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, 2004, Registrant had outstanding 20,593.3 units of limited partnership interest (the "Units").
As of December 31, 2004, the registrant was in its operating stage. It originally owned four properties or interests therein. Its interest in three properties were lost through foreclosure and its interest in a fourth property was sold. As of December 31, 2004 it owned one property. See Item 2.
Item 2. Properties ----------
As of December 31, 2004, Registrant owned one property; the River Street Inn/Factor's Walk. This property consists of 44 hotel rooms and 22,499 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, 2004 was $6,004,947; the bonds become due on December 31, 2015.
The property is managed by BCMI. As of December 31, 2004, 14,422 sf of the commercial space (64%) was under lease at annual rental rates ranging from $13.94 to $32.75. The property also maintains 44 operating hotel rooms at an average nightly rate of $134.10. The average occupancy for 2004 was approximately 72%. The hotel occupancy rate for the previous four years was 62% in 2003, 66% in 2002, 66% in 2001 and 61% in 2000. The average room rates were $131.82 for 2003, $132.95 for 2002, $125.05 for 2001, and $124.23 for 2000. The occupancy for the commercial space was 60% for 2003, 67% for 2002, 66% for 2001, and 74% for 2000. The range for annual rents was $13.94 to $31.8 per sf for 2003, $13.47 to $31.00 per sf for 2002, $9.63 to $31.00 per sf for 2001 and $9.63 to $30.00 per sf for 2000. 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 Total sf rental annual Number of of covered by rental Leases expiring expiring from Years expiring leases leases property ----- --------- -------- ---------- ----------
2005 2 1,460 43,234 16% 2006 4 7,374 124,183 44% 2007 0 0 0 0% 2008 2 1,290 23,321 8% Thereafter 3 4,298 89,178 32%
For tax purposes, this property has a federal tax basis of $10,810,859 and is depreciated using the straight-line method with a useful life of 27.5 years. The annual real estate taxes are $119,349 which is based on an assessed value of $2,832,400 taxed at a rate of $42.14 per $1,000. It is the opinion of the management of the Registrant that the property is adequately covered by insurance.
Item 3.
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.
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. 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 31 Units of record were transferred in 2004.
b. As of December 31, 2004 there were 2,573 record holders of Units.
c. Registrant did not make any cash distributions in 2004 or 2003.
Item 6.
Item 6. Selected Financial Data -----------------------
The following selected financial data are for the five years ended December 31, 2004. 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.
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Unaudited Unaudited
Rental income $ 436,901 $ 3,071,504 $ 5,601,409 $ 5,340,239 $ 5,462,332 Hotel revenues 1,732,449 1,488,779 1,587,328 1,535,825 1,305,660 Interest income 0 6,015 11,583 41,165 45,742 Net income (loss) (1,345,912) 19,872,306 (2,199,044) (2,294,872) (2,474,642) Net income (loss) per Unit (64.70) 955.34 (105.72) (110.32) (118.97) Total assets (net of depreciation and amortization) 4,298,320 4,632,607 20,846,836 22,043,707 25,074,714 Debt obligations 9,101,275 9,076,704 32,608,543 32,739,177 33,792,649
Note: See Part II, Item 7(3) Results of Operations for a discussion of factors which materially affect the comparability of the information reflected in the above table.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------
(1) Liquidity
At December 31, 2004, Registrant had cash of $17,857. Cash generated from operations is used primarily to fund operating expenses and debt service. The Registrant is not aware of any additional sources of liquidity. Because Registrant's liabilities substantially exceed its assets, and its ongoing operational expense and debt service requirements substantially exceed its available cash or cash flow, Registrant is insolvent.
As of December 31, 2004, Registrant had restricted cash of $29,500 consisting of funds held as escrows for taxes. As a consequence of these restrictions as to use, Registrant does not deem these funds to be a source of liquidity.
During the five fiscal years 2000 through 2004, 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, and the sale of a third property. As of June 2005, the Registrant's remaining property, Factors Walk, was foreclosed upon by its mortgage holder. As a result of the foreclosure, no cash was available to the Registrant to make distributions to partners or pay the general and administrative expenses owed to the Registrant.
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 began 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, which was deemed in default, 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, was 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.
(3) Results of Operations
During 2004, Registrant recognized a net loss of $1,345,912 (64.70 per limited partnership unit), compared to a net income of $19,872,306 ($955.34 per limited partnership unit) in 2003, and a net loss of $2,199,044 ($105.72 per limited partnership unit) in 2002. Rental and hotel income was $2,169,350 in 2004, $4,560,283 in 2003, and $7,188,737 in 2002. The decrease in rental income from 2003 to 2004 was due to (i) the sale of Tindeco Wharf on June 30, 2003. (ii) an increase in rental income at Factors Walk is due to an increase in rent overages in 2004. (iii) an increase in hotel income due to an increase in average occupancy at Factors Walk (62% to 72%) and an increase in average daily room rates ($131.82 to $134.10). Rental and hotel income was $4,560,283 in 2003, $7,188,737 in 2002, and $6,876,064 in 2001. The decrease in rental income from 2002 to 2003 was due to (i) the sale of Tindeco Wharf on June 30, 2003 (ii) a decrease in rented commercial space at Factors Walk from 14,022 sf. in 2002 to 13,460 sf. in 2003, and (iii) a decrease in hotel income at Factors Walk due to a decrease in average occupancy (66% to 62%) and a decrease in average daily room rates ($132.95 to $131.82).
Interest income was $0 in 2004, $6,015 in 2003 and $11,583 in 2002. The decrease in interest income from 2002 to 2004 is due to a decrease in invested cash balances due to the sale of Tindeco Wharf on June 30, 2003.
Rental operations expense was $31,651 in 2004, $1,096,076 in 2003, and $2,104,817 in 2002. The decrease in rental operations expense from 2002 to 2004 was due the sale of Tindeco Wharf on June 30, 2003.
Hotel operations expense was $1,452,656 in 2004, $1,398,173 in 2003, and $1,337,487 in 2002. The increase in hotel operations expense from 2003 to 2004 was due to an increase in wages and salaries, utilities and administrative expenses. The increase in wages and salaries expense was due to increased wages for desk clerks and sales managers. The increase in utility expense is a product of increased occupancy. The increase in administrative expenses was also due to increased occupancy, most notably increased credit card charges. The increase in hotel operations expense from 2002 to 2003 was due to an increase in insurance expense, maintenance expense and wages and salaries. The increase in insurance expense was due to the changing market conditions. The increase in maintenance expense was due to an increase in electrical, mechanical and general building repairs. The increase in wages and salaries expense was due to an increase in sales and inn managers. Interest expense was $1,586,292 in 2004, $2,914,074 in 2003 and $4,197,597 in 2002. The decrease in interest expense from 2002 to 2004 was due to the sale of Tindeco Wharf on June 30, 2003.
Depreciation and amortization was $447,920 in 2004, $1,080,871 in 2003 and $1,759,463 in 2002. The decrease in depreciation expense from 2002 to 2004 was due to the sale of fixed assets of Tindeco Wharf on June 30, 2003.
On June 30, 2003, the Registrant transferred its interest in Tindeco Wharf Partnership to an affiliate of the owner of the second mortgage loan, which was deemed in default, 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, was paid by the holder of such second mortgage loan. Because this resulted in extinguishment of the liabilities associated with the property, even though no cash was received, the Registrant recognized a book gain on sale in the amount of $21,777,364.
In 2004, approximately $1,345,912 of book loss was incurred at the Registrant's one property. In 2003, approximately $20,541,000 of book income was recognized at the Registrant's two properties even though no net cash was distributed or distributable to Registrant there from. Included in the book gain for 2003 is a book gain on the disposition of fixed assets in the amount of $21,777,364. In 2002 the registrant incurred a loss of approximately $1,831,000.
Item 7A.
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.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
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, 2004 - 11 2003 (unaudited)
Consolidated Statements of Operations for the Years 12 Ended December 31, 2004 - 2003 (unaudited) , and 2002
Consolidated Statements of Changes in Partners' 13 Equity for the Years Ended December 31, 2004 - 2003 (unaudited), and 2002
Consolidated Statements of Cash Flows for the Years 14 Ended December 31, 2004 - 2003 (unaudited), and 2002
Notes to consolidated financial statements - 15-21 (unaudited)
Financial statement schedules: - (unaudited)
Schedule XI - Real Estate and Accumulated 22-23 Depreciation - (unaudited)
Notes to Schedule XI - (unaudited) 24
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, 2004 and 2003
Assets ------ 2004 2003 ---- ---- (Unaudited)
Rental properties at cost: Land $ 200,000 $ 200,000 Buildings and improvements 10,365,244 10,365,244 Furniture and fixtures 923,367 855,612 ----------- ----------- 11,488,611 11,420,856 Less - accumulated depreciation (7,542,950) (7,109,896) ----------- ----------- 3,945,661 4,310,960 Cash and cash equivalents 17,857 12,963 Restricted cash 29,500 27,706 Accounts receivable 150,988 131,673 Other assets (net of accumulated amortization of $134,782 and $119,916) 154,314 149,305 ----------- ----------- Total $ 4,298,320 $ 4,632,607 =========== ===========
Liabilities and Partners' Equity --------------------------------
Liabilities: Debt obligations $ 9,101,275 $ 9,076,704 Accounts payable: Trade 4,447,257 4,164,610 Related parties 1,988,227 1,723,539 Interest payable 3,233,347 2,931,268 Tenant security deposits 13,445 14,385 Other liabilities 1,789,545 1,650,964 ----------- ----------- Total liabilities 20,573,096 19,561,470 Partners' deficit (16,274,776) (14,928,863) ----------- ----------- Total $ 4,298,320 $ 4,632,607 =========== ===========
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, 2004, 2003 and 2002
2004 2003 2002 ---- ---- ---- (Unaudited) (Unaudited)
Revenues: Rental income $ 436,901 $ 3,071,504 $5,601,409 Hotel income 1,732,449 1,488,779 1,587,328 Interest income 0 6,015 11,583 Other income 3,256 17,838 0 Gain on Sale of Assets 0 21,777,364 0 ---------- ----------- ---------- Total revenues 2,172,606 26,361,500 7,200,320 ---------- ----------- ---------- Costs and expenses: Rental operations 31,650 1,096,076 2,104,817 Hotel operations 1,452,656 1,398,173 1,337,487 Interest 1,586,292 2,914,074 4,197,597 Depreciation and amortization 447,920 1,080,871 1,759,463 ---------- ----------- ---------- Total costs and expenses 3,518,518 6,489,194 9,399,364 ---------- ----------- ---------- Net income (loss) ($1,345,912) $19,872,306 ($2,199,044) ========== =========== ==========
Net loss per limited partnership unit: Total loss per limited partnership unit ($ 64.70) $ 955.34 ($ 105.72) ========== =========== ==========
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, 2004, 2003 and 2002
Dover Historic Advisors Limited (I) Partners (2) Total -------- ------------ -----
Percentage participation in profit or loss 1% 99% 100% == === ====
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) Net income 198,723 19,673,583 19,872,306 -------- ----------- ----------- Balance at December 31, 2003 (320,708) (14,608,155) (14,928,863) Net Loss (unaudited) (13,459) (1,332,453) (1,345,912) -------- ----------- ----------- Balance at December 31, 2004 (unaudited) ($334,167) ($15,940,608) ($16,274,775) ======== =========== ===========
(1) General Partner.
(2) 20,593.3 limited partnership units outstanding at December 31, 2004, 2003, and 2002.
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, 2004, 2003 and 2002
2004 2003 2002 ---- ---- ---- (Unaudited) (Unaudited)
Cash flows from operating activities: Net income (loss) ($1,345,912) $19,872,306 ($2,199,044) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 447,920 1,080,871 1,759,463 Gain on Sale of Tindeco Wharf 0 (21,777,364) 0 Changes in assets and liabilities: (Increase) decrease in restricted cash (1,794) (620,019) (1,074,877) Decrease (increase) in accounts receivable (19,315) 23,485 (56,403) Decrease (increase) in other assets (19,875) 216,391 641,909 (Decrease) Increase in accounts payable - trade 56,250 (37,667) 227,338 Increase (decrease) in accounts payable - related parties 491,084 452,355 257,751 Increase in interest payable 302,079 834,063 508,796 Increase in tenant security deposits (940) 11,069 39,349 (Decrease) increase in other liabilities 138,580 (42,238) 99,574 ---------- ----------- ---------- Net cash provided by operating activities 48,077 13,252 203,856 ---------- ----------- ---------- Cash flows from investing activities: Proceeds from the sale of fixed assets 0 100,000 0 Capital expenditures (67,754) (152,172) (129,005) ---------- ----------- ---------- Net cash used in investing activities (67,754) (52,172) (129,005) ---------- ----------- ---------- Cash flows from financing activities: Borrowings under debt obligations 24,571 0 520 Payments of principal under debt obligations 0 (67,597) (131,154) ---------- ----------- ---------- Net cash (used in) provided by financing activities 24,571 (67,597) (130,634) ---------- ----------- ---------- (Decrease) increase in cash and cash equivalents 4,894 (106,517) (55,783) Cash and cash equivalents at beginning of year 12,963 119,480 175,264 ---------- ----------- ----------
Cash and cash equivalents at end of year $ 17,857 $ 12,963 $ 119,481 ========= ========== ==========
Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 829,928 $1,644,274 $3,347,070 ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS II --------------------------------- (a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited)
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 one subsidiary partnership (the "Venture"), 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. Cash and Cash Equivalents
The Partnership considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents.
4. 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 2004, 2003 and 2002).
5. 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.
6. Restricted Cash
Restricted cash includes amounts held for tenant security deposits, insurance and real estate tax reserves.
7. Revenue Recognition
Revenues are recognized when rental payments are due on a straight- line basis. Rental payments received in advance are deferred until earned.
8. Rental Properties
Rental properties are stated at cost. A provision for impairment of value is recorded when a decline in value of 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.
9. 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, 2004 2003 ---- ---- (unaudited) (unaudited) Mortgage loan, interest only at 14%; $7,301,275 $7,276,704 principal due December 31, 2015, collateralized by the related rental property
Mortgage loan, interest at 12%, due January 1, 1992, collateralized by the related rental property (A) 1,800,000 1,800,000 ---------- ---------- $9,101,275 $9,076,704 ========== ==========
Approximate maturities of mortgage loan obligations, at December 31, 2004 for each of the succeeding five years are as follows:
Year ending December 31, (unaudited)
2005 $1,800,000 2006 0 2007 0 2008 0 2009 0 Thereafter 7,301,275 ---------- $9,101,275 ==========
(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.
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 owned 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% to 50% of net cash flow from operations above certain specified amounts
2. 10% to 45% of the net proceeds, as defined, of the sale of the respective property. 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, 7.25% at December 31, 2004) 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 2004 and 2003 was $30,105 and $30,023, respectively. The balance of the note at December 31, 2004 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 2004 and 2003 was $264,687 and $226,896 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, 2004 is $1,882,352.
NOTE G - INCOME TAX BASIS RECONCILIATION - ----------------------------------------
Certain items enter into the determination of the results of operations in different time periods for financial reporting ("book") purposes and for income tax ("tax") purposes. Reconciliations of net loss and partners' equity follows:
For the Years Ended December 31,
2004 2003 2002 ---- ---- ---- (unaudited) (unaudited)
Net loss - book ($1,345,912) $19,872,306 ($2,199,044) Gaap to tax difference - Book gain on Sale of Tindeco Wharf 0 (6,981,724) 0 Depreciation 41,111 66,854 (143,025) Interest 592,390 957,539 1,038,997 Other interest 0 0 0 Guarantor fees 121,800 121,800 121,800 Investor service fee 10,000 20,000 Other 3 (12,489) (28,196) Minority interest - tax only 5,742 37,882 66,070 ---------- ----------- ---------- Net loss - tax ($ 584,866) $14,072,168 ($1,123,398) ========== =========== ==========
Partners' equity - book ($16,274,776) ($14,928,863)($34,801,169) Costs of issuance 2,471,196 2,471,196 2,471,196 Cumulative tax over (under) book loss 6,518,019 5,756,972 9,006,582 Facade easement donation (tax only) 203,778 203,778 203,778 Prior period adjustment 48,071 48,071 48,071 Capital adjustments (tax only) (324,580) (324,580) (324,580) ----------- ----------- ----------- Partners' equity - tax ($ 7,358,292) ($ 6,773,426)($23,396,122) =========== =========== ===========
NOTE H - BOOK GAIN ON SALE - --------------------------
The Registrant has determined that it was insolvent because (i) the amount of its liabilities exceeded the fair market value of its assets and (ii) it was unable to pay its debts as they become due. Accordingly, pursuant to its Partnership Agreement, Registrant began 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, which was deemed in default, 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, was paid by the holder of such second mortgage loan. The Registrant recognized a book gain on the sale in the amount of $21,777,364.
NOTE I - QUARTERLY FINANCIAL DATA (UNAUDITED) - ---------------------------------------------
The following represents summarized quarterly financial data of the Registrant which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Registrant's results of operations:
For The Three Months Ended - (Unaudited) December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- ------------------------------------------------ Revenues: Rental income $ 99,327 $122,399 $140,263 $ 74,912 Hotel income 425,324 395,345 534,391 377,389 Other income 0 0 3,256 0 -------- -------- -------- -------- Total revenues 524,651 517,744 677,910 452,301 -------- -------- -------- -------- Costs and expenses: Rental operations 31,650 0 0 0 Hotel operations 312,220 422,331 400,145 317,960 Interest 399,978 399,603 395,149 391,562 Capital improvements (56,755) 230 32,284 24,241 Depreciation and amortization 120,706 109,071 109,072 109,071 -------- -------- -------- -------- Total costs and expenses 807,799 931,235 936,650 842,834 -------- -------- -------- -------- Net loss ($283,148) ($413,491) ($258,740) ($390,533) ======== ======== ======== ========
Net loss per limited partnership unit: ($ 13.61) ($ 19.88) ($ 12.44) ($ 18.77) ======== ======== ======== ========
NOTE J - SUBSEQUENT EVENT - -------------------------
In June 2005, Factors Walk was foreclosed upon by its mortgage lender.
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS II --------------------------------- (a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2004 (UNAUDITED)
Costs Capitalized Subsequent Initial Cost to to Partnership (b) Acquisition --------------- -----------
Buildings Land and and Encumbrances Improve- Improve- Description (a) (f) Land ments ments - --------------- ------------ ---- --------- -------- 44 room hotel with 22,559 square feet of commercial space in Savannah, GA $7,276,704 $200,000 $9,245,914 $2,042,696
Gross Amount at which Carried at December 31, 2004 -------------------------------- (Unaudited)
Buildings Accumu- Date and lated of Improv- Total Depr. Constr. Date Description (a) Land ments (c) (d) (d) (e) (a) Acquired - -------------- ---- --------- ------- -------- ------- -------- 44 room hotel with 22,559 square feet of commercial space in 1985- Savannah, GA $200,000 $11,288,610 $11,488,610 $7,542,950 1986 8/9/85
DIVERSIFIED HISTORIC INVESTORS II --------------------------------- (a limited partnership)
NOTES TO SCHEDULE XI
December 31, 2004
(A) The property is a 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 property was rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to development agreements entered into when the property was acquired.
(C) The aggregate cost of real estate owned at December 31, 2004, for Federal income tax purposes is $10,810,859. 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:
2004 2003 2002 ---- ---- ---- (Unaudited) (Unaudited)
Balance at beginning of year $11,420,856 $43,488,645 $43,359,639 Additions during the year: Improvements 67,754 152,172 129,006 Deductions due to sale/foreclosure 0 (32,219,961) 0 ----------- ----------- ----------- Balance at end of year $11,488,610 $11,420,856 $43,488,645 =========== =========== ===========
Reconciliation of accumulated depreciation: 2004 2003 2002 ---- ---- ---- Balance at beginning of year $7,109,896 $26,361,987 $24,658,035 Depreciation expense for the year 433,054 1,080,871 1,703,952 Decreases due to sale/foreclosure 0 (20,332,962) 0 ---------- ----------- ----------- Balance at end of year $7,542,950 $ 7,109,896 $26,361,987 ========== =========== ===========
(E) See Note B to the financial statements for depreciation method and lives.
(F) See Note E to the financial statements for information regarding certain contingencies.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure -----------------------------------------------------------
None.
Item 9A.
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 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.
Item 10. Directors and Executive Officers of Registrant ----------------------------------------------
a. Identification of Directors - Registrant has no directors.
b. Identification of Executive Officers
f. Involvement in Certain legal proceedings. - None
g. Promoters and control persons. - Not Applicable
h. Audit committee financial expert - None
The General Partner of the Registrant is Dover Historic Advisors (DoHA), a Pennsylvania general partnership. The partners of DoHA are as follows:
Term of Name Age Position Office Period Served - ---- --- -------- ------- -------------
SWDHA, Inc. -- Partner in No fixed Since May 1997 DoHA term
EPK, Inc. -- Partner in No fixed Since May 1997 DoHA term
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 47) 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. (an affiliate of D, Ltd) 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 39) 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 2004, 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 2004, 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 2004 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 - 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.
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 1998 through 2004.
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 2004 and 2003 was $30,105 and $30,023, respectively. The balance of the note at December 31, 2004 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 2004 and 2003 was $264,687 and $226,896 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, 2004 is $1,882,352.
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.
Item 14.
Item 14. Principal Accountant Fees and Services --------------------------------------
The following table presents the aggregate fees billed for each of the services listed below for each of the Registrant's last two fiscal years.
2004 2003 ---- ---- (Unaudited)
Audit Fees (1)......................... $ 5,000 $5,000 Audit - Related Fees (2)............... - - Tax Fees (3)........................... 16,500 16,500 All Other Fees (4)..................... - - ------- ------- Total.................................. $21,500 $21,500 ======= ======= 1. Audit Fees - Audit fees for the years ended December 31, 2004 and 2003, respectively, were accrued for professional services to be performed by Russell Bedford Mirchandani Stefanou, LLP for the audits of the consolidated financial statements of the Registrant, statutory audits and subsidiary audits, issuance of comfort letters related to financing transactions, and with review of documents filed with the SEC.
2. Audit-Related Fees - Audit-related fees as of the years ended December 31, 2003 and 2003, respectively, would consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the unaudited consolidated financial services and are not disclosed under "Audit Fees" above; however, no such assurance or services were provided in the relevant periods.
3. Tax Fees - Tax fees as of the years ended December 31, 2003 and 2003, respectively, were for services related to tax compliance, rendered by Brandywine Construction and Management Inc. including preparation of tax returns and claims for refund, tax planning and tax advice, including assistance with and representation in tax audits.
4. All Other Fees - All other fees as of the years ended December 31, 2003 and 2002, respectively, would consist of the aggregate fees billed for products and services described under audit fees, audit - related fees and tax fees; however, no such products and services were provided in the relevant periods.
PART IV -------
Item 15.
Item 15. (A) Exhibits, Financial Statement Schedules and Reports
1. Financial Statements:
a. Consolidated Balance Sheets at December 31, 2004 - 2003 (unaudited).
b. Consolidated Statements of Operations for the Years Ended December 31, 2004 - 2003 (unaudited) and 2002.
c. Consolidated Statements of Changes in Partners' Equity for the Years Ended December 31, 2004 - 2003 (unaudited)and 2002.
d. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 - 2003 (unaudited) and 2002.
e. Notes to consolidated financial statements. - (unaudited)
2. Financial statement schedules: - (unaudited)
a. Schedule XI- Real Estate and Accumulated Depreciation. - (unaudited)
b. Notes to Schedule XI. - (unaudited)
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
31 (Not attached) Certification pursuant to Rule 13a-14(a) / 15d - 14(a) (To be filed with amended 10-K/A)
32 (Not attached) Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (To be filed with amended 10-K/A)
(c) Exhibits: See Item 15(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: September 23, 2005 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.
DIVERSIFIED HISTORIC INVESTORS II ---------------------------------
By: Dover Historic Advisors, its general partner
By: EPK, Inc., managing partner
Date: September 23, 2005 By: /s/ Spencer Wertheimer ------------------ ---------------------- SPENCER WERTHEIMER President (principal executive officer, principal financial officer)