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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, 1997
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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 33-11907
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DIVERSIFIED HISTORIC INVESTORS IV
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2440837
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(State or other jurisdication 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: 8,285.7 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 IV ("Registrant")
is a limited partnership formed in 1987 under the Pennsylvania Uniform
Limited Partnership Act. As of December 31, 1997, Registrant had
outstanding 8,285.7 units of limited partnership interest (the
"Units").
Registrant is presently in its operating stage.
It originally owned three properties or interests therein. One
property has been sold. See Item 2. Properties, for a description
thereof. It currently owns two properties. 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.
The following is a summary of significant
transactions involving the Registrant's interests:
During 1994, the Registrant converted the property
(Henderson Riverfront Apartments) owned by 700 Commerce Mall General
Partnership ("CMGP"), a Louisiana general partnership in which the
Registrant owns a 95% interest, into condominiums ("the Units") and
began offering the Units for sale. The Units were marketed and sold
by an affiliate of the Registrant's co-general partner ("HRI"). The
asking prices of the units ranged from $72,000 to $135,000, depending
on size, configuration and location within the building. Funds were
necessary during the selling period for improvements and repairs to
common areas, individual unit upgrades, marketing, selling costs, and
fees. During 1996 and 1995, these expenses were approximately
$146,000 and $416,000, respectively and were funded from the sales
proceeds. One of the difficulties in selling condominium units in
today's market is the buyers' frequent inability to obtain financing.
Most banks offering residential financing require that their loans
meet Federal National Mortgage Association ("FNMA") requirements. One
such requirement is that the unit being financed cannot be a part of a
project in which 30% or more of the units are owned by investors. At
conversion, the Henderson Apartments were owned 100% by CMGP, and,
therefore, did not meet FNMA requirements. Because of this and
similar market conditions, the seller, CMGP provided financing for a
large percentage of the units sold. All loans required a minimum 10%
down payment, and all purchasers were qualified by an independent
mortgage brokerage company, using FNMA guidelines. The loans were
collateralized by the condominium units and bore interest at rates
ranging from 6 1/2% to 8 1/4%. The loans consisted of two types, a 30-
year fixed rate mortgage and a 7/23 loan. The interest rate on the
7/23 loan during the initial 7-year term is fixed. Interest after the
7th anniversary of the loan will be reset at 250 basis points in
excess of the 10-year Treasury Note as reported in the Wall Street
Journal for the next business day immediately preceding such 7th
anniversary, rounded upward to the next highest 1/8% of 1%, with a cap
of 13.5%. Interest and principal are due monthly and all principal
payments are based on a 30-year amortization schedule. As of December
31, 1996, all 61 Units have been sold for an aggregate amount of
$6,009,745 ($4,055,459 net of selling expenses and capital
expenditures, including those described above). The Units sold ranged
in price from $71,250 to $148,200. Of the Units sold, 46 of the
buyers opted for the seller provided financing with loans ranging from
$62,700 to $181,900.
On December 30, 1997, the mortgage loans were sold.
These mortgages were "nonconforming", which means that they could not
be sold on the standard secondary market. Moreover, even for
"conforming" mortgages the market for loans secured by properties in
Louisiana is limited, based upon certain perceived difficulties in
exercising foreclosure rights in Louisiana. However, despite these
problems, the Registrant believed that the current generally favorable
economic environment provided an unusual opportunity to sell the
mortgages. Any deterioration in the real estate markets or the
interest rate environment would have substantially decreased the value
of the mortgage loans and, of course, would have increased the
likelihood of defaults thereunder. In soliciting offers for the
loans, prospective buyers were unwilling to pay more than 70% to 75%
of the face amount of the loans. However, the Registrant was
ultimately able to procure a purchaser who was willing to pay 85.5% of
the face values. Included in operations is a loss of $448,957 related
to the sale of the loans.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
c. Narrative Description of Business
Registrant is in the business of operating,
holding, selling, exchanging and otherwise dealing in and with real
properties containing improvements which are "Certified Historic
Structures," as such term is defined in the Internal Revenue Code (the
"Code") for use as apartments, offices, hotels and commercial spaces,
or any combination thereof, or low income housing eligible for the tax
credit provided by Section 42 of the Code, and such other uses as the
Registrant's general partner may deem appropriate.
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. All the properties are held for rental
operations. At this time it is anticipated that the two remaining
properties will continue to be held for this purpose until such time
as real property values in the areas in which these properties are
located begin to increase. At that time, the Registrant will re-
evaluate its investment strategy regarding the properties.
As of December 31, 1997, Registrant owned
interests in two properties, located in North Carolina (one) and
Pennsylvania (one). In total, the properties contain 22 apartment
units. As of December 31, 1997, all of the apartment units were under
lease at monthly rental rates ranging from $525 to $755. Rental of
the apartments is not expected to be seasonal. For a further
discussion of the properties, see Item 2. Properties.
The Registrant is affected by and subject to the
general competitive conditions of the residential real estate
industry. As a result of the overbuilding that occurred in the
1980's, the competition for residential tenants 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. The properties held for rental by the Registrant are located
in Philadelphia, Pennsylvania and Concord, North Carolina. In both
areas there are several similar historically certified rehabilitated
buildings. However, there is no organization which holds a dominant
position in the residential housing market in either of the geographic
areas in which the Registrant's properties are located. 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.
Registrant has no employees. Registrant's
activities are overseen by Brandywine Construction & Management, Inc.,
("BCMI"), a real estate management firm.
d. Financial Information About Foreign and Domestic
Operations and Export Sales.
See Item 8. Financial Statements and Supplementary
Data.
Item 2. Properties
As of the date hereof, Registrant owned two properties,
or interests therein. A summary description of each property held at
December 31, 1997 is given below.
a. The Brass Works - consists of 12 apartments
located at 231-237 Race Street, Philadelphia, Pennsylvania. In May
1987, Registrant acquired and rehabilitated the Property for
$1,200,000 ($111 per sf) funded by its equity contribution. The
property is managed by BCMI. At December 31, 1997, all of the
apartment units were under lease (100%) with monthly rents ranging
from $665 to $755.
All leases are renewable, one-year leases. The
occupancy for the previous four years was 89% for 1996, 92% for 1995,
88% for 1994 and 78% for 1993. The monthly rental range has been
approximately the same since 1993. For tax purposes, this property
has a federal tax basis of $1,200,757 and is depreciated using the
straight-line method with a useful life of 27.5 years. The annual
real estate taxes are $9,256 which is based on an assessed value of
$112,000 taxed at a rate of $8.264 per $100. No one tenant occupies
ten percent or more of the building. It is the opinion of the
management of the Registrant that the property is adequately covered
by insurance.
b. Locke Mill Plaza -consists of 10 residential
apartment condominium units in a 169 condominium unit project located
on Buffalo Avenue at Union Street in Concord, North Carolina. In
November 1988, Registrant acquired the units for $665,0000 funded by
its equity contribution. The Property is managed by BCMI. As of
December 31, 1996, all of the units were under lease (100%) with
monthly rates ranging from $525 to $545.
All leases are renewable, one-year leases. The
occupancy for the previous four years was 95% for 1996, 90% for 1995,
98% for 1994 and 100% for 1993. The monthly rental range has been
approximately the same since 1993. For tax purposes, this property
has a federal tax basis of $692,942 and is depreciated using the
straight-line method with a useful life of 27.5 years. The annual
real estate taxes are $4,459 which is based on an assessed value of
$424,670 taxed at a rate of $1.08 per $100. No one tenant occupies
ten percent or more of the building. It is the opinion of the
management of the Registrant that the property is adequately covered
by insurance.
Item 3. Legal Proceedings
a. To the best of its knowledge, Registrant is not a
party to, nor is any of its property the subject of, any pending
material legal proceeding.
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 69 units were sold
or exchanged in 1997.
b. As of December 31, 1997, there were 991 record
holders of Units.
c. In 1997 and 1996 Registrant made distributions in
the amount of $276,190 out of available cash flow.
Item 6. Selected Financial Data
The following selected financial data are for the five
years ended December 31, 1997. 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.
1997 1996 1995 1994 1993
Rental income $ 180,312 $ 267,148 $ 393,751 $ 607,399 $ 692,195
Interest income 274,358 196,100 125,505 11,907 3,787
Net (loss) earnings (541,583) (25,170) (119,070) 528,832 (71,064)
Net (loss) earnings
per Unit (64.71) (3.01) (13.03) 63.18 (7.72)
Total assets (net of 4,802,128 5,574,564 6,095,438 6,479,965 5,637,971
depreciation and
amortization)
Dividends (distribu- 276,190 276,190 291,206 0 0
tions)
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
(1) Liquidity
At December 31, 1997, Registrant had cash of
approximately $3,102,030. The Registrant expects that the funds plus
the cash generated from operations at each property and note
receivable payments will be sufficient to fund the operating expenses
of the properties. In addition to the operating expenses of the
properties, the Registrant distributed $248,571 to the limited
partners in November 1997 and August 1996, respectively. The
Registrant is not aware of any additional sources of liquidity.
As of December 31, 1997, Registrant had restricted
cash of $56,685 consisting primarily of funds held as security
deposits, replacement reserves, escrows for taxes and insurance and
unpaid conversion fees. As a consequence of these restrictions as to
use, Registrant does not deem these funds to be a source of liquidity.
HRI, the Partnership's co-general partner in CMGP,
was paid a 10% conversion fee (the "Conversion Fee") on the sale of
any Unit at or above the agreed-upon sales price. Such fee was
payable upon the closing of the sale of each Unit, provided that the
Conversion Fee from the sale of the first 30 Units was deferred and
paid as follows:
(i) $125,000 at the closing of the 31st unit
(ii) the remaining portion ("the Remainder") at
the rate of 5% of the Remainder at the
closing of the sale of each of the 42nd
through 61st Units
As of December 31, 1996, all Conversion fees (including deferred fees)
had been paid to HRI. In addition, HRI was paid a selling commission
equal to 3.5% of the selling price of each Unit. Commissions paid to
HRI during 1995 and 1996 were $49,499 and $88,452, respectively.
(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. At the Henderson Apartments, funds were necessary
during the selling period for improvements and repairs to common
areas, individual unit upgrades, marketing, selling costs, and fees.
During 1996, these expenses were approximately $146,000 and were
funded by sales proceeds. As all of the units were sold by December
31,1996, no such expenses were incurred in 1997. Other than the
above, 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 investments for the
foreseeable future
(3) Results of Operations
During 1997, Registrant incurred a net loss of
$541,583 ($64.71 per limited partnership unit) compared to a loss of
$25,170 ($3.01 per limited partnership unit) in 1996 and a loss of
$119,070 ($13.03 per limited partnership unit) in 1995. Included in
the loss for 1997 is the loss related to the sale on the notes as
referred to in Item 1a, above. Included in the loss for 1996 and 1995
are gains of $74,551 and $33,305, respectively, due to the sale of
Units at the Henderson Apartments. In November 1997 and August 1996,
the Registrant distributed approximately $291,000 to the limited
partners and General Partner.
Rental income decreased from $393,751 in 1995 to
$267,148 in 1996 to $180,312 in 1997. The decrease from 1996 to 1997
is due to a decrease in rental income at Henderson due to the sale of
Units partially offset by an increase at Brass Works due to an
increase in the average rental rates. The decrease from 1995 to 1996
is due to a decrease in rental income at Henderson due to the sale of
Units partially offset by an increase in the average occupancy at both
Locke Mill and Brass Works.
Interest income increased from $125,505 in 1995 to
$196,100 in 1996 to $274,358 in 1997. The increase from 1995 to 1996
and from 1996 to 1997, is the result of a combination of an increase
in interest earned on deposits due to a higher average cash balance
and an increase in interest earned on purchase money financing
extended by CMGP in connection with the sales of Units at the
Henderson Apartments.
Rental operations expense decreased from $385,284
in 1995 to $306,632 in 1996 and increased to $348,325 in 1997. The
increase from 1996 to 1997 is due to an increase at Henderson due to
fees associated with the sale of the notes partially offset by a
decrease in maintenance expense at Brass Works and a decrease in
condominium fees at Locke Mill. The decrease from 1995 to 1996 is the
result of an overall decrease at Henderson due to the sale of units
partially offset by an increase in commissions, condominium fees and
wages and salaries at Locke Mill and an increase in legal fees at
Henderson.
General and administrative expense increased from
$108,000 in 1995 to $128,000 in 1996 and decreased to $108,000 in
1997. The increase from 1995 to 1996 and the decrease from 1996 to
1997 is due to fees paid in 1996 to reimburse the General Partner for
certain services rendered.
Depreciation and amortization expense decreased
from $178,347 in 1995 to $128,337 in 1996 to $90,971 in 1997. The
decrease from 1995 to 1996 to 1997 is due to the sale of Units at
Henderson resulting in a lower balance on which depreciation is
calculated.
In 1997, a loss of $402,000 was incurred at the
Registrant's three properties compared to income of $111,000 in 1996
and income of $3,000 in 1995. Included in income in 1996 and 1995 is
a gain of $74,000 and $33,000, respectively, due to the sale of Units
at the Henderson. A discussion of property operations/activities
follows:
In 1997, Registrant incurred a loss of $402,000 at
The Henderson Riverfront Apartments compared to income of $138,000,
including depreciation expense of $39,000 in 1996 and income of
$24,000 including depreciation expense of $89,000 in 1995. Included
in income in 1996 and 1995, is a gain of $74,000 and $33,000,
respectively, related to the sale of Units. Overall, exclusive of the
gain resulting from the sale of Units, the Henderson Apartments
recognized income of $64,000 in 1996 compared to a loss of $9,000 in
1995. The increase in the loss from 1996 to 1997 is mainly the result
of the sale of the notes receivable on December 30, 1997 combined with
a decrease in rental income partially offset by a decrease in
operating expenses and an increase in interest income. The decrease
in rental income and the decrease in operating expenses is due to the
sale of Units. The increase in interest income is the result of an
increase in interest earned on the purchase money financing extended
by CMGP in connection with the sales of Units. The increased income
from 1995 to 1996 is due to an increase in interest income and an
overall decrease in operating expenses partially offset by a decrease
in rental income and an increase in legal fees. The increase in
interest income is the result of an increase in interest earned on the
purchase money financing extended by CMGP in connection with the sales
of Units. The decrease in rental income and operating expenses and
the increase in legal fees is due to the sale of Units.
In 1997, Registrant recognized income of $2,000
including $48,000 in depreciation expense at the Brass Works, compared
to a loss of $19,000 including $48,000 depreciation expense in 1996
and a loss of $22,000, including $48,000 of depreciation expense in
1995. The decrease in the loss from 1996 to 1997 is the result of an
increase in rental income due to an increase in the average rental
rates and decrease in maintenance expense due to a decrease in
required maintenance. The decrease in the loss from 1995 to 1996 is
the result of an increase in the average occupancy (72% to 95%).
In 1996, Registrant recognized a loss of $2,000 at
Locke Mill Plaza including $26,000 of depreciation expense, compared
to a loss of $8,000 including $26,000 of depreciation expense in 1996
and income of $1,000, including $26,000 of depreciation expense in
1995. The loss in 1996 reflects, in part, a one-time special
assessment charged by the condominium association in 1996 for capital
improvements to be performed in the common areas of the complex. The
increase in the loss from 1995 to 1996 is also due to an increase in
leasing commissions and wages and salaries partially offset by an
increase in rental income. Commissions and wages and salaries
increased due to additional staffing needed to maintain the property
and the occupancy levels. Rental income increased due to an increase
in the average monthly rental rates.
Item 8. Financial Statements and Supplementary Data
Registrant is not required to furnish the supplementary
financial information referred to in Item 302 of Regulation S-K.
Independent Auditor's Report
To the Partners of
Diversified Historic Investors IV
We have audited the accompanying consolidated balance sheets of
Diversified Historic Investors IV (a Pennsylvania Limited Partnership)
and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in partners' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995.
These consolidated 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
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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in
the first paragraph present fairly, in all material respects, the
financial position of Diversified Historic Investors IV as of December
31, 1997 and 1996, and the results of their operations and their cash
flows for the years ended December 31, 1997, 1996 and 1995, 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 21 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, 1998
DIVERSIFIED HISTORIC INVESTORS IV
(a limited partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated financial statements: Page
Consolidated Balance Sheets at December 31, 1997 and 1996 11
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 12
Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1997, 1996, and 1995 13
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 14
Notes to consolidated financial statements 15-20
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 22
Notes to Schedule XI 23
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 IV INCOME FUND
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
Assets
1997 1996
Rental properties at cost:
Land $ 74,324 $ 74,324
Buildings and improvements 2,246,555 2,245,405
Furniture and fixtures 23,841 21,000
--------- ---------
2,344,720 2,340,729
Less - accumulated depreciation ( 861,579) ( 770,607)
--------- ---------
1,483,141 1,570,122
Cash and cash equivalents 3,102,030 445,412
Restricted cash 56,685 107,436
Notes receivable 0 3,449,018
Other assets 160,272 2,576
--------- ---------
Total $4,802,128 $5,574,564
========= =========
Liabilities and Partners' Equity
Liabilities:
Accounts payable:
Trade $ 213,002 $ 155,463
Related parties 0 39
Deferred income 0 13,282
Other liabilities 745 1,396
Tenant security deposits 11,655 9,885
--------- ---------
Total liabilities 225,402 180,065
--------- ---------
Partners' equity 4,576,726 5,394,499
--------- ---------
Total $4,802,128 $5,574,564
========= =========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS IV INCOME FUND
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Revenues:
Rental income $ 180,312 $ 267,148 $ 393,751
Gain on sale of units 0 74,551 33,305
Interest income 274,358 196,100 125,505
------- ------- -------
Total revenues 454,670 537,799 552,561
------- ------- -------
Costs and expenses:
Rental operations 348,325 306,632 385,284
General and administrative 108,000 128,000 108,000
Loss on sale of notes 448,957 0 0
Depreciation and amortization 90,971 128,337 178,347
------- ------- -------
Total costs and expenses 996,253 562,969 671,631
------- ------- -------
Net loss ($ 541,583) ($ 25,170) ($ 119,070)
======= ======= =======
Net loss per limited partnership unit: ($ 64.71) ($ 3.01) ($ 13.03)
======= ======= =======
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS IV INCOME FUND
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
Dover Historic Limited
Advisors III (1) Partners (2) Total
Percentage participation in profit or loss 1% 99% 100%
Balance at December 31, 1994 ($ 89,772) $6,195,907 $6,106,135
Net loss (1,191) (117,879) (119,070)
Distribution to partners (21,921) (269,285) (291,206)
------- --------- ---------
Balance at December 31, 1995 (112,884) 5,808,743 5,695,859
Net loss (252) (24,918) (25,170)
Distribution to partners (27,619) (248,571) (276,190)
------- --------- ---------
Balance at December 31, 1996 (140,755) 5,535,254 5,394,499
Net loss (5,416) (536,167) (541,583)
Distribution to partners (27,619) (248,571) (276,190)
------- --------- ---------
Balance at December 31, 1997 ($173,790) $4,750,516 $4,576,726
======= ========= =========
(1) General Partner
(2) 8,285.7 limited partnership units outstanding at December 31,
1997, 1996, and 1995.
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS IV INCOME FUND
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net loss ($ 541,583) ($ 25,170) ($ 119,070)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Gain on sale of units 0 (74,551) (33,305)
Depreciation and amortization 90,971 128,337 178,347
Changes in assets and liabilities:
Decrease (increase) in restricted cash 50,751 259,088 (106,771)
(Increase) decrease in other assets (157,705) 755 45,911
Increase (decrease) in accounts payable
- trade 57,539 (89,521) (87,565)
(Decrease) increase in accounts payable
- related parties (39) (59,686) 40,486
(Decrease) increase in deferred income (13,282) (68,495) 81,777
(Decrease) increase in other liabilities (651) 1,396 0
Increase (decrease) in tenant security
deposits 1,780 (3,208) (8,949)
Net cash (used in) provided by --------- -------- ---------
operating activities: (512,219) 68,945 (9,139)
Cash flows from investing activities: --------- -------- ---------
Capital expenditures (3,991) (148,921) (415,718)
Decrease in notes receivable 3,449,018 580,939 20,546
Proceeds from sale of units 0 (125,872) 390,749
Net cash provided by (used in) --------- -------- ---------
investing activities 3,445,027 306,146 (4,423)
Cash flows from financing activities: --------- -------- ---------
Distribution to partners (276,190) (276,190) (291,206)
--------- -------- ---------
Net cash used in financing activities (276,190) (276,190) (291,206)
--------- -------- ---------
Increase (decrease) in cash and cash
equivalents 2,656,618 98,901 (304,768)
Cash and cash equivalents at beginning of
year 445,412 346,511 651,279
--------- -------- ---------
Cash and cash equivalents at end of year $3,102,030 $ 445,412 $ 346,511
========= ======== =========
Supplemental Schedule of Non-Cash Investing
Activities:
Net assets transferred 0 $2,227,249 $1,626,713
Notes receivable received from the sale of Units 0 1,930,501 977,525
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS IV INCOME FUND
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Diversified Historic Investors IV (the "Partnership") was formed in
January 1987, with Dover Historic Advisors III as the General Partner
and DHP, Inc., (formerly Dover Historic Properties, Inc.,) as the
limited partner. Upon the admittance of additional limited partners,
the initial limited partner withdrew.
The Partnership was formed to acquire, rehabilitate, and manage real
properties which are certified historic structures as defined in the
Internal Revenue Code (the "Code"), or which were eligible for
designation as such, utilizing the net proceeds from the sale of
limited partnership units. Any rehabilitations undertaken by the
Partnership were done with a view to obtaining certification of
expenditures therefor as "qualified rehabilitation expenditures" as
defined in the Code.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial
statements follows:
1. Principles of Consolidation
The accompanying consolidated financial statements of the Partnership
include the accounts of one subsidiary partnership (the "Venture"), in
which the Partnership has a controlling interest, with appropriate
elimination of inter-partnership transactions and balances. These
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of the
Partnership's General Partner, are necessary for a fair statement of
the results for the year.
2. Costs of Issuance
Costs incurred in connection with the offering and sale of limited
partnership units were charged against partners' equity as incurred.
3. 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.
4. Net Loss Per Limited Partnership Unit
The net income (loss) per limited partnership unit is based on the
weighted average number of limited partnership units outstanding
during the period (8,285.7 in 1997, 1996, and 1995).
5. Income Taxes
Federal and state income taxes are payable by the individual partners;
therefore, no provision or liability for income taxes is reflected in
the financial statements.
6. Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with
a maturity of less than three months to be cash equivalents.
7. Concentration of Credit Risk
Financial instruments which potentially subject the Partnership to
concentration of credit risk consist principally of cash and cash
equivalents. The Partnership maintains its cash and cash equivalents
in financial institutions insured by the Federal Deposit Insurance
Corporation up to $100,000 per company. At December 31, 1997,
uninsured funds held at one institution approximate $3,099,560.
8. Restricted Cash
Restricted cash includes amounts held for tenant security deposits,
real estate tax reserves and other cash restricted as to use.
9. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-
line basis. Rental payments received in advance are deferred until
earned.
10. Rental Properties
Rental properties are stated at cost. A provision for impairment of
value is recorded when a decline in value of property is determined to
be other than temporary as a result of one or more of the following:
(1) a property is offered for sale at a price below its current
carrying value, (2) a property has significant balloon payments due
within the foreseeable future for which the Partnership does not have
the resources to meet, and anticipates it will be unable to obtain
replacement financing or debt modification sufficient to allow a
continued hold of the property over a reasonable period of time, (3) a
property has been, and is expected to continue, generating significant
operating deficits and the Partnership is unable or unwilling to
sustain such deficit results of operations, and has been unable to, or
anticipates it will be unable to, obtain debt modification, financing
or refinancing sufficient to allow a continued hold of the property
for a reasonable period of time or, (4) a property's value has
declined based on management's expectations with respect to projected
future operational cash flows and prevailing economic conditions. An
impairment loss is indicated when the undiscounted sum of estimated
future cash flows from an asset, including estimated sales proceeds,
and assuming a reasonable period of ownership up to 5 years, is less
than the carrying amount of the asset. The impairment loss is
measured as the difference between the estimated fair value and the
carrying amount of the asset. In the absence of the above
circumstances, properties and improvements are stated at cost. An
analysis is done on an annual basis at December 31.
11. Notes Receivable
The notes receivable are mortgage notes arising from seller - provided
financing on the Units sold at one of the Partnership's properties.
The notes are collateralized by the condominium units and bear
interest at rates ranging from 6 1/2% to 8 1/4%. The notes consist of
two types, a 30-year fixed rate mortgage and a 7/23 loan. The
interest rate on the 7/23 loan during the initial 7-year term is
fixed. Interest after the 7th anniversary of the loan will be reset
at 250 basis points in excess of the 10-year Treasury Note as reported
in the Wall Street Journal for the next business day immediately
preceding such 7th anniversary, rounded upward to the next highest
1/8% of 1%, with a cap of 13.5%. Interest and principal are due
monthly and all principal payments are based on a 30-year amortization
schedule. Interest income is recognized as interest becomes due. On
December 30, 1997, the mortgage loans were sold. These mortgages were
"nonconforming", which means that they could not be sold on the
standard secondary market. Moreover, even for "conforming" mortgages
the market for loans secured by properties in Louisiana is limited,
based upon certain perceived difficulties in exercising foreclosure
rights in Louisiana. However, despite these problems, the Partnership
believed that the current generally favorable economic environment
provided an unusual opportunity to sell the mortgages. Any
deterioration in the real estate markets or the interest rate
environment would have substantially decreased the value of the
mortgage loans and, of course, would have increased the likelihood of
defaults thereunder. In soliciting offers for the loans, prospective
buyers were unwilling to pay more than 70% to 75% of the face amount
of the loans. However, the Partnership was ultimately able to procure
a purchaser who was willing to pay 85.5% of the face values. Included
in operations is a loss of $448,957 related to the sale of the loans.
NOTE C - PARTNERSHIP AGREEMENT
The significant terms of the amended and restated Agreement of Limited
Partnership (the "Agreement"), as they relate to the financial
statements, follow:
The Agreement provides that beginning with the date of the admission
of subscribers as limited partners, all distributable cash from
operations (as defined) will be distributed 90% to the limited
partners and 10% to the General Partner.
All distributable cash from sales or dispositions (as defined) will be
distributed to the limited partners up to their original capital
contributions plus an amount equal to six percent of their original
capital contributions per annum on a cumulative basis, less the sum of
all prior distributions to them; thereafter, after receipt by the
General Partner or its affiliates of any accrued but unpaid real
estate brokerage commissions, the distributable cash will be
distributed 15% to the General Partner and 85% to the limited
partners.
Net income or loss from operations of the Partnership is allocated one
percent to the General Partner and 99% to the limited partners.
Pursuant to certain agreements, the developer of one property, and the
partner in the Venture, are entitled to share in the following:
a. 46% of net cash flow from operations after the
Partnership receives its priority distribution (as
defined).
b. 25% of the net proceeds (as defined) from the sale
or refinancing of the property. The Partnership is
entitled to a priority distribution of such proceeds
prior to any payment to the developer.
NOTE D - ACQUISITIONS
The Partnership acquired two properties and one general partnership
interest in the Venture during the period from May 1987 to November
1988, as discussed below.
In May 1987, the Partnership purchased a three story building located
in Philadelphia, Pennsylvania consisting of 12 apartment units. The
cost to acquire and rehabilitate this property was approximately
$1,200,000.
In July 1987, the Partnership was admitted, with a 95% general
partnership interest, to a Pennsylvania general partnership which owns
a building located in New Orleans, Louisiana consisting of 61
apartment units, for cash contributions of $4,620,000. As of December
31, 1996, all the units were sold.
In November 1988, the Partnership purchased a building located in
Concord, North Carolina, consisting of 10 condominium units, for
$665,000.
NOTE E - TRANSACTIONS WITH RELATED PARTIES
The following is a summary of transactions with related parties of the
Partnership and the General Partner:
Historic Restoration, Inc. ("HRI"), the Partnership's co-
general partner in Commerce Mall General Partnership ("CMGP"),
was paid a 10% conversion fee (the "Conversion Fee") on the
sale of any Unit at or above the agreed-upon sales price. Such
fee was payable upon the closing of the sale of each Unit,
provided that the Conversion Fee from the sale of the first 30
Units was deferred and paid as follows:
(i) $125,000 at the closing of the 31st unit
(ii) the remaining portion ("the Remainder") at
the rate of 5% of the Remainder at the closing of the
sale of each of the 42nd through 61st Units
As of December 31, 1996, all Conversion fees (including
deferred fees) had been paid to HRI. In addition, HRI was paid
a selling commission equal to 3.5% of the selling price of each
Unit. Commissions paid to HRI during 1996 were $88,452.
NOTE F - SALE OF UNITS AT HENDERSON
During 1994, CMGP entered into agreements converting the Henderson
apartments into condominiums and began offering the Units for sale.
The Units were marketed and sold by HRI. The asking prices of the
Units ranged from $72,000 to $135,000, depending on size,
configuration and location within the building. Funds were necessary
during the selling period for improvements and repairs to common
areas, individual unit upgrades, marketing, selling costs, and fees.
During 1996, these expenses were approximately $146,000 and were
funded by sales proceeds.
CMGP provided financing for a large percentage of the units sold. All
loans required a minimum 10% down payment, and all purchasers were
qualified by an independent mortgage brokerage company, using FNMA
guidelines (see Note B, paragraph 12, Notes Receivable). As of
December 31, 1996, all of the 61 Units had been sold. The Units sold
ranged in price from $71,250 to $127,065. Of the Units sold, 46 of
the 61 sellers opted for the seller provided financing. The
Partnership recognized a gain of $74,551 in 1996 based on the selling
price less the original cost of the unit plus any improvements,
selling costs and fees.
NOTE G - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of
operations in different time periods for financial reporting ("book")
purposes and for income tax ("tax") purposes. A reconciliation of net
loss and partners' equity follows:
For the Years Ended December 31,
1997 1996 1995
------ ------ ------
Net (loss) income - book ($ 541,583) ($ 25,170) ($ 119,070)
Excess of book over tax
Depreciation 22,630 9,209 36,354
Gain on sale of units 402,439 (8,648) (2,817)
Timing differences (1,109) 31,086 (8,570)
Minority interest (tax only) 18 9,349 (1,327)
--------- --------- --------
Net (loss) income - tax ($ 117,605) $ 15,826 ($ 95,430)
========= ========= ========
For the Years Ended December 31,
1997 1996 1995
------ ------ ------
Partners' equity - book $4,576,726 $5,394,499 $5,695,859
Costs of issuance 1,077,141 1,077,141 1,077,141
Cumulative tax over book loss 191,295 (232,683) (273,679)
--------- --------- ---------
Partners' equity - tax $5,845,162 $6,238,957 $6,499,321
========= ========= =========
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS IV
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
Gross Amount at
which Carried at
Initial Cost December 31, 1997
to Partnership
(b)
Buildings Buildings
and and Accum Date of Date
Description Land Improvement Land Improvement Total Depr. Constr. Acq
(a) (c)(d) (d)(e)
12 apt
units in
Phila, PA $54,000 $1,209,858 $54,000 $1,395,866 $1,449,866 $539,625 1988 5/87
10 apt
units in
North
Concord,NC 20,324 692,522 20,324 874,530 894,854 321,954 1988 11/88
------ --------- ------ --------- --------- -------
$74,324 $1,902,380 $74,324 $2,270,396 $2,344,722 $861,579
====== ========= ====== ========= ========= =======
DIVERSIFIED HISTORIC INVESTORS IV INCOME FUND
(a limited partnership)
NOTES TO SCHEDULE XI
December 31, 1997
(A) All three properties are certified historic structures as
defined in the Internal Revenue Code of 1986. The "date of
construction" refers to the period in which such properties
were rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to
development agreements entered into when the properties were
acquired.
(C) The aggregate cost of real estate owned at December 31, 1997,
for Federal income tax purposes is approximately $1,893,699.
The depreciable basis of buildings and improvements is further
reduced for Federal income tax purposes by the historic
rehabilitation credit obtained.
(D) Reconciliation of real estate:
1997 1996 1995
Balance at beginning of year $2,340,729 $4,565,527 $5,776,522
Additions during the year:
Improvements 3,991 148,921 415,718
Deductions during the year:
Sale of units 0 (2,373,719) (1,626,713)
--------- --------- ---------
Balance at end of year $2,344,720 $2,340,729 $4,565,527
========= ========= =========
Reconciliation of accumulated depreciation:
1997 1996 1995
Balance at beginning of year $ 770,607 $1,285,912 $1,399,309
Depreciation expense for the year 90,972 128,337 178,347
Sale of units 0 (643,642) (291,744)
--------- --------- ---------
Balance at end of year $ 861,579 $ 770,607 $1,285,912
========= ========= =========
(E) See Note B to the consolidated financial statements for
depreciation methods and lives.
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 III (DoHA-III), a Pennsylvania general partnership.
The partners of DoHA-III are as follows:
Name Age Position Term of Office Period Served
Gerald Katzoff 49 Partner in DoHA-III No fixed term January 1987 -
May 1997
DHP, Inc. -- Partner in DoHA-III No fixed term January 1987 -
("Formerly Dover May 1997
Historic Properties, Inc.")
SWDHA, Inc. -- Partner in DoHA-III No fixed term Since May 1997
EPK, Inc. -- Partner in DoHA-III No fixed term Since May 1997
For further description of DHP, Inc., see
paragraph e. of this Item. There is no arrangement or understanding
between either person named above and any other person pursuant to
which any person was or is to be selected as an officer.
c. Identification of Certain Significant Employees.
Registrant has no employees. Its administrative and operational
functions are carried out by a property management and partnership
administration firm.
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-III is a general partnership
formed in 1987. The partners of DoHA-III are EPK, Inc. and SWDHA,
Inc. EPK, Inc., is managing partner of DoHA III and is thus
responsible for management and control of DoHA III, which in turn is
responsible for the management and control of the Registrant and has
general responsibility and authority for conducting its operations.
On May 13, 1997, SWDHA, Inc. replaced Gerald
Katzoff and EPK, Inc. replaced DHP, Inc. as partners of DoHA-III.
Spencer Wertheimer, the President of SWDHA, Inc., is an attorney with
extensive experience in real estate activities ventures.
EPK, Inc. is a Delaware corporation formed for the
purpose of managing properties or interests therein. EPK, Inc. is a
wholly-owned subsidiary of D, LTD, an entity formed in 1985 to act as
the holding company for various corporations engaged in the
development and management of historically certified properties and
conventional real estate as well as a provider of financial (non-
banking) services. EPK, Inc. is an affiliate of DoHA-III.
The officers and directors of EPK, Inc. are
described below.
Spencer Wertheimer was appointed on May 13, 1997
as President, Treasurer and Sole Director of EPK, Inc. Mr. Wertheimer
is an attorney with extensive experience in real estate activities
ventures.
Donna M. Zanghi (age 40) was appointed on May 13,
1997 as Vice President and Secretary of EPK, Inc. Ms. Zanghi
previously served as Secretary and Treasurer of DHP, Inc. since June
14, 1993 and as a Director and Secretary/Treasurer of D, LTD. She was
associated with DHP, Inc. and its affiliates since 1984 except for the
period from December 1986 to June 1989 and the period from November 1,
1992 to June 14, 1993.
Michele F. Rudoi (age 32) was appointed on May 13,
1997 as Assistant Secretary of EPK, Inc. Ms. Rudoi previously served
as Assistant Secretary and Director of both D, LTD and DHP, Inc. since
January 27, 1993.
Item 11. Executive Compensation
a. Cash Compensation - During 1997, Registrant paid
no cash compensation to DoHA-III, any partner therein or any person
named in paragraph c. of Item 10.
b. Compensation Pursuant to Plans - Registrant has no
plan pursuant to which compensation was paid or distributed during
1997, or is proposed to be paid or distributed in the future, to DoHA-
III, 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 1997 to DoHA-III, 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-III is entitled to 10% of Registrant's
distributable cash from operations in each year. The amount allocable
to DoHA-III for 1997, 1996 and 1995 was $27,619, $27,619 and $21,921,
respectively.
a. Certain Business Relationships - Registrant has no
directors.
b. Indebtedness of Management - No 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, 1997
and 1996.
b. Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995.
c. Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1997, 1996 and 1995.
d. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.
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 Document
Number
3 Registrant's Amended and Restated
Certificate of Limited Partnership and
Agreement of Limited Partnership,
previously filed as part of Amendment
No. 1 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, 1997.
(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.
Date: April 15, 1998 DIVERSIFIED HISTORIC INVESTORS IV Income Fund
--------------
By: Dover Historic Advisors III, General Partner
By: EPK, Inc., General Partner
By: /s/ Spencer Wertheimer
----------------------
SPENCER WERTHEIMER
President
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 III General Partner
By: EPK, Inc., General Partner
By: /s/ Spencer Wertheimer April 15, 1998
---------------------- --------------
SPENCER WERTHEIMER,
President
By: /s/ Michele F. Rudoi April 15, 1998
---------------------- --------------
MICHELE F. RUDOI,
Assistant Secretary