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, 1998, Registrant had outstanding 20,593.3 units of limited partnership interest (the "Units").
Registrant is presently in its operating stage. It originally owned four properties or interests therein. Its interest in one property has been lost through foreclosure. It currently owns three properties or interests therein. See Item 2.
Item 2. Properties.
The Registrant is affected by and subject to the general competitive conditions of the residential and commercial real estate industry. As a result of the overbuilding that occurred in the 1980's, the competition in the local markets where the Registrant's properties are located is generally strong. As a result, the Registrant is forced to keep its rent levels competitively low in order to maintain moderate to high occupancy levels. One residential property is located in the suburbs of Philadelphia and the other is located in the Historic District of the Inner Harbor in Baltimore. In both locations the competition for tenants remains stiff and several similar buildings exist. The apartment market remains stable and new construction remains virtually nonexistent although the availability of favorable home financing has placed pressure on the rental tenant base.
The hotel is located in Savannah, Georgia and is one of several historic buildings which have been converted into hotels and inns. The hotel relies heavily on the tourist trade which is on the upswing in Savannah. The hotel is generally considered to be a market leader, due to its location on "River Street", the main shopping and entertainment area on the river, and the fact that it provides a full array of hotel amenities, not just a "bed and breakfast" atmosphere.
Registrant has no employees. Registrant's activities are overseen by Brandywine Construction & Management, Inc., ("BCMI"), a real estate management firm.
d. Financial Information About Foreign and Domestic Operations and Export Sales.
See Item 8. Financial Statements and Supplementary Data.
Item 2. Properties
As of the date hereof, Registrant owned three properties, or interests therein. A summary description of each property held at December 31, 1997 is given below.
a. Tindeco Wharf - consists of 240 apartment units and approximately 41,307 sf of commercial space located at 2809 Boston Street in the Fell's Point-Canton Historic District of Baltimore, Maryland. In October 1985, Registrant was admitted with an 85% interest, to Tindeco Wharf Partnership ("TWP"), a Maryland general partnership, for a cash contribution of $7,271,300. Registrant subsequently increased its ownership interest in TWP to 90% by purchasing an additional 5% interest for $262,500. TWP acquired and rehabilitated this Property at an approximate cost of $28,600,000 ($66 per sf), funded by the equity contribution and mortgage financing of $21,869,600. The mortgage financing is comprised of mortgage revenue bonds and a Urban Development Action Grant ("UDAG") loan. Other financing includes a loan from the developer of $2,300,000 and operating deficit loans from both the property manager and D, LTD in the original principal amounts of $300,000 and $200,000 respectively. The excess of equity and mortgage financing over the acquisition and rehabilitation costs was utilized to provide various escrow deposits and required reserves.
The City of Baltimore issued mortgage revenue refunding bonds, Series 1992, (GNMA collateralized) for the purpose of providing permanent financing for TWP. The bonds are backed by a HUD- insured mortgage ("the note"). The note, held by GNMA as lender, bears interest at a rate of 9.75% per annum and is secured by a first mortgage on the property. Principal and interest is payable in monthly installments of $143,801. The note matures December 2028. The refunding issue bears interest at an average rate of 6.62%. The difference in the interest on the mortgage and the refunding bonds is returned to the Partnership for operations.
The principal balance of the bonds was $16,737,463 at December 31, 1998. The bonds are comprised of both serial and term bonds. The serial bonds bear interest 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, 1998) 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, 1998) and the operating deficit loans (aggregate principal balance of $15,893 at December 31, 1998) all bear interest at 12% and are payable on a pro-rata basis out of cash flow from the property. The developer's loan is due in 2005, or upon earlier sale or refinancing of the property. The operating deficit loans are due in 2007, or upon earlier sale or refinancing of the property.
The property is managed by BCMI. As of December 31, 1998, 235 apartment units (98%) and 40,157 sf of commercial space (97%) were under lease. Monthly rental rates range from $810 to $1,815 for apartments and annual rental rates ranging from $5.33 to $25.34 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 98% for 1997, 95% for 1996, 97% for 1995 and 95% for 1994. The monthly rental range has been approximately the same since 1994. The occupancy for the commercial space for the previous four years has been 100% for 1997, 100% for 1996, 85% for 1995 and 93% for 1994. The range for annual rents has been $5.33 to $19.47 per sf for 1997, $5.33 to $19.47 per sf for 1996, $5.33 to $18.54 per sf for 1995 and $10.30 to $22.39 per sf for 1994. There are four tenants who each occupy ten percent or more of the commercial rentable square footage. They operate principally as a medical office, restaurant, a fitness club and a travel agency.
The following is a table showing commercial lease expirations at Tindeco Wharf for the next five years.
Total annual % of gross Number of Total sf of rental covered annual rental Years Leases expiring Expiring leases by expiring leases from property
1999 3 7,999 $165,831 4% 2000 1 4,469 63,491 2% 2001 2 6,139 93,547 2% 2002 0 0 0 0% 2003 0 0 0 0% Thereafter 2 21,550 251,999 6%
There are three leases which expire in 1999. The Registrant is currently negotiating a lease extension with the tenant who occupies 5,105 sf. Although there can be no assurances that a lease will be finally executed, the negotiations currently contemplate a five-year extension with for an increase in the rent to market rates. The second lease for 950 sf expires April 30, 1999 and the tenant has notified the Registrant that they intend to vacate. The Registrant is actively marketing the space to prospective tenants. The third lease is for 1,944 sf and expires November 30,1999. There have been no negotiations but the Registrant expects the tenant to renew at current market rates.
For tax purposes, this property has a federal tax basis of $29,684,172 and is depreciated using the straight-line method with a useful life of 27.5 years. The annual real estate taxes are $420,795 which is based on an assessed value of $17,359,517, taxed at a rate of $6.06 per $100. It is the opinion of the management of the Registrant that the property is adequately covered by insurance.
b. River Street Inn/Factor's Walk - consists of 44 hotel rooms and 22,559 sf of commercial space located at 115 E. River Street in Savannah, Georgia. In August 1985, Registrant was admitted with a 99% interest in Factor's Walk Partners ("FWP") a Georgia general partnership, for $3,600,409. FWP acquired and rehabilitated the Property for $8,900,409 ($127 per sf), including financing through an issuance by a governmental agency of tax-exempt bonds in the principal amount of $5,800,000. The excess of equity and mortgage financing over the acquisition and rehabilitation costs was utilized to provide working capital reserves of $500,000. The bonds bore interest at TENR (a rate based on yields of high quality, short-term tax exempt obligations) plus 0.5% until December 30, 1996 and were guaranteed by a private corporation. On December 30, 1996, both the bonds and the guarantee were sold. The new holder of the bonds exercised its right to convert the interest rate from the variable rate to 14% due to the credit rating of the new guarantor. The principal balance of the bonds at December 31, 1998 was $5,920,572 and are due in 2015.
The property is managed by BCMI. As of December 31, 1998, 16,652 sf of the commercial space (74%) was under lease at annual rental rates ranging from $7.11 to $26.26 per sf. The Property also maintains 44 operating hotel rooms at an average nightly rate of $128.06; average occupancy for 1998 was approximately 75%. The hotel occupancy rate for the previous four years was 74% for 1997, 77% for 1996, 78% for 1995 and 74% for 1994. The average room rates were $106.06 for 1997, $100.92 for 1996, $94.54 for 1995 and $90.18 for 1994. The occupancy for the commercial space was 96% for 1997, 97% for 1996, 83% for 1995, 92% for 1994. The range for annual rents was $7.11 to $25.82 per sf for 1997, $5.53 to $25.27 per sf for 1996, $5.53 to $24.53 per sf for 1995 and $1.58 to $23.12 per sf for 1994. There are two tenants who each occupy ten percent or more of the rentable square footage. They operate principally as a restaurant and a retail store.
The following is a table showing commercial lease expirations at Factor's Walk for the next five years.
Total annual % of gross Number of Total sf of rental covered annual rental Years Leases expiring expiring leases by expiring leases from property
1999 0 0 0 0% 2000 3 3,096 53,244 3% 2001 4 5,334 82,040 4% 2002 1 400 6,600 <1% 2003 3 2,640 37,377 2% Thereafter 1 4,072 46,848 2%
For tax purposes, this property has a federal tax basis of $9,554,816 and is depreciated using the straight-line method with a useful life of 27.5 years. The annual real estate taxes are $67,506 which is based on an assessed value of $3,343,870, taxed at a rate of $3.40 per $100. It is the opinion of the management of the Registrant that the property is adequately covered by insurance.
c. Washington Square - consists of 9,500 sf of commercial space and 29 residential units located at 320 N. Church Street, West Chester, Pennsylvania. In October 1985, Registrant acquired and rehabilitated the Property for $2,750,000 ($79 per sf; such amount is exclusive of $170,883 of capitalized fees incurred which were funded by Registrant's equity contributions), including mortgage financing of $1,600,000. The mortgage loan (principal balance of $1,080,615 at December 31, 1998) bears interest at the Federal Reserve Discount rate plus 2% with a minimum of 7% and a maximum of 15% (7% at December 31, 1998) and is due in October 2005.
The property is managed by BCMI. As of December 31, 1998, 7,920 sf of commercial space (83%) was rented at annual rates ranging from $7.56 per sf to $12.60 per sf. At December 31, 1998, all of the residential units (100%) were under lease at monthly rental rates ranging from $650 to $1,100. All residential leases are renewable, one-year leases. The occupancy for the residential units for the previous four years was 86% for 1997, 100% for 1996, 97% for 1995 and 98% for 1994. The monthly rental range has been approximately the same since 1994. The occupancy for the commercial space for the previous four years was 87% for 1997, 86% for 1996, 97% for 1995, and 100% for 1994. The range for annual rents has been $8.00 to $13.00 per sf for 1997, $6.00 to $13.00 per sf for 1996, $6.00 to $12.00 per sf for 1995 and $6.00 to $13.23 per sf for 1994.
The following is a table showing commercial lease expirations at Washington Square for the next five years.
Total annual % of gross Number of Total sf of rental covered annual rental Years Leases expiring expiring leases by expiring leases from property
1999 2 3,680 $34,714 9% 2000 0 0 0 0% 2001 1 1,330 16,772 15% 2002 0 0 0 0% 2003 0 0 0 0% Thereafter 1 2,910 32,000 9%
There are two leases which expire in 1999. Although no firm commitments have been made, the Registrant anticipates that the leases which are scheduled to expire in 1999 will be extended for at least an additional year, due to the availability of renewal options under the leases.
For tax purposes, this property has federal tax basis of $2,926,808 and is depreciated using the straight-line method with a useful life of 27.5 years. The annual real estate taxes are $29,059 which is based on an assessed value of $119,610 taxed at a rate of $24.295 per $100. It is the opinion of the management of the Registrant that the property is adequately covered by insurance.
Item 3.
Item 3. Legal Proceedings
a. For a description of legal proceedings involving Registrant's properties, see Part II, Item 7. River Street Inn/Factor's Walk Partners.
Item 4.
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.
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 34 Units of record were sold or exchanged in 1998.
b. As of December 31, 1998, there are 2,565 record holders of Units.
c. Registrant did not declare any cash dividends in 1998 or 1997
Item 6.
Item 6. Selected Financial Data
The following selected financial data are for the five years ended December 31, 1998. 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.
1998 1997 1996 1995 1994
Rental income $ 4,623,527 $ 4,463,462 $ 4,303,963 $ 4,103,099 $ 3,950,879 Hotel revenues 1,582,824 1,282,525 1,282,662 1,230,057 1,108,942 Interest income 35,575 29,639 18,654 28,988 9,219 Net loss (3,457,494) (2,262,184) (2,426,416) (2,869,321) (2,980,282) Net loss per Unit (143.27) (166.22) (108.75) (116.65) (137.94) Total assets(net 26,503,288 27,143,753 28,633,916 29,418,648 30,742,909 of depreciation and amortization) Debt obligations 32,808,014 32,712,165 33,087,679 33,161,299 33,527,230
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(1) Liquidity
At December 31, 1998, Registrant had cash of $219,254. 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, 1998, Registrant had restricted cash of $1,095,373 consisting primarily of funds held as security deposits, replacement reserves and escrows for taxes. As a consequence of these restrictions as to use, Registrant does not deem these funds to be a source of liquidity.
In recent years the Registrant has realized significant losses, including the foreclosure of one property, due to the properties' inability to generate sufficient cash flow to pay their operating expenses and debt service. At the present time, all three remaining properties are able to pay their operating expenses and debt service but it is unlikely that any cash will be available to the Registrant to pay its general and administrative expenses. In the legal proceeding involving the Morrison Clark Inn (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. However, the Registrant has in the past, been able to obtain forbearance on execution for several years upon payment of a $20,000 fee to the judgment creditor and believes it may be able to do so when the current forbearance period ends in July 1999.
It is the Registrant's intention to continue to hold the properties until they can no longer meet the debt service requirements and the properties are foreclosed, or the market value of the properties increases to a point where they can be sold at a price which is sufficient to repay the underlying indebtedness (principal plus accrued interest).
(2) Capital Resources
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 1998, Registrant incurred a net loss of $2,980,282 ($143.27 per limited partnership unit), compared to a net loss of $3,457,494 ($166.22 per limited partnership unit), in 1997 and a net loss of $2,262,184 ($108.75 per limited partnership unit), in 1996.
Rental and hotel income increased from $5,586,625 in 1996 and to $5,745,987 in 1997 to $6,206,351 in 1998. The increase from 1997 to 1998 is due to an increase in residential rental income at both Washington Square and Tindeco Wharf due to an increase in the average rental rates combined with an increase in hotel income due to an increase in the average nightly rate ($106.06 to $128.06) at the River Street Inn. The increase from 1996 to 1997 was the result of an increase in residential rental income due to increases in the average rental rates at both Washington Square and Tindeco Wharf and an increase in the average rental rates in the commercial space at Factor's Walk.
Interest income increased from $18,654 in 1996 to $29,639 in 1997 and to $35,575 in 1998. The increases from 1997 to 1998 and from 1996 to 1997 were the result of changes in the balances of the restricted cash which generated the interest income.
Rental operations expenses increased from $1,684,209 in 1996 to $1,858,157 in 1997 and decreased to $1,850,883 in 1998. The decrease from 1997 to 1998 resulted mainly from a decrease in maintenance expense due to a lower turnover of apartment units in 1998 as compared to 1997 at Washington Square and a decrease in legal fees at Tindeco Wharf due to fees incurred in connection with a review of the underlying loan documents in 1997 with no comparable fees in 1998. The increase from 1996 to 1997 was due to an increase in legal expense at Tindeco Wharf as a result of legal fees incurred in connection with a review of the loan documents pertaining to the financing of the property partially offset by a decrease in utilities expense due to a decrease in the average consumption at both Tindeco Wharf and Washington Square.
Hotel operations expense increased from $1,317,387 n 1996 to $1,385,410 in 1997 to $1,423,018 in 1998. The increase from 1997 to 1998 is due to an increase in legal fees partially offset by a decrease in administrative expenses. Legal fees increased due to fees paid in connection with a settlement agreement with the previous guarantor in 1998. Administrative expense increased due to a misapplication of payments on a note payable where the payments should have been classified as administrative expenses. The increase from 1996 to 1997 is the result of an increase in administration expenses partially offset by a decrease in rent and management fee expense. Administrative expense increased due to a misapplication of payments on a note payable where the payments should have been classified as administrative expenses. Rent expense decreased due to the assignment of a lease with respect to the adjacent property to another entity which will develop that property (see below). Management fee expense decreased due to a change in the management contract which allows for a management fee based on a fixed percentage of revenues.
Interest expense increased from $3,198,970 in 1996 to $3,975,462 in 1997 to $4,007,500 in 1998. The increase from 1997 to 1998 is due to an increase in interest expense at Tindeco Wharf due to the accrual of interest on a higher average balance on the second mortgage. The balance increased due to the capitalization of interest accrued but not paid on certain loans, as described below. The increase from 1996 to 1997 is due to an increase in the average interest rate at Factor's Walk combined with an increase in interest expense at Tindeco Wharf due to the accrual of interest on a higher average balance on the second mortgage. The balance increased due to the capitalization of interest accrued but not paid on certain loans, as described below.
Depreciation and amortization increased from $1,707,209 in 1996 to $1,714,090 in 1997 and increased to $1,742,807 in 1998. The increase from 1997 to 1998 and from 1996 to 1997 is due to an increase at Tindeco Wharf due to the depreciation of fixed asset additions.
In 1998, losses of $2,456,000 were incurred at the Registrant's three properties compared to $2,711,000 in 1997 and $1,772,000 in 1996. A discussion of property operations/activities follows:
In 1998, Tindeco Wharf sustained a loss of $1,559,000 including $1,201,000 of depreciation and amortization expense and $1,094,000 of deferred interest (reflecting interest accrued but not paid on the developer's and operating deficit loans) compared to a loss of $1,642,000 including $1,175,000 of depreciation and amortization expense and $708,000 of deferred interest in 1997 and a loss of $1,544,000, including $1,162,000 of depreciation and amortization expense and $846,000 of deferred interest in 1996. The decrease in the loss from 1997 to 1998 is the result of an increase in residential rental income and interest income combined with a decrease in legal fees partially offset by an increase in interest and depreciation expense. Residential rental income increased due to an increase in the average rental rates and interest income increased due an increase in the balance of the restricted cash which generates the interest income. Legal fees decreased due to fees incurred in connection with a review of the loan documents pertaining to the financing of the property in 1997 with no comparable fees in 1998. Interest expense increased due to an increase in the principal balance upon which interest is calculated. Depreciation expense increased due to the depreciation of fixed asset additions. The increase in the loss from 1996 to 1997 is the result of an increase in interest, depreciation and legal expense partially offset by an increase in residential rental income and interest income combined with a decrease in utilities expense due to a decrease in the average consumption. Interest expense increased due to an increase in the principal balance upon which interest is calculated due to the capitalization of interest accrued but not paid on certain loans, as described above. Depreciation expense increased due to the depreciation of fixed asset additions and legal fees increased due to fees incurred in connection with a review of the loan documents pertaining to the financing of the property. Residential rental income increased due to an increase in the average rental rates and interest income increased due an increase in the balance of the restricted cash which generates the interest income.
In 1998, River Street Inn sustained a loss of $907,000 including $371,000 of depreciation and amortization expense compared to a loss of $1,038,000 including $372,000 of depreciation and amortization expense in 1997 and a loss of $199,000, including $381,000 of depreciation expense in 1996. The decrease in the loss from 1997 to 1998 is due to an increase in hotel income combined with a decrease in administrative expenses partially offset by an increase in legal fees. Hotel income increased due to an increase in the average nightly rate ($106.06 to $128.06). Administrative expense increased due to a misapplication of payments on a note payable where the payments should have been classified as administrative expenses. Legal fees increased due to fees paid in connection with a settlement agreement in with the previous guarantor in 1998. The increased loss from 1996 to 1997 is the result of an increase in interest and administration expenses partially offset by an increase in rental income and a decrease in rent and management fee expense. Interest expense increased due to an increase in the interest rate and administrative expense increased due to a misapplication of payments on a note payable where the payments should have been classified as administrative expenses. Rental income increased due to an increase in the average rental rates in the commercial space of the hotel. Rent expense decreased due to the assignment of a lease with respect to the adjacent property to another entity which will develop that property (see below). Management fee expense decreased due to a change in the management contract which allows for a management fee based on a fixed percentage of revenues.
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, 7% at December 31, 1998) and is due on October 1, 2011. Interest is due quarterly. The Registrant recognized a gain in the amount of $238,312 for the excess of the amount of the judgment over the amount stipulated in the settlement agreement in 1996.
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable, from FWP to the Registrant, that had been assigned to DHP, Inc. The note was in the stated amount of $55,951 and bore interest at 10%; the note was due on June 30, 1997. On January 13, 1994 D, LTD obtained a judgment on this note in the amount of $73,184 in Common Pleas Court for Philadelphia County, Pennsylvania. The judgment accrues interest at 15%. The judgment provided that all future distributions, in any form, due to the Registrant on account of its ownership interest in FWP, be immediately delivered to D, LTD. Interest accrued during 1998 was $21,249. The balance of the note at December 31, 1998 was $153,435.
In 1998, Washington Square recognized income of $10,000 including $117,000 of depreciation expense compared to a loss of $31,000 including $113,000 of depreciation expense in 1997 and a loss of $29,000 including $110,000 of depreciation expense in 1996. The decrease in the loss from 1997 to 1998 resulted mainly from an increase in rental income due to an increase in the average rental rates combined with a decrease in maintenance expense. Maintenance expense decreased due to a lower turnover of apartment units in 1998 as compared to 1997. The increase in the loss from 1996 to 1997 is due to an increase in interest expense partially offset by an increase in rental income due to an increase in the average rental rates and a decrease in utilities expense. Interest expense increased due to default interest incurred on the mortgage while utilities expense decreased due to the mild weather experienced in 1997.
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 1998 and 1997 was $147,747 and $408,037, respectively. Payments on the judgment are to be made from available cash flow from Washington Square and before any distribution can be made to the Registrant's limited partners. The balance of the note at December 31, 1998 is $997,365.
In February 1993, one of the Registrant's properties, the Morrison-Clark Inn, was foreclosed by the lender. In November 1993, the lender obtained a judgment in the matter of Capital Bank, N.A. v. Diversified Historic Investors II in the amount of $1,800,000. In return for payment of $20,000, Capital Bank has agreed to forbear from executing on the judgment until July 6, 1999. Although there have been no discussions, the Registrant anticipates that it will be able to extend the forbearance agreement for several more years for similar consideration.
Item7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
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, 1998 and 1997 and the related statements of operations and changes in partners' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. 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 $19,072,099 and $19,292,293 as of December 31, 1998 and 1997, respectively, and total revenues of $3,954,174 and $3,751,874, 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 generally accepted auditing standards. 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, 1998 and 1996, and the results of operations and cash flows for the years ended December 31, 1998, 1997 and 1996 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 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 forebearance when the period ends in July, 1999. 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 April 5, 1999
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, 1998, 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, 1998, 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.
Grant Thorton Philadelphia, Pennsylvania April 3, 1999
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, 1998 and 1997 17
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996 18
Consolidated Statements of Changes in Partners' Equity for the Years Ended December 31, 1998, 1997, and 1996 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 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, 1998 and 1997
Assets
1998 1997 Rental properties at cost: Land $ 934,582 $ 934,582 Buildings and improvements 40,542,742 39,666,989 Furniture and fixtures 3,026,576 2,866,600 ---------- ---------- 44,503,900 43,468,171 Less - accumulated depreciation (21,218,232) (19,522,725) ---------- ---------- 23,285,668 23,945,446
Cash and cash equivalents 219,254 71,023 Restricted cash 1,095,373 1,293,871 Accounts receivable 71,582 48,911 Other assets (net of accumulated amortization of $351,780 and $288,791) 1,831,411 1,784,502 ---------- ---------- Total $26,503,288 $27,143,753 ========== ========== Liabilities and Partners' Equity
Liabilities: Debt obligations $32,808,014 $32,712,165 Accounts payable: Trade 2,827,452 2,565,803 Related parties 1,521,734 1,496,403 Interest payable 11,343,408 9,576,402 Tenant security deposits 249,134 242,687 Other liabilities 1,293,221 1,109,686 ---------- ---------- Total liabilities 50,042,963 47,703,146 ---------- ---------- Partners' equity (23,539,675) (20,559,393) ---------- ---------- Total $26,503,288 $27,143,753 ========== ==========
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, 1998, 1997 and 1996
1998 1997 1996
Revenues: Rental income $4,623,527 $4,463,462 $4,303,963 Hotel income 1,582,824 1,282,525 1,282,662 Interest income 35,575 29,639 18,654 --------- --------- --------- Total revenues 6,241,926 5,775,626 5,605,279 --------- --------- --------- Costs and expenses: Rental operations 1,850,883 1,858,158 1,684,209 Hotel operations 1,423,018 1,385,410 1,317,387 General and administrative 198,000 300,000 198,000 Interest 4,007,500 3,975,462 3,198,970 Depreciation and amortization 1,742,807 1,714,090 1,707,209 --------- --------- --------- Total costs and expenses 9,222,208 9,233,120 8,105,775 --------- --------- --------- Loss before extraordinary item (2,980,282) (3,457,494) (2,500,496)
Extraordinary gain 0 0 238,312 --------- --------- --------- Net loss ($2,980,282) ($3,457,494) ($2,262,184) ========= ========= ========= Net loss per limited partnership unit: Loss before extraordinary item ($ 143.27) ($ 166.22) ($ 120.21) Extraordinary gain 0 0 11.46 --------- --------- --------- ($ 143.27) ($ 166.22) ($ 108.75) ========= ========= =========
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, 1998, 1997 and 1996
Dover Historic Limited Advisors (1) Partners (2) Total
Percentage participation in profit or loss 1% 99% 100%
Balance at December 31, 1995 ($319,817) ($14,519,898) ($14,839,715) Net loss (22,622) (2,239,562) (2,262,184) ------- ---------- ---------- Balance at December 31, 1996 (342,439) (16,759,460) (17,101,899) Net Loss (34,575) (3,422,919) (3,457,494) ------- ---------- ---------- Balance at December 31, 1997 (377,014) (20,182,379) (20,559,393) Net Loss (29,803) (2,950,479) (2,980,282) ------- ---------- ---------- Balance at December 31, 1998 ($406,817) ($23,132,858) ($23,539,675) ======= ========== ==========
(1) General Partner.
(2) 20,593.3 limited partnership units outstanding at December 31, 1998, 1997, and 1996.
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, 1998, 1997 and 1995
1998 1997 1996
Cash flows from operating activities: Net loss ($2,980,282)($3,457,494)($2,262,184) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,742,807 1,714,090 1,707,209 Extraordinary gain 0 0 (238,312) Changes in assets and liabilities, net of disposals due to foreclosure: Decrease (increase) in restricted cash 198,498 6,896 (608,740) (Increase) decrease in accounts receivable (22,671) (1,414) 2,533 Increase in other assets (94,299) (22,207) (98,386) Increase in accounts payable - trade 261,649 357,244 1,341,822 Increase (decrease) in accounts payable - related parties 25,331 (265,640) (67,326) Increase in interest payable 1,767,006 1,263,277 1,622,880 Increase (decrease) in tenant security deposits 6,447 6,010 (5,027) Increase (decrease) in other liabilities 183,535 981,954 (1,102,965) Net cash provided by operating --------- --------- --------- activities: 1,088,021 582,716 291,504 Cash flows from investing activities: --------- --------- --------- Capital expenditures (1,035,729) (215,746) (253,239) Net cash used in investing --------- --------- --------- activities: (1,035,729) (215,746) (253,239) Cash flows from financing activities: --------- --------- --------- Borrowings under debt obligations 182,998 0 0 Payments of principal under debt obligations (87,059) (375,514) (73,620) --------- --------- --------- Net cash provided by (used in) financing activities 95,939 (375,514) (73,620) activities: --------- --------- --------- Increase (decrease) in cash and cash equivalents 148,231 (8,544) (35,355) Cash and cash equivalents at beginning of year 71,023 79,567 114,922 --------- --------- --------- Cash and cash equivalents at end of year $ 219,254 $ 71,023 $ 79,567 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $2,240,494 $2,712,185 $1,486,204
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 $791,054 of settlement fees in conjunction with a bond refinancing. These settlement fees are included in other assets and are being amortized over the term of the bond issue. Accumulated amortization was $143,351 and $120,695 at December 31, 1998 and 1997, 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 1998, 1997 and 1996).
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 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 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, 1998 1997
Mortgage loan, interest only at 14% at December 31, $ 5,920,572 $ 5,800,000 1998 and 1997; principal due 2015, collateralized by the related rental property
Mortgage loan, interest at 12%, collateralized by the 1,800,000 1,800,000 related rental property with maturity at January 1, 1992 (A)
Mortgage loans, interest at the Federal Reserve 1,080,615 1,018,188 Discount rate plus 2% with a minimum of 7% and a maximum of 15% (7% at December 31, 1998 and 1997), principal and interest payable monthly based on a 20-year amortization schedule; collateralized by the related rental property; principal due October 1, 2005
Mortgage revenue bonds comprised of the following: 16,737,463 16,826,402 $1,440,000 Serial Bonds, interest rates ranging from 4.6% to 6.1%, maturing semi-annually from June 20, 1999, to December 20, 2006; $1,650,000 Term Bonds, interest at 6.5%, maturing December 20, 2012; $8,260,000 Term Bonds, interest at 6.6%, maturing December 20, 2024; $5,605,000 Term Bonds, interest at 6.7%, maturing December 20, 2028; collateralized by the related rental property
Notes payable to a property management company, bearing 15,893 14,104 interest at 12% per annum; principal and interest to be repaid from the earliest positive cash flow from operations or capital transactions, or within 90 days of termination of the management agreement; unpaid principal and interest due upon the earlier of sale or refinance of the property or December 1, 2007
Second mortgage loan, principal and interest at 7.5%, 4,953,471 4,953,471 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 ---------- ---------- $32,808,014 $32,712,165 ========== ==========
(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 1998, 1997 or 1996.
Approximate maturities of mortgage loan obligations at December 31, 1998, for each of the succeeding five years are as follows:
Year Ending December 31,
1999 $ 1,898,008 2000 107,003 2001 119,017 2002 131,154 2003 144,528 Thereafter 30,408,304 ---------- $ 32,808,014 ==========
NOTE E - ACQUISITIONS
The Partnership acquired one property and three general partnership interests in Ventures during the period August 1985 to October 1985, as discussed below.
In August 1985, the Partnership was admitted, with a 99% general partner interest, to a Pennsylvania general partnership, which owns a building located in Savannah, Georgia, consisting of 22,559 commercial square feet and a 44 room hotel, for a cash capital contribution of $3,600,409.
In October 1985, the Partnership was admitted, with an 85% general partner interest, to a Pennsylvania general partnership, which owned a 54-room hotel located in Washington, D.C., for a cash capital contribution of $1,820,100. The Partnership's interest was subsequently reduced to 69% when an affiliate of the Partnership acquired a 19% interest. The lender foreclosed in 1993.
In October 1985, the Partnership purchased a three-story building, consisting of 29 residential apartments and 9,500 square feet of commercial space, for a cash contribution of $1,320,883.
In October 1985, the Partnership was admitted, with an 85% general partner interest, to a Maryland general partnership, which owns a building located in Baltimore, Maryland, consisting of 240 residential units and 41,307 square feet of commercial space, for a cash capital contribution of $7,271,300. The Partnership subsequently purchased an additional 5% interest for $262,500.
NOTE F- COMMITMENTS AND CONTINGENCIES
Pursuant to certain agreements, the developers of and lenders to the properties are entitled to share in the following:
1. 15% of net cash flow from operations (one property), and 15% to 50% of net cash flow from operations above certain specified amounts (two properties);
2. 10% to 45% of the net proceeds, as defined, of the sale of the respective properties (three properties). Generally, the Partnership is entitled to a priority distribution of the net proceeds of sale prior to any payments to developers.
J. A. Jones Construction Company ("Jones") contracted with Factor's Walk Partners ("FWP"), a subsidiary of the Partnership, for the renovation of what was originally a warehouse, into the River Street Inn/Factor's Walk. During construction, numerous disputes arose between the parties. As a result of those disputes, Jones abandoned the project prior to completion and filed suit. In the matter of J.A. Jones Construction Company v. Factor's Walk Partners in the United States District Court for the Northern District of Georgia. On January 1, 1994, the court entered a judgment in favor of Jones and against FWP in the amount of $1,069,017. The judgment accrued interest at 9.5% and $62,562 of interest was accrued in both 1995 and 1994. FWP filed an appeal which was held in abeyance while FWP and Jones participated in a court sponsored settlement program. On November 8, 1996, a settlement agreement was reached whereby a note in the amount of $1,000,000 was issued. The note calls for 6% interest until September 1, 1997, with the rate increasing .5% on each August 1 thereafter to a maximum of prime plus 2% (therefore, 7% at December 31, 1998) and is due on October 1, 2011. Interest is due quarterly with the first payment due September 1, 1997. The Partnership recognized a gain in the amount of $238,312 for the excess of the amount of the judgment over the amount stipulated in the settlement agreement in 1996.
NOTE G - RELATED PARTY TRANSACTIONS
On June 30, 1992, DHP, Inc. assigned to D, LTD a note receivable from the Partnership in the stated amount of $404,046. The note 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 1998 and 1997 was $147,747 and $408,037, 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, 1998 was $997,365.
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%. The judgment provides that all future distributions, in any form, due to the Partnership on account of its ownership interest in FWP, be immediately delivered to D, LTD. Interest accrued during 1998 and 1997 was $21,249 and $15,771, respectively. The balance of the note at December 31, 1998 was $153,435.
The seller of Washington Square agreed to lend funds to the Partnership to cover cash flow deficits for a five-year period expiring in 1990. The Partnership borrowed $97,008 through December 1988. The loan bears interest at 12%, with principal and interest payments out of cash flow. Interest accrued during both 1998 and 1997 was $11,641. The balance of the note at December 31, 1998 was $225,059.
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, 1998 1997 1996 ---- ---- ---- Net loss - book ($2,980,282) ($ 3,457,494) ($ 2,262,184) Depreciation 147,722 (86,047) (221,239) Interest 1,103,722 1,277,877 864,793 Guarantor fees 121,800 121,800 121,800 Investor service fee 20,000 (200,000) 10,000 Administrative fee 0 342,000 0 Gain on foreclosure 0 0 (238,312) Other 0 (1,191) 0 Minority interest - tax only 179,674 147,592 93,373 --------- --------- --------- Net loss - tax ($ 1,407,364) ($ 1,855,463) ($ 1,631,769) ========= ========= =========
Partners' equity - book ($23,539,675) ($20,559,393) ($17,101,899) Costs of issuance 2,471,196 2,471,196 2,471,196 Cumulative tax over (under) book loss 6,947,522 6,376,859 5,394,643 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) (619,813) ---------- ---------- ---------- Partners' equity - tax ($14,193,688) ($11,784,069) ($ 9,604,024) ========== ========== ==========
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS II (a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
Costs Capitalized Subsequent to Acquisition Initial Cost to Partnership (b) Buildings and Description (a) Encumbrances Land Improvements Improvements (f)
44 room hotel with 21,500 square feet of commercial space in Savannah, GA $ 5,920,572 $200,000 $ 9,178,160 $ 854,407 Savannah, GA
29 apartment units and 9,500 square feet of commercial space in West Chester, PA 1,080,614 87,500 2,833,383 93,424
262 apartment units and 39,000 square feet of commercial space in Baltimore, MD 24,006,827 647,082 2,000,000 28,609,944 ---------- ------- ---------- ---------- $31,008,013 $934,582 $14,011,543 $29,557,775 ========== ======= ========== ========== Gross Amount at which Carried at December 31, 1998
Buildings and Accumulated Date of Date Description (a) Land Improvements Total Depreciation Constr. Acq.
44 room hotel with 21,500 square feet of commercial space in Savannah, GA $200,000 $10,032,567 $10,232,567 $5,030,173 85-86 8/9/85
29 apartment units and 9,500 square feet of commercial space in West Chester, PA 87,500 2,926,807 3,014,307 1,533,633 1985 10/1/85
262 apartment units and 39,000 square feet of commercial space in Baltimore, MD647,082 30,609,944 31,257,026 14,654,426 85-88 10/15/8 ------- ---------- ---------- ---------- $934,582 $43,569,318 $44,503,900 $21,218,232 ======= ========== ========== ==========
DIVERSIFIED HISTORIC INVESTORS (a limited partnership)
NOTES TO SCHEDULE XI
December 31, 1998
(A) All properties are certified historic structures as defined in the Internal Revenue Code, or are eligible for designation as such. The "date of construction" refers to the period in which such properties are rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to development agreements entered into when the properties are acquired.
(C) The aggregate cost of real estate owned at December 31, 1998, for Federal income tax purposes is $29,219,087. However, the depreciable basis of buildings and improvements is reduced for Federal income tax purposes by the investment tax credit and the historic rehabilitation credit obtained.
(D) Reconciliation of real estate:
1998 1997 1996 Balance at beginning of year $43,468,171 $43,252,425 $42,999,186 Additions during the year: Improvements 1,035,729 215,746 253,239 ---------- ---------- ---------- Balance at end of year $44,503,900 $43,468,171 $43,252,425 ========== ========== ========== Reconciliation of accumulated depreciation: 1998 1997 1996 Balance at beginning of year $19,522,725 $17,857,486 $16,210,001 Depreciation expense for the year 1,695,507 1,665,239 1,647,485 ---------- ---------- ---------- Balance at end of year $21,218,232 $19,522,725 $17,857,486 ========== ========== ========== (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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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 Partner in DoHA Since May 1997
EPK, Inc. -- Partner in DoHA Partner in DoHA Since May 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. There is no family relationship between or among the executive officers and/or any person nominated or chosen by Registrant to become an executive officer.
e. Business Experience. DoHA is a general partnership formed in August 1985. The General Partner is responsible for the management and control of the Registrant's affairs and 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 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.
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.
Item 11. Executive Compensation
a. Cash Compensation - During 1997, 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 1997, 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 1997 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.
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.
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 1996 through 1998.
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.
Item 14. (A) Exhibits, Financial Statement Schedules and Reports on Form 8-K.
1. Financial Statements:
a. Consolidated Balance Sheets at December 31, 1998 and 1997.
b. Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.
c. Consolidated Statements of Changes in Partners' Equity for the Years Ended December 31, 1998, 1997 and 1996.
d. Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.
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. 2 of Registrant's Registration Statement on Form S-11, are incorporated herein by reference.
21 Subsidiaries of the Registrant are listed in Item 2. Properties of this Form 10-K.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended December 31, 1998.
(c) Exhibits:
See Item 14(A)(3) above.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIVERSIFIED HISTORIC INVESTORS II
Date: August 31, 1999 By: Dover Historic Advisors, General Partner --------------- By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer ---------------------- SPENCER WERTHEIMER President and Treasurer
By: /s/ Michele F. Rudoi ----------------------- MICHELE F. RUDOI, Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
DOVER HISTORIC ADVISORS General Partner
By: EPK, Inc., Partner
By: /s/ Spencer Wertheimer August 31, 1999 ------------------------ --------------- SPENCER WERTHEIMER President and Treasurer
By: /s/ Michele F. Rudoi August 31, 1999 ----------------------- --------------- MICHELE F. RUDOI, Assistant Secretary