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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 2003
Commission File No. 0-14510
CEDAR INCOME FUND, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 42-1241468
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 South Bayles Avenue, Port Washington, New York 11050
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 767-6492
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 14, 2003
------------------- ---------------------------
Common Shares 851,336
Cedar Income Fund, Ltd.
-----------------------
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003 (unaudited)
and December 31, 2002
Consolidated Statements of Shareholders' Equity - March
31, 2003 (unaudited) and December 31, 2002
Consolidated Statements of Operations - Quarter Ended
March 31, 2003 and 2002 (unaudited)
Consolidated Statements of Cash Flows - Quarter Ended
March 31, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements - March 31,
2003 (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K and 8-K/A
Signatures
Certifications
2
Part I. Financial Information
Item1. Financial Statements
Cedar Income Fund, Ltd.
Consolidated Balance Sheet
March 31,
2003 December 31,
(unaudited) 2002
---------------- ----------------
Assets
Real estate
Land $ 28,844,000 $ 24,741,000
Buildings and improvements 115,645,000 98,893,000
--------------- ---------------
144,489,000 123,634,000
Less: accumulated depreciation (3,120,000) (2,396,000)
--------------- ---------------
Real estate, net 141,369,000 121,238,000
Cash and cash equivalents 1,658,000 3,827,000
Cash at joint ventures and restricted cash 2,272,000 2,883,000
Property deposits 150,000 344,000
Real estate tax deposits 554,000 627,000
Rents and other receivables, net 654,000 304,000
Prepaid expenses, net 1,228,000 496,000
Deferred rental income 551,000 432,000
Deferred charges, net 2,901,000 2,987,000
--------------- ---------------
Total Assets $ 151,337,000 $ 133,138,000
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 109,047,000 $ 93,537,000
Loans payable 6,737,000 7,464,000
Accounts payable and accrued expenses 2,069,000 1,767,000
Security deposits 355,000 335,000
Deferred liabilities 5,413,000 5,195,000
Advance rents 623,000 468,000
--------------- ---------------
Total Liabilities 124,244,000 108,766,000
--------------- ---------------
Minority Interests 13,815,000 10,238,000
Limited partner's interest in consolidated
Operating Partnership 7,261,000 7,889,000
Series A preferred 9% convertible, redeemable
Operating Partnership units 2,498,000 3,000,000
--------------- ---------------
9,759,000 10,889,000
Shareholders' Equity
Common stock ($0.01 par value,
50,000,000 shares authorized,
851,336 and 694,411 shares issued and
outstanding, respectively) 9,000 7,000
Accumulated other comprehensive loss (203,000) (65,000)
Additional paid-in capital 3,713,000 3,303,000
--------------- ---------------
Total Shareholders' Equity 3,519,000 3,245,000
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 151,337,000 $ 133,138,000
=============== ===============
Total Shareholders' Equity in the Company
and limited partner's equity interest in
Operating Partnership and minority interests $ 27,093,000 $ 24,372,000
=============== ===============
See accompanying notes to the consolidated financial statements.
3
Cedar Income Fund, Ltd.
-----------------------
Consolidated Statements of Shareholders' Equity
(unaudited)
Accumulated
Additional Un- other Total
Common Paid-In distributed comprehensive Shareholders'
Stock Capital Net Income income Equity
------------- -------------- ------------- ------------------ ---------------
Balance at December 31, 2002 $ 7,000 $3,303,000 $ - $ (65,000) $ 3,245,000
Unrealized loss on change of
fair value of cash flow hedge - - - (138,000) (138,000)
Issuance of warrants - 14,000 - - 14,000
Issuance of stock 200 95,000 - - 95,200
Conversion of OP units to stock 1,400 500,000 - - 501,000
Net loss - (199,000) - - (199,000)
------- ---------- ------ ------------ -----------
Balance at March 31, 2003 $ 8,600 $3,713,000 $ - $ (203,000) $ 3,519,000
======= ========== ====== ============ ===========
See accompanying notes to the consolidated financial statements.
4
Cedar Income Fund, Ltd.
Consolidated Statements of Operations
(unaudited)
For the three months ended
March 31, March 31,
2003 2002
------------- -------------
REVENUE
Rents $5,281,000 $2,500,000
Interest 3,000 10,000
---------- ----------
Total Revenue 5,284,000 2,510,000
---------- ----------
EXPENSES
Operating, maintenance and management 1,730,000 604,000
Real estate taxes 620,000 289,000
General and administrative 523,000 248,000
Depreciation and amortization 841,000 552,000
Interest expense 2,038,000 921,000
---------- ----------
Total Expenses 5,752,000 2,614,000
---------- ----------
Income (loss) (468,000) (104,000)
Minority interests (134,000) (67,000)
Limited partner's interest 403,000 118,000
---------- ----------
Net (loss) $ (199,000) $ (53,000)
========== ==========
Net (loss) per share $ (0.24) $ (0.08)
========== ==========
Dividends to shareholders $ - $ -
Dividends to shareholders per share $ - $ -
---------- ----------
Average number of shares outstanding 833,381 692,111
========== ==========
See accompanying notes to the consolidated financial statements.
5
Cedar Income Fund, Ltd.
Consolidated Statements of Cash Flows
(unaudited)
For the three months ended
March 31, March 31,
2003 2002
--------------- -------------
Cash Flow From Operating Activities
Net loss $ (199,000) $ (53,000)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Minority interest 134,000 67,000
Limited partner's interest in Operating Partnership (403,000) (118,000)
Distribution to minority interest partners (296,000) -
Depreciation and amortization 672,000 552,000
Straight line rent (119,000) (80,000)
Changes in operating assets and liabilities:
Increase in rent and other receivables (350,000) (206,000)
Increase in prepaid expenses (732,000) (389,000)
Decrease in taxes held in escrow 73,000 400,000
Increase in accounts payable and accrued expense 302,000 235,000
Security deposits collected, net 20,000 (16,000)
Increase (decrease) in advance rents 155,000 (90,000)
----------- -----------
Net cash (used in) provided by operating activities (743,000) 302,000
----------- -----------
Cash Flow From Investing Activities
Expenditures for real estate and improvements (20,855,000) (417,000)
Decrease in joint venture and restricted cash 611,000 513,000
Decrease (increase) in property deposits 194,000 (150,000)
Payment of deferred leasing costs (62,000) (214,000)
----------- -----------
Net cash used in investing activities (20,112,000) (268,000)
----------- -----------
Cash Flow from Financing Activities
Proceeds from mortgages 15,769,000 -
Repayment of line of credit (577,000) -
Repayment of loans payable (150,000) -
Principal portion of scheduled mortgage payments (258,000) (108,000)
Contributions from minority interest partners 3,740,000 -
Deferred financing and legal costs (net) 162,000 (508,000)
----------- -----------
Net cash provided by (used in) financing activities 18,686,000 (616,000)
----------- -----------
Net decrease in cash and cash equivalents (2,169,000) (582,000)
Cash and cash equivalents at beginning of the period 3,827,000 2,872,000
----------- -----------
Cash and cash equivalents $ 1,658,000 $ 2,290,000
=========== ===========
Supplemental Disclosure of Cash Activities
Interest paid $ 1,967,122 $ 839,000
=========== ===========
See accompanying notes to the consolidated financial statements.
6
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 1. Organization and Basis of Presentation
Cedar Income Fund, Ltd. (the "Company"), organized in 1984 and
qualified to operate as a real estate investment trust ("REIT"), focuses on the
ownership, operation and redevelopment of community and neighborhood shopping
centers located primarily in Pennsylvania and New Jersey. As of March 31, 2003,
the Company owned eleven properties, aggregating approximately 2,000,000 square
feet of rentable space. The Company has no employees and accordingly relies on
Cedar Bay Realty Advisors, Inc. and its affiliates (collectively, "CBRA") to
manage the affairs of, and provide other services to, the Company. The terms of
the agreements and other information are further discussed in Note 7.
Cedar Income Fund Partnership, L.P. (the "Operating Partnership") is
the entity through which the Company conducts substantially all of its business
and owns (either directly or through subsidiaries) substantially all of its
assets. The Company owns an approximate 29% economic interest in, and is the
sole general partner of, the Operating Partnership. As of March 31, 2003, the
consolidated financial statements of the Company include the accounts and
operations of the Company and the Operating Partnership. The Operating
Partnership has a 50% general partnership interest in The Point Shopping Center
("The Point"), a 20% general partnership interest in the Red Lion Shopping
Center ("Red Lion"), a 25% general partnership interest in the Loyal Plaza
Shopping Center ("Loyal Plaza"), and a 30% general partnership interest in the
three Giant supermarket-anchored shopping centers, Fairview Plaza Associates,
L.P. ("Fairview"), Halifax Plaza Associates, L.P. ("Halifax") and Newport Plaza
Associates, L.P. ("Newport"). As the Company has operating control over the
Operating Partnership, and the Operating Partnership exercises similar control
over the other entities, all of the partnerships are included in the
consolidated financial statements.
The accompanying interim unaudited financial statements have been
prepared by the Company's management pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements as of March 31,
2003, and for the three months ended March 31, 2003 and 2002 include, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial information set forth
herein. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. These financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.
7
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 1. Organization and Basis of Presentation (continued)
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the disclosure
of contingent assets and liabilities and the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
In December 2002, the Financial Accounting Standards Board ("FASB"),
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to provide alternative methods of transition for an entity that
voluntarily adopts the fair value recognition method of recording stock option
expense. SFAS 148 also amends the disclosure provisions of SFAS 123 and
Accounting Principals Board ("APB") Opinion No. 28. "Interim Financial
Reporting", to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to stock
options on reported net income and earnings per share in annual and interim
financial statements.
SFAS 123, as amended by SFAS 148, establishes financial accounting and
reporting standards for stock based employee compensation plans, including all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. SFAS 123 defines a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion No. 25"). The Company has elected to continue
using Opinion No. 25 and make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting defined in SFAS 123 had been
applied.
In 1998, the Company's shareholders approved an incentive stock option
plan authorizing the issuance of option grants for up to 500,000 shares. During
2001, the Company granted to each of its five directors then in office, options
to purchase 10,000 shares at $3.50 per share, the market value of the Company's
common stock on the date of the grant.
8
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 1. Organization and Basis of Presentation (continued)
The following table sets forth, on a pro forma basis, the net loss and
net loss per share as if the fair value method of accounting defined in SFAS 123
had been applied.
Pro Forma Basic Net Loss Per Share
For the quarter ended March 31,
2003 2002
-------------- --------------
Net loss as reported $199,000 $53,000
Adjustment to amortize the value of options granted 4,000 4,000
Pro forma loss $203,000 $57,000
======== =======
Outstanding shares 833,381 692,111
Note 2. Supplemental Cash Flow Disclosures
During the first quarter of 2003, 138,000 shares of common stock were
issued in exchange for 552 Series A cumulative redeemable preferred Operating
Partnership units, and 19,000 shares of common stock were issued at $5.00 per
share to vendors for services rendered.
Note 3. Cash at Joint Ventures and Restricted Cash
Joint venture partnership agreements require, among other things, that
the Company maintain separate cash accounts for the operation of the joint
venture and that distributions to the general and limited partners be strictly
controlled. These arrangements to date have not resulted in any significant
liquidity shortfalls at the Company or the partnership level; however, the
Company or any combination of the joint venture partnerships could suffer a
liquidity crisis while other members of the group have sufficient liquidity.
Cash at joint ventures and restricted cash amounted to approximately $2.3
million at March 31, 2003.
Note 4. Acquisition and Disposition Activity
In February 2003, the Company completed the acquisition of a 30% general
partnership interest in three Giant supermarket-anchored shopping centers with
an aggregate gross leaseable area of approximately 190,000 sq. ft. in the
Harrisburg, Pennsylvania area. The centers cost approximately $20.8 million. The
Company's general partnership interest cost $1.16 million and the limited
partner, which is affiliated with the limited partner in the Loyal Plaza
partnership, invested $3.74 million. The terms of the partnership agreement
provide that the limited partner receive a preferential return of 12.5% on its
investment before the Company is entitled to receive any distributions. The
9
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 4. Acquisition and Disposition Activity (continued)
balance of the purchase price was financed by three separate mortgage loans
aggregating approximately $15.9 million. One loan, in the amount of
approximately $6.1 million with a term of ten years, has a fixed rate of 5.64%.
The Company entered into interest rate swaps for the entire amount and for the
seven year terms of the other two loans (approximately $ 4.3 million and $5.5
million), resulting in a fixed rate of 6.43%. The blended interest rate for the
three loans is 6.09%. The Company intends to account for the acquisition in
accordance with Statement of Financial Accounting Standards No. 141 "Business
Combinations," ("SFAS 141") and Statement of Financial Accounting Standards No.
142 "Goodwill and Intangibles" ("SFAS 142"), and is currently in the process of
analyzing the fair value of its in-place leases; and, consequently, no value has
yet been assigned to the leases.
Note 5. Line of Credit and SWH Financing
Effective as of March 16, 2003, the Company entered into a new line of
credit facility for a one-year period. The credit facility has a $2 million
limit, provided, however, that only $1 million is available until the SWH
financing has been repaid. The line bears interest on the outstanding balance at
the greater of 6% or the bank's prime rate plus 1%. During the first quarter,
the Company also exercised its rights under the SWH financing to utilize the
$150,000 per month alternate amortization schedule under the loan agreement.
Note 6. Intangible Lease Asset/Liability
On July 1, 2001 and January 1, 2002, the Company adopted SFAS 141 and
SFAS 142, respectively. These standards govern business combinations and asset
acquisitions, and the accounting for acquired intangibles. As part of the
acquisition of real estate assets, the Company determines whether an intangible
asset or liability related to above- or below-market leases, was acquired as
part of the acquisition of the real estate. As a result of adopting the
standards, amounts totaling $5,117,000 have been recorded as intangible lease
liabilities, relating to above and below market lease arrangements for
properties acquired in 2002. The intangible assets and liabilities are recorded
at their estimated fair market values at the date of acquisition, and are
amortized over the remaining term of the respective lease to rental income. Such
amortization amounted to $169,000 during the first quarter of 2003 and $0 during
the first quarter of 2002. The weighted average amortization period for the
intangible lease liabilities was approximately eight years.
10
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 6. Intangible Lease Asset/Liability (continued)
These intangibles will be amortized as follows:
For the year ending December 31:
2003 $ 719,000
2004 678,000
2005 642,000
2006 577,000
2007 591,000
Thereafter 1,764,000
------------
$ 4,971,000
============
Note 7. Related Party Transactions
The Company has no employees and accordingly relies on CBRA and its
affiliates to manage the affairs of the Company. The Company is thus referred to
as an "advised" REIT. Pursuant to the terms of an Administrative and Advisory
Agreement (the "Advisory Agreement"), CBRA provides the Company with management,
acquisition, leasing, advisory services, accounting systems, professional and
support personnel and office facilities. Leo S. Ullman, the Company's Chairman
and Chief Executive Officer, is also the principal stockholder of CBRA. Certain
of the Company's other officers are also officers and employees of CBRA.
The Advisory Agreement may be terminated (i) for cause upon not less
than sixty days' prior written notice, and (ii) by vote of at least 75% of the
independent directors at the end of the third or fourth year of its five-year
term in the event gross assets fail to increase by 15% per annum.
Pursuant to the Advisory Agreement, effective as of January 1, 2002,
CBRA will earn a disposition or acquisition fee, as applicable, equal to 1% of
the sale/purchase price; no other fees will be payable in connection with such
transactions. All accrued acquisition fees are included in accounts payable at
March 31, 2003.
11
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 7. Related Party Transactions (continued)
The following is a schedule of acquisition and disposition fees paid,
accrued, or deferred by the Company to CBRA for the quarter ended March 31, 2003
and for the year ended December 31, 2002:
Property Deferred (1) Paid Accrued Total
- ------------------------------- ------------- ------------ ------------- ------------
2003 Transactions
- -----------------
Three Giant supermarket-
anchored shopping centers $ - $ - $ 180,000 $ 180,000
---------- ---------- ----------- ----------
Totals $ - $ - $ 180,000 $ 180,000
========== ========== =========== ==========
2002 Transactions
- -----------------
Southpoint $ - $ 47,000 $ 0 $ 47,000
Red Lion - 44,000 - 44,000
Loyal Plaza - - 183,000 183,000
Camp Hill - - 172,000 172,000
LA Fitness - 60,000 - 60,000
---------- ---------- ----------- ----------
Totals $ - $ 107,000 $ 399,000 $ 506,000
========== ========== =========== ==========
(1) During 2001, the Advisory Agreement was modified and CBRA agreed to defer
certain fees of $195,700 and to ultimately waive such fees if the Agreement
is not terminated before December 31, 2004.
The following is a schedule of management, administrative, advisory,
legal, leasing and loan placement fees paid to CBRA or its affiliates:
For the quarters ending March 31,
2003 2002
----------- -----------
Management Fees (1) $ 203,000 $ 102,000
Construction Management (2) $ - $ 20,000
Leasing Fees (3) $ - $ 260,000
Administrative and Advisory (4) $ 159,000 $ 90,000
Legal (5) $ 58,000 $ 29,000
Loan Placement Fees (6) $ - $ -
(1) Management fees are calculated at 3%-4% of gross revenues collected.
(2) Construction management fees are calculated at 5% of construction costs.
(3) Leasing fees are calculated at 4%-4.5% of a new tenant's base rent.
(4) Monthly administrative and advisory fees are equal to 1/12 of 3/4 of 1% of
the estimated current value of real estate assets of the Company plus 1/12
of 1/4 of 1% of the estimated current value of all other assets of the
Company.
(5) Legal fees are paid to an affiliate of CBRA for the services provided by
Stuart H. Widowski, Esq., in-house counsel.
(6) Loan placement fees are calculated at 1% of the loan cost up to a maximum
of $100,000.
12
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 7. Related Party Transactions (continued)
Homburg Invest (USA) Inc. ("Homburg USA"), a wholly-owned U.S.
subsidiary of Homburg Invest Inc. (approximately 72% owned by Richard Homburg),
a real estate company listed on the Toronto (Canada) Stock Exchange, and which
owns 21.6% of the Company's common shares outstanding, purchased on December 24,
2002 for $3 million, 3,300 convertible preferred Operating Partnership units at
$909.09 with a liquidation value of $1,000 each and a preferred distribution
rate of 9%. The Board subsequently elected Mr. Homburg a Director of the Company
to serve alongside Frank Matheson who is also a Director of the Company and an
officer of Homburg Invest (USA) Inc. During January 2003, 138,000 shares of
common stock were issued to Homburg USA in exchange for 552 preferred operating
partnership units.
The issuance of common stock to Homburg USA may result in the
disqualification of the Company's status as a REIT in 2003. If Richard Homburg,
directly or indirectly, together with the four other largest shareholders of the
Company, were to own, during the second half of any calendar year, more than 50%
of the value of the Company, it would fail to meet the "five or fewer" test
(five or fewer individual shareholders owning more than 50%) for continued REIT
status. The loss of REIT status, while creating no immediate income taxes for
the Company or its shareholders, would mean, among other things, that the
Company would be taxed as if it were a "C" corporation on future net taxable
income and capital gains. Additionally, the Company would generally be
disqualified for federal income tax purposes as a REIT for the four taxable
years following disqualification. The Company does not presently expect to have
taxable income for the year ended December 31, 2003, and as such does not
contemplate paying dividends during 2003. The Company believes that as of the
date of this filing, it is in full compliance with the REIT provisions of the
Internal Revenue Code, and will continue to monitor the situation closely.
Note 8. Interest Rate Hedges
During 2002, the Company completed one interest rate swap transaction
to hedge the Company's exposure to changes in interest rates with respect to $14
million of LIBOR based variable rate debt. The swap agreement provides for a
fixed all-in rate of 4.74% (includes a credit spread of 1.95%). The swap
agreement extends through November 19, 2003, on $7 million of notional principal
and through November 19, 2004 on the remaining $7 million.
During the first quarter of 2003, the Company entered into two interest
rate swaps to hedge the Company's exposure to changes in interest rates with
respect to $9.8 million of LIBOR based variable rate debt. The swap agreements
provide for a fixed all-in rate of 6.43% and extend through the seven year term
of the loans.
13
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 8. Interest Rate Hedges (continued)
As of March 31, 2003, unrealized losses of $616,000 representing the
change in fair value of the aforementioned swaps were reflected 33% or
approximately $203,000 in accumulated other comprehensive loss, a component of
shareholder's equity, and 67% or approximately $413,000 is reflected in the
limited partner's interest.
The Company's interest rate hedges are designated as cash flow hedges
and hedge the future cash outflows on debt. Interest rate swaps that convert
variable payments to fixed payments, such as those held by the Company, as well
as interest rate caps, floors, collars, and forwards are cash flow hedges. The
unrealized gains/losses in the fair value of these hedges are reported on the
balance sheet with a corresponding adjustment to either accumulated other
comprehensive income or earnings. For cash flow hedges, the ineffective portion
of a derivative's change in fair value is immediately recognized in earnings.
Note 9. Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("EPS") ("SFAS 128"), basic EPS are computed by dividing
income available to common shareholders by the weighted average number of shares
of common stock outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. As the Company
reported a net loss during the first quarter of 2003 and 2002, diluted EPS are
not presented.
Note 10. Subsequent Events
During, the second quarter of 2003, the Company acquired a 15% general
partnership interests in Pine Grove Shopping Center, a 79,000 sq. ft. center in
Browns Mills, New Jersey, and Swede Square, a 101,000 sq. ft. center in East
Norriton, Pennsylvania. The Pine Grove Shopping Center cost approximately $8.3
million and was financed in part by a $6 million first mortgage of which the
Company guaranteed $1.8 million. Swede Square cost approximately $8 million and
was financed in part by a $5 million first mortgage. Homburg USA, a related
party (see Note 7), supplied substantially all of the equity required for the
two acquisitions through limited partner interests. The terms of the partnership
agreements provide, among other things, that the limited partner receive a 12%
preferential return prior to any distributions to the Company. In addition, the
Company has the option to purchase the limited partner's interest provided that
the limited partner receives a 15% annualized rate of return from the
acquisition date through the effective date of the exercise of the option.
14
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2003
(unaudited)
-----------
Note 10. Subsequent Events (continued)
During the second quarter of 2003, the Company entered into a proposed
net lease transaction with regard to a shopping center in Philadelphia,
Pennsylvania. In connection therewith, the Company made a non-refundable deposit
of $1 million borrowed from its unsecured line of credit. The Company is
currently seeking a joint venture partner and or other financing arrangements
for this transaction. In the event that the Company is unable to make such
arrangements the $1 million dollar deposit would be at risk.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations
Forward-Looking Statements
Statements made or incorporated in this Form 10-Q include certain
forward-looking statements. Forward-looking statements include, without
limitation, statements containing the words "anticipates," "believes,"
"expects," "intends," "future," and words of similar import which express the
Company's belief, expectations or intentions regarding future performance or
future events or trends. We caution you that, while forward-looking statements
reflect good faith beliefs, they are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors, which may
cause actual results, performance or achievements to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements as a result of factors outside of the Company's
control. Certain factors that might cause such a difference include, but are not
limited to, the following: real estate investment considerations, such as the
effect of economic and other conditions in general and in the eastern United
States in particular; the financial viability of our tenants; the continuing
availability of retail center acquisitions, development and redevelopment
opportunities on favorable terms; the availability of equity and debt capital in
the public markets; the fact that returns from development, redevelopment and
acquisition activity may not be at expected levels; the Company may be unable to
realize the level of proceeds from property sales as initially expected;
inherent risks in ongoing redevelopment and development projects including, but
not limited to, cost overruns resulting from weather delays, changes in the
nature and scope of redevelopment and development efforts, and market factors
involved in the pricing of material and labor; the need to renew leases or relet
space upon the expiration of current leases; and the financial flexibility to
refinance debt obligations when due. Reference is made to the statements under
the caption "Risk Factors" included in the Company's Form 10-K for 2002.
Summary of Critical Accounting Policies
Basis of Presentation and Consolidation Policy
The financial statements are prepared on the accrual basis in
accordance with accounting principles generally accepted in the United States
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the disclosure
of contingent assets and liabilities and the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
The consolidated financial statements of the Company include the
accounts and operations of the Company and the Operating Partnership in which
the Company has a 33% general partnership interest. The Operating Partnership
has a 50% general partnership interest in The Point, a 20% general partnership
interest in Red Lion, a 25% general partnership interest in Loyal Plaza and a
30% general partnership interest in the three Giant anchored centers purchased
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Basis of Presentation and Consolidation Policy (continued)
during the first quarter. As the Company has operating control over the
Operating Partnership, and the Operating Partnership exercises similar control
over the other entities, all of the partnerships are included in the
consolidated financial statements.
Rents and Other Receivables
Management has determined that all of the Company's leases with its
various tenants are operating leases. Minimum rents are recognized on a
straight-line basis over the terms of the related leases net of valuation
adjustments based on management's assessment of credit, collection and other
business risks. The excess of rents recognized over amounts contractually due is
included in deferred rents receivable on the Company's balance sheets. The
leases also typically provide for tenant reimbursements of common area
maintenance and other operating expenses and real estate taxes. Ancillary and
other property-related income is recognized in the period earned. The Company
makes estimates as to the collectibility of its accounts receivables and
assesses historical bad debts, customer creditworthiness, current economic
trends and changes in customer payment patterns when evaluating the adequacy of
its allowance for doubtful accounts. Such estimates have a direct impact on the
Company's net income.
Real Estate Investments and Real Estate Held For Sale
Real estate investments are carried at cost less accumulated
depreciation. The provision for depreciation and amortization has been
calculated using the straight-line method based upon the following estimated
useful lives of assets:
Buildings and Improvements 40 years
Tenant Improvements Over the life of the lease
Expenditures for maintenance, repairs, and betterments that do not
materially prolong the normal useful life of an asset are charged to operations
as incurred.
Additions and betterments that substantially extend the useful lives of
the properties are capitalized. Upon sale or other disposition of assets, the
cost and related accumulated depreciation and amortization are removed from the
accounts and the resulting gain or loss, if any, is reflected in net income.
Real estate investments include capitalized interest and other costs on
development and redevelopment activities and on significant construction in
progress. Capitalized costs are included in the cost of the related asset and
charged to operations through depreciation over the asset's estimated useful
life.
In October 2001, the FASB issued Statement of Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 provides accounting guidance for financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Real Estate Investments and Real Estate Held For Sale (continued)
Long-Lived Assets to be Disposed Of." It also supersedes the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
related to the disposal of a segment of a business. The Company adopted SFAS 144
on January 1, 2002. Accordingly, the Company periodically evaluates its real
estate to determine if any impairment has occurred.
On July 1, 2001 and January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 141 "Business Combinations," and Statement of
Financial Accounting Standards No. 142 "Goodwill and Intangibles", respectively.
These standards govern business combinations and asset acquisitions, and the
accounting for acquired intangibles. As part of the acquisition of real estate
assets, the Company determines whether an intangible asset or liability related
to above or below market leases, was acquired as part of the acquisition of the
real estate. The intangible assets and liabilities are recorded at their
estimated fair market values at the date of acquisition, and are amortized over
the remaining term of the respective lease to rental income.
Real estate investments held for sale are carried at the lower of cost
or fair value less cost to sell. Depreciation and amortization are suspended
during the period held for sale.
Deferred Charges
Deferred charges consist of leasing commissions incurred in leasing the
Company's properties. Such charges are amortized using the straight-line method
over the term of the relevant lease. In addition, deferred charges include costs
incurred in connection with securing long-term debt, including the costs of
entering into interest rate protection agreements. Such costs are amortized over
the term of the relevant agreement.
Derivative Financial Instruments
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments. This accounting standard
requires the Company to measure derivative instruments at fair value and to
record them in the Consolidated Balance Sheet as an asset or liability,
depending on the Company's rights or obligations under the applicable derivative
contract. The Company's derivative investments are primarily cash flow hedges
that limit the base rate of variable rate debt. For cash flow hedges the
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings, if applicable, and the effective portion of the fair
value difference of the derivative is reflected separately in shareholders'
equity as accumulated other comprehensive income (loss).
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Derivative Financial Instruments (continued)
The Company utilizes derivative financial instruments to reduce
exposure to fluctuations in interest rates. The Company has established policies
and procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company has not, and does not
plan to enter into derivative financial instruments for trading or speculative
purposes. Additionally, the Company has a policy of only entering into
derivative contracts with major financial institutions. The principal derivative
financial instruments used by the Company are interest rate swaps and interest
rate caps.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS 107"), requires the Company to
disclose fair value information of all financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate fair
value. The Company's financial instruments, other than debt are generally
short-term in nature and contain minimal credit risk. These instruments consist
of cash and cash equivalents, rents and other receivables, and accounts payable.
The carrying amount of these assets and liabilities in the consolidated balance
sheets are assumed to be at fair value.
The fair value of mortgage loans payable is estimated utilizing
discounted cash flow analysis, using interest rates reflective of current market
conditions and the risk characteristics of the loans.
Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("EPS") ("SFAS 128"), basic EPS are computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Stock Option Plans and Warrants
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation" to provide alternative methods of transition for
an entity that voluntarily adopts the fair value recognition method of recording
stock option expense. SFAS 148 also amends the disclosure provisions of SFAS 123
and APB Opinion No. 28. "Interim Financial Reporting" to require disclosure in
the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock options on reported net income and
earnings per share in annual and interim financial statements.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Stock Option Plans and Warrants (continued)
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans, including all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. SFAS 123 defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("Opinion No. 25"). The Company has elected to continue using Opinion No. 25 and
make pro forma disclosures of net income and earnings per share as if the fair
value method of accounting defined in SFAS 123 had been applied.
The Company accounts for non-employee stock-based awards in which
goods or services are the consideration received for the equity instruments
issued in accordance with SFAS 123 and EITF 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services", based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable with charges taken into operations over
the period goods and services are received.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes
the current practice in the accounting for, and disclosure of, guarantees.
Guarantees and indemnification agreements meeting the characteristics described
in FIN 45 are required to be initially recorded as a liability at fair value.
FIN 45 also requires a guarantor to make significant new disclosures for
virtually all guarantees even if the likelihood of the guarantor having to make
payment under the guarantee is remote. The disclosure requirements within FIN 45
are effective for financial statements for annual or interim periods ending
after December 15, 2002. The initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted FIN 45 on January 1, 2003.
The result of this adoption did not have a material effect on the results of
operations or the financial position of the Company.
In January 2003, FASB Interpretation No. 46 was issued, "Consolidation
of Variable Interest Entities" ("FIN 46"), which explains how to identify
variable interest entities ("VIE") and how to assess whether to consolidate such
entities. The provisions of this interpretation are immediately effective for
VIE's formed after January 31, 2003. For VIEs formed prior to January 31, 2003,
the provisions of this interpretation apply to the first fiscal year or interim
period beginning after June 15, 2003. Management has not yet determined whether
any of its consolidated entities in existence on January 31, 2003 represent
variable interest entities pursuant to such interpretation. Such determination
could result in a change in the Company's consolidation policy related to such
entities.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Results of Operations
During the first quarter of 2003, the Company acquired a 30% general
partnership interest in three shopping centers with an aggregate purchase price
of $20.8 million. During the second quarter of 2002, the Company acquired a 20%
general partnership interest in one shopping center from a related party, based
on a property value of $23 million. The Company also sold one office property
for a gross sales price of approximately $4.4 million, which resulted in a loss
of $49,000. During the third quarter of 2002, the Company acquired a 25% general
partnership interest in one shopping center with an aggregate purchase price of
approximately $18.3 million. During the fourth quarter of 2002, the Company
acquired a 100% interest in a property with a purchase price of $ 17.2 million
and acquired a 50% general partnership interest in a seven-acre parcel of land
on which the partnership commenced construction, during the first quarter of
2003, of a 41,000 sq. ft. health club facility.
Differences in results of operations between the first quarter of 2003
and the first quarter of 2002 were driven largely by the Company's acquisition
and disposition activity. Net loss before the loss on sale of properties, and
income allocated to minority interest, increased approximately $359,000 from a
net loss of $109,000 in the first quarter of 2002 to a net loss of $468,000 in
the first quarter of 2003. Net loss attributable to common shareholders
increased approximately $146,000 from a net loss of $53,000 in the first quarter
of 2002 to a net loss of $199,000 in the first quarter of 2003. Net loss per
share increased $0.15 from a net loss per share of $0.08 in the first quarter of
2002 to a net loss per share of $0.23 in the first quarter of 2003.
Results of operations for properties consolidated for financial
reporting purposes and held throughout both the first quarter of 2002 and the
first quarter of 2003 included four properties. Results of operations for
properties consolidated for financial reporting purposes and purchased or sold
subsequent to January 1, 2002 through March 31, 2003 included eight properties.
As of March 31, 2003, the Company owned eleven shopping center properties.
Revenue and Expenses
Quarter ended
March 31, March 31, Acquisitions/ Held in
2003 2002 Difference dispositions both years
---------------------------------------------------------------------
Rents $5,281,000 $2,504,000 $ 2,777,000 $ 2,790,000 $(13,000)
Property expenses 2,368,000 893,000 1,475,000 1,161,000 314,000
Depreciation & amortization 841,000 552,000 289,000 269,000 20,000
Interest expense 2,038,000 921,000 1,117,000 964,000 153,000
General & administrative expense 478,000 191,000 287,000 - -
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Results attributable to acquisition and disposition activities
Rents increased from approximately $2,500,000 in the first quarter of
2002 to approximately $5,300,000 in the first quarter of 2003, a net increase of
approximately $2,800,000 or 112%. Such net increase is attributable to the
Company's acquisition and disposition activities.
Property expenses, excluding depreciation, amortization and interest
expense, increased from approximately $893,000 in the first quarter of 2002 to
approximately $2,368,000 in the first quarter of 2003, a net increase of
approximately $1,475,000 or 165%. Such increase reflects approximately
$1,161,000 attributable to the Company's acquisition activities, and
approximately $314,000 attributable to properties held in both years.
Depreciation and amortization increased from approximately $552,000 in
the first quarter of 2002 to approximately $841,000 in the first quarter of
2003, a net increase of approximately $288,000 or 52%. Such increase reflects
approximately $269,000 attributable to the Company's acquisition activities, and
approximately $20,000 attributable to properties held in both years.
Interest expense increased from approximately $921,000 in the first
quarter of 2002 to approximately $2,038,000 in the first quarter of 2003, a net
increase of approximately $1,117,000 or 121%. Such increase reflects
approximately $964,000 attributable to the Company's acquisition activities, and
approximately $153,000 attributable to properties held in both years.
General and administrative expense increased approximately $287,000 to
$478,000 in the first quarter of 2003 from approximately $191,000 in the first
quarter of 2002, a change of 150%. The increase is primarily the result of the
Company's growth throughout both years.
Results for properties fully operating throughout both years
Rental income for Port Richmond L.L.C. 1 ("Port Richmond"), Academy
Plaza L.L.C. 1 ("Academy Plaza"), Washington Center L.L.C. 1 ("Washington
Center'), and The Point Associates, L.P. ("The Point Associates"), the only
properties fully operating throughout the first quarters of both years,
decreased by approximately $13,000 from $2,218,000 in the first quarter of 2002
to $2,206,000 in the first quarter of 2003. Property expenses increased $314,000
from approximately $710,000 during the first quarter of 2002 to $1,024,000
during the first quarter of 2003. The increase in property expenses for the
quarter ended March 31, 2003 is attributable to (1) an increase in snow removal
costs of approximately $94,000, (2) an increase in real estate taxes of $66,000
resulting from a second quarter 2002 re-assessment following the completion of
The Point redevelopment project, and (3) an increase of $94,000 in bad debt
expense principally attributable to disputed common area maintenance ("CAM")
charges with a major tenant.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Net Cash Flows
Operating Activities
Net cash flow provided by (used in) operating activities increased from
$302,000 during the first quarter of 2002 to $(743,000) during the first quarter
of 2003. The change of $1,045,000 is primarily attributable to increases in rent
and other receivables and prepaid expenses, offset in part by a decrease of
taxes held in escrow.
Investing Activities
Net cash flow used in investing activities increased to approximately
$20,112,000 during the first quarter of 2003, from approximately $268,200 in the
first quarter of 2002. During the first quarter of 2003, the Company completed
the acquisitions of three shopping centers located in Pennsylvania aggregating
190,000 square feet for a cost of approximately $20,800,000.
Financing Activities
Net cash flow provided by (used in) financing activities increased to
approximately $18,686,000 in the first quarter of 2003 from approximately
$(616,000) during the first quarter of 2002. The change of approximately
$19,300,000 was primarily the result of the Company borrowing approximately
$16,000,000 and the receipt of $3,740,000 in equity contributions from limited
partners to fund the acquisitions of three shopping centers, and the capital
expenditures necessary to improve and lease its properties.
Liquidity and Capital Resources
The Company funds its operating expenses primarily from operating cash
flows, although, if needed, the Company may also use its bank line of credit for
this purpose. The Company funds acquisitions, developments, and other capital
expenditures primarily from available cash, property-specific mortgage
indebtedness, joint venture partner equity contributions, its line of credit,
and to a lesser extent, operating cash flows. The Company may also acquire
properties through the issuance of limited partnership Units of the Operating
Partnership. Additionally, the Company may dispose of certain properties,
reinvesting the proceeds from such dispositions into properties with better
growth potential or more consistent with its strategic focus.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Liquidity and Capital Resources (continued):
The Company's financial liquidity is provided by $1,658,000 in cash and
cash equivalents at March 31, 2003 and by the unused balance of its bank line of
credit. In March 2003, the Company entered into a new line of credit that will
contribute to its liquidity during 2003 (see below). The Company also believes
that it has sufficient flexibility to fund its operations for at least the next
twelve months including required payments in connection with the SWH financing
(based on a $150,000 alternative monthly amortization schedule provided for in
the SWH loan documents and adopted by the Company on April 1, 2003), property
level capital expenditures, tenant improvements, leasing costs and mortgage and
other scheduled principal payments.
The Company's ability, however, to meet these obligations is dependent
in large part on its ability to attract joint venture partners or make other
suitable financing arrangements with respect to acquisition agreements and
redevelopment projects undertaken by the Company. With respect to the Camp Hill
redevelopment project, and as a result of preliminary discussions with several
potential partners, the Company believes it will be successful in arranging a
transaction to finance the redevelopment project, however, no assurances can be
given that such an arrangement will ultimately be finalized.
During the second quarter of 2003, the Company entered into a proposed
net lease transaction with regard to a shopping center in Philadelphia,
Pennsylvania. In connection therewith, the Company made a non-refundable deposit
of $1 million fully utilizing the amount available from its unsecured line of
credit. The Company is currently seeking a joint venture partner and or other
financing arrangements for this acquisition. In the event that the Company is
unable to make such arrangements, the $1 million deposit would be at risk.
In March 2002, the Company entered into a one-year $1 million unsecured
line of credit facility with North Fork Bank, Melville, New York. The line of
credit bore interest at the greater of 6% or the bank's prime rate plus 1%. The
line of credit was repaid on January 26, 2003. During March 2003, the Company
entered into a new line of credit facility with North Fork Bank for a one-year
period. The line bears interest at the greater of 6% or the bank's prime rate
plus 1%. The new credit facility has a $2 million limit, provided, however, that
only $1 million will be available until the SWH financing has been repaid.
Capital Strategy
The Company focuses its investment activities on community and
neighborhood shopping centers, primarily located in Pennsylvania and New Jersey,
anchored principally by regional and national grocery store chains. The Company
continues to seek acquisition opportunities where it can utilize its experience
in shopping center renovation, expansion, re-leasing and re-merchandising to
achieve long-term cash flow growth and favorable investment returns. The Company
would also consider investment opportunities in markets beyond the Pennsylvania
and New Jersey area provided such opportunities were consistent with its focus,
had the potential to create favorable investment returns and increased value to
its shareholders, and could be effectively controlled and managed.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (continued)
Funds from Operations
Management believes that funds from operations ("FFO") is an
appropriate measure of performance of an equity REIT. FFO is defined by the
National Association of Real Estate Investment Trusts ("NAREIT") as net income
or loss excluding gains or losses from debt restructuring and sales of
properties plus real estate depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with accounting principles
generally accepted in the United States and is not indicative of cash available
to fund cash needs. FFO should not be considered as an alternative to net
income, as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
As all companies and analysts do not calculate FFO in a similar
fashion, the Company's calculation of FFO presented herein may not be comparable
to similarly titled measures as reported by other companies.
25
The following table represents the Company's FFO calculation for the quarters
ended,
March 31, March 31,
2003 2002
-----------------------------
Net (loss) income before limited partner's
interest in Operating Partnership $ (602,000) $ (171,000)
Add (Less):
Limited partner's interest in the
Operating Partnership 403,000 118,000
-------------------------
Net (loss) income available to common shareholders (199,000) (53,000)
Add (less) Company's share of the following items:
Depreciation 239,000 94,000
Minority interest 44,000 21,000
Amount distributable to minority partners (129,000) (40,000)
-------------------------
Basic and diluted funds (used in) from operations $ (45,000) $ 22,000
=========================
Weighted average shares outstanding 833,000 692,000
The following table represents the Company's and the Operating Partnership's FFO
calculation for the quarters ended,
March 31, March 31,
2003 2002
-----------------------------
Net (loss) income before limited partner's
interest in Operating Partnership $ (602,000) $ (171,000)
Add (Less):
Limited partner's interest in the
Operating Partnership 403,000 118,000
-------------------------
Net (loss) income available to common shareholders (199,000) (53,000)
Add (less) Company's share of the following items:
Limited partner's interest (403,000) (118,000)
Depreciation 725,000 302,000
Minority interest 134,000 67,000
Amount distributable to minority partners (391,000) (128,000)
-------------------------
Basic and diluted funds (used in ) from operations $ (134,000) $ 70,000
=========================
Weighted average shares/units outstanding (1) 2,534,000 2,393,000
(1) Assumes conversion of 1,701,000 limited partnership units of the Operating
Partnership.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary market risk facing the Company is interest rate risk on its
loans payable and mortgage notes payable. The Company will, when advantageous,
hedge its interest rate risk using financial instruments. The Company is not
subject to foreign currency risk.
The Company is exposed to interest rate changes primarily as a result
of (i) the line of credit used to maintain liquidity, fund capital expenditures
and expand its real estate investment portfolio and (ii) the Camp Hill
acquisition financing. The Company's interest rate risk management objectives
are to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve these objectives, the Company
borrows primarily at fixed rates and may enter into derivative financial
instruments such as interest rate swaps, caps and treasury locks in order to
mitigate its interest rate risk on a related financial instrument. The Company
does not enter into derivative or interest rate transactions for speculative
purposes.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk (continued)
The Company will recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges will be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged assets, liability or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. As of March 31, 2003, the
Company has interest rate swaps on three of its mortgage loans. These
derivatives had a change in fair value of approximately $616,000, of which
$203,000 was recognized in other comprehensive income and the remaining $413,000
was recognized as the limited partner's interest in consolidated Operating
Partnership.
The Company's interest rate risk is monitored using a variety of
techniques. As of March 31, 2003, long-term debt consisted of fixed-rate secured
mortgage indebtedness, fixed-rate unsecured notes, variable rate secured
mortgage notes, and a variable rate line of credit facility. The average
interest rate on the $88 million of fixed rate secured mortgage indebtedness
outstanding at March 31, 2003 was 7.5%, with maturities at various dates through
2013. The weighted average interest rate on the Company's line of credit at
March 31, 2003 was 6%. There was no outstanding balance on the line of credit at
March 31, 2003.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in its
filings under the Securities Exchange Act of 1934 is reported within the time
periods specified in the Securities and Exchange Commission's ("SEC") rules and
forms. In this regard, the Company has formed a Disclosure Committee currently
comprised of all of the Company's executive officers as well as certain other
employees with knowledge of information that may be considered in the SEC
reporting process. The Committee has responsibility for the development and
assessment of the financial and non-financial information to be included in the
reports filed by the Company with the SEC and assists the Company's Chief
Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company's SEC reports. The Committee meets
regularly and reports to the Audit Committee on a quarterly or more frequent
basis. The Company's principal executive and financial officers have evaluated
its disclosure controls and procedures within ninety days prior to the filing of
this Quarterly Report on Form 10-Q and have determined that such disclosure
controls and procedures are effective.
There have been no significant changes in the internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
27
Cedar Income Fund, Ltd.
-----------------------
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
8-K reporting under Item 5 on the investment of funds to Cedar
Income Fund, Ltd. and Cedar Income Fund Partnership, L.P.,
filed January 7, 2003;
8-K/A reporting under Item 7 on the financial statements, revenues
and certain expenses in connection with the acquisition of the
Camp Hill Mall, filed February 5, 2003; and
8-K reporting under Item 2 on the acquisition of the three Giant
supermarket-anchored shopping center properties located in
Pennsylvania, filed February 21, 2003.
Exhibit 99. Section 906 Certifications
28
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.
CEDAR INCOME FUND, LTD.
Leo S. Ullman Thomas J O'Keeffe
- ----------------------------------- --------------------------------
Leo S. Ullman Thomas J O'Keeffe
Chairman of the Board and President Chief financial Officer
(Principal executive officer) (Principal financial officer)
Ann Maneri
- -----------------------------------
Ann Maneri
Controller
(Principal accounting officer)
May 15, 2003
29
CERTIFICATION
-------------
I, Leo S. Ullman, Chief Executive Officer of Cedar Income Fund, Ltd.
the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
30
(a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
Leo S. Ullman
--------------------------------
Leo S. Ullman
Chief Executive Officer
31
CERTIFICATION
-------------
I, Thomas J. O'Keeffe, Chief Financial Officer of Cedar Income Fund,
Ltd. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
32
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
Thomas J. O'Keeffe
-------------------------------
Thomas J. O'Keeffe
Chief Financial Officer
33
CERTIFICATION
-------------
I, Leo S. Ullman, Chief Executive Officer of the Cedar Income Fund, Ltd. (the
"Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby
certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period ended March
31, 2003, fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 15th day of May,
2003.
Leo S. Ullman
---------------------------------------
Leo S. Ullman, Chief Executive Officer
A signed original of this written statement
required by Section 906 has been provided to
Cedar Income Fund, Ltd. and will be retained
by Cedar Income Fund, Ltd. and furnished to
the Securities and Exchange Commission or its
staff upon request.
I, Thomas J. O'Keeffe, Chief Financial Officer of the Cedar Income Fund, Ltd.
(the "Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do
hereby certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period ended
March 31, 2003, fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 15th day of May,
2003.
Thomas J. O'Keeffe
-------------------------------------------
Thomas J. O'Keeffe, Chief Financial Officer
A signed original of this written statement
required by Section 906 has been provided to
Cedar Income Fund, Ltd. and will be retained
by Cedar Income Fund, Ltd. and furnished to
the Securities and Exchange Commission or its
staff upon request.
34