UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-14645
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DIVERSIFIED HISTORIC INVESTORS II
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2361261
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 LOCUST STREET, PHILADELPHIA, PA 19102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215)557-9800
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: 20,593.3 Units
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UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of Units held by non-affiliates of the
Registrant: Not Applicable*
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* Securities not quoted in any trading market to Registrant's
knowledge.
PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors II ("Registrant") is a
limited partnership formed in 1984 under Pennsylvania law. As of
December 31, 2002, Registrant had outstanding 20,593.3 units of
limited partnership interest (the "Units").
Registrant is presently in its operating stage. It
originally owned four properties or interests therein. Its interest
in two properties have been lost through foreclosure. It currently
owns two properties or interests therein. See Item 2. Properties, for
a description thereof. For a discussion of the operations of the
Registrant, see Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
c. Narrative Description of Business
Registrant is in the business of operating, holding,
selling, exchanging and otherwise dealing in and with real properties
containing improvements which are "Certified Historic Structures," as
such term is defined in the Internal Revenue Code (the "Code"), or
which are eligible for designation as such, for use as apartments,
offices, hotels and commercial spaces, or any combination thereof, or
low income housing eligible for the tax credit provided by Section 42
of the Code, and such other uses as the Registrant's general partner
may deem appropriate.
Since the Registrant's inception, all the properties
acquired either by the Registrant, or the subsidiary partnerships in
which it has an interest, have been rehabilitated and certified as
historic structures and have received the related investment tax
credit. One of the properties is held for rental operations and one is
operated as a hotel. As of the date hereof it is anticipated that all
the properties will continue to be held for these purposes. At such
time as real property values begin to increase, the Registrant will re-
evaluate its investment strategy regarding the properties.
As of December 31, 2002, Registrant owned two properties
(or interests therein), one each located in Maryland and Georgia. In
total, the two properties contain 240 apartment units, 64,361 square
feet ("sf") of commercial/retail space and 44 hotel rooms. As of
December 31, 2002, 226 of the apartment units were under lease at
monthly rental rates ranging from $800 to $2,250 and approximately
50,315 sf of commercial space was under lease at annual rental rates
ranging from $5.33 per sf to $31.00 per sf. Throughout 2002, all of
the hotel rooms were available for use. During 2002, the hotel
maintained an average nightly room rate of $132.95 and average
occupancy of 66%. Rental of the apartments and commercial space is not
expected to be seasonal. However, the hotel does experience seasonal
changes, with the busiest months being March, April and October and
the slowest months being January and December.
In 2003, the Registrant determined that it is insolvent
because (i) the amount of its liabilities exceeds the fair market
value of its assets and (ii) it is unable to pay its debts as they
become due. Accordingly, pursuant to its partnership agreement,
Registrant has begun the process of dissolution. In connection
therewith, on June 30, 2003, the Registrant transferred its interest
in Tindeco Wharf to an affiliate of the owner of the second mortgage
loan secured by the property of Tindeco Wharf. At transfer, the
liabilities of Tindeco Wharf exceeded the value of Registrant's
interest in Tindeco Wharf. In exchange for such interest, Registrant's
cost of dissolution, up to $100,000, will be paid by the holder of
such second mortgage loan.
The Registrant is affected by and subject to the general
competitive conditions of the residential and commercial real estate
industry. In the Historic District of the Inner Harbor in Baltimore,
the competition for tenants remains stiff and several similar
buildings exist. The apartment market remains stable although the
availability of favorable home financing has placed pressure on the
rental tenant base.
The hotel is located in Savannah, Georgia and is one of
several historic buildings which have been converted into hotels and
inns. The hotel relies heavily on the tourist trade which is on the
upswing in Savannah. The hotel is generally considered to be a market
leader, due to its location on River Street, the main shopping and
entertainment area on the river, and the fact that it provides a full
array of hotel amenities, not just a bed and breakfast atmosphere.
Registrant has no employees. Registrant's activities are
overseen by Brandywine Construction & Management, Inc., ("BCMI"), a
real estate management firm.
d. Financial Information About Foreign and
Domestic Operations and Export Sales.
See Item 8. Financial Statements and Supplementary Data.
Item 2. Properties
As of the date hereof, Registrant owned two properties or
interests therein. A summary description of each property held at
December 31, 2002 is given below.
a. Tindeco Wharf - consists of 240 apartment units and
approximately 41,802 sf of commercial space located at 2809 Boston
Street in the Fell's Point-Canton Historic District of Baltimore,
Maryland. In October 1985, Registrant was admitted with an 85%
interest to Tindeco Wharf Partnership ("TWP"), a Maryland general
partnership, for a cash contribution of $7,271,300. Registrant
subsequently increased its ownership interest in TWP to 90% by
purchasing an additional 5% interest for $262,500. TWP acquired and
rehabilitated this Property at an approximate cost of $28,600,000 ($66
per sf), funded by the equity contribution and mortgage financing of
$21,869,600. The mortgage financing is comprised of mortgage revenue
bonds and an Urban Development Action Grant ("UDAG") loan. Other
financing includes a loan from the developer of $2,300,000 and
operating deficit loans from both the property manager and D, LTD in
the original principal amounts of $300,000 and $200,000 respectively.
The operating deficit loans were repaid during 1999. The excess of
equity and mortgage financing over the acquisition and rehabilitation
costs was utilized to provide various escrow deposits and required
reserves.
The City of Baltimore issued mortgage revenue refunding
bonds, Series 1992, (GNMA collateralized) for the purpose of providing
permanent financing for Tindeco Wharf. The bonds are backed by a HUD-
insured mortgage ("the note"). The note, held by GNMA as lender,
bears interest at a rate of 9.75% per annum and is secured by a first
mortgage on the property. Principal and interest is payable in
monthly installments of $143,801. The note matures December 2028.
The refunding issue bears interest at an average rate of 6.62%. The
difference in the interest on the mortgage and the refunding bonds is
returned to TWP for operations.
The principal balance of the bonds was $16,281,282 at
December 31, 2002. The bonds are comprised of both serial and term
bonds. The serial bonds bear interest at rates ranging from 4.6% to
6.1% and mature semi-annually from June 1999 through December 2006.
The term bonds bear interest at rates ranging from 6.5% to 6.7% and
mature in 2012, 2024, and 2028. The UDAG loan (which has a balance of
$4,953,471 at December 31, 2002, 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,
2002) bears interest at 12% and is payable on a pro-rata basis out of
cash flow from the property. The developer's loan is due in 2005, or
upon earlier sale or refinancing of the property.
The property is managed by BCMI. As of December 31, 2002,
226 apartment units (94%) and 33,239 sf of commercial space (80%) were
under lease. Monthly rental rates range from $800 to $2,250 for
apartments and annual rental rates range from $5.33 to $23.79 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 91% for 2001, 94% for 2000, 96% for 1999, and 98% for 1998.
The occupancy for the commercial space for the previous four years has
been 90% for 2001, 92% for 2000, 98% for 1999, and 97% for 1998. The
range for annual commercial rents has been $5.33 to $21.57 per sf for
2001 and 2000, $5.33 to $20.55 per sf for 1999, and $5.33 to $25.34
per sf for 1998. There are three tenants who each occupy ten percent
or more of the commercial rentable square footage. They operate
principally as a medical office, a restaurant and a fitness club.
The following is a table showing commercial lease
expirations at Tindeco Wharf for the next five years.
Total annual
Number of Total sf of rental covered % of gross
leases expiring by expiring annual rental
Year expiring leases leases from property
2003 2 6,750 204,000 37%
2004 1 1,944 40,000 8%
2005 1 4,500 24,000 1%
2006 2 2,995 54,000 10%
2007 1 17,050 240,000 44%
Thereafter 1 0 - -
For tax purposes, this property has a federal tax basis
of $27,956,334 and is depreciated using the straight-line method with
a useful life of 27.5 years. The annual real estate taxes are
$465,996 which is based on an assessed value of $19,508,200, taxed at
a rate of $2.39 per $100. It is the opinion of the management of the
Registrant that the property is adequately covered by insurance.
On June 30, 2003, the Registrant transferred its interest in
TWP to an affiliate of the owner of the second mortgage loan secured
by the property of TWP. At transfer, the liabilities of TWP exceeded
the value of Registrant's interest in TWP. In exchange for such
interest, Registrant's cost of dissolution, up to $100,000, will be
paid by the holder of such second mortgage loan.
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, 2002 was $5,980,376 and are due on December 31,
2015.
The property is managed by BCMI. As of December 31,
2002, 14,022 sf of the commercial space (67%) was under lease at
annual rental rates ranging from $13.47 to $31.00 $9.63 to $31.00 per
sf. The property also maintains 44 operating hotel rooms at an
average nightly rate of $132.95. The average occupancy for 2002 was
approximately 66%. The hotel occupancy rate for the previous four
years was 66% in 2001, 61% for 2000, 66% for 1999, and 75% for 1998.
The average room rates were $125.05 for 2001, $124.23 for 2000,
$126.45 for 1999, and $128.06 for 1998. The occupancy for the
commercial space was 66% for 2001, and 74% from 1998 to 2000. The
range for annual rents was $9.63 to $31.00 per sf for 2001, $9.63 to
$30.00 per sf for 2000, $7.89 to $26.83 per sf for 1999, and $7.11 to
$26.26 per sf for 1998. There are two tenants who each occupy ten
percent or more of the rentable square footage. They operate
principally as a restaurant and a retail store.
The following is a table showing commercial lease
expirations at Factor's Walk for the next five years.
Total annual
Number of Total sf of rental covered % of gross
leases expiring by expiring annual rental
Year expiring leases leases from property
2003 3 2,640 40,690 18%
2004 0 0 0 0%
2005 2 2,336 68,810 32%
2006 5 9,046 111,333 50%
Thereafter 0 - - -
For tax purposes, this property has a federal tax basis
of $10,743,105 and is depreciated using the straight-line method with
a useful life of 27.5 years. The annual real estate taxes are $62,501
which is based on an assessed value of $2,832,400 taxed at a rate of
$2.21 per $100. It is the opinion of the management of the Registrant
that the property is adequately covered by insurance.
Item 3. Legal Proceedings
For a description of legal proceedings involving
Registrant's properties, see Part II, Item 7. River Street
Inn/Factor's Walk Partners.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal years covered by
this report to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
a. There is no established public trading market for the
Units. Registrant does not anticipate any such market will develop.
Trading in the Units occurs solely through private transactions. The
Registrant is not aware of the prices at which trades occur.
Registrant's records indicate that 172.5 Units of record were sold or
exchanged in 2002.
b. As of December 31, 2002, there are 2,572 record holders
of Units.
c. Registrant did not declare any cash dividends in 2002 or
2001.
Item 6. Selected Financial Data
The following selected financial data are for the five years
ended December 31, 2002. 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.
2002 2001 2000 1999 1998
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Rental
income $ 5,601,409 $ 5,340,239 $ 5,462,332 $ 5,015,476 $ 4,623,527
Hotel
revenues 1,587,328 1,535,825 1,305,660 1,384,057 1,582,824
Interest
income 11,583 41,165 45,742 23,336 35,575
Net loss (2,199,044) (2,294,872) (2,474,642) (4,292,936) (2,980,282)
Net loss per
Unit (105.72) (110.32) (118.97) (206.38) (143.27)
Total assets
(net of
depreciation
and amortiza-
tion) 20,846,836 22,043,707 25,074,714 25,880,800 26,503,288
Debt
obligations 32,608,543 32,739,177 33,792,649 33,306,221 32,808,014
Note: See Part II, Item 7(3) Results of Operations for a discussions
of factors which materially affect the comparability of the
information reflected in the above table.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(1) Liquidity
At December 31, 2002, Registrant had cash of $119,481.
Cash generated from operations is used primarily to fund operating
expenses and debt service. If cash flow proves to be insufficient,
the Registrant will attempt to negotiate loan modifications with the
various lenders in order to remain current on all obligations and to
defer administrative costs. The Registrant is not aware of any
additional sources of liquidity.
As of December 31, 2002, Registrant had restricted cash
of $1,639,333 consisting primarily of funds held as security deposits,
replacement reserves and escrows for taxes. As a consequence of these
restrictions as to use, Registrant does not deem these funds to be a
source of liquidity.
In recent years the Registrant has realized significant
losses, including the foreclosure of two properties, due to the
properties' inability to generate sufficient cash flow to pay their
operating expenses and debt service. At the present time, the two
remaining properties are able to pay their operating expenses and debt
service but it is unlikely that any cash will be available to the
Registrant to pay its general and administrative expenses. In the
legal proceeding involving the Morrison Clark Inn (see "Results of
Operations" below in this Item 7), a property formerly owned by the
Registrant, if Capital Bank executes upon its $1,800,000 judgment with
respect to the Registrant, it is expected to have significant adverse
impact on the Registrant since there is insufficient available cash to
pay the judgment. Any such execution could result in a forced sale of
the Registrant's remaining properties.
It is the Registrant's intention to continue to hold the
properties until they can no longer meet their debt service
requirements and the properties are foreclosed, or the market value of
the properties increases to a point where they can be sold at a price
which is sufficient to repay the underlying indebtedness (principal
plus accrued interest).
In 2003, the Registrant determined that it is insolvent
because (i) the amount of its liabilities exceeds the fair market
value of its assets and (ii) it is unable to pay its debts as they
become due. Accordingly, pursuant to its partnership agreement,
Registrant has begun the process of dissolution. In connection
therewith, on June 30, 2003, the Registrant transferred its interest
in Tindeco Wharf to an affiliate of the owner of the second mortgage
loan secured by the property of Tindeco Wharf. At transfer, the
liabilities of Tindeco Wharf exceeded the value of Registrant's
interest in Tindeco Wharf. In exchange for such interest, Registrant's
cost of dissolution, up to $100,000, will be paid by the holder of
such second mortgage loan.
(2) Capital Resources
Any capital expenditures needed are generally replacement
items and are funded out of cash from operations or replacement
reserves, if any. The Registrant is not aware of any factors which
would cause historical capital expenditures levels not to be
indicative of capital requirements in the future and, accordingly,
does not believe that it will have to commit material resources to
capital investment for the foreseeable future.
(3) Results of Operations
During 2002, Registrant incurred a net loss of $2,199,044
($105.72) per limited partnership unit), compared to a loss of
$2,294,872 ($110.32 per limited partnership unit) in 2001, and a loss
$2,474,642 ($118.97 per limited partnership unit) in 2000.
Rental and hotel income was $7,188,737 in 2002,
$6,876,064 in 2001, and $6,767,992 in 2000. The increase in rental
income at Tindeco Wharf from 2001 to 2002 is due to an increase in
average occupancy (91% to 94%). The increase in hotel income at the
River Street Inn from 2001 to 2002 is due to an increase in average
nightly room rates from $125.05 in 2001 to $132.95 in 2002. The
increase in rental income at Tindeco Wharf from 2000 to 2001 is due to
an increase in average occupancy for commercial units (92% to 95%).
The increase in hotel income at the River Street Inn from 2000 to 2001
is due to an increase in average room occupancy (61% to 66%). The
decrease in rental income at Washington Square due to the foreclosure
of the property on March 22, 2001.
Interest income was $11,583 in 2002, $41,165 in 2001, and
$45,742 in 2000. The decrease in interest income from 2001 to 2002 is
due to a decrease in interest rates and a decrease in invested cash
balances. The decrease from 2000 to 2001 is due to a decrease in the
interest bearing restricted cash balance at Tindeco Wharf.
Rental operations expense was $2,104,817 in 2002,
$2,028,376 in 2001, and $2,102,470 in 2000. The increase in rental
operations expense from 2001 to 2002 is due to an increase in wages
and salaries expense and insurance expense, partially offset by a
decrease in miscellaneous operating expense at Tindeco Wharf. The
increase in wages and salaries expense is due to an increase in office
staff salaries and janitorial wages paid. The increase in insurance
expense is due to insurance market conditions. The decrease in
miscellaneous operating expense is due to a decrease in parking
expense and administrative cable charges. The decrease in rental
operations expense from 2000 to 2001 is due to the foreclosure of
Washington Square due on March 22, 2001. The decrease in rental
operations expense at Washington Square is partially offset by an
increase at Tindeco Wharf. The increase is due to an increase in
miscellaneous operating expense and wages and salaries expense,
partially offset by a decrease in maintenance expense. The increase in
miscellaneous operating expense is due to an increase in general and
administrative expenses at the property. The increase in wages and
salaries expense is due to an increase in janitorial salaries. The
decrease in maintenance expense is due to a decrease in decorating
expense, grounds maintenance, outside cleaning service and
exterminating expenses.
Hotel operations expense was $1,337,487 in 2002,
$1,257,784 in 2001, and $1,122,156 in 2000. The increase in hotel
operations expense from 2001 to 2002 is due to an increase in wages
and salaries expense, insurance expense, and real estate tax expense,
partially offset by a decrease in legal and professional fees. The
increase in wages and salaries expense is due to an increase in sales
manager salaries and housekeeper wages paid. The increase in insurance
expense is due to insurance market conditions. The increase in real
estate tax expense is due to an increase in the appraised value of the
property. The decrease in legal and professional fees is due to non-
recurring appraisal fees incurred during the fourth quarter of 2001.
The increase from 2000 to 2001 is due to an increase in wages and
salaries expense, and utilities expense, partially offset by a
decrease in legal and accounting expense. The increase in wages and
salaries expense is due to an increase in administrative salaries. The
increase in utilities expense is due to an increase in electricity and
gas charges. The decrease in legal and accounting expense is due to a
decrease in legal services rendered in 2001.
Interest expense was $4,197,597 in 2002, $4,216,229 in
2001, and $4,240,944 in 2000. The decrease in interest expense from
2001 to 2002 is due to a decrease in prime rate used to calculate
interest expense on a note payable at Tindeco Wharf. The increase in
interest expense at Factors Walk is due to an increase in principal
balance. The increase from 2000 to 2001 is due to an increase in
interest expense at the River Street Inn and Tindeco Wharf. The
interest expense at the River Street Inn increased due to an increase
in principal balance due to advances made by the first mortgage holder
to fund building improvements. The increase in interest expense at
Tindeco Wharf is due to a decrease in interest returned to the
property by the trustee of the City of Baltimore refunding the bonds.
This decrease corrects prior period errors when the trustee returned
interest in excess of what it should.
Depreciation and amortization was $1,759,463 in 2002,
$1,781,784 in 2001, and $1,822,805 in 2000. The decrease from 2000 to
2002 is due to the foreclosure of Washington Square on March 22, 2001.
Effective as of March 22, 2001 Washington Square was
foreclosed by the holder of the mortgage and a judgment. As a result,
the Registrant recognized an extraordinary gain on the extinguishment
of debt in the amount of $68,458 which is the difference between the
debt of the property and the net book value of the assets.
In 2002, a loss of approximately $1,831,000 was incurred
at the Registrant's properties, compared to a loss of approximately
$2,008,000 at the registrant's properties during 2001, and a loss of
$2,131,000 during 2000. Included in the loss for 2001 is an
extraordinary gain on the extinguishment of debt in the amount of
$68,458. A discussion of property operations/activities follows:
In 2002, Tindeco Wharf sustained a loss of $870,000
including $1,282,000 of depreciation and amortization expense,
compared to a loss of $1,150,000 including $1,274,000 of depreciation
and amortization expense, in 2001, and a loss of $1,203,000, including
$1,235,000 of depreciation and amortization expense, in 2000. The
decrease in loss from 2001 to 2002 is due to an increase in rental
income and a decrease in interest expense, partially offset by an
increase in rental operations expense. The increase in rental income
is due to an increase in average occupancy (91% to 94%). The decrease
in interest expense is due to a decrease in prime rate used to
calculate interest expense on a note payable. The increase in rental
operations expense is due to an increase in wages and salaries expense
due to an increase in office salaries and janitorial wages, and an
increase in insurance expense due to insurance market conditions. The
decrease in loss from 2000 to 2001 is due to an increase in rental
income and a decrease in maintenance expense, partially offset by an
increase in miscellaneous operating expense, wages and salaries
expense and interest expense. The increase in rental income is due to
the increase in commercial unit occupancy (92% to 95%). The decrease
in maintenance expense is due to a decrease in decorating expense,
grounds maintenance, outside cleaning service and exterminating
expenses. The increase in miscellaneous operating expense is due to an
increase in miscellaneous general and administrative expenses at the
property. The increase in wages and salaries expense is due to an
increase in janitorial salaries. The increase in interest expense is
due to a decrease in interest returned to the property by the trustee
of the City of Baltimore refunding the bonds. This decrease corrects
prior period errors when the trustee returned interest in excess of
what it should.
On June 30, 2003, the Registrant transferred its interest in
Tindeco Wharf to an affiliate of the owner of the second mortgage loan
secured by the property of Tindeco Wharf. At transfer, the liabilities
of Tindeco Wharf exceeded the value of Registrant's interest in
Tindeco Wharf. In exchange for such interest, Registrant's cost of
dissolution, up to $100,000, will be paid by the holder of such second
mortgage loan.
In 2002, the River Street Inn sustained a loss of $961,000
including $424,000 of depreciation and amortization expense compared
to a loss of $936,000 including $424,000 of depreciation and
amortization expense, in 2001, and a loss of $928,000 including
$407,000 of depreciation and amortization expense, in 2000. The
increase in loss from 2001 to 2002 is due to an increase in rental
income and hotel income partially offset by an increase in hotel
operations expense and interest expense. The increase in rental income
is due to an increase in commercial rental rates from $9.63 to $31.00
per sf in 2001 to $13.47 to $31.00 per sf in 2002. The increase in
hotel income is due to an increase in average nightly room rates from
$125.05 in 2001 to $132.95 in 2002. The increase in hotel operations
expense is due to an increase in wages and salaries expense, insurance
expense and real estate tax expense. The increase in interest expense
is due to an increase in principal balance. The increase in wages and
salaries expense is due to an increase in sales manager salaries and
housekeeper wages paid. The increase in insurance expense is due to
insurance market conditions. The increase in real estate tax expense
is due to an increase in the appraised value of the property. The
increase in loss from 2000 to 2001 is due to an increase in hotel
operations expense, partially offset by an increase in hotel income.
The increase in hotel operations expense is due to an increase in
wages and salaries expense and utilities expense, partially offset by
a decrease in legal and accounting expense. The increase in wages and
salaries expense is due to an increase in administrative salaries. The
increase in utilities expense is due to an increase in electricity and
gas charges. The decrease in legal and accounting expense is due to a
decrease in legal services rendered in 2001. The increase in hotel
income is due to an increase in average occupancy (61% to 66%).
FWP is involved in one legal proceeding as discussed below:
J. A. Jones Construction Company ("Jones") contracted
with FWP for the renovation of what was originally a warehouse into
the River Street Inn/Factor's Walk. During construction, numerous
disputes arose between the parties. As a result of those disputes,
Jones abandoned the project prior to completion and filed suit in the
matter of J.A. Jones Construction Company v. Factor's Walk Partners in
the United States District Court for the Northern District of Georgia.
On January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1994 and
1995. FWP filed an appeal and this appeal was held in abeyance while
FWP and Jones participated in a court sponsored settlement program.
On November 8, 1996, a settlement agreement was reached whereby a note
in the amount of $1,000,000 was issued. The note calls for 6%
interest until September 1, 1997, with the rate increasing .5% on each
August 1 thereafter to a maximum rate of prime plus 2% (therefore,
6.25% at December 31, 2002) and is due on October 1, 2011. Interest
is due quarterly.
On June 30, 1992, Dover Historic Properties, Inc.
assigned to Dover Limited a note receivable, from FWP to the
Registrant that had been assigned to Dover Historic Properties, Inc.
The note was in the stated amount of $55,951 and bore interest at 10%;
the note was due on June 30, 1997. On January 13, 1994 Dover Limited
obtained a judgment on this note in the amount of $73,184 in Common
Pleas Court for Philadelphia County, Pennsylvania. The judgment
accrues interest at 15%. On March 31, 2000 the note was sold. Interest
accrued during 2002 and 2001 was $30,023. The balance of the note at
December 31, 2002 was $197,409.
In 2001, Washington Square recognized income of $80,000,
including $30,000 of depreciation and amortization expense compared to
a loss of $1,000 including $126,000 of depreciation expense in 2000.
Included in the income for 2001 is extraordinary income of $68,458
related to the foreclosure of Washington Square effective as of March
22, 2001.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note
receivable from the Registrant in the stated amount of $404,046. The
note bore interest at 10% and was due on June 30, 1997. On March 23,
1993 D, LTD obtained a judgment on this note in the amount of $454,299
in Common Pleas Court for Philadelphia County, Pennsylvania. The
judgment accrues interest at 15%. Interest accrued during 2001 and
2000 was $168,668 and $163,654, respectively. Payments on the
judgment are to be made from available cash flow before any
distribution can be made to the limited partners. The balance of the
note at December 31, 2002 is $1,390,769.
In February 1993, one of the Registrant's properties, the
Morrison-Clark Inn, was foreclosed by the lender. In November 1993,
the lender obtained a judgment in the matter of Capital Bank, N.A. v.
Diversified Historic Investors II in the amount of $1,800,000. If
capital bank executes upon its $1,800,000 judgment with respect to the
registrant, it is expected to have significant adverse impact on the
Registrant since there is insufficient available cash to pay the
judgment. Any such execution could result in a forced sale of the
registrants remaining properties.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
All of our assets and liabilities are denominated in U.S.
dollars, and as a result, we do not have exposure to currency exchange
risks.
We do not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions, and as a
result, we do not have exposure to derivatives risk.
Item 8. Financial Statements and Supplementary Data
Registrant is not required to furnish the supplementary
financial information referred to in Item 302 of Regulations S-K.
Independent Auditor's Report
To the Partners of
Diversified Historic Investors II
We have audited the accompanying consolidated balance sheet of
Diversified Historic Investors II (a Pennsylvania limited partnership)
and subsidiaries as of December 31, 2002 and 2001 and the related
statements of operations and changes in partners' equity and cash
flows for the years ended December 31, 2002, 2001 and 2000. These
consolidated financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit. We did
not audit the financial statements of Tindeco Wharf Partnership, which
statements reflect total assets of $15,521,120, $16,168,452, and
$17,449,441 as of December 31, 2002, 2001 and 2000 respectively, and
total revenues of $5,179,528, $4,875,326, and $4,656,945, respectively
for the years then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Tindeco Wharf
Partnership, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of
Diversified Historic Investors II and subsidiaries as of December 31,
2002 and 2001, and the results of operations and cash flows for the
years ended December 31, 2002, 2001 and 2000 in conformity with U.S.
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule of Real
Estate and Accumulated Depreciation on page 28 is presented for the
purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, which insofar as it relates
to Tindeco Wharf Partnership is based solely on the report of other
auditors, such information is fairly stated in all material respects
in relation to the basic financial statements taken as a whole.
As discussed in Note C of the financial statements, Diversified
Historic Investors II is liable for payment of a $1,800,000 guarantee
resulting from the foreclosure on a property in 1993. In the past the
partnership has been able to continue the forbearance when the period
ends in July, 2000. If the lender executes judgment it is expected to
have significant adverse impact on the partnership and could result in
a forced sale of the remaining properties.
Gross, Kreger & Passio
Philadelphia, Pennsylvania
May 27, 2003
Independent Auditor's Report
To the Partners of
Tindeco Wharf Partnership
We have audited the accompanying balance sheet of Tindeco Wharf
Partnership as of December 31, 2002, and the related statements of
profit and loss, partners' deficit and cash flows for the year then
ended. The financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller
General of the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tindeco
Wharf Partnership as of December 31, 2002, and the results of its
operations, the changes in partners' deficit and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Reznick, Fedder & Silverman
Baltimore, Maryland
February 5, 2003
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, 2002 and 17
2001
Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001, and 2000 18
Consolidated Statements of Changes in Partners'
Equity for the Years Ended December 31, 2002, 2001,
and 2000 19
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001, and 2000 20
Notes to consolidated financial statements 21-27
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 29
Notes to Schedule XI 30
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2002 and 2001
Assets
2002 2001
---- ----
Rental properties at cost:
Land $ 847,082 $ 847,082
Buildings and improvements 39,014,097 38,847,686
Furniture and fixtures 3,627,466 3,664,871
----------- -----------
43,488,645 43,359,639
Less - accumulated depreciation (26,361,987) (24,658,035)
----------- -----------
17,126,658 18,701,604
Cash and cash equivalents 119,481 175,264
Restricted cash 1,639,333 564,456
Accounts receivable 252,319 195,916
Other assets (net of accumulated
amortization of $550,675 and
$495,163) 1,709,045 2,406,467
----------- -----------
Total $20,846,836 $22,043,707
=========== ===========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $32,608,543 $32,739,177
Accounts payable:
Trade 4,003,547 3,776,209
Related parties 3,008,831 2,751,080
Interest payable 13,968,150 13,459,354
Tenant security deposits 323,436 284,087
Other liabilities 1,735,498 1,635,925
----------- -----------
Total liabilities 55,648,005 54,645,832
Partners' deficit (34,801,169) (32,602,125)
----------- -----------
Total $20,846,836 $22,043,707
=========== ===========
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, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Revenues:
Rental income $5,601,409 $5,340,239 $5,462,332
Hotel income 1,587,328 1,535,825 1,305,660
Interest income 11,583 41,165 45,742
Other income 0 3,614 0
---------- ---------- ----------
Total revenues 7,200,320 6,920,843 6,813,734
---------- ---------- ----------
Costs and expenses:
Rental operations 2,104,817 2,028,376 2,102,471
Hotel operations 1,337,487 1,257,784 1,122,156
Interest 4,197,597 4,216,229 4,240,944
Depreciation and amortization 1,759,463 1,781,784 1,822,805
---------- ---------- ----------
Total costs and expenses 9,399,364 9,284,173 9,288,376
---------- ---------- ----------
Net loss before extraordinary
item ($2,199,044) ($2,363,330) ($2,474,642)
Extraordinary gain on
extinguishment of debt 0 68,458 0
---------- ---------- ----------
Net loss ($2,199,044) ($2,294,872) ($2,474,642)
========== ========== ==========
Net loss per limited
partnership unit:
Loss before extraordinary item ($ 105.72) ($ 113.61) ($ 118.97)
Extraordinary item 0 3.29 0
---------- ---------- ----------
Total loss per limited
partnership unit ($ 105.72) ($ 110.32) ($ 118.97)
========== ========== ==========
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, 2002, 2001 and 2000
Dover
Historic Limited
Advisors Partners
(1) (2) Total
-------- -------- -----
Percentage participation in
profit or loss 1% 99% 100%
== === ====
Balance at December 31, 1999 ($449,746) ($27,382,865) ($27,832,611)
Net loss (24,746) (2,449,896) (2,474,642)
-------- ----------- -----------
Balance at December 31, 2000 (474,492) (29,832,761) (30,307,253)
Net loss (22,949) (2,271,923) (2,294,872)
-------- ----------- -----------
Balance at December 31,2001 (497,441) (32,104,684) (32,602,125)
Net loss (21,990) (2,177,054) (2,199,044)
-------- ----------- -----------
Balance at December 31, 2002 ($519,431) ($34,281,738) ($34,801,169)
======== =========== ===========
(1) General Partner.
(2) 20,593.3 limited partnership units outstanding at December 31,
2002, 2001, and 2000.
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, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating
activities:
Net loss ($2,199,044) ($2,294,872) ($2,474,642)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 1,759,463 1,781,784 1,822,805
Extraordinary gain 0 (68,458) 0
Changes in assets and liabilities:
(Increase) decrease in restricted
cash (1,074,877) 1,202,782 (258,714)
(Increase) decrease in accounts
receivable (56,403) 4,525 (67,168)
Decrease (increase) in other assets 641,909 (805,007) 60,552
Increase in accounts payable -
trade 227,338 94,903 440,072
Increase (decrease) in accounts
payable - related parties 257,751 123,251 (84,354)
Increase in interest payable 508,796 198,745 807,247
Increase in tenant security
deposits 39,349 6,357 27,792
Increase (decrease) in other
liabilities 99,574 145,332 (8,629)
---------- ---------- ----------
Net cash provided by operating
activities 203,856 389,342 264,961
---------- ---------- ----------
Cash flows from investing
activities:
Capital expenditures (129,005) (248,415) (765,817)
---------- ---------- ----------
Net cash used in investing
activities (129,005) (248,415) (765,817)
---------- ---------- ----------
Cash flows from financing
activities:
Borrowings under debt obligations 520 157,472 1,694,430
Payments of principal under debt
obligations (131,154) (146,816) (1,208,003)
---------- ---------- ----------
Net cash (used in) provided by
financing activities (130,634) 10,656 486,427
---------- ---------- ----------
(Decrease) increase in cash and cash
equivalents (55,783) 151,583 (14,429)
Cash and cash equivalents at
beginning of year 175,264 23,681 38,110
---------- ---------- ----------
Cash and cash equivalents at end of
year $ 119,481 $ 175,264 $ 23,681
========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for
interest $3,347,070 $3,689,055 $3,433,697
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II
(A limited partnership)
NOTE A - ORGANIZATION
Diversified Historic Investors II (the "Partnership") was formed in
December 1984 to acquire, rehabilitate, and manage real properties
which are certified historic structures as defined in the Internal
Revenue Code (the "Code"), or which are eligible for designation as
such, utilizing mortgage financing and the net proceeds from the sale
of limited partnership units. Rehabilitations undertaken by the
Partnership were done with a view to obtaining certification of
expenditures therefore as "qualified rehabilitation expenditures" as
defined in the Code. The General Partner, Dover Historic Advisors,
has the exclusive responsibility for all aspects of the Partnership's
operations
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows:
1. Principles of Consolidation
The accompanying consolidated financial statements of the Partnership
include the accounts of two subsidiary partnerships (the "Ventures"),
in which the Partnership has controlling interests, with appropriate
elimination of inter-partnership transactions and balances. These
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of the
Partnership's General Partner, are necessary for a fair statement of
the results for the years presented.
2. Depreciation
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Buildings and improvements are
depreciated over 25 years and furniture and fixtures over five years.
3. Finance Costs
Loan fees have been incurred with respect to certain loans. Such fees
are being amortized over the terms of the related loans (18 to 40
years) and being charged to amortization expense.
The Partnership prepaid all amounts due under a ground lease for one
of its properties. Such prepayment is being amortized over the term
of the lease (75 years) and being charged to amortization expense.
Tindeco Wharf Partnership ("TWP") incurred $818,465 of settlement fees
in conjunction with a bond refinancing. These settlement fees are
included in other assets and are being amortized over the term of the
bond issue. Accumulated amortization was $233,955 and $211,319 at
December 31, 2002 and 2001, 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 2002, 2001 and 2000).
6. Income Taxes
Income taxes or credits resulting from earnings or losses are payable
by or accrue to the benefits of the partners; accordingly, no
provision has been made for income taxes in these financial
statements.
7. Restricted Cash
Restricted cash includes amounts held for tenant security deposits,
insurance and real estate tax reserves.
8. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-
line basis. Rental payments received in advance are deferred until
earned.
9. Rental Properties
Rental properties are stated at cost. A provision for impairment of
value is recorded when a decline in value of a property is determined
to be other than temporary as a result of one or more of the
following: (1) a property is offered for sale at a price below its
current carrying value, (2) a property has significant balloon
payments due within the foreseeable future for which the Partnership
does not have sufficient resources, and anticipates it will be unable
to obtain replacement financing or debt modification sufficient to
allow it to continue to hold the property over a reasonable period of
time, (3) a property has been, and is expected to continue, generating
significant operating deficits and the Partnership is unable or
unwilling to sustain such deficits and has been unable, or anticipates
it will be unable, to obtain debt modification, financing or
refinancing sufficient to allow it to continue to hold the property
for a reasonable period of time or, (4) a property's value has
declined based on management's expectations with respect to projected
future operational cash flows and prevailing economic conditions. An
impairment loss is indicated when the undiscounted sum of estimated
future cash flows from an asset, including estimated sales proceeds,
and assuming a reasonable period of ownership up to 5 years, is less
than the carrying amount of the asset. The impairment loss is
measured as the difference between the estimated fair value and the
carrying amount of the asset. In the absence of the above
circumstances, properties and improvements are stated at cost. An
analysis is done on an annual basis at December of each year.
10. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
NOTE C - DEBT OBLIGATIONS
Debt obligations were as follows:
December 31,
2002 2001
---- ----
Mortgage loan, interest only at 14%; $ 7,273,790 $ 7,273,271
principal due December 31, 2015,
collateralized by the related rental
property
Mortgage loan, interest at 12%, due 1,800,000 1,800,000
January 1, 1992, collateralized by the
related rental property (A)
Mortgage revenue bonds comprised of the 16,281,282 16,412,435
following: $1,440,000 of Serial Bonds,
interest rates ranging from 4.6% to 6.1%,
maturing semi-annually from June 20,
2000, to December 20, 2006; $1,650,000 of
Term Bonds, interest at 6.5%, maturing
December 20, 2012; $8,260,000 of Term
Bonds, interest at 6.6%, maturing
December 20, 2024; $5,605,000 of Term
Bonds, interest at 6.7%, maturing
December 20, 2028; collateralized by the
related rental property
Second mortgage loan, principal and 4,953,471 4,953,471
interest at 7.5%, payable in monthly
installments of $36,606 to July 2005
based upon available cash flow, at which
time the balance is due; collateralized
by the related rental property (B)
Note payable to a developer, interest
accrues at 12%, of which 6% interest is
payable annually; deferred interest is
payable out of cash flow after a
preference return to the Partnership with
interest accruing on the unpaid amount;
principal and unpaid interest due at the
earlier of sale or refinancing of the
property or 2005; unsecured 2,300,000 2,300,000
----------- ----------
$32,608,543 $32,739,177
=========== ===========
(A) Interest payments were not made after August 1991. Lender
declared default and accelerated payment of the note in February
1992. The partnership which owns the property filed a petition
of reorganization in May 1992. In November 1992, the automatic
stay was lifted and the property which collateralizes this loan
was foreclosed by the lender in February 1993. However, the
partnership guaranteed $1,800,000 of the original note balance,
which is included in debt obligations.
(B) Interest and principal after August 1, 1990 due only to the
extent of available cash flow. Any unpaid principal and interest is
deferred. Additional interest equal to 20% of net cash flow from
operations, as defined, in excess of $1,075,000 is payable annually.
The lender is also entitled to receive 10% of the net proceeds from
the sale of the property as defined. No interest was paid during
2002, 2001 or 2000.
Approximate maturities of mortgage loan obligations, at December 31,
2002 for each of the succeeding five years are as follows:
Year ending December 31,
2003 $ 1,944,528
2004 159,267
2005 7,428,980
2006 193,400
2007 213,129
Thereafter 22,669,239
-----------
$32,608,543
===========
NOTE D - ACQUISITIONS
The Partnership acquired one property and three general partnership
interests in Ventures during the period August 1985 to October 1985,
as discussed below.
In August 1985, the Partnership was admitted, with a 99% general
partner interest, to a Pennsylvania general partnership, which owns a
building located in Savannah, Georgia, consisting of 22,559 commercial
square feet and a 44 room hotel, for a cash capital contribution of
$3,600,409.
In October 1985, the Partnership was admitted, with an 85% general
partner interest, to a Pennsylvania general partnership, which owned a
54-room hotel located in Washington, D.C., for a cash capital
contribution of $1,820,100. The Partnership's interest was
subsequently reduced to 69% when an affiliate of the Partnership
acquired a 19% interest. The lender foreclosed in 1993.
In October 1985, the Partnership purchased a three-story building,
consisting of 29 residential apartments and 9,500 square feet of
commercial space, for a cash consideration of $1,320,883. The lender
foreclosed on March 22, 2001.
In October 1985, the Partnership was admitted, with an 85% general
partner interest, to a Maryland general partnership, which owns a
building located in Baltimore, Maryland, consisting of 240 residential
units and 41,307 square feet of commercial space, for a cash capital
contribution of $7,271,300. The Partnership subsequently purchased an
additional 5% interest for $262,500. On June 30, 2003, the Registrant
transferred its interest in TWP to an affiliate of the owner of the
second mortgage loan secured by the property of TWP. At transfer, the
liabilities of TWP exceeded the value of Registrant's interest in TWP.
In exchange for such interest, Registrant's cost of dissolution, up to
$100,000, will be paid by the holder of such second mortgage loan.
NOTE E- COMMITMENTS AND CONTINGENCIES
Pursuant to certain agreements, the developers of and lenders to the
properties are entitled to share in the following:
1. 15% of net cash flow from operations (one property), and 15% to
50% of net cash flow from operations above certain specified
amounts (two properties);
2. 10% to 45% of the net proceeds, as defined, of the sale of the
respective properties (two properties). Generally, the
Partnership is entitled to a priority distribution of the net
proceeds of sale prior to any payments to developers.
J. A. Jones Construction Company ("Jones") contracted with Factor's
Walk Partners ("FWP"), a subsidiary of the Partnership, for the
renovation of what was originally a warehouse, into the River Street
Inn/Factor's Walk. During construction, numerous disputes arose
between the parties. As a result of those disputes, Jones abandoned
the project prior to completion and filed suit in the matter of J.A.
Jones Construction Company v. Factor's Walk Partners in the United
States District Court for the Northern District of Georgia. On
January 1, 1994, the court entered a judgment in favor of Jones and
against FWP in the amount of $1,069,017. The judgment accrued
interest at 9.5% and $62,562 of interest was accrued in both 1995 and
1994. FWP filed an appeal which was held in abeyance while FWP and
Jones participated in a court sponsored settlement program. On
November 8, 1996, a settlement agreement was reached whereby a note in
the amount of $1,000,000 was issued. The note calls for 6% interest
until September 1, 1997, with the rate increasing .5% on each August 1
thereafter to a maximum of prime plus 2% (therefore, 6.25% at December
31, 2002) and is due on October 1, 2011. Interest is due quarterly
with the first payment due September 1, 1997.
NOTE F - RELATED PARTY TRANSACTIONS
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from
FWP to the Partnership that had been assigned to DHP, Inc. The note
was in the stated amount of $55,951 and bore interest at 10%; the note
was due on June 30, 1997. On January 13, 1994 D, LTD obtained a
judgment on this note in the amount of $73,184 in Common Pleas Court
for Philadelphia County, Pennsylvania. The judgment accrues interest
at 15%. On March 31, 2000 the note was sold. Interest accrued during
2000 was $22,620. The balance of the note at December 31, 2001 was
$197,409. Interest accrued during 2002 and 2001 was $30,023,
respectively. The balance of the note at December 31, 2002 was
$197,409.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable from
the Partnership in the stated amount of $404,046. The note bore
interest at 10% and was due on June 30, 1997. On March 23, 1993, D,
LTD obtained a judgment on this note in the amount of $454,299 in
Common Pleas Court for Philadelphia County, Pennsylvania. The
judgment accrues interest at 15%. Interest accrued during 2002 and
2001 was $212,948 and $168,668, 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, 2002 was $1,390,769.
Tindeco Wharf Partnership accrues to Dover Historic Advisors, an
affiliate of a partner, and Boston Street Properties, Inc., a former
partner, an annual investor service fee of $10,000 each. These fees
are paid from available cash flow subsequent to the payment of the
operating deficit loan and current interest on the development fee
note. No fees were paid during 2002. Accrued investor service fees are
$120,000 at December 31, 2002.
NOTE G - EXTRAORDINARY GAIN
Effective as of March 22, 2001 Washington Square was foreclosed by the
holder of the mortgage and a judgment. As a result, the Registrant
recognized an extraordinary gain on this foreclosure in the amount of
$68,458 which is the difference between the debt of the property and
the net book value of the assets.
NOTE H - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of
operations in different time periods for financial reporting ("book")
purposes and for income tax ("tax") purposes. Reconciliations of net
loss and partners' equity follows:
For the Years Ended December 31,
2002 2001 2000
---- ---- ----
Net loss - book ($ 2,199,044)($ 2,294,872)($ 2,474,642)
Depreciation (143,025) (262,345) 77,686
Interest 1,038,997 982,822 978,434
Other interest 0 (240,000) 0
Guarantor fees 121,800 121,800 121,800
Investor service fee 20,000 20,000 20,000
Partnership administrative fee 0 0 (1,333,786)
Other (28,196) 110,692 19,252
Minority interest - tax only 66,070 97,016 199,521
Extraordinary gain on
extinguishment of debt 0 (259,981) 0
----------- ----------- -----------
Net loss - tax ($ 1,123,398)($ 1,724,868)($ 2,391,735)
=========== =========== ===========
Partners' equity - book ($34,801,169)($32,602,125)($30,307,253)
Costs of issuance 2,471,196 2,471,196 2,471,196
Cumulative tax over (under) book
loss 9,006,582 8,481,727 8,436,375
Facade easement donation (tax only) 203,778 203,778 203,778
Prior period adjustment 48,071 48,071 48,071
Capital adjustments (tax only) (324,580) (324,580) (324,580)
----------- ----------- -----------
Partners' equity - tax ($23,396,122)($21,721,933)($19,472,413)
=========== =========== ===========
NOTE I - SUBSEQUENT EVENT
The Registrant has determined that it is insolvent because (i) the
amount of its liabilities exceeds the fair market value of its assets
and (ii) it is unable to pay its debts as they become due.
Accordingly, pursuant to its Partnership Agreement, Registrant has
begun the process of dissolution. In connection therewith, on June 30,
2003, the Registrant transferred its interest in TWP to an affiliate
of the owner of the second mortgage loan secured by the property of
TWP. At transfer, the liabilities of TWP exceeded the value of
Registrant's interest in TWP. In exchange for such interest,
Registrant's cost of dissolution, up to $100,000, will be paid by the
holder of such second mortgage loan.
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS II
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
Cost
Capitalized
Initial Cost Subsequent
to Partnership to
(b) Acquisition
Buildings Land
and and
Encum- Improve- Improve-
Description brances Land ments ments
- ----------- ------- ---- --------- --------
(a) (f)
44 room hotel with
22,559 square
feet of commercial
space in
Savannah, GA $ 7,273,790 $200,000 $ 9,178,160 $ 2,042,696
240 apartment units
and 41,802
square feet of
commercial
space in
Baltimore, MD 23,534,753 647,082 2,000,000 29,420,707
----------- -------- ----------- -----------
$30,808,543 $847,082 $11,178,160 $31,463,403
=========== ======== =========== ===========
Gross Amount
at which
Carried at
December 31, 2002
Buildings Date
and Accumu- of Date
Improve- Total lated Constr. Acquir-
Description Land ments (c)(d) Depr.(d)(e) (a) ed
- ----------- ---- --------- ------- ----------- ------ -------
44 room hotel
with
22,559 square
feet of
commercial
space in 1985-
Savannah, GA $200,000 $11,220,856 $11,420,856 $6,683,270 1986 8/9/85
240 apartment
units and
41,802
square feet
of commercial
space in 1985-
Baltimore,MD $647,082 $31,420,707 $32,067,789 $19,678,717 1988 10/15/85
-------- ----------- ----------- -----------
$847,082 $42,641,563 $43,488,645 $26,361,987
======== =========== =========== ===========
DIVERSIFIED HISTORIC INVESTORS
(A limited partnership)
NOTES TO SCHEDULE XI
December 31, 2002
(A) All properties are certified historic structures as defined in
the Internal Revenue Code, or are eligible for designation as
such. The "date of construction" refers to the period in which
such properties were rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to
development agreements entered into when the properties were
acquired.
(C) The aggregate cost of real estate owned at December 31, 2002, for
Federal income tax purposes is $38,699,439. 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:
2002 2001 2000
---- ---- ----
Balance at beginning of year $43,359,639 $46,163,905 $45,398,088
Additions during the year:
Improvements 129,006 248,415 765,817
Deductions due to foreclosure 0 (3,052,681) 0
----------- ----------- -----------
Balance at end of year $43,488,645 $43,359,639 $46,163,905
=========== =========== ===========
Reconciliation of accumulated depreciation:
2002 2001 2000
---- ---- ----
Balance at beginning of year $24,658,035 $24,737,850 $22,962,044
Depreciation expense for the year 1,703,952 1,725,944 1,775,806
Decreases due to foreclosure 0 (1,805,759) 0
----------- ----------- -----------
Balance at end of year $26,361,987 $24,658,035 $24,737,850
=========== =========== ===========
(E) See Note B to the financial statements for depreciation method
and lives.
(F) See Note F to the financial statements for information regarding
certain contingencies.
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Securities
Exchange Act of 1934 reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to
our management, including our managing partner's principal executive
officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
Under the supervision of our managing partner's principal
executive officer and principal financial officer we have carried out
an evaluation of the effectiveness of our adopted disclosure controls
and procedures as of the end of the period covered by this report.
Based upon that evaluation, our managing partner's president and
treasurer concluded that our disclosure controls and procedures are
effective.
There have been no significant changes in our internal controls
over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting during our most recent fiscal quarter.
PART III
Item 10. Directors and Executive Officers of Registrant
a. Identification of Directors - Registrant has no
directors.
b. Identification of Executive Officers
The General Partner of the Registrant is Dover Historic
Advisors (DoHA), a Pennsylvania general partnership. The partners of
DoHA are as follows:
Name Age Position Term of Office Period Served
- ---- --- -------- -------------- -------------
SWDHA, Inc. -- Partner in DoHA-II No fixed term Since May 1997
EPK, Inc. -- Partner in DoHA-II No fixed term Since May 1997
DoHA term 1997
c. Identification of Certain Significant Employees. Registrant has
no employees. Its administrative and operational functions are
carried out by a property management and partnership administration
firm engaged by the Registrant.
d. Family Relationships. None
e. Business Experience. DoHA is a general partnership
formed in August 1985. The General Partner is responsible for the
management and control of the Registrant's affairs and will have
general responsibility and authority in conducting its operations.
On May 13, 1997, SWDHA, Inc. and EPK, Inc. were appointed
partners of DoHA. Spencer Wertheimer, the President and Sole Director
of SWDHA, Inc., is an attorney with extensive experience in real
estate activities and ventures.
EPK, Inc. is a Delaware corporation formed for the purpose of
managing properties or interests therein. EPK, Inc. is a wholly-owned
subsidiary of D, LTD, an entity formed in 1985 to act as the holding
company for various corporations engaged in the development and
management of historically certified properties and conventional real
estate as well as a provider of financial (non-banking) services.
EPK, Inc. is a partner of DoHA.
The officers and directors of EPK, Inc. are described below.
Spencer Wertheimer was appointed on May 13, 1997 as
President, Treasurer and Sole Director of EPK, Inc. Mr. Wertheimer is
an attorney with extensive experience in real estate activities and
ventures.
Donna M. Zanghi (age 45) 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 37) 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 2002, 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 2002, 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 2002 to DoHA, any partner therein, or any person named in
paragraph c. of Item 10.
d. Compensation of Directors - Registrant has no directors.
e. Termination of Employment and Change of Control
Arrangement - Registrant has no compensatory plan or arrangement, with
respect to any individual, which results or will result from the
resignation or retirement of any individual, or any termination of
such individual's employment with Registrant or from a change in
control of Registrant or a change in such individual's
responsibilities following such a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners - No
person is known to Registrant to be the beneficial owner of more than
five percent of the issued and outstanding Units.
b. Security Ownership of Management - None.
c. Changes in Control - Registrant does not know of any
arrangement, the operation of which may at a subsequent date result in
a change in control of Registrant.
Item 13. Certain Relationships and Related Transactions
Pursuant to Registrant's Amended and Restated Agreement of
Limited Partnership, DoHA is entitled to 10% of Registrant's
distributable cash from operations in each year. There was no such
share allocable to DoHA for fiscal years 1997 through 2002.
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, 2002 and 2001.
b. Consolidated Statements of Operations
for the Years Ended December 31, 2002, 2001 and
2000.
c. Consolidated Statements of Changes in
Partners' Equity for the Years Ended December 31,
2002, 2001 and 2000.
d. Consolidated Statements of Cash Flows
for the Years Ended December 31, 2002, 2001 and
2000.
e. Notes to consolidated financial
statements.
2. Financial statement schedules:
a. Schedule XI- Real Estate and
Accumulated Depreciation.
b. Notes to Schedule XI.
3. Exhibits:
(a) Exhibit Number Document
-------------- --------
3 Registrant's Amended and
Restated Certificate of
Limited Partnership and
Agreement of Limited
Partnership, previously
filed as part of Amendment
No. 2 of Registrant's
Registration Statement on
Form S-11, are
incorporated herein by
reference.
21 Subsidiaries of the
Registrant are listed in
Item 2. Properties of this
Form 10-K.
31 General Partners Opinion
Certification
32 Certification Pursuant to
18 U.S.C. Section 1350, As
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
ended December 31, 2002.
(c) Exhibits:
See Item 14(A) (3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: June 8, 2004 DIVERSIFIED HISTORIC INVESTORS II
------------
By: Dover Historic Advisors,
its General Partner
By: EPK, Inc., Managing Partner
By: /s/ Spencer Wertheimer
----------------------
SPENCER WERTHEIMER
President(principal executive
officer,principal financial
officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 8, 2004 DIVERSIFIED HISTORIC INVESTORS II
------------
By: Dover Historic Advisors,
its General Partner
By: EPK, Inc., Managing Partner
By: /s/ Spencer Wertheimer
----------------------
SPENCER WERTHEIMER
President(principal executive
officer,principal financial
officer)
Exhibit 31
CERTIFICATION
I, Spencer Wertheimer, certify that:
1. I have reviewed this annual report on Form 10-K for the period
ended December 31, 2002 of Diversified Historic Investors II;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) [Omission in accordance with SEC Release Nos. 33-
8238, 34-47986 and IC-26068 (June 5, 2003)] for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to me by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Omitted in accordance with SEC Release Nos. 33-8238, 34-
47986 and IC-26068 (June 5, 2003)];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: June 8, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: President
(principal executive officer,
principal financial officer)
of the registrant's
managing partner, EPK, Inc.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Diversified Historic
Investors II (the "Company") on Form 10-K for the period ended
December 31, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Spencer Wertheimer, President
and Treasurer of the Company's managing partner, EPK, Inc., certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: June 8, 2004 /s/ Spencer Wertheimer
------------ ----------------------
Name: Spencer Wertheimer
Title: President
(principal executive officer,
principal financial officer)
of the registrant's
managing partner, EPK, Inc.