Back to GetFilings.com
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
------------------------------------------------------
[ ] 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
----------------------- ----------------------
Commission file 0-14645
----------------------------------------------------------------
DIVERSIFIED HISTORIC INVESTORS II
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2361261
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 500, 1521 LOCUST STREET, PHILADELPHIA, PA 19102
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 735-5001
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
--------------------
Securities registered pursuant to Section 12(g) of the Act: 20,593.3 Units
--------------------
UNITS OF LIMITED PARTNERSHIP INTEREST
- --------------------------------------------------------------------------------
(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_
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*
* Securities not quoted in any trading market to Registrant's knowledge.
PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors II ("Registrant") is a limited
partnership formed in 1984 under the Pennsylvania Uniform Limited Partnership
Act. As of December 31, 1995, 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 one property has been lost
through foreclosure. See Item 2. Properties, for a description thereof. It
currently owns three properties or interests therein. For a discussion of the
operations of the Registrant, see Part II, Item 7. Management's Discussion and
Analysis of Financial Conditions 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. Two of the properties are 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, 1995, Registrant owned three properties (or
interests therein), located in Pennsylvania (one), Maryland (one), and Georgia
(one). In total, the three properties contain 269 apartment units, 72,307 square
feet ("sf") of commercial/retail space and 44 hotel rooms. As of December 31,
1995, 253 of the apartment units were under lease at monthly rental rates
ranging from $650 to $1,315 and approximately 64,769 sf of commercial space was
under lease at annual rental rates ranging from $5.33 per sf to $24.53 per sf.
-2-
Throughout 1995, all of the hotel rooms were available for use. During 1995, the
hotel maintained an average nightly room rate of $94.54 and average occupancy of
78%. 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 April and May and the slowest months being January, August and
September. 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 industry.
As a result of the overbuilding that occurred in the 1980's, the competition in
the local markets 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. One
residential property is located in the suburbs of Philadelphia and the other is
located in the Historic District of the Inner Harbor in Baltimore. In both
locations the competition for tenants remains stiff and several similar
buildings exist. The apartment market remains stable and new construction
remains virtually nonexistent 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, in part
due to its proximity to Atlanta, the site of the 1996 Summer Olympics. 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 three properties, or
interests therein. A summary description of each property held at December 31,
1995 is given below.
a. Tindeco Wharf - consists of 240 apartment units and approximately
41,307 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
-3-
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 a 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 (See Part III, Item 10e) in the original amounts of $300,000
and $200,000 respectively. 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 the
Partnership for operations.
The principal balance of the bonds were $16,980,349 at December
31, 1995. The bonds are comprised of both serial and revenue bonds. The serial
bonds bear interest rates ranging from 2.75% to 6.7% and mature semi-annually
from June 1997 through December 2006. The term bonds bear interest at rate
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, 1995) 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, 1995) and the
operating deficit loans (principal balances of $300,000 and $0, respectively, at
December 31, 1995) all bear interest at 12% and are payable on a pro-rata basis
out of cash flow from the property. The property is managed by BCMI. As of
December 31, 1995, 225 apartment units (94%) and 37,453 sf of commercial space
(85%) were under lease. Monthly rental rates range from $725 to $1,315 for
apartments and annual rental rates range from $5.33 per sf to $18.54 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 95% for
1994, 92% for 1993, 94% for 1992 and 100% for 1991. The monthly rental range has
been approximately the same since 1991. The occupancy for the commercial space
for the previous four years has been 93% for 1994, 93% for 1993, 95% for 1992
and 100% for 1991. The range for annual rents has been $10.30 per sf to $22.39
per sf for 1994, $5.88 to $21.36 per sf for 1993, $5.28 to $15.96 per sf for
1992 and $7.08 to $14.16 per sf for 1991. There are four tenants who each occupy
ten percent or more of the rentable square footage. They operate principally as
a medical office, restaurant, a fitness club and a travel agency.
-4-
The following is a table showing commercial lease expirations at
Tindeco Wharf for the next five years.
Total annual % of gross
Number of Total sf of rental covered annual rental
Years leases expiring expiring leases by expiring leases from property
1996 1 17,050 $264,504 8%
1997 0 0 0 0%
1998 1 950 11,324 <1%
1999 3 8,199 127,805 4%
2000 1 4,469 56,443 2%
Thereafter 2 8,695 84,828 3%
The Registrant has entered into lease negotiations with the large
tenant whose lease is due to expire in October 1996. The Registrant believes
that it is likely that a lease extension will be signed, extending the current
termination date until June 1997 at a rent level which is 30% lower than the
current rental rate. The Registrant believes that is probable that at the end of
the extension period, a long-term lease (8-10 years) will be signed at the
reduced rental rate.
For tax purposes, this property has a federal tax basis of
$28,105,775 and is depreciated using the straight-line method with a useful life
of 27.5 years. The annual real estate taxes are $407,185 which is based on an
assessed value of $6,719,220, taxed at a rate of $6.06 per $100. It is the
opinion of the management of the Registrant that the property is adequately
covered by insurance.
b. River Street Inn/Factor's Walk - consists of 44 hotel rooms and
21,500 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 bear interest at TENR (a rate based on
yields of high quality, short-term tax exempt obligations) plus 0.5% (5.375% at
December 31, 1995) The principal balance of the bonds at December 31, 1995 is
$5,800,000 and they are due in 2015. The property is managed by BCMI. As of
December 31, 1995, 17,816 sf of its 21,500 sf (83%) of commercial space was
under lease at annual rental rates ranging from $5.53 to $24.53 per sf. The
Property also maintains 44 operating hotel rooms at an average nightly rate of
$94.54; average occupancy for 1995 was approximately 78%.
The hotel occupancy rate for the previous four years has been
74% for 1994, 71% for 1993, 72% for 1992 and 67% for 1991. The average room
rates have been $90.18 for 1994, $86.59 for 1993, $86.44 for 1992 and $85.00 for
-5-
1991. The occupancy for the commercial space for the previous four years has
been 92% for 1994, 83% for 1993, 80% for 1992 and 63% for 1991. The range for
annual rents has been $1.58 to $23.12 per sf for 1994, $1.56 to $23.16 per sf
for 1993, $5.28 to $15.96 per sf for 1992 and $3.72 to $22.92 per sf for 1991.
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 % of gross
Number of Total sf of rental covered annual rental
Years leases expiring expiring leases by expiring leases from property
1996 3 6,425 $80,544 5%
1997 0 -0- -0- 0%
1998 2 1,983 26,804 2%
1999 3 1,219 17,700 1%
2000 3 3,096 48,887 3%
Thereafter 1 5,093 37,661 2%
Although no firm commitments have been made, the Registrant
anticipates that the three leases which are scheduled to expire in 1996, will be
extended for at least an additional year, due to the long-standing tenancy of
the merchants and the availability of renewal options under their leases.
For tax purposes, this property has a federal tax basis of
$8,863,762 and is depreciated using the straight-line method with a useful life
of 27.5 years. The annual real estate taxes are $30,904 which is based on an
assessed value of $908,667, taxed at a rate of $3.40 per $100. It is the opinion
of the management of the Registrant that the property is adequately covered by
insurance.
c. Washington Square - consists of 9,500 sf of commercial space and
29 residential units located at 320 N. Church Street, West Chester,
Pennsylvania. In October 1985, Registrant acquired and rehabilitated the
Property for $2,750,000 ($79 per sf; such amount is exclusive of $170,883 of
capitalized fees incurred which were funded by Registrant's equity
contributions), including mortgage financing of $1,600,000. The mortgage loan
(principal balance of $1,155,227 at December 31, 1995) bears interest at the
Federal Reserve Discount rate plus 2% with a minimum of 7% and a maximum of 15%
(7.25% at December 31, 1995) and is callable on May 1, 1996 when the total
outstanding balance will be $1,081,704. The Registrant anticipates that upon
providing additional information to the lender, the loan will be reinstated and
the principal balance due in October 2005. The property is managed by an
independent property management firm. As of December 31, 1995, all commercial
space is rented out at annual rates ranging from $6.00 per sf to $12.00 per sf.
-6-
At December 31, 1995, 28 of the residential units (97%) were under lease at
monthly rental rates ranging from $650 to $1,050.
All residential leases are renewable, one-year leases. The
occupancy for the residential units for the previous four years was 98% for
1994, 92% for 1993, 97% for 1992 and 100% for 1991. The monthly rental range has
been approximately the same since 1991. 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 $6.00 to $13.23 per sf
for 1994, $6.12 to $12.12 per sf for 1993, $6.00 to $11.52 per sf for 1992 and
$6.00 to $11.52 per sf for 1991.
The following is a table showing commercial lease expirations
at Washington Square for the next five years.
Total annual % of gross
Number of Total sf of rental covered annual rental
Years leases expiring expiring leases by expiring leases from property
1996 4 7,600 $ 61,639 18%
1997 0 0 0 0%
1998 0 0 0 0%
1999 1 1,900 17,575 5%
2000 0 0 0 0%
Thereafter 0 0 0 0%
Although no firm commitments have been made, the Registrant
anticipates that four leases which are scheduled to expire in 1996, will be
extended for at least an additional year, due to the long-standing tenancy of
the merchants and the availability of renewal options under their leases.
For tax purposes of depreciation, this property has federal tax
basis of $2,840,483 and is depreciated using the straight-line method with a
useful life of 27.5 years. The annual real estate taxes are $29,059 which is
based on an assessed value of $119,610 taxed at a rate of $242.95 per $100. It
is 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 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.
-7-
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 114 Units
of record were sold or exchanged in 1995.
b. As of December 31, 1995, there are 2,562 record holders of
Units.
c. Registrant has not declared 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
---- ---- ---- ---- ----
Rental income $4,103,099 $3,950,879 $3,763,979 $3,418,773 $3,516,818
Hotel revenues 1,230,057 1,108,942 1,227,925 3,007,997 2,697,852
Interest income 28,988 9,219 10,300 121,721 121,721
Net loss (2,426,416) (2,869,321) (4,825,243) (4,348,359) (4,348,359)
Net loss per Unit (116.65) (137.94) (231.97) (209.04) (209.04)
Total assets 29,418,648 30,742,909 31,466,054 38,107,985 38,107,985
(net of
depreciation and
amortization)
Debt obligations 33,161,299 33,527,230 33,547,443 35,562,071 35,562,071
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
$114,922. 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.
-8-
As of December 31, 1995, Registrant had restricted cash of
$692,027 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 one property, due to the properties' inability to
generate sufficient cash flow to pay their operating expenses and debt service.
At the present time, all three 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 Factor's Walk, if the final outcome was adverse
to the Registrant, the property could be foreclosed. If a foreclosure were to
occur, it is not likely to have a significant impact on the Registrant's
liquidity, as this property has generated little or no cash flow to the
Registrant. In addition, if Capital Bank executes its judgment on the
Registrant, it is expected to have significant impact on the Registrant's
liquidity as no cash will be available to pay the operating expenses of the
properties.
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 (principal plus accrued interest).
(2) Capital Resources
Due to the 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. Accordingly, at
December 31, 1995, Registrant's material commitment for capital expenditures
consists solely of required debt service.
(3) Results of Operations
During 1995, Registrant incurred a net loss of $2,426,416
($116.65 per limited partnership unit), compared to a net loss of $2,869,321
($137.94 per limited partnership unit), in 1994 and a net loss of $4,825,243
($231.97 per limited partnership unit), in 1993.
Rental and hotel income increased from $4,991,904 in 1993 to
$5,059,821 in 1994 to $5,333,156 in 1995. The increase from 1994 to 1995 is the
result of an increase of $152,000 in rental income and $121,000 in hotel income.
The increase in rental income is mainly the result of an increase in average
residential occupancy and average rental rates at both Tindeco Wharf and
Washington Square and an increase in the occupancy of the commercial space at
Tindeco Wharf. The increase in hotel income is the result of an increase in
-9-
average room rates at Factor's Walk ($90.18 to $94.54) and an increase in
average occupancy (74% to 78%). The increase from 1993 to 1994 is the result of
an increase of $187,000 in rental income and decrease of $119,000 in hotel
income. The increase in rental income is mainly the result of an increase in
residential occupancy at both Tindeco Wharf and Washington Square and an
increase in the occupancy of commercial space at Factor's Walk. The decrease in
hotel income is the result of an increase in average room rates at Factor's Walk
($86.59 to $90.18) and an increase in occupancy partially offset by the loss of
one of the Registrant's properties (also a hotel) in 1993 through foreclosure
(see below).
Interest income remained constant from $10,300 in 1993 to
$9,219 in 1994 and increased to $28,988 in 1995. The increase from 1994 to 1995
is the result of an increase in the restricted cash which generates the interest
income.
Rental operations expenses increased from $1,556,301 in 1993 to
$1,590,865 in 1994 and to $1,654,247 in 1995. The increase from 1994 to 1995 is
due to higher operating expenses at Tindeco Wharf including wages and salaries,
utilities, management fees and insurance. The increase in operating expenses is
proportional to the increase in occupancy in both the residential units and
commercial space. The increase from 1993 to 1994 is due to higher operating
expenses at Tindeco Wharf including management fees, real estate taxes, and
general and administrative. Hotel operations expense decreased from $1,333,260
in 1993 to $1,018,311 in 1994 and remained constant to $1,037,365 in 1995. The
decrease from 1993 to 1994 is due to the settlement in 1993 of a dispute
concerning management fees owed to the previous management company at Factor's
Walk (see below).
General and administrative expenses remained constant from
$198,000 in 1993, 1994 and 1995.
Interest expense increased from $2,571,868 in 1993 to
$3,478,235 in 1994 and decreased to $3,231,126 in 1995. The decrease from 1994
to 1995 is the result of an the accrual of interest at Factor's Walk on the
judgment in 1994 partially offset by an increase in the average interest rate on
both the Washington Square and Factor's Walk loans combined with an increase at
Tindeco Wharf due to accrual of interest on a higher balance on the second
mortgage in 1995. The increase from 1993 to 1994 is due to the increase in
interest rates at Factor's Walk and the second mortgage at Tindeco Wharf, the
accrual of interest at Factor's Walk in 1994, on amounts owed, upon which
interest had not been accrued in prior years and the accrual of interest on the
judgment relating to the Morrison-Clark Inn. The interest on Factor's Walk
should have been accrued in previous years but due to immateriality, no
adjustment was made to prior years' financial statements. The increase is also
due to the accrual of interest on the judgment at Factor's Walk. All interest
rate increases reflected in the base indexes from which the Registrant's rates
are derived.
Depreciation and amortization increased from $1,621,508 in 1993
to $1,652,950 in 1994 and to $1,667,832 in 1995. The increase from 1993 to 1994
is the result of depreciation on additions to property relating to the judgment
at Factor's Walk
-10-
In 1995, losses of $1,923,450 were incurred at the Registrant's
three properties compared to $2,403,410 in 1994 and $4,338,971 in 1993. A
discussion of property operations/activities follows:
In 1995, Tindeco Wharf sustained a loss of $1,549,544 including
$1,151,400 of depreciation and amortization expenses and $874,000 of deferred
interest (reflecting interest accrued but not paid on the developer's and
operating deficit loans) compared to $1,504,919 including $1,135,336 of
depreciation and amortization expense and $641,000 of deferred interest in 1993
and a loss of $1,419,504, including $1,124,145 of depreciation and amortization
expense and $901,200 of deferred interest in 1993. The increased loss is due to
an increase in interest expense and other operating expenses such as wages and
salaries, utilities, management fees and insurance partially offset by an
increase in rental and interest income. Interest expense increased due to the
accrual of interest on a higher balance on the second mortgage. The increase in
operating expenses and rental income is due to an increase in occupancy in both
the residential units and commercial space and a proportionate increase in the
operating expenses. Interest income increased due to a higher cash balance
throughout the year. The increased loss from 1993 to 1994 is due to an increase
in interest expense and other operating expenses such as management fees, real
estate taxes, and general and administrative offset by an increase in rental
income. Interest expense increased due to a scheduled increase in the interest
rate (3% to 7.5%) on the second mortgage. The increase in rental income is the
result of an increase in residential occupancy from 92% to 95% and an increase
in the average rents.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable,
from TWP to the Registrant, that had been assigned to it, in the amount of
$261,600 which bears interest at 10% with the entire principal and interest due
on June 30, 1997. On March 23, 1993 D, LTD obtained a judgment on this note in
Common Pleas Court for Philadelphia County, Pennsylvania. The judgment provides
that all future distributions, in any form, due to the Registrant on account of
its ownership interest in TWP, be immediately delivered to it. Interest accrued
during 1995 was $2,864. This note was repaid in 1995.
In 1995, River Street Inn sustained a loss of $354,314 including
$354,747 of depreciation expense compared to a loss of $865,885 including
$353,669 of depreciation expense in 1994 and a loss of $510,687, including
$333,478 of depreciation expense in 1993. The decreased loss from 1994 to 1995
is the result of an increase in hotel income combined with an increase in
interest expense. The increase in hotel income is the result of an increase in
average room rates at Factor's Walk ($90.18 to $94.54) and an increase in
average occupancy (74% to 78%). The increase in interest rates is the result of
an increase in the average interest rate on the both the mortgage and on amounts
owed to the guarantor which accrues interest at prime plus 2%. The increase in
the loss from 1993 to 1994 is the result of the judgment entered against FWP
(see below) in combination with an increase in hotel income and a decrease in
hotel operations expense partially offset by an increase in interest expense.
Hotel income increased due to an increase in average room rates ($86.59 to
-11-
$90.18) and an increase in occupancy from 71% to 74%. Hotel operations expense
decreased due to the settlement in 1993 of a dispute concerning management fees
owed to the previous management company (see below). Interest expense increased
due to an increase in the interest rates on the bonds (4.5% to 6%).
FWP has been involved in two legal proceedings as discussed below:
(a) 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 accrues
interest at 9.5% and $62,562 of interest was accrued in both 1995 and 1994. FWP
filed an appeal and this appeal is currently held in abeyance while FWP and
Jones participate in a court sponsored settlement program. Because of the
complexity of the factual and legal issues involved, it is impossible to predict
with any reasonable degree of certainty the outcome of the appeal. A final
outcome adverse to FWP is a reasonable probability. However, FWP continues to
participate in negotiations with Jones, which the Registrant believes will lead
to a settlement that will allow FWP to retain ownership of the property. If no
settlement occurs and an adverse appellate ruling is handed down, the property
could be foreclosed.
(b) In October 1992, FWP terminated its contract with the existing
management company, Great Inns of America ("GIA"), and hired a new management
company. In February 1993, GIA filed suit in the United States District Court
for the Southern District of Georgia in the matter of Great Inns of America,
Inc. v. Factor's Walk Partners for breach of contract and tortious interference.
On September 10, 1993 the lawsuit was settled for $102,670, of which $25,000 was
paid at the time of settlement and equal monthly installments of $6,472 are
payable commencing October 10, 1993 and continuing until September 10, 1994. As
of December 31, 1995, this obligation has been repaid.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable,
from FWP to the Registrant, that had been assigned to it, in the amount of
$55,951 which bears interest at 10% with the entire principal and interest 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 accrued interest at 15%. The judgment provides that
all future distributions, in any form, due to the Registrant on account of its
ownership interest in FWP, be immediately delivered to it. Interest accrued
during 1995 was $2,226. This note was repaid in 1995.
In 1995, Washington Square sustained a loss of $19,592 including
$110,227 of depreciation expense compared to a loss of $32,606 including
$110,003 of depreciation expense in 1994 and a loss of $52,039 including
$109,943 of depreciation expense in 1993. The decreased loss from 1994 to 1995
-12-
is mainly the result of an increase in rental income due to a higher average
rental rates. The decreased loss from 1993 to 1994 is mainly the result of an
increase in rental income due to an increase in average occupancy (92% to 97%).
The decreased loss from 1992 to 1993 is primarily due to the inclusion in 1992
of interest expense, relating to previous years, due to the property manager on
amounts advanced to fund negative cash flow. Registrant expects operations in
1996 to approximate those experienced in 1995.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable
from the Registrant in the amount of $404,046 which bears interest at 10% with
the entire principal and interest 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 accrued interest at 15%.
Interest accrued during 1995 was $45,430. 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
$488,433.
In 1993, the Registrant recognized a loss of $2,356,741 and
$2,340,510 in extraordinary losses from the foreclosure of one property. The
foreclosure was as follows:
The Registrant recognized a loss of a loss of $2,356,741 in 1993 at
the Morrison-Clark Inn . As a result of insufficient cash flow generated by the
property, Mass & L was unable to make scheduled debt service payments. In 1992,
the lender notified Mass & L of the default under both notes and made a demand
for payment. In May 1992, in order to forestall the threatened foreclosure by
the lender, a reorganization petition was filed pursuant to Chapter 11 of the
U.S. Bankruptcy Code. In addition, the lender filed a claim against the
Registrant on its guaranty of payment of both notes. In February 1993, the
lender, with permission of the bankruptcy court, foreclosed on the property. In
November 1993, the lender obtained a judgment in the matter of Capital Bank,
N.A. v. Diversified Historic Investors II in the amount of $1,800,000. In return
for payment of $20,000, Capital Bank has agreed to forebear from executing on
the judgment until July 6, 1996. Although there have been no discussions, the
Registrant anticipates that it will be able to extend the forbearance agreement
for several years for similar consideration. Included in operations for 1993 is
an extraordinary loss of $2,340,510 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 II
We have audited the accompanying consolidated balance sheets of Diversified
Historic Investors II (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 did not audit the financial statements of Tindeco Wharf Partnership,
which statements reflect total assets of $20,637,093 and $21,583,406 as of
December 31, 1995 and 1994, and total revenues of $3,483,636 and $3,319,873,
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 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 and the report of
other auditors 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, 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 30 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 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.
Gross, Kreger & Passio
Philadelphia, Pennsylvania
February 13, 1996
-14-
Independent Auditor's Report
To the Partners of
Tindeco Wharf Partnership
We have audited the accompanying consolidated balance sheet of Tindeco Wharf
Partnership as of December 31, 1995, and the related statements of profit and
loss (on HUD Form No. 92410), partners' deficit and cash flows for the year then
ended. These 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 audits 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 audits 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 presents fairly, in
all material respects, the financial position of Tindeco Wharf Partnership as of
December 31, 1995, and the result of its operations, changes in partners'
deficit and cash flows for the year then ended in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental information on pages 24 through 30
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 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.
In accordance with Government Auditing Standards, we have also issued reports
dated January 18, 1996, on our consideration of Tindeco Wharf Partnership's
internal control structure and in its compliance with specific requirements
applicable to major HUD programs, affirmative fair housing, and laws and
regulations applicable to the financial statements.
Reznick Fedder and Silverman
Baltimore, Maryland
January 18, 1996
-15-
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, 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 21-29
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 31
Notes to Schedule XI 32
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 II
---------------------------------
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1995 and 1994
Assets
1995 1994
------------ ------------
Rental properties at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,414,132 39,296,842
Furniture and fixtures 2,650,472 2,566,749
------------ ------------
42,999,186 42,798,173
Less - accumulated depreciation (16,210,001) (14,575,699)
------------ ------------
26,789,185 28,222,474
Cash and cash equivalents 114,922 101,340
Restricted cash 692,027 607,039
Accounts receivable 50,030 31,298
Other assets (net of accumulated
amortization of $180,216 and $147,153) 1,772,484 1,780,758
------------ ------------
Total $ 29,418,648 $ 30,742,909
============ ============
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 33,161,299 $ 33,527,230
Accounts payable:
Trade 866,737 717,773
Related parties 678,569 816,878
Interest payable 6,928,557 5,887,209
Tenant security deposits 241,704 247,139
Other liabilities 2,381,497 1,959,979
------------ ------------
Total liabilities 44,258,363 43,156,208
------------ ------------
Partners' equity (14,839,715) (12,413,299)
------------ ------------
Total $ 29,418,648 $ 30,742,909
============ ============
The accompanying notes are an integral part of these financial statements.
-17-
DIVERSIFIED HISTORIC INVESTORS II
---------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- -----------
Revenues:
Rental income $ 4,103,099 $ 3,950,879 $ 3,763,979
Hotel income 1,230,057 1,108,942 1,227,925
Interest income 28,998 9,219 10,300
----------- ----------- -----------
Total revenues 5,362,154 5,069,040 5,002,204
----------- ----------- -----------
Costs and expenses:
Rental operations 1,654,247 1,590,865 1,556,301
Hotel operations 1,037,365 1,018,311 1,333,260
General and administrative 198,000 198,000 198,000
Interest 3,231,126 3,478,235 2,571,868
Depreciation and amortization 1,667,832 1,652,950 1,621,508
Loss on disposal of property -0- -0- 206,000
----------- ----------- -----------
Total costs and expenses 7,788,570 7,938,361 7,486,937
----------- ----------- -----------
Loss before extraordinary item (2,426,416) (2,869,321) (2,484,733)
Extraordinary loss -0- -0- (2,340,510)
----------- ----------- -----------
Net loss ($2,426,416) ($2,869,321) ($4,825,243)
=========== =========== ===========
Net loss per limited partnership unit:
Loss before extraordinary item (116.65) (137.94) (119.45)
Extraordinary loss -0- -0- (112.52)
----------- ----------- -----------
($ 116.65) ($ 137.94) ($ 231.97)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-18-
DIVERSIFIED HISTORIC INVESTORS II
---------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
------------------------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
Dover
Historic Limited
Advisors(1) Partners(2) Total
----------- ----------- -----
Percentage participation in
profit or loss 1% 99% 100%
== === ====
Balance at December 31, 1992 (218,608) (4,500,127) (4,718,735)
Net loss (48,252) (4,776,991) (4,825,243)
------------ ------------ ------------
Balance at December 31, 1993 (266,860) (9,277,118) (9,543,978)
Net loss (23,608) (2,337,232) (2,360,840)
------------ ------------ ------------
Balance at December 31, 1994 (290,468) (11,614,350) (11,904,818)
Prior period adjustment (5,085) (503,396) (508,481)
Net loss (24,264) (2,402,152) (2,426,416)
------------ ------------ ------------
Balance at December 31, 1995 ($ 319,817) ($14,519,898) ($14,839,715)
============ ============ ============
(1) General Partner.
(2) 20,593.3 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 II
---------------------------------
(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 ($2,426,416)($2,869,321)($4,825,243)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,667,832 1,652,950 1,621,508
Bad debt expense -0- -0- 206,000
Extraordinary loss on extinguishment of debt -0- -0- 2,340,510
Minority interests' portion of loss -0- -0- -0-
Changes in assets and liabilities,
net of disposals due to foreclosure:
(Increase) decrease in restricted cash (84,988) (9,171) 38,628
(Increase) decrease in accounts (18,732) 399 5,279
receivable
Increase in other assets (25,256) (13,660) (1,761)
Increase in accounts payable - trade 148,964 217,168 15,617
Increase (decrease) in accounts (138,309) (824,896) 364,716
payable - related parties
Increase in interest payable 1,041,348 778,531 614,852
(Decrease) increase in tenant security (5,435) 35,602 (112)
deposits
Increase in other liabilities 421,518 1,959,980 -0-
----------- ----------- -----------
Net cash provided by operating
activities: 580,526 927,582 379,994
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (201,013) (827,483) (106,374)
----------- ----------- -----------
Net cash used in investing
activities: (201,013) (827,483) (106,374)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under debt obligations -0- 43,423 -0-
Payments of principal under debt (365,931) (63,636) (288,026)
obligations
Other financing activities -0- -0- (4,752)
----------- ----------- -----------
Net cash used in financing
activities: (365,931) (20,213) (292,778)
----------- ----------- -----------
Increase (decrease) in cash and cash 13,582 79,886 (19,158)
equivalents
Cash and cash equivalents at beginning of 101,340 21,454 40,612
year ----------- ----------- -----------
Cash and cash equivalents at end of year $ 114,922 $ 101,340 $ 21,454
=========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for interest $ 1,848,790 $ 2,223,822 $ 1,561,485
Supplemental Schedule of Non-Cash
Investing and financing activities:
Net assets transferred for liability
reduction:
Net assets transferred 0 0 $ 5,070,245
Liability reduction 0 0 $ 2,729,735
The accompanying notes are an integral part of these financial statements.
-20-
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, whose corporate
partner is DHP, Inc., (formerly Dover Historic Properties, Inc.), has the
exclusive responsibility for all aspects of the Partnership's operations
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 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.
-21-
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 incurred $791,054 of settlement fees in conjunction
with the bond refinancing. These settlement fees are included in other assets
and are being amortized to amortization expense over the term of the bond issue.
Accumulated amortization was $74,920 and $52,264 at December 31, 1995 and 1994,
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
1995, 1994 and 1993).
6. Reclassifications
Certain amounts in the 1993 financial statements have been reclassified to
conform with the format adopted in 1994.
7. Restricted Cash
Restricted cash includes amounts held for tenant security deposits 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 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
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
-22-
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. 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 - PRIOR PERIOD ADJUSTMENT
On January 1, 1994, a judgment was entered against the Partnership (See Note F
Commitments and Contingencies) in the amount of $1,069,017 consisting of
$648,018 in construction costs and $420,999 in accrued interest. The judgment
was not accrued in 1994. In addition, interest on the judgment in the amount of
$61,562 was not accrued and depreciation on the construction costs in the amount
of $25,921 was not expensed for the year ended December 31, 1994. Accordingly,
the financial statements for the year ended December 31, 1994 have been restated
to reflect the above obligations as follows:
Net loss as previously reported ($ 2,360,840)
Interest expense (482,560)
Depreciation expense (25,921)
-------------
Net loss as restated ($ 2,869,321)
=============
Net loss per limited partnership unit, as previously stated ($ 113.49)
Interest expense (23.20)
Depreciation expense (1.25)
-------------
Net loss per limited partnership unit, as restated ($ 137.94)
=============
-23-
NOTE D - DEBT OBLIGATIONS
Debt obligations were as follows:
December 31,
1995 1994
---- ----
Mortgage loan, interest only at TENR plus 1/2% $ 5,800,000 $ 5,800,000
(5.375% and 6% at December 31, 1995 and 1994,
respectively) (TENR is a rate based upon yields of
high quality, short-term, tax exempt obligations),
subject to certain adjustments, to a maximum of
15%; principal due in 2015, collateralized by the
related rental property (A)
Mortgage loan, interest at 12%, collateralized by 1,800,000 1,800,000
the related rental property with maturity at
January 1, 1992 (B)
Mortgage loans, interest at the Federal Reserve 1,155,227 1,223,214
Discount rate plus 2% with a minimum of 7% and a
maximum of 15% (7.25% and 7% at December 31, 1995,
and 1994, respectively), principal and interest
payable monthly based on a 20-year amortization
schedule at the foregoing rates of interest, as
applicable; callable by the lender in 1996, at
which time the balance will be approximately
$1,081,704; collateralized by the related rental
property (C)
Mortgage revenue bonds comprised of the 16,980,349 17,046,806
following: $1,440,000 Serial Bonds, interest
rates ranging from 2.75% to 6.10%, maturing
semi-annually from June 20, 1996, to December 20,
2006; $1,650,000 Term Bonds, interest at 6.5%,
maturing December 20, 2012; $8,260,000 Term Bonds,
interest at 6.6%, maturing December 20, 2024;
$5,605,000 Term Bonds, interest at 6.7%, maturing
December 20, 2028; collateralized by the related
rental property
Notes payable to a property management company, 172,252 300,000
bearing interest at 12% per annum; principal and
interest to be repaid from the earliest positive
cash flow from operations or capital transactions,
or within 90 days of termination of the management
agreement; unpaid principal and interest due upon
the earlier of sale or refinance of the property
or December 1, 2007
-24-
Note payable; interest accrues at 12%; principal -0- 103,739
and interest to be repaid from the earliest
positive cash flow from operations; unsecured and
due on demand
Second mortgage loan, principal and interest at 4,953,471 4,953,471
7.5%, payable in monthly installments of $36,606
to August 2004, at which time the balance of
approximately $3,948,784 is due; collateralized by
the related rental property (D)
Note payable to the 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
----------- -----------
$33,161,299 $33,527,230
=========== ===========
(A) The partnership has the right to convert the interest rate to a fixed rate,
based upon market conditions at the time of conversion.
A private corporation provides an interest guarantee on these bonds. The
guarantor charges an annual fee of approximately 2% of the outstanding
balance of the bonds.
(B) 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.
(C) Although the loan is callable on May 1, 1996, the Partnership
anticipates that upon providing additional information to the lender, the
loan will be reinstated and the principal balance due in October 2005.
(D) Interest and principal after August 1, 1990, is 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 additional interest was paid during 1995, 1994 or 1993.
-25-
Approximate maturities of mortgage loan obligations at December 31, 1995, for
each of the succeeding five years are as follows:
Year Ending December 31,
1996 $ 1,949,204
1997 162,166
1998 176,286
1999 191,671
2000 208,436
Thereafter 30,473,536
-----------
$33,161,299
===========
NOTE E - ACQUISITIONS
The Partnership acquired one property and three general or limited 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 21,500 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 owns 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
contribution of $1,320,883.
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 39,000 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.
-26-
NOTE F- 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 (three 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 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 accrues
interest at 9.5% and $62,562 of interest was accrued in both 1995 and 1994. FWP
filed an appeal and this appeal is currently held in abeyance while FWP and
Jones participate in a court sponsored settlement program. Because of the
complexity of the factual and legal issues involved, it is impossible to predict
with any reasonable degree of certainty the outcome of the appeal. A final
outcome adverse to FWP is a reasonable probability. However, FWP continues to
participate in negotiations with Jones, which the Registrant believes will lead
to a settlement that will allow FWP to retain ownership of the property. If no
settlement occurs and an adverse appellate ruling is handed down, the property
could be foreclosed.
In October 1992, FWP terminated its contract with the existing management
company, Great Inns of America ("GIA"), and hired a new management company. In
February 1993, GIA filed suit in the United States District Court for the
Southern District of Georgia in the matter of Great Inns of America, Inc. v.
Factor's Walk Partners for breach of contract and tortious interference. On
September 10, 1993 the lawsuit was settled for $102,670, of which $25,000 was
paid at the time of settlement and equal monthly installments of $6,472 are
payable commencing October 10, 1993 and continuing until September 10, 1994. As
of December 31, 1995, this obligation has been repaid.
NOTE G - RELATED PARTY TRANSACTIONS
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable from the
Registrant in the amount of $404,046 which bears interest at 10% with the entire
principal and interest 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 1995 was $45,430. Payments on the judgment are to be
-27-
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
$488,433.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from TWP to
the Registrant, that had been assigned to it, in the amount of $261,600 which
bears interest at 10% with the entire principal and interest due on June 30,
1997. On March 23, 1993 D, LTD obtained a judgment on this note in Common Pleas
Court for Philadelphia County, Pennsylvania. The judgment provides that all
future distributions, in any form, due to the Registrant on account of its
ownership interest in TWP, be immediately delivered to it. Interest accrued
during 1995 was $2,864. This note was repaid in 1995.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from FWP to
the Registrant, that had been assigned to it, in the amount of $55,951 which
bears interest at 10% with the entire principal and interest 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 provides that all future distributions, in any form, due to the
Registrant on account of its ownership interest in FWP, be immediately delivered
to it. Interest accrued during 1995 was $2,226. This note was repaid in 1995.
The seller of Washington Square agreed to lend funds to the Partnership to cover
cash flow deficits for a five-year period expiring in 1990. The Partnership
borrowed $97,008 through December 1988. The loan bears interest at 12%, with
principal and interest payments out of cash flow. Interest accrued during 1995
was $11,641. The balance of the note at December 31, 1995 was $190,136.
NOTE H - EXTRAORDINARY GAINS/ LOSSES
During 1993, the mortgagee of the property located at the intersection of
Massachusetts Avenue and L Street ("Mass and L") in Washington, D.C. (54 hotel
rooms and a 120 seat restaurant) foreclosed on the property. Due to insufficient
cash flow generated by the property, Mass & L was unable to make scheduled debt
service payments. In 1992, the lender notified Mass & L of the default under
both notes and made a demand for payment. In May 1992, in order to forestall the
threatened foreclosure by the lender, a reorganization petition was filed
pursuant to Chapter 11 of the U.S. Bankruptcy Code. In addition, the lender
filed a claim against the Partnership on its guaranty of payment of both notes.
In February 1993, the lender, with permission of the bankruptcy court,
foreclosed on the property. In November 1993, the lender obtained a judgment in
the matter of Capital Bank, N.A. v. Diversified Historic Investors II in the
amount of $1,800,000. In return for payment of $20,000, Capital Bank has agreed
to forebear from executing on the judgment until July 6, 1996. Although there
have been no discussions, the Registrant anticipates that it will be able to
extend the forbearance agreement for several years for similar consideration.
The Partnership has recognized an extraordinary loss of $2,340,510 in 1993 for
the difference between the book value of the property (which approximated fair
value) and the extinguished debt.
-28-
NOTE I - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of operations in
different time periods for financial reporting ("book") purposes and for income
tax ("tax") purposes. Reconciliations of net loss and partners' equity follows:
For the Years Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
Net loss - book ($ 2,338,933) ($ 2,360,840) ($ 4,825,243)
Depreciation (83,317) (156,840) (253,587)
Interest 867,170 964,427 794,644
Guarantor fees 121,800 76,018 71,108
Investor service fee 10,000 10,000 10,000
Bad debt expense -0- (196,000) 833,270
Note payable -0- (1,800,000) -0-
Gain on foreclosure -0- -0- 791,059
Minority interest - tax only 120,702 115,381 210,473
------------ ------------ ------------
Net loss - tax ($ 1,302,578) ($ 3,347,854) ($ 2,368,276)
------------ ============ ============
Partners' equity - book ($14,243,751) ($11,904,818) ($ 9,543,978)
Costs of issuance 2,471,196 2,471,196 2,471,196
Cumulative tax over (under) book loss 4,590,280 3,997,356 5,336,595
Facade easement donation (tax only) 203,778 203,778 203,778
Prior period adjustment 48,071 48,071 48,071
Capital adjustments (tax only) (422,016) (443,431) (352,225)
------------ ------------ ------------
Partners' equity - tax ($ 7,352,442) ($ 5,627,848) ($ 1,836,563)
============ ============ ============
-29-
SUPPLEMENTAL INFORMATION
-30-
DIVERSIFIED HISTORIC INVESTORS II
---------------------------------
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Costs
Capitalized
Subsequent
Initial Cost to to
Partnership (b) Acquisition
--------------- -----------
Buildings
and
Description (a) Encumbrances Land Improvements Improvements
- --------------- ------------ ---- ------------ ------------
(f)
---
44 room hotel with 21,500 square
feet commercial space in
Savannah, GA $ 5,800,000 $ 200,000 $ 9,178,160 $ 136,412
29 apartment units and 9,500
square feet of commercial space
in West Chester, PA 1,155,227 87,500 2,833,383 1,500
262 apartment units and 39,000
square feet of commercial space
in Baltimore, MD 24,406,072 647,082 2,000,000 26,886,653
54 room hotel with restaurant
in Washington, DC 1,800,000 0 0 0
----------- ----------- ----------- -----------
$33,161,299 $ 934,582 $14,011,543 $27,024,565
=========== =========== =========== ===========
Gross Amount at which Carried at December 31, 1995
--------------------------------------------------
Buildings and Accumulated Date of Date
Land Improvements Total(c)(d) Depr.(d)(e) Constr.(a) Acquired
---- ------------ ----------- ----------- ---------- --------
$200,000 $ 9,341,513 $ 9,541,513 $ 3,859,097 1985-1986 8/9/85
87,500 2,849,730 2,937,230 1,193,640 1985 10/1/85
647,082 29,225,343 29,872,425 11,105,422 1985-1988 10/15/85
0 0 0 0 1985-1988 10/1/85
------------ ------------ ------------ ------------
$934,582 $41,416,586 $42,351,168 $16,158,159
============ ============ ============ ============
-31-
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 $40,011,031. 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) Reconciliation of real estate:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 42,150,155 $ 41,970,690 $ 48,496,834
Additions during the year:
Improvements 201,013 179,465 106,374
Deductions during the year:
Retirements -0- (6,632,518)
------------ ------------
Balance at end of year $ 42,351,168 $ 42,150,155 $ 41,970,690
============ ============ ============
Reconciliation of accumulated
depreciation:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 14,549,778 $ 12,958,664 $ 12,976,944
Depreciation expense for the year 1,608,381 1,591,114 1,584,151
Retirements -0- -0- (1,602,431)
------------ ------------ ------------
Balance at end of year $ 16,158,159 $ 14,549,778 $ 12,958,664
============ ============ ============
(E) See Note B to the financial statements for depreciation method and lives.
(F) See Note F to the financial statements for further information.
-32-
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 Dover Historic
Advisors (DoHA), a Pennsylvania general partnership. The corporate partner of
DoHA is DHP, Inc. (formerly Dover Historic Properties, Inc.)
For further description of DHP, Inc., see paragraph e. of this Item
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. 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. 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 has general responsibility and authority in
conducting its operations.
Dover Historic Properties, Inc. was incorporated in Pennsylvania in
December 1984 for the purpose of sponsoring investments in, rehabilitating,
developing and managing historic (and other) properties. In February 1992, Dover
Historic Properties, Inc.'s name was changed to DHP, Inc. DHP, Inc. is a
subsidiary of The Dover Group, Ltd., an entity formed in 1985 to act as the
holding company for DHP 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.
-33-
The executive officers, directors, and key employees of Dover are
described below.
Michael J. Tuszka (age 49) was appointed Chairman and Director of
both D, LTD and DHP, Inc. on January 27, 1993. Mr. Tuszka has been associated
with DHP, Inc. and its affiliates since 1984.
Donna M. Zanghi (age 39) is Secretary/Treasurer of DHP, Inc.. She is
also a Director and Secretary/Treasurer of D, LTD. She has been 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 31) was appointed on January 27, 1993 as
Assistant Secretary of both D. LTD and DHP, Inc.
Item 11. Executive Compensation
a. Cash Compensation - During 1995, 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 1995, 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 1995 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.
-34-
b. Security Ownership of Management - No equity security 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, 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 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.
-35-
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.
-36-
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 II
Date: May 24, 1996 BY: Dover Historic Advisors, General Partner
-------------
By: DHP, 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
--------- -------- ----
DOVER HISTORIC ADVISORS General Partner
By: DHP, Inc.,
Partner
By: /s/ Michael J. Tuszka May 27, 1996
---------------------------- ------------
MICHAEL J. TUSZKA,
Chairman
By: /s/ Donna M. Zanghi May 24, 1996
---------------------------- ------------
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi May 24, 1996
---------------------------- ------------
MICHELE F. RUDOI,
Assistant Secretary
-37-