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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, 1996
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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 0-14645
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DIVERSIFIED HISTORIC INVESTORS II
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2361261
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(g) of the Act: 20,593.3 Units
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes _X No
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, 1996, 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. It currently owns
three properties or interests therein. See Item 2. Properties, for a
description thereof. For a discussion of the operations of the
Registrant, see Part II, Item 7. Management's Discussion and Analysis
of Financial 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, 1996, 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, 73,366 square feet ("sf") of
commercial/retail space and 44 hotel rooms. As of December 31, 1996,
258 of the apartment units were under lease at monthly rental rates
ranging from $630 to $1,390 and approximately 71,298 sf of commercial
space was under lease at annual rental rates ranging from $5.33 per sf
to $25.27 per sf. Throughout 1996, all of the hotel rooms were
available for use. During 1996, the hotel maintained an average
nightly room rate of $100.92 and average occupancy of 77%. Rental of
the apartments and commercial space is not expected to be seasonal.
However the hotel does experience seasonal changes, with the busiest
months being March and April and the slowest months being January and
December. 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. 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, 1996 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
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 was $16,907,100
at December 31, 1996. The bonds are comprised of both serial and
revenue bonds. The serial bonds bear interest rates ranging from 4.6%
to 6.1% and mature semi-annually from June 1997 through December 2006.
The term bonds bear interest at rates ranging from 6.5% to 6.7% and
mature in 2012, 2024, and 2028. The UDAG loan (which has a balance of
$4,953,471 at December 31, 1996) 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,
1996) and the operating deficit loan (principal balance of $250,383 at
December 31, 1996) all bear interest at 12% and are payable on a pro-
rata basis out of cash flow from the property. The developer's loan
is due in 2005, or upon earlier sale or refinancing of the property.
The operating deficit loan is due in 2007, or upon earlier sale or
refinancing of the property. The property is managed by BCMI. As of
December 31, 1996, 229 apartment units (95%) and 41,307 sf of
commercial space (100%) were under lease. Monthly rental rates range
from $780 to $1,390 for apartments and annual rental rates range from
$5.33 per sf to $19.47 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 97% for 1995, 95% for 1994, 92% for 1993 and 94% for 1992.
The monthly rental range has been approximately the same since 1992.
The occupancy for the commercial space for the previous four years has
been 85% for 1995, 93% for 1994, 93% for 1993 and 95% for 1992. The
range for annual rents has been $5.33 per sf to $18.54 per sf for
1995, $10.30 per sf to $22.39 per sf for 1994, $5.88 to $21.36 per sf
for 1993 and $5.28 to $15.96 per sf for 1992. 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.
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
1997 2 18,000 $ 210,787 6%
1998 0 0 0 0%
1999 3 8,199 137,941 4%
2000 1 4,469 58,701 2%
2001 2 6,139 89,016 2%
Thereafter 1 4,500 24,000 <1%
The Registrant has entered into lease negotiations with
the large tenant whose lease is due to expire in June 1997 and
believes that a long-term lease (8-10 years) will be signed at a
reduced rental rate.
For tax purposes, this property has a federal tax basis
of $28,550,778 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 22,559 sf of commercial space located at 115 E. River
Street in Savannah, Georgia. In August 1985, Registrant was admitted
with a 99% interest in Factor's Walk Partners ("FWP") a Georgia
general partnership, for $3,600,409. FWP acquired and rehabilitated
the Property for $8,900,409 ($127 per sf), including financing through
an issuance by a governmental agency of tax-exempt bonds in the
principal amount of $5,800,000. The excess of equity and mortgage
financing over the acquisition and rehabilitation costs was utilized
to provide working capital reserves of $500,000. The bonds bore
interest at TENR (a rate based on yields of high quality, short-term
tax exempt obligations) plus 0.5% until December 30, 1996 and were
guaranteed by a private corporation. On December 30, 1996, both the
bonds and the guarantee were sold. The new holder of the bonds
exercised its right to convert the interest rate from the variable
rate to 14% due to the credit rating of the new guarantor. The
principal balance of the bonds at December 31, 1996 is $5,800,000 and
they are due in 2015. The property is managed by BCMI. As of
December 31, 1996, 21,799 sf of its 22,559 sf (97%) of commercial
space was under lease at annual rental rates ranging from $5.53 to
$25.27 per sf. The Property also maintains 44 operating hotel rooms
at an average nightly rate of $100.92, average occupancy for 1996 was
approximately 77%.
The hotel occupancy rate for the previous four
years has been 78% for 1995, 74% for 1994, 71% for 1993 and 72% for
1992. The average room rates have been $94.54 for 1995, $90.18 for
1994, $86.59 for 1993 and $86.44 for 1992. The occupancy for the
commercial space for the previous four years has been 83% for 1995,
92% for 1994, 83% for 1993 and 80% for 1992. The range for annual
rents has been $5.53 to $24.53 per sf for 1995, $1.58 to $23.12 per sf
for 1994, $1.56 to $23.16 per sf for 1993 and $5.28 to $15.96 per sf
for 1992. 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
1997 1 354 $ 3,600 <1%
1998 3 7,233 71,676 4%
1999 0 0 0 0%
2000 3 3,096 50,772 3%
2001 8 11,116 140,889 9%
Although no firm commitment has been made, the
Registrant anticipates that the lease which is scheduled to expire in
1997 will be extended for at least an additional year, due to the long-
standing tenancy of the merchant.
For tax purposes, this property has a federal tax basis
of $9,511,781 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 $1,076,725 at December 31, 1996) 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, 1996) and is due in October
2005. The property is managed by an independent property management
firm. As of December 31, 1996, 8,192 sf of commercial space (86%) was
rented at annual rates ranging from $6.00 per sf to $13.00 per sf. At
December 31, 1996, all of the residential units (100%) were under
lease at monthly rental rates ranging from $630 to $1,076.
All residential leases are renewable, one-year
leases. The occupancy for the residential units for the previous four
years was 97% for 1995, 98% for 1994, 92% for 1993 and 97% for 1992.
The monthly rental range has been approximately the same since 1992.
The occupancy for the commercial space for the previous four years has
been 97% for 1995, 100% for 1994, 100% for 1993 and 100% for 1992.
The range for annual rents has been $6.00 to $12.00 per sf for 1995,
$6.00 to $13.23 per sf for 1994, $6.12 to $12.12 per sf for 1993 and
$6.00 to $11.52 per sf for 1992.
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
1997 1 1,094 $ 14,222 4%
1998 1 1,198 9,769 3%
1999 1 1,900 19,000 6%
2000 0 0 0 0%
2001 1 4,000 32,000 10%
Although no firm commitment has been made, the
Registrant anticipates that the lease which is scheduled to expire in
1997 will be extended for at least an additional year, due to the long-
standing tenancy of the merchant and the availability of a renewal
option under the lease.
For tax purposes of depreciation, this property
has federal tax basis of $2,849,730 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 $24.295 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.
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 118 Units of record
were sold or exchanged in 1996.
b. As of December 31, 1996, there are 2,562 record
holders of Units.
c. Registrant did not declare any cash dividends in
1996 or 1995.
Item 6. Selected Financial Data
The following selected financial data are for the five
years ended December 31, 1996. 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.
1996 1995 1994 1993 1992
Rental income $ 4,303,963 $ 4,103,099 $ 3,950,879 $ 3,763,979 $ 3,418,773
Hotel revenues 1,282,662 1,230,057 1,108,942 1,227,925 3,007,997
Interest income 18,654 28,988 9,219 10,300 121,721
Net loss (2,262,184) (2,426,416) (2,869,321) (4,825,243) (4,348,359)
Net loss per Unit (108.75) (116.65) (137.94) (231.97) (209.04)
Total assets (net 28,633,916 29,418,648 30,742,909 31,466,054 38,107,985
of depreciation
and amortization)
Debt obligations 33,087,679 33,161,299 33,527,230 33,547,443 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, 1996, Registrant had cash of
$79,567. Such funds are expected to be used to pay the liabilities of
the 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 loan modifications with the
various lenders in order to remain current on all obligations. The
Registrant is not aware of any additional sources of liquidity.
As of December 31, 1996, Registrant had restricted
cash of $1,300,767 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 the Morrison Clark Inn, 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. See Part
II. Item 7. Morrison Clark Inn.
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. In the first quarter of 1996, the Registrant's
wholly-owned affiliate, Factor's Walk Partners ("FWP") entered into a
lease with the owner of the building adjacent to the River Street Inn
(owned by FWP) with the intention of expanding the inn. The source of
financing for this expansion has not yet been identified and the
expansion has been deferred until financing can be arranged. The
Registrant is not aware of any factors which would cause historical
capital expenditures levels not to be indicative of capital
requirements in the future and accordingly, does not believe that it
will have to commit material resources to capital investment for the
foreseeable future.
(3) Results of Operations
During 1996, Registrant incurred a net loss of
$2,262,184 ($108.75 per limited partnership unit), compared to a net
loss of $2,426,416 ($116.65 per limited partnership unit), in 1995 and
a net loss of $2,869,321 ($137.94 per limited partnership unit), in
1994.
Rental and hotel income increased from $5,059,821
in 1994 to $5,333,156 in 1995 to $5,586,625 in 1996. The increase
from 1995 to 1996 is the result of an increase of $201,000 in rental
income and $53,000 in hotel income. The increase in rental income is
a combination of an increase in the average rental rates of the
residential units and an increase in the average occupancy of the
commercial space at Tindeco Wharf. The increase in hotel income is
due to an increase in the average room rates at Factor's Walk ($94.54
to $100.92). 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 average room rates at Factor's Walk
($90.18 to $94.54) and an increase in average occupancy (74% to 78%).
Interest income increased from $9,219 in 1994 to
$28,988 in 1995 and decreased to $18,654 in 1996. The increase from
1994 to 1995 and the decrease from 1995 to 1996 is the result of
changes in the balances of the restricted cash which generates the
interest income.
Rental operations expenses increased from
$1,590,865 in 1994 to $1,654,247 in 1995 and to $1,684,209 in 1996.
The increase from 1995 to 1996 is the result of higher legal fees at
Tindeco Wharf due to fees incurred in connection with the approval by
HUD of a new management agreement and higher maintenance and utilities
expense at Washington Square due to the inclement weather experienced
in the winter of 1996 partially offset by a decrease in maintenance
expense at Tindeco Wharf due to the renegotiation of the cable
television contract. 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. Hotel operations expense
increased from $1,018,311 in 1994 to $1,037,365 in 1995 and to
$1,317,387 in 1996. The increase from 1995 to 1996 is due to an
increase in rent expense and management fees. Rent expense increased
due to the execution of a lease between FWP and the building adjacent
to it with the intention of expanding the River Street Inn, while
management fees increased due to the increase in hotel income.
Interest expense decreased from $3,478,235 in 1994
to $3,231,126 in 1995 and to $3,198,970 in 1996. The decrease from
1995 to 1996 is due to a decrease in the average interest rate at
Factor's Walk partially offset by an increase in interest expense at
Tindeco Wharf due to the accrual of interest on a higher balance on
the second mortgage. The decrease from 1994 to 1995 is the result of
the accrual of interest at Factor's Walk on a 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.
Depreciation and amortization increased from
$1,652,950 in 1994 to $1,667,832 in 1995 and to $1,707,209 in 1996.
The increase from 1995 to 1996 is the result of the amortization at
the River Street Inn of leasing commissions incurred in 1996 as a
result of the extension of several of the commercial tenant leases and
the execution of the adjacent building lease in the first quarter of
1996.
In 1996, losses of $1,772,000 were incurred at the
Registrant's three properties compared to $1,924,000 in 1995 and
$2,404,000 in 1994. A discussion of property operations/activities
follows:
In 1996, Tindeco Wharf sustained a loss of $1,544,000
including $1,162,000 of depreciation and amortization expense and
$846,000 of deferred interest (reflecting interest accrued but not
paid on the developer's and operating deficit loans) compared to a
loss of $1,550,000 including $1,151,000 of depreciation and
amortization expense and $874,000 of deferred interest in 1995 and a
loss of $1,505,000, including $1,135,000 of depreciation and
amortization expense and $641,000 of deferred interest in 1994. The
decrease in the loss from 1995 to 1996 is due to an increase in rental
income and a decrease in maintenance expense partially offset by an
increase in interest expense and legal fees. The increase in rental
income is a combination of an increase in the average rental rates of
the residential units and an increase in the average occupancy of the
commercial space. Maintenance expense decreased due to the
renegotiation of the cable television contract. Interest expense
increased due to the accrual of interest on a higher balance on the
second mortgage and legal fees increased due to fees incurred in
connection with the approval by HUD of a new management agreement.
The increased loss from 1994 to 1995 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.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note
receivable, from TWP to the Registrant, that had been assigned to DHP,
Inc. The note was in the stated amount of $261,600 and bore interest
at 10%; the note was 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 provided that all
future distributions, in any form, due to the Registrant on account of
its ownership interest in TWP, be immediately delivered to D, LTD.
Interest accrued during 1995 was $2,864. This note was repaid in
1995.
In 1996, River Street Inn sustained a loss of $199,000
including $381,000 of depreciation and amortization expense compared
to a loss of $354,000 including $355,000 of depreciation expense in
1995 and a loss of $866,000, including $354,000 of depreciation
expense in 1994. The decreased loss from 1995 to 1996 is due to an
increase in hotel and extraordinary income and a decrease in interest
expense partially offset by an increase in rent, management fees, and
amortization expense. Hotel income increased due to an increase in
the average room rates ($94.54 to $100.92) while extraordinary income
increased due to the recognition of a gain resulting from the
settlement agreement with J. A. Jones (see below). Interest expense
decreased due to a decrease in the average interest rate. Rent
expense increased due to the execution of a lease between FWP and the
building adjacent to it with the intention of expanding the River
Street Inn. Management fees increased due to the increase in hotel
income while amortization expense increased due to the amortization of
leasing commissions incurred in 1996 as a result of the extension of
several of the commercial tenant leases and the execution of the
adjacent building lease in the first quarter of 1996. 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%.
FWP is involved in one legal proceeding as discussed
below:
J. A. Jones Construction Company ("Jones") contracted
with FWP for the renovation of what was originally a warehouse, into
the River Street Inn/Factor's Walk. During construction, numerous
disputes arose between the parties. As a result of those disputes,
Jones abandoned the project prior to completion and filed suit in the
matter of J.A. Jones Construction Company v. Factor's Walk Partners in
the United States District Court for the Northern District of Georgia.
On January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1995 and
1994. FWP filed an appeal and this appeal was held in abeyance while
FWP and Jones participated in a court sponsored settlement program.
On November 8, 1996, a settlement agreement was reached whereby a note
in the amount of $1,000,000 was issued. The note calls for 6%
interest until September 1, 1997, with the rate increasing .5% on each
August 1 thereafter to a maximum of prime plus 2% and is due on
October 1, 2011. Interest is due quarterly with the first payment due
September 1, 1997. The Registrant recognized a gain in the amount of
$238,312 for the excess of the amount of the judgment over the amount
stipulated in the settlement agreement.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note
receivable, from FWP to the Registrant, that had been assigned to DHP,
Inc. The note was in the stated amount of $55,951 and bore interest
at 10%; the note was due on June 30, 1997. On January 13, 1994 D, LTD
obtained a judgment on this note in the amount of $73,184 in Common
Pleas Court for Philadelphia County, Pennsylvania. The judgment
accrued interest at 15%. The judgment provided that all future
distributions, in any form, due to the Registrant on account of its
ownership interest in FWP, be immediately delivered to D, LTD..
Interest accrued during 1995 was $2,226. This note was repaid in
1995.
In 1996, Washington Square sustained a loss of $29,000
including $110,000 of depreciation expense compared to a loss of
$20,000 including $110,000 of depreciation expense in 1995 and a loss
of $33,000 including $110,000 of depreciation expense in 1994. The
increased loss from 1995 to 1996 is due to an increase in rental
operations expense such as maintenance and utilities expense resulting
from the inclement weather experienced in the winter of 1996. The
decreased loss from 1994 to 1995 is mainly the result of an increase
in rental income due to a higher average rental rates.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note
receivable from the Registrant in the stated amount of $404,046. The
note bears interest at 10% and becomes 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 1996
and 1995 was $44,034 and $45,430, respectively. 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, 1996 is $409,466.
In February 1993, one of the Registrant's properties,
the Morrison-Clark Inn, was foreclosed by the lender. In November
1993, the lender obtained a judgment in the matter of Capital Bank,
N.A. v. Diversified Historic Investors II in the amount of $1,800,000.
In return for payment of $20,000, Capital Bank has agreed to forebear
from executing on the judgment until July 6, 1997. 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.
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.
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, 1996 and 1995 and the related
consolidated statements of operations, changes in partners' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994.
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 $20,325,765 and $20,637,093
as of December 31, 1996 and 1995, and total revenues of $3,649,724 and
$3,483,636, 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,
1996 and 1995, and the results of their operations and their cash
flows for the years ended December 31, 1996, 1995 and 1994 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 19, 1997
Independent Auditor's Report
To the Partners of
Tindeco Wharf Partnership
We have audited the accompanying consolidated balance sheets of
Tindeco Wharf Partnership as of December 31, 1996 and 1995, and the
related statements of operations, partners' deficit and cash flows for
the years 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
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tindeco
Wharf Partnership as of December 31, 1996 and 1995, and the result of
its operations, changes in partners' deficit and cash flows for the
years then ended in conformity with generally accepted accounting
principles.
Reznick Fedder and Silverman
Baltimore, Maryland
January 10, 1997
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, 1996 and 1995 17
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 18
Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1996, 1995, and 1994 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 20
Notes to consolidated financial statements 21-28
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 30
Notes to Schedule XI 31
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
Assets
1996 1995
Rental properties at cost:
Land $ 934,582 $ 934,582
Buildings and improvements 39,577,198 39,414,132
Furniture and fixtures 2,740,645 2,650,472
---------- ----------
43,252,425 42,999,186
Less - accumulated depreciation (17,857,486) (16,210,001)
---------- ----------
25,394,939 26,789,185
Cash and cash equivalents 79,567 114,922
Restricted cash 1,300,767 692,027
Accounts receivable 47,497 50,030
Other assets (net of accumulated
amortization of $239,940 and $180,216) 1,811,146 1,772,484
---------- ----------
Total $28,633,916 $29,418,648
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $33,087,679 $33,161,299
Accounts payable:
Trade 2,208,559 866,737
Related parties 611,243 678,569
Interest payable 8,313,125 6,928,557
Tenant security deposits 236,677 241,704
Other liabilities 1,278,532 2,381,497
---------- ----------
Total liabilities 45,735,815 44,258,363
---------- ----------
Partners' equity (17,101,899) (14,839,715)
---------- ----------
Total $28,633,916 $29,418,648
========== ==========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Revenues:
Rental income $4,303,963 $4,103,099 $3,950,879
Hotel income 1,282,662 1,230,057 1,108,942
Interest income 18,654 28,998 9,219
--------- --------- ---------
Total revenues 5,605,279 5,362,154 5,069,040
--------- --------- ---------
Costs and expenses:
Rental operations 1,684,209 1,654,247 1,590,865
Hotel operations 1,317,387 1,037,365 1,018,311
General and administrative 198,000 198,000 198,000
Interest 3,198,970 3,231,126 3,478,235
Depreciation and amortization 1,707,209 1,667,832 1,652,950
--------- --------- ---------
Total costs and expenses 8,105,775 7,788,570 7,938,361
--------- --------- ---------
Loss before extraordinary item (2,500,496) (2,426,416) (2,869,321)
Extraordinary gain 238,312 0 0
--------- --------- ---------
Net loss ($2,262,184) ($2,426,416) ($2,869,321)
========= ========= =========
Net loss per limited partnership unit:
Loss before extraordinary item ( 120.21) ( 116.65) ( 137.94)
Extraordinary gain 11.46 0 0
--------- --------- ---------
($ 108.75) ($ 116.65) ($ 137.94)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
Dover
Historic Limited
Advisors (1) Partners (2) Total
Percentage participation in
profit or loss 1% 99% 100%
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)
Net Loss (22,622) (2,239,562) (2,262,184)
------- ---------- ----------
Balance at December 31, 1996 ($342,439) ($16,759,460) ($17,101,899)
======= ========== ==========
(1) General Partner.
(2) 20,593.3 limited partnership units outstanding at December 31,
1996, 1995, and 1994.
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net loss ($2,262,184) ($2,426,416) ($2,869,321)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 1,707,209 1,667,832 1,652,950
Extraordinary gain (238,312) 0 0
Changes in assets and liabilities,
net of disposals due to foreclosure:
Increase in restricted cash (608,740) (84,988) (9,171)
Decrease (increase) in accounts
receivable 2,533 (18,732) 399
Increase in other assets (98,386) (25,256) (13,660)
Increase in accounts payable-trade 1,341,822 148,964 217,168
Decrease in accounts payable -
related parties (67,326) (138,309) (824,896)
Increase in interest payable 1,622,880 1,041,348 778,531
(Decrease) increase in tenant
security deposits (5,027) (5,435) 35,602
(Decrease) increase in other
liabilities (1,102,965) 421,518 1,959,980
Net cash provided by operating --------- --------- ---------
activities: 291,504 580,526 927,582
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (253,239) (201,013) (827,483)
--------- --------- ---------
Net cash used in investing activities: (253,239) (201,013) (827,483)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under debt obligations 0 0 43,423
Payments of principal under debt
obligations (73,620) (365,931) (63,636)
--------- --------- ---------
Net cash used in financing activities: (73,620) (365,931) (20,213)
--------- --------- ---------
(Decrease) increase in cash and cash
equivalents (35,355) 13,582 79,886
Cash and cash equivalents at beginning of year114,922 101,340 21,454
--------- --------- ---------
Cash and cash equivalents at end of year $ 79,567 $ 114,922 $ 101,340
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $1,486,204 $1,848,790 $2,223,822
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
NOTE A - ORGANIZATION
Diversified Historic Investors II (the "Partnership") was formed in
December 1984 to acquire, rehabilitate, and manage real properties
which are certified historic structures as defined in the Internal
Revenue Code (the "Code"), or which are eligible for designation as
such, utilizing mortgage financing and the net proceeds from the sale
of limited partnership units. Rehabilitations undertaken by the
Partnership were done with a view to obtaining certification of
expenditures therefore as "qualified rehabilitation expenditures" as
defined in the Code. The General Partner, Dover Historic Advisors,
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.
The Partnership prepaid all amounts due under a ground lease for one
of its properties. Such prepayment is being amortized over the term
of the lease (75 years) and being charged to amortization expense.
Tindeco Wharf Partnership ("TWP") incurred $791,054 of settlement fees
in conjunction with a bond refinancing. These settlement fees are
included in other assets and are being amortized over the term of the
bond issue. Accumulated amortization was $97,576 and $74,920 at
December 31, 1996 and 1995, 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 1996, 1995 and 1994).
6. Restricted Cash
Restricted cash includes amounts held for tenant security deposits and
real estate tax reserves.
7. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-
line basis. Rental payments received in advance are deferred until
earned.
8. 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 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.
9. 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)
=======
NOTE D - DEBT OBLIGATIONS
Debt obligations were as follows:
December 31,
1996 1995
Mortgage loan, interest only at 14% and 5.375% at December $ 5,800,000 $ 5,800,000
31, 1996 and 1995, respectively); principal due in 2015,
collateralized by the related rental property (A)
Mortgage loan, interest at 12%, collateralized by the related 1,800,000 1,800,000
rental property with maturity at January 1, 1992 (B)
Mortgage loans, interest at the Federal Reserve Discount rate 1,076,725 1,155,227
plus 2% with a minimum of 7% and a maximum of 15% (7.25% at
December 31, 1996 and 1995,), principal and interest payable
monthly based on a 20-year amortization schedule;
collateralized by the related rental property; principal due
October 1, 2005
Mortgage revenue bonds comprised of the following: 16,907,100 16,980,349
$1,440,000 Serial Bonds, interest rates ranging from 4.6% to
6.1%, maturing semi-annually from June 20, 1997, 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, bearing 250,383 172,252
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
Second mortgage loan, principal and interest at 7.5%, payable 4,953,471 4,953,471
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 (C)
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
---------- ----------
$33,087,679 $33,161,299
========== ==========
(A) The bonds bore interest at TENR (a rate based on yields of high
quality, short-term tax exempt obligations) plus 0.5% until
December 30, 1996 and were guaranteed by a private corporation.
On December 30, 1996, both the bonds and the guarantee were
sold. The new holder of the bonds exercised its right to
convert the interest rate from the variable rate to 14% due to
the credit rating of the new guarantor.
(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) 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 1996, 1995 or
1994.
Approximate maturities of mortgage loan obligations at December 31,
1996, for each of the succeeding five years are as follows:
Year Ending December 31,
1997 $ 1,959,400
1998 173,529
1999 188,941
2000 205,751
2001 224,093
Thereafter 30,335,965
----------
$33,087,679
==========
NOTE E - ACQUISITIONS
The Partnership acquired one property and three general partnership
interests in Ventures during the period August 1985 to October 1985,
as discussed below.
In August 1985, the Partnership was admitted, with a 99% general
partner interest, to a Pennsylvania general partnership, which owns a
building located in Savannah, Georgia, consisting of 22,559 commercial
square feet and a 44 room hotel, for a cash capital contribution of
$3,600,409.
In October 1985, the Partnership was admitted, with an 85% general
partner interest, to a Pennsylvania general partnership, which owned a
54-room hotel located in Washington, D.C., for a cash capital
contribution of $1,820,100. The Partnership's interest was
subsequently reduced to 69% when an affiliate of the Partnership
acquired a 19% interest. The lender foreclosed in 1993.
In October 1985, the Partnership purchased a three-story building,
consisting of 29 residential apartments and 9,500 square feet of
commercial space, for a cash 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 41,307 square feet of commercial space, for a cash capital
contribution of $7,271,300. The Partnership subsequently purchased an
additional 5% interest for $262,500.
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 Factor's
Walk Partners ("FWP"), a subsidiary of the Partnership, for the
renovation of what was originally a warehouse, into the River Street
Inn/Factor's Walk. During construction, numerous disputes arose
between the parties. As a result of those disputes, Jones abandoned
the project prior to completion and filed suit. In the matter of J.A.
Jones Construction Company v. Factor's Walk Partners in the United
States District Court for the Northern District of Georgia. On
January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1995 and
1994. FWP filed an appeal which was held in abeyance while FWP and
Jones participated in a court sponsored settlement program. On
November 8, 1996, a settlement agreement was reached whereby a note in
the amount of $1,000,000 was issued. The note calls for 6% interest
until September 1, 1997, with the rate increasing .5% on each August 1
thereafter to a maximum of prime plus 2% and is due on October 1,
2011. Interest is due quarterly with the first payment due September
1, 1997. The Partnership recognized a gain in the amount of $238,312
for the excess of the amount of the judgment over the amount
stipulated in the settlement agreement.
NOTE G - RELATED PARTY TRANSACTIONS
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable from
the Partnership in the stated amount of $404,046. The note bears
interest at 10% and becomes 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 1996 and
1995 was $44,034 and $45,430, respectively. Payments on the judgment
are to be made from available cash flow and before any distribution
can be made to the Partnership's limited partners. The balance of the
note at December 31, 1996 is $409,466.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from
TWP to the Partnership, that had been assigned to DHP, Inc. The note
was in the stated amount of $261,600 and bore interest at 10%; the
note was 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 provided that all future distributions, in
any form, due to the Partnership on account of its ownership interest
in TWP, be immediately delivered to D, LTD. 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 Partnership, that had been assigned to DHP, Inc. The note
was in the stated amount of $55,951 and bore interest at 10%; the note
was due on June 30, 1997. On January 13, 1994 D, LTD obtained a
judgment on this note in the amount of $73,184 in Common Pleas Court
for Philadelphia County, Pennsylvania. The judgment accrued interest
at 15%. The judgment provided that all future distributions, in any
form, due to the Partnership on account of its ownership interest in
FWP, be immediately delivered to D, LTD.. 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 both 1996 and 1995
was $11,641. The balance of the note at December 31, 1996 was
$201,777.
NOTE H - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of
operations in different time periods for financial reporting ("book")
purposes and for income tax ("tax") purposes. Reconciliations of net
loss and partners' equity follows:
For the Years Ended December 31,
1996 1995 1994
Net loss - book ($ 2,262,184) ($ 2,426,416) ($ 2,869,321)
Depreciation (221,239) (83,317) (156,840)
Interest 864,793 954,653 1,472,908
Guarantor fees 121,800 121,800 76,018
Investor service fee 10,000 10,000 10,000
Bad debt expense 0 0 (196,000)
Note payable 0 0 (1,800,000)
Gain on foreclosure (238,312) 0 0
Minority interest - tax only 93,373 120,702 115,381
---------- ---------- ----------
Net loss - tax ($ 1,631,769) ($ 1,302,578) ($ 3,347,854)
========== ========== ==========
Partners' equity - book ($17,101,899) ($14,839,715) ($12,413,299)
Costs of issuance 2,471,196 2,471,196 2,471,196
Cumulative tax over (under) book lo 5,394,643 4,590,280 3,997,356
Facade easement donation (tax only) 203,778 203,778 203,778
Prior period adjustment 48,071 48,071 48,071
Capital adjustments (tax only) (619,813) (422,016) (443,431)
---------- ---------- ----------
Partners' equity - tax ($ 9,604,024) ($ 7,352,442) ($ 5,627,848)
========== ========== ==========
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
Costs
Capitalized
Subsequent
Initial Cost to Partnership to Acquisition
(b)
Buildings and
Description (a) Encumbrances Land Improvements Improvements
(f)
44 room hotel with
21,500 square feet
of commercial space
in Savannah, GA $ 5,800,000 $200,000 $ 9,178,160 $ 811,372
29 apartment units and
9,500 square feet
feet of commercial space
in West Chester, PA 1,076,725 87,500 2,833,383 16,347
262 apartment units and
and 39,000 square feet
of commercial space
in Baltimore, MD 24,410,954 647,082 2,000,000 27,478,581
54 room hotel with
restaurant in
Washington, DC 1,800,000 0 0 0
---------- ------- ---------- ----------
$33,087,679 $934,582 $14,011,543 $28,306,300
========== ======= ========== ==========
Gross Amount at which Carried at
December 31, 1996
Accumulate Date of Date
Description (a) Land Improvements Total Depr. Constr. Acq
(c) (d) (d) (e) (a)
44 room hotel with
21,500 square feet
of commercial space
in Savannah, GA $200,000 $ 9,989,532 $10,189,532 $ 4,282,516 1985-86 8/9/85
29 apartment units and
9,500 square feet of
commercial space in
West Chester, PA 87,500 2,849,730 2,937,230 1,303,867 1985 10/1/85
262 apartment units and
39,000 square feet of
commercial space
in Baltimore, MD 647,082 29,478,581 30,125,663 12,271,103 1985-8810/15/8
54 room hotel with
restaurant in
Washington, DC
0 0 0 0 1985-8810/1/85
------- ---------- --------- ---------
$934,582 $42,317,843$43,252,425 $17,857,486
======= ========== ========= =========
DIVERSIFIED HISTORIC INVESTORS
(a limited partnership)
NOTES TO SCHEDULE XI
December 31, 1996
(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, 1996,
for Federal income tax purposes is approximately $40,912,289.
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:
1996 1995 1994
Balance at beginning of year $42,999,186 $42,798,173 $41,970,690
Additions during the year:
Improvements 253,239 201,013 827,483
---------- ---------- ----------
Balance at end of year $43,252,425 $42,999,186 $42,798,173
========== ========== ==========
Reconciliation of accumulated depreciation:
1996 1995 1994
Balance at beginning of year $16,210,001 $14,575,699 $12,958,664
Depreciation expense for the year 1,647,485 1,634,302 1,617,035
---------- ---------- ----------
Balance at end of year $17,857,486 $16,210,001 $14,575,699
========== ========== ==========
(E) See Note B to the financial statements for depreciation method
and lives.
(F) See Note F to the financial statements for further information.
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.
The executive officers, directors, and key employees of
Dover are described below.
Michael J. Tuszka (age 50) was appointed Chairman and
Director of both D, LTD and DHP, Inc. on January 27, 1993. Mr. Tuszka
resigned as Chairman and Director of both D, LTD and DHP, Inc. on June
30, 1996.
Donna M. Zanghi (age 40) 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 32) was appointed on January 27,
1993 as Assistant Secretary of both D. LTD and DHP, Inc.
Item 11. Executive Compensation
a. Cash Compensation - During 1996, 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
1996, 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 1996 to DoHA, any partner therein, or any person
named in paragraph c. of Item 10.
d. Compensation of Directors - Registrant has no
directors.
e. Termination of Employment and Change of Control
Arrangement - Registrant has no compensatory plan or arrangement, with
respect to any individual, which results or will result from the
resignation or retirement of any individual, or any termination of
such individual's employment with Registrant or from a change in
control of Registrant or a change in such individual's
responsibilities following such a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners -
No person is known to Registrant to be the beneficial owner of more
than five percent of the issued and outstanding Units.
b. Security Ownership of Management - 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 1994 through 1996.
a. Certain Business Relationships - Registrant has no
directors.
b. Indebtedness of Management - No executive officer
or significant employee of Registrant, Registrant's general partner
(or any employee thereof), or any affiliate of any such person, is or
has at any time been indebted to Registrant.
PART IV
Item 14. (A) Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
1. Financial Statements:
a. Consolidated Balance Sheets at December 31, 1996 and 1995.
b. Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994.
c. Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1996, 1995 and 1994.
d. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.
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, 1996.
(c) Exhibits:
See Item 14(A)(3) above.
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: April 14, 1997 By: Dover Historic Advisors, General Partner
By: DHP, Inc., Partner
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/ Donna M. Zanghi April 14, 1997
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi April 14, 1997
MICHELE F. RUDOI,
Assistant Secretary