulative effect of the adoption of SFAS No. 121.
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.
-13-
Independent Auditor's Report
To the Partners of
Diversified Historic Investors
We have audited the accompanying consolidated balance sheets of Diversified
Historic Investors (a Pennsylvania Limited Partnership) and its subsidiaries as
of December 31, 1995 and 1994 and the related consolidated statements of
operations, changes in partners' equity and cash flows for the years ended
December 31, 1995, 1994 and 1993. 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
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Diversified Historic Investors and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for the years
ended December 31, 1995, 1994 and 1993, in conformity with 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 32 is presented for the purposes of additional
analysis and is not a required part of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
-14-
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. In recent years, the Partnership
has incurred significant losses from operations, which raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Gross, Kreger & Passio
Philadelphia, Pennsylvania
February 9, 1996
-15-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AND FINANCIAL STATEMENT SCHEDULES
---------------------------------
Consolidated financial statements: Page
----
Consolidated Balance Sheets at December 31, 1995 and 1994 17
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994, and 1993 18
Consolidated Statements of Changes in Partners' Equity for the
Years Ended December 31, 1995, 1994, and 1993 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993 20
Notes to consolidated financial statements 21-30
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 32
Notes to Schedule XI 33
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
-16-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1995 and 1994
Assets
------
1995 1994
------------ ------------
Rental properties at cost:
Land $ 331,362 $ 449,062
Buildings and improvements 7,896,078 11,107,326
Furniture and fixtures 149,151 310,358
------------ ------------
8,376,591 11,866,746
Less - accumulated depreciation (3,614,119) (4,565,332)
------------ ------------
4,762,472 7,301,414
Cash and cash equivalents 4,571 7,789
Restricted cash 40,882 79,768
Accounts receivable 93,259 78,226
Other assets (net of accumulated
amortization of $54,420 and $48,675) 44,880 61,001
------------ ------------
Total $ 4,946,064 $ 7,528,198
============ ============
Liabilities and Partners' Equity
--------------------------------
Liabilities:
Debt obligations $ 5,607,067 $ 7,910,843
Accounts payable:
Developers -0- 280,000
Trade 491,919 322,622
Related parties 94,540 95,566
Taxes 313,032 499,114
Interest payable 2,140,747 1,926,092
Tenant security deposits 38,938 70,161
Other liabilities 19,687 5,160
------------ ------------
Total liabilities 8,705,930 11,109,558
------------ ------------
Partners' equity (3,759,866) (3,581,360)
------------ ------------
Total $ 4,946,064 $ 7,528,198
============ ============
The accompanying notes are an integral part of these financial statements.
-17-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- --------- ---------
Revenues:
Rental income $ 634,710 $ 795,515 $ 797,966
Other income -0- -0- 109,015
Interest income 527 5,332 10,557
--------- --------- ---------
Total revenues 635,237 800,847 917,538
--------- --------- ---------
Cost and expenses:
Rental operations 535,597 584,003 678,152
General and administrative 162,000 162,000 241,600
Interest 618,991 572,350 653,189
Depreciation and amortization 396,536 449,205 451,052
--------- --------- ---------
Total costs and expenses 1,713,124 1,767,558 2,023,993
--------- --------- ---------
Loss before extraordinary item (1,077,887) (966,711) (1,106,455)
Extraordinary gain on extinguishment of debt 899,381 -0- 671,493
--------- --------- ---------
Net loss ($ 178,506)($ 966,711)($ 434,962)
========= ========= =========
Net loss per limited partnership unit:
Loss before extraordinary item (91.91) (82.44) (94.35)
Extraordinary item 76.69 -0- 57.26
--------- --------- ---------
($ 15.22)($ 82.44)($ ($37.09)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-18-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
------------------------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
Diversified
Historic Limited
Advisors (1) Partners (2) Total
------------- ------------ ---------
Percentage participation in profit or loss 1% 99% 100%
== === ====
Balance at December 31, 1992 ($ 113,662) ($2,066,025) ($2,179,687)
Net loss (4,350) (430,612) (434,962)
----------- ----------- ----------
Balance at December 31, 1993 (118,012) (2,496,637) (2,614,649)
Net loss (9,667) (957,044) (966,711)
----------- ----------- -----------
Balance at December 31, 1994 (127,679) (3,453,681) (3,581,360)
Net loss (1,785) (176,721) (178,506)
----------- ----------- -----------
Balance at December 31, 1995 ($ 129,464) ($3,630,402) ($3,759,866)
=========== =========== ===========
(1) General Partner.
(2) 11,609.6 limited partnership units outstanding at December 31, 1995,
1994, and 1993.
The accompanying notes are an integral part of these financial statements.
-19-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net loss ($ 178,506) ($ 966,711) ($ 434,962)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt, net (899,381) -0- (671,493)
Depreciation and amortization 396,536 449,205 451,052
Minority interest (11,504) -0- -0-
Changes in assets and liabilities, net of disposals due to foreclosure:
Decrease (increase) in restricted cash 38,711 (21,333) (32,573)
Decrease in marketable securities -0- 66,133 151,739
Increase in accounts receivable (22,680) (38,767) (37,596)
Decrease in other assets -0- 11,354 7,896
Increase (decrease) in accounts payable - trade 221,557 213,615 (109,463)
(Decrease) increase in accounts (1,026) (151,375) 37,629
payable - related parties
Increase in accounts payable-taxes 16,542 51,345 130,196
Increase in interest payable 430,573 341,171 418,986
(Decrease) increase in tenant security deposits (31,223) 9,555 43
Increase (decrease) in other liabilities 16,095 (1,087) 6,245
----------- ----------- -----------
Net cash used in operating activities: (24,306) (36,895) (82,301)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (41,507) (13,625) (7,126)
----------- ----------- -----------
Net cash used in investing activities: (41,507) (13,625) (7,126)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under debt obligations 63,159 36,174 66,955
Payments of principal under debt obligations (564) -0- -0-
Other financing activities -0- -0- (26,681)
----------- ----------- -----------
Net cash provided by financing activities: 62,595 36,174 40,274
----------- ----------- -----------
Decrease in cash and cash equivalents (3,218) (14,346) (49,153)
Cash and cash equivalents at beginning of year 7,789 22,135 71,288
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,571 $ 7,789 $ 22,135
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 157,394 $ 299,696 $ 187,864
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Net assets transferred for liability reduction*:
Net assets transferred $ 3,549,860 0 $ 4,160,197
Liability reduction $ 4,615,984 0 $ 4,986,687
* As a result of foreclosures on properties owned by the Partnership
The accompanying notes are an integral part of these financial statements
-20-
DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE A - ORGANIZATION
Diversified Historic Investors (the "Partnership") was formed in March 1984,
with Diversified Historic Advisors (a general partnership whose partners are Mr.
Gerald Katzoff and Diversified Historic Properties, Inc., ) as the General
Partner. Upon the admittance of additional limited partners, the initial limited
partner withdrew.
The Partnership was formed to acquire, rehabilitate, and manage real properties
which are certified historic structures as defined in the Internal Revenue Code
(the "Code"), or which were eligible for designation as such, utilizing the
mortgage financing and the net proceeds from the sale of limited partnership
units. Any 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.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying financial statements of the Partnership include the accounts of
one subsidiary partnership (the "Venture"), in which the Partnership has a
controlling interest, 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 those years.
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. Costs of Issuance
Costs incurred in connection with the offering and sale of limited partnership
units were charged against partners' equity as incurred.
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.
-21-
5. Net Loss Per Limited Partnership Unit
The net loss per limited partnership unit is based on the weighted average
number of limited partnership units outstanding during the period (11,609.6 in
1995, 1994, and 1993).
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 and real
estate tax reserves.
8. Other Income
Other income is comprised of accounts payable amounts which has been on the
Registrant's books for several years and were determined not to be due and
payable in 1993.
9. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-line basis.
Rental payments received in advance are deferred until earned.
10. Rental Properties
Rental properties are stated at cost. A provision for impairment of value is
recorded when a decline in value of 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 the resources to meet, and anticipates it will be
unable to obtain replacement financing or debt modification sufficient to allow
a continued hold of 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 deficit
results of operations, and has been unable to, or anticipates it will be unable
to, obtain debt modification, financing or refinancing sufficient to allow a
continued hold of 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 31 of each year.
-22-
11. New Accounting Pronouncement
Effective January 1, 1995, the Partnership adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
There was no cumulative effect of the adoption of SFAS No. 121.
NOTE C - GOING CONCERN
In recent years the Registrant has realized significant losses, including the
foreclosure of five properties, due to the properties' inability to generate
sufficient cash flow to pay their operating expenses and debt service. At the
present time, with the exception of the eleven units at Smythe Stores, where the
Registrant will either be able to negotiate a loan modification or the units
will be foreclosed, the Registrant has feasible loan modifications in place.
However, in all three cases, the mortgages are basically "cash-flow" mortgages,
requiring all available cash after payment of operating expenses to be paid to
the first mortgage holder. Therefore it is unlikely that any cash will be
available to the Registrant to pay its general and administrative expenses.
It is the Registrant's intention to continue to hold the properties until they
can no longer meet the 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.
Since the lenders have agreed to forebear from taking any foreclosure action, as
long as cash flow payments are made, the Partnership believes it is appropriate
to continue presenting the financial statements on a going concern basis.
NOTE D - PARTNERSHIP AGREEMENT
The significant terms of the amended and restated Agreement of Limited
Partnership (the "Agreement"), as they relate to the financial statements,
follow:
Distributions from Operations
The Agreement provides that, beginning with the date of the admission of
subscribers as limited partners, all distributable cash from operations (as
defined) will be distributed 90% to the limited partners and 10% to the General
Partner.
All distributable cash from sales or refinancing will be distributed to the
limited partners equal to their Original Capital Contribution plus an amount
equal to 6% of their Original Capital Contribution per annum on a cumulative
basis less the sum of all prior distributions and, thereafter, after receipts by
certain affiliates of the General partner of their subordinated real estate
commissions, the limited partners will receive 85% of cash from sales or
refinancings.
-23-
NOTE E - ACQUISITIONS
The Partnership acquired six properties and two general or limited partnership
interests in Ventures during the period November 1984 to December 1986, as
discussed below.
In November 1984, the Partnership purchased 20 residential apartments located in
Philadelphia, Pennsylvania for a cash capital contribution of $4,056,475.
Also in November 1984, the Partnership purchased a building located in
Philadelphia, Pennsylvania, consisting of 17 units, for a cash capital
contribution of $1,725,000.
In December 1984, the Partnership purchased two adjoining buildings located in
Philadelphia, Pennsylvania, consisting of 18 residential units and 4,500 square
feet of commercial space, for a cash contribution of $405,000.
In December 1984, the Partnership purchased a four-story building located in
Philadelphia, Pennsylvania, consisting of 22,200 square feet of commercial
space, for a cash capital contribution of $465,000. The lender on the property
foreclosed in 1992.
Also in December 1984, the Partnership acquired a building located in
Philadelphia, Pennsylvania, consisting of 14 residential units, for a cash
capital contribution of $160,000. The lender on the property foreclosed in 1993.
In February 1985, the Partnership was admitted, with a 99% general partner
interest, to a Pennsylvania general partnership which owns 21 residential units
located in East Greenwich, Rhode Island, for a cash capital contribution of
$3,600,000. The lender on the property foreclosed in 1993.
In June 1985, the Partnership was admitted, with a 99.5% general partner
interest, to a Pennsylvania general partnership which owns a building consisting
of 50 residential units located in Reading, Pennsylvania, for a cash capital
contribution of $2,650,000. The lender on the property foreclosed in 1995.
In December 1986, the Partnership acquired a building located in Savannah,
Georgia, consisting of 13 apartments and 7,820 square feet of commercial space,
for a cash capital contribution of $812,916. The lender on the property
foreclosed in 1993.
NOTE F- DEBT OBLIGATIONS
Debt obligations are as follows:
December 31,
------------
1995 1994
---- ----
Mortgage loans, interest at the National Average $ 2,440,044 $ 2,440,044
Mortgage Contract rate plus 1 1/2%, therefore
8.98% and 9.06% at December 31, 1995 and 1994,
respectively; payable in equal monthly installments
-24-
of principal and interest; due in 2015; collateralized
by the related rental properties (A)
Mortgage loan, interest accrues at 12%, interest only 1,192,411 1,129,251
payable monthly to the extent of net operating income
with a minimum of $6,833; principal due October 31,
1998; collateralized by the related rental property (B)
Mortgage loan, interest at 15%, payable in equal monthly 138,444 138,444
installments of $1,770 (including interest); due in
1992; collateralized by the related rental property (C)
Mortgage loan, interest accrues at 2 1/2% over the 1,359,365 1,359,929
Federal Home Bank Board Cost of Funds Index with a
maximum of 14 1/2% and a minimum of 8 1/2%;
therefore 8 1/2% at December 31, 1995 and 1994,
interest only payable monthly to the extent of net
operating income with a minimum of $9,000;
principal due October 31, 1998; collateralized by
the related rental property (D)
Notes payable, interest at 11% and is payable monthly 380,114 380,114
based on the lesser of 75% of cash flow from the
operation of the properties or certain stated amounts;
principal and all accrued interest is due at the earlier
of sale of the related properties or 2009;
collateralized by the related rental property (E)
Notes payable, interest at prime plus 1-1/2% (10% at 96,689 96,689
December 31, 1995 and 1994); principal and interest
due upon sale of the related property;
collateralized by the related rental property (F)
Revenue bonds, interest at 10.5% at December 31, 1995, -0- 2,041,371
and 1994; interest payable semiannually; annual sinking
fund redemptions commencing in 1987; collateralized by
the related rental property (G)
Mortgage loan, interest only at 2% payable annually;
principal payable of $81,250 in 1991 and 1996 and
$162,500 in 2001; collateralized by the related
rental property (H) -0- 325,000
----------- ----------
$5,607,067 $7,910,843
=========== ==========
-25-
(A) In 1988, the Partnership stopped making scheduled mortgage payments. In
1989, the lender was placed in receivership by the Resolution Trust
Corporation ("RTC"). The entities which purchased the mortgages from
the RTC each filed complaints for foreclosure due to non-payment. See
Note H - Commitments and Contingencies for further information.
(B) On June 1, 1993, the terms of this loan were modified to those
described above. In accordance with Statement of Financial Accounting
Standards No. 15, "Accounting for Debtors and Creditors for Troubled
Debt Restructurings" the effects of the modification have been and will
continue to be accounted for prospectively from the date of the
restructuring with no gain recognized at that time.
(C) In 1991, the Partnership stopped making scheduled mortgage payments. No
notice of default has yet been received from the lender. The interest
in arrears amounts to $93,450 at December 31, 1995 which includes
$20,767 for each of 1995, 1994 and 1993.
(D) On June 1, 1993, the terms of this loan were modified to those
described above. In accordance with Statement of Financial Accounting
Standards No. 15, "Accounting for Debtors and Creditors for Troubled
Debt Restructurings" the effects of the modification have been and will
continue to be accounted for prospectively from the date of the
restructuring with no gain recognized at that time.
(E) Interest is no longer being accrued on these notes, since the first
mortgage is a cash flow mortgage and is not being serviced to the
extent of total interest due. The interest in arrears amounts to
$188,157 at December 31, 1995 which includes $41,813 for each of 1995,
1994 and 1993.
(F) This note represents amounts owed to developers pursuant to negative
cash flow guarantees. Interest is no longer being accrued on the
remaining note, since the first mortgage is a cash flow mortgage and is
not being serviced to the extent of total interest due. The interest in
arrears amounts to $37,874 at December 31, 1995 which includes $10,070,
$8,419 and $7,252 for 1995, 1994 and 1993, respectively.
(G) Due to insufficient cash flow of the property and the utilization
of all remaining cash reserves on June 1, 1994, the Partnership ceased
making debt service payments. As a result, the guarantor of the bonds
had to fund interest and principal payments in the amount of $35,451.
The guarantor declared an Event of Default under the loan documents and
on August 19, 1994, the guarantor exercised its option to purchase the
bonds and in accordance with the guarantor agreement, raised the
interest rate to prime plus 2%. The Registrant's attempts to negotiate
the terms of the loan were unsuccessful and on July 11, 1995 CPA filed
a reorganization petition pursuant to Chapter 11 of the U.S. Bankruptcy
Code. After determining that reorganization was not feasible for CPA,
the bankruptcy was dismissed and the lender on the property foreclosed
in 1995.
(H) The principal payment due in 1991 was not made due to insufficient cash
flow. The lender has not declared the loan in default. The lender on
the property foreclosed in 1995.
-26-
Approximate maturities of the mortgage loan obligations at December 31, 1995,
for each of the succeeding five years are as follows:
1996 $ 3,055,291
1997 -0-
1998 2,551,776
1999 -0-
2000 -0-
Thereafter -0-
--------------
$5,607,067
==============
NOTE G - TRANSACTIONS WITH RELATED PARTIES
On June 30, 1992 Diversified Historic Properties, Inc., co-partner of the
Registrant's general partner, assigned to D, LTD (its parent) a note receivable
from the Registrant in the amount of $127,418 which bears interest at 10% with
the entire principal and accrued interest due on June 30, 1997. On October 8,
1993 D, LTD obtained a judgment in the amount of $156,873 on this note in Common
Pleas Court for Philadelphia County, Pennsylvania. The judgment accrues interest
at 15%. Interest accrued in 1995 was $6,474. Payments on the judgment are to be
made out of available cash flow before any distributions can be made to the
Registrant's limited partners. The balance of the note on December 31, 1995 is
$50,716.
On June 30, 1992 Diversified Historic Properties, Inc. co-partner of the
Registrant's general partner, assigned to D, LTD (its parent) a note receivable,
from CPA to the Registrant, that had been assigned to it, in the amount of
$246,491 which bears interest at 10% with the entire principal and accrued
interest due on June 30, 1997. On October 8, 1993 D, LTD obtained a judgment in
the amount of $299,651 on this note in Common Pleas Court for Philadelphia
County, Pennsylvania. The judgment accrues interest at 15%. Interest accrued in
1995 was $20,950. Payments on the judgment are to be made out of available cash
flow from CPA. The balance of the judgment at the date of foreclosure was
$155,239. Due to the foreclosure of the property, no additional payments will be
made to D, LTD on account of the note from CPA.
NOTE H - COMMITMENTS AND CONTINGENCIES
Due to insufficient cash flow at Smythe Stores, the Partnership ceased making
debt service payments. In 1990, the lender was placed in receivership by the
Resolution Trust Corporation ("RTC"). The entities which purchased the mortgages
from the RTC each filed complaints for foreclosure due to non-payment;
foreclosure proceedings on nine units were filed in the Court of Common Pleas,
Philadelphia County in the matters of Bruin Holdings, Inc. ("Bruin") v,
Diversified Historic Investors and foreclosure proceedings on eleven units were
filed in the Court of Common Pleas, Philadelphia County in the matters of EMC
Mortgage Corporation v. Diversified Historic Investors. In March 1996, the Bruin
cases were settled and the nine mortgages were sold. The Registrant is in the
process of negotiating a modification with the holder of the mortgage. It is
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anticipated that the new terms will call for monthly payments of interest in an
amount equal to net operating income, with a minimum monthly payment. A hearing
date is set for mid-April in the EMC Mortgage Corporation cases. The Partnership
is pursuing settlement negotiations; however if no settlement is reached it is
expected that the eleven associated units will be foreclosed by the lender.
On May 3, 1993, a contractor who had performed services at Centre Park Place
obtained and executed a judgment (due to non-payment) in the amount of $26,028
against Centre Park Associates and garnished certain Partnership bank accounts.
The contractor collected $7,226 on his judgment. The balance of the judgment at
the date of foreclosure of the property was $18,802 Due to the foreclosure of
the property, no additional payments will be made to the contractor on account
of his judgment.
NOTE I - EXTRAORDINARY GAINS/LOSSES
During 1991, the mortgagee of the property located at 128-130 Chestnut Street,
Philadelphia (22,000 square feet of commercial space) declared the loan in
default and the Partnership confessed judgment on the note. The Partnership
negotiated an arrangement with the lender whereby the lender would forebear from
foreclosing on the property until January 1992 in order for the Partnership to
attempt to sell the property. The Partnership was unable to sell the property,
and the lender foreclosed in April 1992. The Partnership has recognized an
extraordinary loss of $69,003 during 1992 for the difference between the book
value of the property (which approximates fair value) and the extinguished debt.
During 1993, the mortgagee of the property located in the Hill and Harbor
District of East Greenwich, Rhode Island (21 residential units) foreclosed on
the property. Since 1989 the Partnership had made neither wraparound nor
underlying mortgage payments. In May 1990, the Partnership converted the
building to condominium form of ownership. In June 1990, in order to forestall
threatened foreclosure by the first mortgage lender, a reorganization petition
was filed. Since that time, several auctions to sell the property were both
scheduled and canceled. Finally, the automatic stay was lifted, and on February
19, 1993, the property was foreclosed. The Partnership recognized an
extraordinary loss of $134,869 in 1993 for the difference between the book value
of the property (which approximated fair value) and the extinguished debt.
During 1993, the underlying mortgage holder of the property located at 314
Catherine Street, Philadelphia (seven remaining residential units) foreclosed on
the property. In 1991, both the wraparound and underlying mortgages matured. The
underlying mortgage was declared due and payable, but the lender agreed to
forebear from foreclosing to allow the Partnership to attempt to sell the units.
During 1992, four condominium units were sold and the proceeds were applied
against the outstanding loan balance. However, since the Partnership was unable
to sell any additional units, on July 12, 1993, the lender foreclosed on the
property. The Partnership recognized an extraordinary gain of $966,665 in 1993
for the difference between the book value of the property (which approximated
fair value) and the extinguished debt.
During 1993, the mortgagee of the property located at 121 West Broughton Street
in Savannah, Georgia (13 residential units and 7,820 square feet of commercial
space) foreclosed on the property. The Partnership had ceased making mortgage
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payments in 1991. Subsequently, the first mortgage lender was placed into
receivership by the RTC. In August 1992, the Registrant received notice from the
RTC that the mortgage had been sold and then received a notice of default from
the new mortgage holder. In order to forestall threatened foreclosure
proceedings, the property was transferred to a newly-created partnership, owned
by the Partnership, which filed a reorganization petition. In December 1992, the
bankruptcy court ordered that by January 15, 1993, the Partnership was either to
pay a specified amount or provide a deed in lieu of foreclosure to the new
mortgage holder. On January 15, 1993, the Partnership executed a deed in lieu of
foreclosure and relinquished the property to the mortgagee. The Partnership
recognized an extraordinary loss of $160,303 in 1993 for the difference between
the book value of the property (which approximated fair value) and the
extinguished debt.
Due to insufficient cash flow at Centre Park Associates and the utilization of
all remaining cash reserves on June 1, 1994, the Registrant ceased making debt
service payments. As a result, the guarantor of the bonds had to fund interest
and principal payments in the amount of $35,451. The guarantor declared an Event
of Default under the loan documents and on August 19, 1994, the guarantor
exercised its option to purchase the bonds and in accordance with the guarantor
agreement, raised the interest rate on such bonds to prime plus 2% (therefore,
10.5% at December 31, 1994). On October 31, 1994, the guarantor instituted legal
proceedings against CPA. The Partnership's attempts to negotiate the terms of
the loan were unsuccessful and on July 11, 1995, CPA filed a reorganization
petition pursuant to Chapter 11 of the U.S. Bankruptcy Code. After determining
that reorganization was not feasible for CPA, the bankruptcy was dismissed and,
on July 28, 1995, the lender foreclosed on the property. The Partnership
recognized an extraordinary gain of $899,381 during 1995 for the difference
between the book value of the property (which approximated fair value) and the
extinguished debt.
NOTE J - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of operations in
different time periods for financial reporting ("book") purposes and for income
tax ("tax") purposes. Reconciliations of net loss and partners' equity follow:
For the Years Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
Net loss - book ($ 178,506) ($ 966,711) ($ 434,962)
Excess of tax over book depreciation (21,200) (26,436) (151,529)
Interest 195,204 272,654 219,146
Extraordinary gain on foreclosure (165,716) 0 414,763
Other timing differences 0 0 (52,751)
Minority interest - tax only (4,636) 1,339 1,221
--------- --------- ---------
Net loss - tax ($ 174,854) ($ 719,154) ($ 4,112)
========= ========= =========
Partners' equity - book ($3,759,866) ($3,581,358) ($2,614,649)
Costs of issuance 1,393,762 1,393,762 1,393,762
Cumulative tax over (under) book loss 94,598 (258,764) 117,239
Basis reduction due to
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Investment Tax Credit - tax only -0- -0- (623,554)
---------- --------- ---------
Partners' equity - tax ($2,771,506) ($2,446,360) ($1,727,202)
========== ========= =========
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SUPPLEMENTAL INFORMATION
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DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Costs
Capitalized
Subsequent Gross Amount at which Carried
Initial Cost to at
Partnership to Acquisition December 31, 1995
----------- -------------- -----------------
(b)
---
Buildings Buildings
and and Accumulated Date of Date
Description (a) Encumbrances(g) Land Improvements Improvements Land Improvements Total(c)(e) Depr.(e)(f) Constr.(a) Acquired
- - --------------- --------------- ---- ------------ ------------ ---- ------------ ----------- ---------- ---------- --------
20 condominium
apartment units
in
Philadelphia, PA $2,440,044 $37,362 $4,320,948 ($236,947)(h) $37,362 $4,098,126 $4,135,488 $1,851,566 1984 12/28/84
14,125
17 apartment units
in Philadelphia, 1,330,855 120,000 1,744,097 41,281 120,000 1,785,378 1,905,378 795,507 1984 11/14/84
PA
18 apartment units
and 4,500 square
feet of commercial
space in
Philadelphia, PA 1,836,168 174,000 2,188,961 (45,079)(h) 174,000 2,161,725 2,335,725 967,046 1984-1985 12/14/84
17,843
---------- --------- ---------- ---------- -------- ---------- ---------- ----------
$5,607,067 $331,362 $8,254,006 ($208,777) $331,362 $8,045,229 $8,376,591 $3,614,119
========== ========= ========== ========== ======== ========== ========== ==========
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DIVERSIFIED HISTORIC INVESTORS
------------------------------
(a limited partnership)
NOTES TO SCHEDULE XI
--------------------
December 31, 1995
(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
are rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to
development agreements entered into when the properties are acquired.
(C) The aggregate cost of real estate owned at December 31, 1995, for
Federal income tax purposes is approximately $8,045,229. However, 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) Development /rehabilitation was completed during 1986.
(E) Reconciliation of real estate:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 11,866,746 $ 11,853,121 $ 17,716,601
Additions during the year:
Improvements 41,507 13,625 7,126
------------ ------------ ------------
11,908,253 11,866,746 17,723,727
Deductions during the year:
Retirements (3,531,662) -0- (5,870,606)
------------ ------------ ------------
Balance at end of year $ 8,376,591 $ 11,866,746 $ 11,853,121
============ ============ ============
Reconciliation of
accumulated depreciation:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 4,565,332 $ 4,120,738 $ 5,418,713
Depreciation expense for the year 390,791 444,594 447,466
Retirements (1,342,004) -0- (1,745,441)
------------ ------------ ------------
Balance at end of year $ 3,614,119 $ 4,565,332 $ 4,120,738
============ ============ ============
(F) See Note B to the financial statements for depreciation method and lives.
(G) See Note F to the financial statements for further information.
(H) In connection with the purchase of certain of the properties, the
sellers agreed to reimburse the Partnership for cash flow deficits, as
defined, of these properties. Such reimbursements were treated as a
reduction of buildings and improvements.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 Diversified
Historic Advisors (DHA), a Pennsylvania general partnership. The partners of DHA
are as follows:
Name Age Position Term of Office Period Served
- - ---- --- -------- -------------- -------------
Gerald Katzoff 48 Partner in DHA No fixed term Since March 1984
Diversified Historic -- Partner in DHA No fixed term Since March 1984
Properties, Inc.
("Diversified")
For further description of Diversified, see paragraph e. of
this Item. There is no arrangement or understanding between either person names
above and any other person pursuant to which any person was or is to be selected
as an officer.
c. Identification of Certain Significant Employees. Registrant
has no employees. Its administrative and operational functions are carried out
by an separate property management and partnership administration which has no
affiliation with the Registrant, except that an employee of the affiliate of the
Registrant is an officer and minority shareholder of such firm. The terms of
service of such firm are believed to be no less favorable to Registrant than
those obtainable from an unaffiliated entity.
d. Family Relationships. There is no family relationship
between or among the executive officers and/or any person nominated or chosen by
Registrant to become an executive officer.
e. Business Experience. DHA is a general partnership formed in
March, 1984. The partners of DHA are Diversified and Gerald Katzoff. The General
Partner is responsible for the management and control of the Registrant's
affairs and has general responsibility and authority in conducting its
operations.
Gerald Katzoff (age 48) has been involved in various aspects
of the real estate industry since 1974. Mr. Katzoff is the owner of Katzoff
Resorts, which controls various hotel and spa resorts in the United States. Mr.
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Katzoff is a principal in an entity which is the owner of a property in Avalon,
New Jersey which has filed a petition pursuant to Chapter 11 of the U.S.
Bankruptcy Code. Mr. Katzoff is a former President and director of D, LTD.,
(formerly The Dover Group, Ltd., the corporate parent of Diversified).
Diversified was incorporated in Pennsylvania in April 1983 for
the purpose of sponsoring investments in, rehabilitating, developing and
managing historic (and other) properties. Diversified is a subsidiary of The
Dover Group, Ltd., an entity formed in 1985 to act as the holding company for
Diversified and certain other companies involved in the development and
operation of both historic properties and conventional real estate as well as in
financial (non-banking) services. In February 1992, Dover Group's name was
changed to D, LTD.
The executive officers, directors, and key employees of
Diversified are described below.
Michael J. Tuszka (age 49) was appointed Chairman and Director
of both D, LTD and Diversified on January 27, 1993. Mr. Tuszka has been
associated with Diversified and its affiliates since 1984.
Donna M. Zanghi (age 39) is Secretary/Treasurer of
Diversified. She is also a Director and Secretary/Treasurer of D, LTD. She has
been associated with Diversified 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 31) was appointed on January 27, 1993 as
Assistant Secretary of both D, LTD and Diversified.
Item 11. Executive Compensation
a. Cash Compensation - During 1995, Registrant has paid no
cash compensation to DHA, any partner therein or any person named in paragraph
c. of Item 10.
b. Compensation Pursuant to Plans - Registrant has no plan
pursuant to which compensation was paid or distributed during 1995, or is
proposed to be paid or distributed in the future, to DHA, 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 1995 to
DHA, 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
-35-
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 - No equity securities of
Registrant are beneficially owned by any person named in paragraph c. of Item
10.
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, DHA is entitled to 10% of Registrant's distributable cash
from operations in each year. There was no such share allocable to DHA for
fiscal years 1993 through 1995.
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.
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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, 1995 and 1994.
b. Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993.
c. Consolidated Statements of Changes in Partners' Equity for
the Years Ended December 31, 1995, 1994 and 1993.
d. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.
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.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
ended December 31, 1995.
(c) Exhibits:
See Item 14(A)(3) above.
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
DIVERSIFIED HISTORIC INVESTORS
Date: April 11, 1996 By: Diversified Historic Advisors, General Partner
--------------
By: Diversified Historic Properties, Inc., Partner
By: /s/ Michael J. Tuszka
-----------------------------------
MICHAEL J. TUSZKA,
Chairman
By: /s/ Donna M. Zanghi
-----------------------------------
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi
-----------------------------------
MICHELE F. RUDOI,
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
DIVERSIFIED HISTORIC ADVISORS General Partner
By: Diversified Historic Properties, Inc.,
Partner
By: /s/ Michael J. Tuszka April 11, 1996
------------------------------ --------------
MICHAEL J. TUSZKA,
Chairman
By: /s/ Donna M. Zanghi April 11, 1996
------------------------------ --------------
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi April 11, 1996
------------------------------ --------------
MICHELE F. RUDOI,
Assistant Secretary
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