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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission file number 0-14510
CEDAR INCOME FUND, LTD.
(Exact name of registrant as specified in its charter)
Maryland 42-1241468
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
44 South Bayles Avenue, #304, Port Washington, NY 11050
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 767-6492
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
- - ------------------- ------------------------
Common Stock, $0.01 par value The NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sales price on March 11, 1999 of $5.125 per share, the
aggregate market value of the voting stock held by non-affiliates of the
registrant was $1,804,891.
The number of shares outstanding of the registrant's common stock $.01 par value
was 542,111 on March 11, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
TABLE OF CONTENTS
Form 10-K
Item No. Report Page
- - -------- -----------
PART I
1. Business.................................................... I-1
2. Properties.................................................. I-3
3. Legal Proceedings........................................... I-7
4. Submission of Matters to a Vote of Security-Holders......... I-7
PART II
5. Market for Registrant's Common Equity and Related
Matters............................................. II-1
6. Selected Financial Data..................................... II-3
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. II-4
7(a). Quantitative and Qualitative Disclosures about Market Risk.. II-8
8. Financial Statements and Supplemental Data.................. II-9
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. II-26
PART III
10. Directors and Executive Officers of the Registrant.......... III-1
11. Executive Compensation...................................... III-2
12. Security Ownership of Certain Beneficial Owners and
Management.......................................... III-3
13. Certain Relationships and Related Transactions.............. III-4
PART IV
14. Financial Statements and Schedules, Exhibits and
Reports on Form 8-K................................. IV-1
15. Signatures.................................................. IV-3
Part I.
Item 1. Business
Cedar Income Fund, Ltd. ("Old Cedar") was incorporated in Iowa on December 10,
1984. Old Cedar's public offerings of common stock completed in 1986 and 1988
raised nearly $19 million. Old Cedar invested the proceeds from these offerings
in four real estate properties and a mortgage loan participation, utilizing only
a minimum amount of indebtedness against the properties. The mortgage loan
participation has since been liquidated.
On April 2, 1998, Cedar Bay Company, a New York general partnership ("CBC"),
pursuant to a tender offer to purchase all of the outstanding shares of common
stock of Old Cedar for $7.00 per share in cash (the "Offer"), acquired
1,893,038.335 shares of Old Cedar's outstanding Common Stock, $1.00 par value
per share ("Old Common Stock"), representing approximately 85% of the
outstanding shares.
On June 26, 1998, Old Cedar merged with and into Cedar Income Fund, Ltd., a
Maryland corporation (the "Company) newly formed as a wholly-owned subsidiary of
Old Cedar. Immediately thereafter, the Company assigned substantially all of its
assets and liabilities to a newly-formed Delaware limited partnership, Cedar
Income Fund Partnership, L.P. (the "Operating Partnership"), in exchange for an
aggregate of 2,245,411 units of the Operating Partnership ("Units"), which
constituted the sole general partnership interest and all of the limited
partnership interests in the Operating Partnership. After such assignment, CBC
exchanged 1,703,300 shares of the Company's Common Stock, $.01 par value per
share ("New Common Stock"), for 1,703,300 limited partnership Units in the
Operating Partnership owned by the Company. The shares of New Common Stock were
cancelled by the Company upon their exchange by CBC. Following these
transactions, CBC owned 189,737 shares of New Common Stock, aggregating
approximately 35% of the issued and outstanding shares of New Common Stock.
There were 542,111 shares of New Common Stock outstanding as of December 31,
1998. The Company's shares are traded on the NASDAQ Small Cap Market under the
symbol "CEDR".
Currently, a Unit in the Operating Partnership and a share of Common Stock of
the Company have essentially the same economic characteristics, as they
effectively share equally in net income or loss and distributions of the
Operating Partnership.
The Company operates as a real estate investment trust ("REIT"). To qualify as a
REIT under applicable provisions of the Internal Revenue Code of 1986, as
amended, and Regulations thereto, the Company must have a significant percentage
of its assets invested in, and income derived from, real estate and related
sources. The Company's objectives are to provide its shareholders with a
professionally managed, diversified portfolio of commercial real estate
investments which will provide the best available cash flow and present an
opportunity for capital appreciation.
I-1
Item 1. Business (continued)
The Company, through its Operating Partnership, owns and operates three office
properties aggregating approximately 224,000 square feet, located in
Jacksonville, Florida, Salt Lake City, Utah and Bloomington, Illinois and a 50%
undivided interest in a 74,000 square foot retail property located in
Louisville, Kentucky.
Cedar Bay Realty Advisors, Inc. serves as investment advisor to the Company
pursuant to an Administrative and Advisory Agreement with the Company
substantially similar to the terms of that agreement previously in effect
between Old Cedar and AEGON USA Realty Advisors, Inc. of Cedar Rapids, Iowa
("AEGON"), which served as investment advisor to the Company from formation
until April 3, 1998. Brentway Management LLC, a New York limited liability
company provides property management services for the Company's properties
pursuant to a management agreement with the Company on substantially the same
terms as the agreement previously in effect with AEGON. Brentway Management LLC
and Cedar Bay Realty Advisors, Inc. are both affiliates of Cedar Bay Company,
SKR Management Corp. and Leo S. Ullman. Leo S. Ullman is Chairman of the Board
of Directors and President of the Company.
On June 1, 1998, the Company entered into a Financial Advisory Agreement (the
"HVB Agreement") with BV Capital Markets, Inc., since renamed HVB Capital
Markets, Inc. ("HVB"), a wholly-owned subsidiary of the Hypo Vereinsbank of
Germany, of which Jean-Bernard Wurm, a director of the Company, serves as
director. Pursuant to the HVB Agreement, HVB has agreed to perform the following
services as financial advisor to the Company: (a) advise on acquisition
financing and/or lines of credit for future acquisitions; (b) advise on
acquisitions of United States real property interests and the consideration to
be paid therefor; (c) advise on private placements of the shares of the Company;
(d) assist the Board of Directors in developing suitable investment parameters
for the Company; (e) develop and maintain contacts on behalf of the Company with
institutions with substantial interests in real estate and capital markets; (f)
advise the Board with respect to additional private or public offerings of
equity securities of the Company; (g) review certain financial policy matters
with consultants, accountants, lenders, attorneys and other agents of the
Company; and (h) prepare periodic reports of its performance of the foregoing
services. As compensation for the foregoing services, the Company is required to
pay to HVB (i) .25% of the Company's net asset value, less any indebtedness
affecting such net value, but in any event, not less than $100,000 per year;
(ii) a one-time payment of 1.5% of 90% of the agreed value of properties
contributed to the Company or its affiliates by persons introduced to the
Company by HVB; and (iii) upon the Company becoming self-administered, a
one-time payment equal to five times the annual fee income attributable to fee
receipts from clients or contacts of HVB that have contributed property to the
Company. The term of the HVB Agreement is for a period of one (1) year and is
automatically renewed annually for an additional year subject to the right of
either party to cancel at the end of any year upon 60 days' written notice.
The Company's real estate investments are not expected to be substantially
affected by current federal, state or local laws and regulations establishing
ecological or environmental restrictions on the development and operations of
such property. However, the enactment of new provisions or laws may reduce the
Company's ability to fulfill its investment objectives.
I-2
Item 2. Properties
Retail Property
Germantown Square Shopping Center
Louisville, Kentucky
On September 28, 1988, the Company purchased a 50% undivided interest in a
neighborhood shopping center known as Germantown Square Shopping Center in
Louisville, Kentucky ("Germantown"). The remaining 50% undivided interest was
purchased by Life Investors Insurance Company of America ("Life Investors") an
affiliate of the Company's former management company and advisor. Germantown
consists of two single-story buildings totaling 74,267 square feet on a 9.0 acre
site which includes parking for 428 vehicles. The total acquisition cost of the
Company's 50% interest in Germantown was $2,963,674. Subsequent improvements
have increased the Company's recorded cost to $3,740,376.
Germantown represented 20% of the Company's total assets as of December 31,
1998, and provided 16% of total revenue. At December 31, 1998, Germantown was
98% leased to ten tenants under leases having a minimum term of five years (not
including renewal options). Annual base rents range from $7.94 to $16.94 per
square foot. The anchor tenant, Winn Dixie (a grocery store), pays a fixed base
rent plus 1% of gross sales in excess of a specified base. Winn Dixie occupies
59% of Germantown under a lease term expiring in September 2008, with five
five-year options to renew at the same rent. Winn Dixie provided 14% of the
Company's 1998 revenue.
Rental income is expected to decline by approximately 4% in 1999 due to the
lease renewal and downsizing of one tenant. Approximately $13,000 in tenant
improvement costs are expected as a result of the aforementioned downsizing and
lease renewal.
Germantown experiences competition in attracting tenants in its primary trade
area from a number of shopping centers ranging in size from 35,000 square feet
to 600,000 square feet. The effect of this competition is mitigated by high
occupancy rates experienced in the area, as well as the location attributes of
the Germantown site. Germantown's primary market area is mostly developed,
thereby limiting the possibility of additional retail development.
Office Properties
Corporate Center East
Bloomington, Illinois
On March 24, 1988, the Company acquired Corporate Center East, a 25,200 square
foot office building in Bloomington, Illinois for $2,221,783 in cash. Capital
improvements have increased the property's recorded cost to $2,559,393.
I-3
Item 2. Properties (continued)
In 1997, the Company incurred tenant improvement, lease commission and other
costs of approximately $194,000 in securing one of the tenants, Goshen Fidelity,
Inc., for 12,666 square feet. Included in this cost is the development of
additional parking as required by Goshen Fidelity, Inc., Goshen Fidelity also
had an option to purchase Corporate Center East during the first year of its
lease term at an agreed upon value. This option expired unexercised in February
1998.
Corporate Center East represented 14% of the Company's total assets at December
31, 1998, and provided 13% of 1998 revenue. At December 31, 1998, Corporate
Center East was 100% leased to four tenants under leases having a minimum
remaining term of four months (not including renewal options). Annual base rents
range from $11.00 to $13.15 per square foot. One lease, representing 10% of the
square footage at Corporate Center East, expires in April 1999. The Company is
negotiating a five year lease renewal at market rent. Tenant improvement costs
are estimated to be $15,000. The corresponding leasing commission expense is
estimated to be $3,300. Goshen Fidelity, Corporate Center East's largest tenant,
occupies 12,666 square feet under a lease which expires in February 2000. Rental
receipts from Goshen Fidelity's lease provided 6% of the Company's 1998 revenue.
The property is subject to competition from several office properties in the
same geographic area.
Broadbent Business Center
Salt Lake City, Utah
Broadbent Business Center in Salt Lake City, Utah ("Broadbent") was acquired on
March 31, 1987, for $4,057,950, subject to mortgage loan indebtedness of
$1,966,110. Approximately $300,000 was expended to upgrade the property
immediately after acquisition and subsequent improvements have increased the
property's recorded cost to $4,584,927. The original mortgage indebtedness was
scheduled to mature in September 2008. However, this loan was called by the
lender pursuant to the terms of the note. New financing was obtained in October
1992 in the amount of $1,500,000 to retire the original mortgage which had a
balance of $1,300,472 at the date of retirement.
Broadbent consists of eight single-story buildings totaling 119,500 square feet,
approximately half of which is office use and the other half of which is
service/warehouse, on a 12.5 acre site which includes parking for approximately
320 vehicles. Broadbent represented 22% of the Company's total assets at
December 31, 1998, and provided 31% of 1998 revenue. At December 31, 1998,
Broadbent was 90% occupied by 51 tenants under leases having a minimum term of
one month (not including renewal options) with annual base rents ranging from
$3.50 to $9.00 per square foot. Leases representing 31% of the square footage of
Broadbent expire during 1999.
I-4
Item 2. Properties (continued)
Cyclopss Corporation ("Cyclopss"), Broadbent's largest tenant representing 3% of
the Company's 1998 revenue, occupied 13,250 square feet under a lease which
expired in December 1998. Due to financial constraints, Cyclopss has reduced its
leased space to 9,150 square feet effective January 1, 1999. A three-year
extension has been signed by the tenant, the terms of which are $5.50 per square
foot for two years with a 5% increase in year three. In the event the tenant's
financial uncertainties are not satisfactorily resolved, the revenues at this
property will in all likelihood be adversely affected, as Cyclopss represents 6%
of projected 1999 revenue for Broadbent. Further, the Company would have to
incur tenant improvement and leasing commission costs in order to secure a
replacement tenant. Broadbent's second largest tenant, Purser Associates' lease,
was renegotiated to include a three year term and an expansion of 4,886 square
feet to 7,500 square feet.
Other national tenants in Broadbent include: IBM, Pitney Bowes, USA Today
(Gannet), Nalley's Fine Foods, Mosler Alarm Systems, DFC Transportation and
Midwest Industrial Tools.
Throughout 1998 new leases and lease renewals have taken longer to conclude than
expected. The market in Broadbent's category has softened; general market
stability during the last half of 1998 and going into 1999 was not as strong as
the previous two years. This was evidenced by the increase in existing tenants
unwilling to commit to long-term leases or opting to vacate, and new tenants
looking for short-term leases ranging from one to two years rather than more
standard three to five year terms.
There is some increased direct competition in Broadbent's immediate geographic
area and there is significant competition from newer projects within its market,
most notably the Salt Lake International Center, a 900 acre business park
adjoining the Salt Lake City International Airport.
Tenants with leases representing approximately 13% of the square footage of
Broadbent will vacate at the expiration of their respective lease terms in 1999
or pursuant to the 30 day notice provisions of the month-to-month tenancies. The
Company is actively pursuing leasing of such potentially vacant spaces. However,
if no additional leases are concluded in 1999, Broadbent could have a vacancy of
as much as 25% by the second quarter 1999.
Southpoint Parkway Center
Jacksonville, Florida
Southpoint Parkway Center in Jacksonville, Florida ("Southpoint") was acquired
on May 6, 1986 for $6,505,495 in cash. Capital expenditures made since the
purchase date have increased the property's recorded cost to $8,019,071.
Southpoint is a single-story office service center consisting of 79,010 square
feet of net leaseable area on approximately 10.8 acres which includes 467
parking spaces. Southpoint represented 40% of the Company's total assets at
December 31, 1998, and provided 38% of its revenue.
I-5
Item 2. Properties (continued)
At December 31, 1998, the property was 100% leased to eight tenants with
remaining terms ranging from one to seven years (not including renewal options)
and annual base rents ranging from $9.50 to $13.37 per square foot.
The General Services Administration ("GSA"), a United States government agency,
occupies 40,447 square feet in Southpoint under a ten-year lease which expires
in December 2001, with an option to terminate at any time after 90 days' prior
written notice. The Company is aware that the same government agency that
occupies Southpoint has solicited requests for proposals for 100,000 square feet
of space in the downtown market area. After due inquiry, the Company has been
advised that the Southpoint location will not be affected. However, there can be
no assurances with respect thereto. The GSA lease was negotiated in 1991 and, in
connection therewith, the Company purchased 2.9 acres of adjacent land,
constructed a parking lot and made interior building improvements at a total
cost of $988,832 (included in the above $8,019,071). Rental receipts from the
GSA provided 21% of the Company's 1998 revenue.
In 1997, the Company leased an additional 17,116 square feet to an existing
tenant, Intuition, Inc., expanding its total leased premises to 20,827 square
feet at Southpoint. The Company incurred leasing commission and tenant
improvement costs of approximately $179,500 for the Intuition, Inc. expansion.
Intuition, Inc.'s lease term on 20,072 square feet of its 20,827 premises is
through January 31, 2002. The remaining 755 square feet of their space expires
as of October 31, 1999. The Company has been advised that the lease on this
space will not be renewed.
Southpoint competes with other office buildings in the suburban Jacksonville
office market. During the early 1990's, Jacksonville experienced an oversupply
of office space due to new office construction and consolidations by two major
financial services firms, both of which occurred in the late 1980's. Net new
absorption of office space in recent years had resulted in improved office
occupancies and stabilized rents in the Southpoint market area during 1997 and
the first two quarters of 1998. However, during the latter part of 1998,
Southpoint had experienced a further softening of the rental market. Late in the
third quarter of 1998, a major healthcare firm relocated from the Southpoint
market area to the downtown area, resulting in approximately 200,000 vacant
square feet. In addition, new construction, resulting in approximately 500,000
square feet of new office space, will be available late in the third quarter of
1999.
I-6
Item 2. Properties (continued)
The Company's properties are summarized in the table below.
Occupancy 1998 Revenue
Size at Lease -------------------
Name and Location (Sq. Ft.) December 31, 1998 Expiration Amount Percent
- - ------------------------------------------------------------------------------------------------------
Germantown Square 74,267 98% 1999-2008 $416,837 16%
Louisville, Kentucky
Corporate Center East 25,200 100 1999-2002 323,427 13
Bloomington, Illinois
Broadbent Business Center 119,500 90 1999-2003 785,693 31
Salt Lake City, Utah
Southpoint Parkway Center 79,010 100 1999-2006 979,415 38
Jacksonville, Florida ------- ---------- ---
297,977 2,505,372 98
=======
Financial and other 59,653 2
---------- ---
$2,565,025 100%
========== ===
Item 3. Legal Proceedings
Legal Proceedings
The Company is not a party to any pending legal proceedings which, in the
opinion of management, are material to the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
I-7
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Dividend Information
The Company is required to distribute at least 95% of its taxable income to
continue qualification as a real estate investment trust. In 1998, the Company
paid dividends of $0.10 per share in February, May, August and November,
totaling $0.40 per share. While the Company expects to continue to pay dividends
to shareholders, there can be no assurance of future dividends, as they are
dependent upon earnings, cash flow, the financial condition of the Company and
other factors. It should be noted that 1998 dividend payments were substantially
greater than both the Company's net income and the amounts required to be
distributed to continue qualification as a real estate investment trust.
A Form 1099 is mailed to shareholders at the end of each year reflecting the
dividends paid by the Company in that year. The percentages indicated below,
multiplied by the amount of dividends paid for that year, result in the amount
to be reported for income tax purposes.
Dividend Character
1998 1997 1996
-------------------------------------------------------------------
Ordinary
income 57.34% 66.23% 71.24%
Nontaxable
return of
capital 42.66% 33.77% 28.76%
Total 100.00% 100.00% 100.00%
Dividends
paid, per share $.40 $.40 $.40
Market Information
As of June 26, 1998, CBC, which had owned from April 2, 1998, 1,893,038 of the
2,245,411 shares of common stock, exchanged 1,703,300 of such shares for
Operating Partnership units of equal number. The shares were cancelled, and,
accordingly, there are 542,111 shares outstanding to 522 shareholders of record
at December 31, 1998. The Company's shares began trading on the NASDAQ Stock
Market under the symbol CEDR on December 17, 1986. At March 11, 1999, the
Company's per share high and low sales were 5-1/8 high and 5-1/8 low, as
obtained by Wedbush/Morgan Securities, Inc., Newport Beach, California and
Herzog, Heine, Geduld, Inc., New York, New York, the principal market makers for
shares of the Company. These prices reflect quotations between dealers without
adjustment for retail mark-up, mark-down or commission and do not necessarily
represent actual transactions.
II-1
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(continued)
Market Price Range
Quarter Over-the-Counter Sales Prices
Ended High Low Close
--------------------------------------------------------------
1998
March 31 $7 $6-9/16 $6-13/16
June 30 7-3/8 2-1/2 5-1/8
September 30 5-3/4 4-3/4 4-3/4
December 31 7-1/16 4-3/4 6
1997
March 31 4-3/4 3-7/8 4-5/8
June 30 6 4-1/8 5-5/8
September 30 6-3/8 5-3/8 5-7/8
December 31 7-1/4 5-7/8 6-1/2
II-2
Item 6. Selected Financial Data
Years ended December 31,
1998 1997 1996 1995 1994
Operating Data
REVENUE
Rents $2,505,372 $ 2,386,549 $2,121,866 $ 2,400,273 $ 2,316,229
Interest 59,653 81,309 95,160 86,884 67,660
---------- ----------- ---------- ----------- -----------
Total revenue 2,565,025 2,467,858 2,217,026 2,487,157 2,383,889
---------- ----------- ---------- ----------- -----------
EXPENSES
Property expenses:
Real estate taxes 262,761 233,160 239,324 228,006 226,426
Repairs and maintenance 252,320 385,806 255,621 318,633 315,393
Utilities 163,279 159,762 146,772 134,362 130,667
Management fee 126,520 130,084 128,053 139,924 159,040
Insurance 18,336 19,270 18,817 16,521 15,699
Other 73,737 92,396 95,517 94,985 92,898
---------- ----------- ---------- ----------- -----------
Property expenses, excluding depreciation 896,953 1,020,388 884,104 932,431 940,123
Depreciation 480,410 462,687 436,739 436,276 436,562
---------- ----------- ---------- ----------- -----------
Total property expenses 1,377,363 1,483,075 1,320,843 1,368,707 1,376,685
Interest 130,197 136,137 138,209 140,096 141,814
Administrative fees 99,180 101,192 100,363 99,359 98,797
Directors' fees and expenses 56,188 49,417 42,382 44,228 49,994
Other administrative 632,199 197,851 53,613 65,146 57,046
---------- ----------- ---------- ----------- -----------
Total expenses 2,295,127 1,967,672 1,655,410 1,717,536 1,724,336
---------- ----------- ---------- ----------- -----------
Net income before limited partner's
interest in Operating Partnership 269,898 500,186 561,616 769,621 659,553
Limited partner's share of income
in Operating Partnership (89,950) - - - -
---------- ----------- ---------- ----------- -----------
Net income $ 179,948 $ 500,186 $ 561,616 $ 769,621 $ 659,553
========== =========== ========== =========== ===========
Net income per share $ 0.13 $ 0.22 $ 0.25 $ 0.34 $ 0.29
========== =========== ========== =========== ===========
Dividends to shareholders $ 557,504 $ 898,164 $ 898,164 $ 898,164 $ 898,164
========== =========== ========== =========== ===========
Dividends to shareholders per share $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40
========== =========== ========== =========== ===========
Average number of shares outstanding 1,393,761 2,245,411 2,245,411 2,245,411 2,245,411
========== =========== ========== =========== ===========
Balance Sheet Data
Real estate before accumulated
depreciation $18,903,767 $18,762,887 $18,462,902 $18,326,583 $18,326,583
Real estate after accumulated
depreciation $14,205,658 $14,545,188 $14,707,890 $15,008,310 $15,444,586
Total assets $15,323,315 $15,941,683 $16,270,149 $16,610,105 $16,786,232
Mortgage loan payable $ 1,374,751 $ 1,400,259 $ 1,423,492 $ 1,444,654 $ 1,463,929
Limited partner's interest in
Operating Partnership $10,309,316 $ - $ - $ - $ -
Shareholders' equity $ 3,289,520 $14,227,102 $14,625,080 $14,961,628 $15,090,171
Other Data
Funds from operations (1) $ 750,308 $ 962,873 $ 998,355 $ 1,205,897 $ 1,096,115
Total properties square feet 297,977 297,977 297,977 297,977 297,977
Total properties percent leased 95% 98% 89% 91% 98%
(1) See "Management Discussion and Analysis" for discussion of funds from
operations.
II-3
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the historical
financial statements of Cedar Income Fund, Ltd. (the "Company") and related
notes.
Results of Operations
The Company owns office, office/warehouse, and retail properties in four U.S.
cities. The Company's properties continue to compete with centers and office
buildings of similar size, tenant mix and location. As of December 31, 1998, the
combined lease occupancy of the Company's four properties was 95%. Operating
results in the forthcoming year will be influenced by the ability of current
tenants to continue paying rent, and the Company's ability to renew expiring
tenant leases and obtain new leases at competitive rental rates.
1998 Compared to 1997
The Company's net income for the year ended December 31, 1998 was $179,948 ($.13
per share) compared to $500,186 ($.22 per share) for the year ended December 31,
1997. (All per share amounts are on a basic and diluted basis). The decrease in
net income from 1997 to 1998 was primarily due to legal and consulting expenses
incurred in connection with the tender offer which was completed in March 1998,
the Company's reorganization in June 1998, the payment of financial advisory
fees and other professional expenses, including those incurred in connection
with due diligence reviews for the proposed purchase of additional properties,
none of which have been concluded to date. In addition, the decline in net
income also reflects the accounting treatment of the limited partner's interest
not applicable in prior years.
Rental income was $2,505,372 in 1998 compared to $2,386,549 in 1997, an increase
of $118,833 or 5%. Rental income at Corporate Center East in Bloomington,
Illinois increased by approximately $75,000 due to the full year impact of
revenue (i.e. no vacancy and no rent concessions) from certain space vacant
since 1995. Corporate Center East is currently 100% occupied. Rental income
increased at Southpoint Parkway Center in Jacksonville, Florida by $44,000 (8%)
due to an increase in tenant expense recoveries and increased base rent from a
large tenant. Rental income at Broadbent Business Center in Salt Lake City, Utah
was relatively unchanged from the prior year. Germantown Square in Louisville,
Kentucky experienced a decrease in rental income due to decreased expense
recoveries.
Interest income decreased by approximately $22,000 due to the liquidation in
March 1998 of the mortgage receivable formerly with Life Investors. Interest was
earned for one quarter in 1998 as compared to the full year in 1997.
Property expenses, excluding depreciation, decreased from $1,020,388 in 1997 to
$896,953 in 1998, a decrease of 12%. The decrease in property expenses is
primarily due to substantial repair and maintenance costs resulting from tenant
remodeling and parking lot repair incurred in 1997, but were not required in
1998.
II-4
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Directors' fees and expenses increased by approximately $7,000 primarily due to
directors' liability runoff coverage, travel and meetings associated with the
change of directors and the Company reorganization. Other administrative
expenses increased by approximately $434,000 due to legal and consulting
expenses incurred in connection with the tender offer, the Company's
reorganization to the "umbrella partnership REIT", and the proposed purchase of
new properties. Total administrative costs of $632,199 consisted of
approximately $300,000 in legal, $130,000 in accounting, $60,000 in financial
advisory fees, $45,000 in director's insurance, $40,000 in printing and mailing
of shareholder related materials, and other administrative items such as office
expenses, state taxes and other corporate expenses.
1997 Compared to 1996
The Company's net income for the year ended December 31, 1997 was $500,186 ($.22
per share) compared to $561,616 ($.25 per share) for the year ended December 31,
1996. (All per share amounts are on a basic and diluted basis.) The decrease in
net income from 1996 to 1997 was primarily due to legal and consulting expenses
incurred in connection with the tender offer for all shares of the Company which
was completed in March 1998.
Rental income was $2,386,549 in 1997 compared to $2,121,866 in 1996, an increase
of $264,683 or 12%. Rental income at Corporate Center East in Bloomington,
Illinois increased by $175,000 due to the Company's success in locating
replacement tenants for the 20,000 square feet of space that had been vacant
since the end of 1995. Rental income increased by $51,000 at Broadbent Business
Center in Salt Lake City, Utah due to higher base rents. Rents also increased at
Germantown Square in Louisville, Kentucky and at Southpoint Parkway Center in
Jacksonville, Florida due to an increase in tenant expense recoveries.
Interest income decreased by $14,000 due to a lower balance of funds available
for investment throughout 1997.
Property expenses, excluding depreciation, increased from $884,104 in 1996 to
$1,020,388 in 1997. The increase in property expenses is attributed to the
following items. Wages and salaries decreased by 51% due to the reduction of
property management personnel at Broadbent. Repairs and maintenance increased by
$130,000 primarily due to tenant remodeling, parking lot improvements and other
expenses incurred in 1997 that were not required in 1996. Management fees
increased by $13,000 in 1997, an increase of 12%, corresponding to the 12%
increase in rental income.
Directors' fees and expenses increased by $7,000 primarily due to an increase in
directors and officers' insurance coverage and an increase in the annual
insurance premium. Other administrative expenses increased by $144,000 primarily
due to legal and consulting expenses incurred in connection with the tender
offer.
II-5
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of 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 restructurings and sales of properties, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles 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. (See
Selected Financial Data). In March 1995, NAREIT issued a "White Paper" analysis
to address certain interpretive issues under its definition of FFO. The White
Paper provides that amortization of deferred financing costs and depreciation of
non-rental real estate assets are no longer to be added back to net income to
arrive at FFO.
Since all companies and analysis 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.
The following table presents the Company's FFO calculation for the years ended
December 31,
1998 1997 1996
---- ---- ----
Net earnings before limited partner's
interest in Operating Partnership $269,898 $500,186 $561,616
Less:
Limited partner's interest in the
Operating Partnership 89,950 - -
--------- --------- ---------
Net income available to common shareholders 179,948 500,186 561,616
Adjustment for funds from operations
Add:
Limited partner's interest in the
Operating Partnership 89,950 - -
Depreciation 480,410 462,687 436,739
--------- -------- ---------
Basic and diluted funds from operations $750,308 $962,873 $998,355
========= ========= =========
Weighted average shares/units outstanding (1) 2,245,411 2,245,411 2,245,411
========= ========= =========
(1) Assumes conversion of limited partnership units of the Operating
Partnership.
II-6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
The Company's capital resources consist of its current equity in real estate
investments (carrying value less mortgage indebtedness). The Company maintains
the real estate in good condition and provides adequate insurance coverage. The
Company's rental revenues for 1998 were $2,505,372. The rental revenues for 1999
are expected to decrease by approximately $120,000 to $2,385,272 due mainly to
expected vacancies absent any reletting in 1999. As a result, the vacant square
footage is expected to increase from approximately 13,500 to 31,500. The leasing
time-table between getting a lease signed, building-out the space and the tenant
taking possession varies from 6 months to 18 months depending on the market in
the geographical location of the property. Management estimates they will incur
approximately $175,000 in tenant improvement costs to lease-up these vacancies
during 1999. Despite the expected decrease in rental revenues and increase in
tenant improvement costs, liquidity is considered sufficient to meet current
obligations, which include capital expenditures, and is represented by cash and
cash equivalents of $678,196 as of December 31, 1998.
Net cash provided by operating activities, as shown in the Statements of Cash
Flows, was $771,095 for the year ended December 31, 1998. The major uses of cash
in 1998 were dividends to shareholders and distributions to the limited partner
of the Operating Partnership totaling $898,164, and capital expenditures of
$140,880 ($ 28,550 at Broadbent, $18,981 at Southpoint and $93,349 in
capitalized transfer tax for the transfer of Company assets to the Operating
Partnership in June 1998). A fourth quarter dividend was declared on January 19,
1999 to shareholders of record on March 1, 1999, payable March 15, 1999. The
Board of Directors continues to closely monitor occupancies, leasing activity,
overall Company operations, and liquidity in determining quarterly dividends.
The Company's debt service commitments for the mortgage loan payable are
described in Note 6 to the Financial Statements. There are no other material
commitments at December 31, 1998.
Inflation
Low to moderate levels of inflation during the past few years have favorably
impacted the Company's operations by stabilizing operating expenses. At the same
time, low inflation has the indirect effect of reducing the Company's ability to
increase tenant rents. The Company's properties have tenants whose leases
include expense reimbursements and other provisions to minimize the effect of
inflation. These factors, in the long run, are expected to result in more
attractive returns from the Company's real estate portfolio as compared to
short-term investment vehicles.
II-7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Year 2000 Issue
Although the Company does not employ any computer systems in its business, the
Company could be adversely affected if the computer systems used by the Advisor
(Cedar Bay Realty Advisors, Inc.), Property Manager (Brentway Management LLC),
and other service providers do not properly process and calculate the
date-related information from and after January 1, 2000. The Advisor and
Property Manager have taken steps that they believe are reasonably designed to
address this issue. These steps include an upgrade of their computer software to
a version that will properly process and calculate the date related information
from and after January 1, 2000. The upgrade was completed on January 15, 1999.
The Advisor and Property Manager are satisfied that the properties have no year
2000 issues since there are no elevators or other date sensitive equipment that
would have an adverse effect on the operation of the buildings. In addition, the
Advisor and Property Manager will endeavor to obtain reasonable assurances that
comparable steps are being taken by the Company's other major service providers.
While the Advisor and Property Manager believe their efforts are adequate to
address the Company's year 2000 concerns, there can be no assurances that the
systems of the other companies on which the Company's operations rely will be
converted on a timely basis and will not have a material effect on the Company.
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
The primary market risk facing the Company is interest rate risk on its mortgage
loan payable. The Company does not hedge interest rate risk using financial
instrument nor is the Company subject to foreign currency risk.
The following table sets for the Company's long term debt obligations, principal
cash flows by scheduled maturity, weighted average interest rates and estimated
fair market value ("FMV") at December 31, 1998:
For the Year ended December 31,
-------------------------------
1999 2000 2001 2002 Total FMV
----------------------------------------------------------------------------------
Long term debt:
Fixed rate $28,004 $30,742 $33,755 $1,282,250 $1,374,751 $1,466,113
Average interest rate 9.38% 9.38% 9.38% 9.38% 9.38%
The fair value of the Company's mortgage loan payable is estimated based on the
discounting of future cash flows at interest rates that management believes
reflects the risks associated with mortgage loan payable at similar risk and
duration.
II-8
Item 8. Financial Statements and Schedules
Page
----
Report of Independent Auditors........................................ II-10
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997................................................... II-11
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.................................... II-12
Consolidated Statements of Stockholder's Equity for the years
ended December 31, 1998, 1997 and 1996.............................. II-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.................................... II-14
Notes to Financial Statements......................................... II-15
II-9
Report of Independent Auditors
The Board of Directors and Shareholders
Cedar Income Fund, Ltd.
We have audited the accompanying consolidated balance sheets of Cedar Income
Fund, Ltd. as of December 31, 1998 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cedar Income Fund,
Ltd. at December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young
New York, NY
February 24, 1999
II-10
Item 8. Financial Statements and Supplementary Data
Cedar Income Fund, Ltd.
Consolidated Balance Sheets
December 31,
1998 1997
- - --------------------------------------------------------------------------------------------------------
Assets
Real estate (Note 3)
Land $ 4,144,705 $ 4,126,044
Buildings and improvements 14,759,062 14,636,843
----------- -----------
18,903,767 18,762,887
Less accumulated depreciation (4,698,109) (4,217,699)
----------- -----------
14,205,658 14,545,188
Mortgage loan receivable (Note 4) - 564,437
----------- -----------
14,205,658 15,109,625
Cash and cash equivalents (Note 2) 678,196 407,216
Rent and other receivables 108,196 130,615
Interest receivable - 3,881
Prepaid expenses 107,283 109,624
Deferred leasing commissions (Note 1) 131,350 164,826
Due from co-tenancy partner (Note 8) 61,323 -
Deferred rental receivables (Note 1) 21,500 -
Taxes held in escrow 9,809 15,896
----------- -----------
Total assets $15,323,315 $15,941,683
=========== ===========
Liabilities and Shareholders' Equity
Liabilities
Mortgage loan payable (Notes 2 and 6) $ 1,374,751 $ 1,400,259
Accounts payable and accrued expenses 172,358 162,320
Due to co-tenancy partner (Note 8) 46,570 62,570
Security deposits 84,466 80,085
Advance rents 46,334 9,347
----------- -----------
Total liabilities 1,724,479 1,714,581
Limited partner's interest in consolidated
Operating Partnership (Note 1) 10,309,316 -
Shareholders' equity
Common stock ($.01 and $1.00 par value,
50,000,000 and 5,020,000 shares
authorized, 542,111 and 2,245,411 shares
issued and outstanding, respectively) 5,421 2,245,411
Additional paid-in capital 3,284,099 11,981,691
----------- -----------
Total shareholders' equity 3,289,520 14,227,102
----------- -----------
Total liabilities and shareholders' equity $15,323,315 $15,941,683
=========== ===========
See the accompanying notes to financial statements.
II-11
Cedar Income Fund, Ltd.
Consolidated Statements of Operations
Years ended December 31,
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------
Revenue
Rents $2,505,372 $2,386,549 $2,121,866
Interest 59,653 81,309 95,160
---------- ---------- ----------
2,565,025 2,467,858 2,217,026
Expenses
Property expenses
Real estate taxes 262,761 233,160 239,324
Repairs and maintenance 252,320 385,806 255,621
Utilities 163,279 159,672 146,772
Management fees (Note 7) 126,520 130,084 128,053
Insurance 18,336 19,270 18,817
Other 73,737 92,396 95,517
---------- ---------- ----------
Property expenses, excluding depreciation 896,953 1,020,388 884,104
Depreciation 480,410 462,687 436,739
---------- ---------- ----------
Total property expenses 1,377,363 1,483,075 1,320,843
Interest 130,197 136,137 138,209
Administrative fees (Note 7) 99,180 101,192 100,363
Directors' fees and expenses 56,188 49,417 42,382
Other administrative 632,199 197,851 53,613
---------- ---------- ----------
2,295,127 1,967,672 1,655,410
---------- ---------- ----------
Net income before limited partner's
interest in Operating Partnership 269,898 500,186 561,616
Limited partner's interest (89,950) - -
---------- ---------- ----------
Net income $ 179,948 $ 500,186 $ 561,616
========== ========== ==========
Basic and diluted net income per share $ .13 $ .22 $ .25
========== ========== ==========
Dividends to shareholders $ 557,504 $ 898,164 $ 898,164
========== ========== ==========
Dividends to shareholders per share $ .40 $ .40 $ .40
========== ========== ==========
Average number of shares outstanding 1,393,761 2,245,411 2,245,411
========== ========== ==========
See the accompanying notes to financial statements.
II-12
Cedar Income Fund, Ltd.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
- - -----------------------------------------------------------------------------------------------------------------
Additional Undistributed Total
Common Paid-In Net Shareholders'
Stock Capital Earnings Equity
- - -----------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 $ 2,245,411 $ 12,716,217 $ - $ 14,961,628
Net earnings - - 561,616 561,616
Dividends to shareholders - (336,548) (561,616) (898,164)
----------- ------------ --------- -----------
Balance at December 31, 1996 2,245,411 12,379,669 - 14,625,080
Net earnings - - 500,186 500,186
Dividends to shareholders - (397,978) (500,186) (898,164)
----------- ------------ --------- -----------
Balance at December 31, 1997 2,245,411 11,981,691 - 14,227,102
Net earnings - - 179,948 179,948
Dividends to shareholders - (377,556) (179,948) (557,504)
Change in par value (Note 1) (536,690) 536,690 - -
Canceled shares (Note 1) (1,703,300) 1,703,300 - -
Limited partner's interest in
Operating Partnership (Note 1) - (10,560,026) - (10,560,026)
----------- ------------ --------- -----------
Balance at December 31, 1998 $ 5,421 $ 3,284,099 $ - $ 3,289,520
=========== ============ ========= ===========
See the accompanying notes to financial statements.
II-13
Cedar Income Fund, Ltd.
Consolidated Statements of Cash Flows
Years ended December 31,
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 179,948 $ 500,186 $ 561,616
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Limited partner's interest in Operating Partnership 89,950 - -
Depreciation and amortization 483,161 466,353 436,739
Increase in deferred rental receivable (21,500) - -
Changes in operating assets and liabilities:
(Decrease) increase in rent and other receivable 22,419 (35,202) (15,200)
Decrease in interest receivable 3,881 65 61
Increase in prepaid expenses (410) (28,532) (40,483)
Increase (decrease) in deferred lease commissions 33,477 (48,678) (1,341)
Increase (decrease) in tax held in escrow 6,087 1,801 (14,117)
Increase in accounts payable 10,038 58,983 3,664
Decrease in amounts due from co-tenancy partner (61,323) - -
(Increase) decrease in due to co-tenancy partner (16,000) 26,032 7,776
Security deposits collected, net 4,381 13,430 (214)
Increase (decrease) in advance rents 36,986 (5,700) 6,528
------------- --------- ---------
Net cash provided by operating activities 771,095 948,738 945,029
Cash Flows from Investing Activities
Capital expenditures (140,880) (299,985) (136,319)
Sale and collection of mortgage loan receivable 564,437 9,554 8,778
------------- --------- ---------
Net cash provided by (used) in investing activities 423,557 (290,431) (127,541)
Cash Flow from Financing Activities
Principal portion of scheduled mortgage payments (25,508) (23,233) (21,162)
Dividends paid (557,504) (898,164) 898,164
Distributions to limited partner (340,660) - -
------------- --------- ---------
Net cash used in financing activities (923,672) (921,397) (919,326)
------------- --------- ---------
Net increase (decrease) in cash and cash equivalents 270,980 (263,090) (101,838)
Cash and cash equivalents at beginning of the period 407,216 670,306 772,144
------------- --------- ---------
Cash and cash equivalents at end of the period $ 678,196 $ 407,216 $670,306
============= ========= =========
Supplemental Disclosure of Cash Activities
Interest paid $ 130,197 $ 136,137 $ 138,209
============= ========= =========
Supplemental Disclosure of Non-Cash Financing
Activities
Canceled shares $ (1,703,300) $ - $ -
============= ========= =========
Decrease in par value from $1 to $.01 $ (506,690) $ - $ -
============= ========= =========
Recordation of initial limited
partner's interest $(10,560,026) $ - $ -
============= ========= =========
See the accompanying notes to financial statements.
II-14
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
December 31, 1998
1. Description of Business and Significant Accounting Policies
Background, Organization and Reorganization of the Company
Cedar Income Fund, Ltd. ("Old Cedar") was incorporated in Iowa on December 10,
1984. Old Cedar's public offerings of common stock completed in 1986 and 1988
raised nearly $19 million. Old Cedar invested the proceeds from these offerings
in four real estate properties and a mortgage loan participation, utilizing only
a minimum amount of indebtedness against the properties. The mortgage loan
participation has since been liquidated (see Note 4).
On April 2, 1998, Cedar Bay Company, a New York general partnership ("CBC"),
pursuant to a tender offer to purchase all of the outstanding shares of common
stock of Old Cedar for $7.00 per share in cash (the "Offer"), acquired
1,893,038,335 shares of Old Cedar's outstanding Common Stock, $1.00 par value
per share ("Old Common Stock") representing approximately 85% of the outstanding
shares.
On June 26, 1998, Old Cedar merged with and into Cedar Income Fund, Ltd., a
Maryland corporation (the "Company") newly formed as a wholly-owned subsidiary
of Old Cedar. Immediately thereafter, the Company assigned substantially all of
its assets and liabilities to a newly-formed Delaware limited partnership, Cedar
Income Fund Partnership, L.P. (the "Operating Partnership"), in exchange for an
aggregate of 2,245,411 units of the Operating Partnership ("Units"), which
constituted the sole general partnership interest and all of the limited
partnership interests in the Operating Partnership. After such assignment, CBC
exchanged 1,703,300 shares of the Company's Common Stock, $.01 par value per
share ("New Common Stock"), for 1,703,300 limited partnership Units in the
Operating Partnership owned by the Company. The shares of New Common Stock were
cancelled by the Company upon their exchange by CBC. Following these
transactions, CBC owned 189,737 shares of New Common Stock, aggregating
approximately 35% of the issued and outstanding shares of New Common Stock.
There were 542,111 shares of New Common Stock outstanding as of December 31,
1998. The Company's shares are traded on the NASDAQ Small Cap Market under the
symbol "CEDR".
Description of Business
The Company is engaged in ownership, management, operation and leasing of real
estate properties, principally office and retail located in four U.S. states:
Utah, Illinois, Florida and Kentucky.
The Company, through its Operating Partnership, owns and operates three office
properties aggregating approximately 224,000 square feet located in
Jacksonville, Florida, Salt Lake City, Utah and Bloomington, Illinois and a 50%
co-tenancy interest in a 74,000 square foot retail property located in
Louisville, Kentucky.
II-15
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Basis of Presentation and Summary of Significant Accounting Policies
Consolidation Policy and Related Matters
The accompanying consolidated financial statements include the consolidated
financial position of the Company and the Operating Partnership as of December
31, 1998. All significant intercompany balances and transactions have been
eliminated in consolidation.
Since the Company owns the sole general partnership interest in the Operating
Partnership, which provides the Company with effective control over all
significant activities of the Operating Partnership, the Operating Partnership
is consolidated with the Company in the accompanying financial statements as of
December 31, 1998.
The limited partner's interest as of December 31, 1998 (currently owned entirely
by CBC) represents approximately a 76% limited partnership interest in the
equity of the Operating Partnership.
Currently, a Unit in the Operating Partnership and a share of Common Stock of
the Company have essentially the same economic characteristics, as they
effectively share equally in net income or loss and distributions of the
Operating Partnership.
The accompanying financial statements include its 50% co-tenancy interest in the
assets, liabilities and operations of the retail property.
Use of Estimates
The preparation of 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.
Revenue Recognition
Minimum rental income is recognized on a straight-line basis over the term of
the lease. The excess of rents recognized over amounts contractually due are
included in deferred rents receivable on the accompanying balance sheets.
Contractually due but unpaid rents are included in tenant receivables on the
accompanying balance sheets. Certain lease agreements provide for reimbursement
on real estate taxes, insurance, common area maintenance costs and indexed
rental increases, which are recorded on an accrual basis.
II-16
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Real Estate
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of ten to forty years for buildings and improvements. Tenant
improvements, which are included in buildings and improvements, are amortized on
a straight-line basis over the term of the related leases.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three months
or less when purchased, to be cash equivalents.
Deferred Costs
Leasing fees and loan costs are capitalized and amortized over the life of the
related lease or loan.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," (FAS No. 123) requires use of option valuation models
that were not developed for use in valuing employee stock options. No stock
options have been granted to date.
The Company established a stock option plan (the "Plan") for the purpose of
attracting and retaining executive officers, directors and other key employees,
500,000 of the Company's authorized shares of Common Stock have been reserved
for the issuance under the Plan. The Plan is administered by a committee of the
Board of Directors, which committee will, among other things, select the number
of shares subject to each grant, the vesting period for each grant and the
exercise price (subject to applicable regulations with respect to incentive
stock options) for the options. As of December 31, 1998, no options have been
granted under the Plan.
Earnings Per Share
Statement of Financial Accounting Standard Board ("FASB") No. 128, Earnings per
Share, was issued and adopted by the Company during 1997. Statement No. 128
replaced the calculation of primary and fully diluted earnings per share with
II-17
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
basic and diluted earnings per share. Since the Company has no potentially
dilutive securities outstanding, basic and diluted net income per share in
accordance with Statement No. 128 are the same and do not differ from amounts
previously reported as net income per share (primary earnings per share).
Accordingly, basic and diluted net income per share are computed using the
weighed average number of shares outstanding during the year.
Basic and diluted net income per share are based on the weighted average number
of shares outstanding (1,393,761 in 1998 and 2,245,411 for the years 1997 and
1996). Dividends to shareholders per share are based on the actual number of
shares outstanding on the respective dates.
Recent Pronouncements
In 1997, the FASB issued the following statements (i) Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130") which is effective for fiscal
years beginning after December 17, 1997. SFAS 130 established standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The adoption of this standard
had no impact on the Company's financial position or results of operations (ii)
Statement No. 131 "Disclosures about segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes standards for reporting information
about operating segments in annual financial statements and in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of this
standard had no impact on the Company's financial position or results of
operations, but did affect the disclosure of segment information.
Income Taxes
The Company generally will not be subject to federal income taxes as long as it
qualifies as a real estate investment trust "REIT" under Section 856-869 of the
Internal Revenue Code of 1986, as amended (the "Code"). A REIT will generally
not be subject to federal income taxation on that portion of income that
qualifies as REIT taxable income and to the extent that it distributes such
taxable income to its stockholders and complies with certain requirements of the
code relating to income and assets. As a REIT, the Company is allowed to reduce
taxable income by all or a portion of distributions to stockholders and must
distribute at least 95% of its taxable income to qualify as a REIT. As
distributions, for federal income tax purposes, have exceeded taxable income, no
federal income tax provision has been reflected in the accompanying consolidated
financial statements. State income taxes are not significant.
II-18
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
The Company reviews its real estate assets if indicators of impairment are
present to determine whether the carrying amount of the asset will be recovered.
Recognition of impairment is required if the undiscounted cash flows estimated
to be generated by the asset are less than the asset's carrying amount.
Measurement is based upon the fair value of the asset. As of December 31, 1998,
management determined that no impairment indicators exist.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts of cash and cash equivalents
approximate their fair values.
Mortgage loan payable: The fair value of the mortgage loan payable is estimated
utilizing discounted cash flow analysis, using interest rates reflective of
current market conditions and the risk characteristics of the loans.
II-19
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
2. Fair Value of Financial Instruments (continued)
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standard No. 107:
1998 1997
--------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------- --------------------------
Assets
Mortgage loan receivable $ - $ - $ 564,437 $ 581,013
========== ========== ========== ==========
Cash and cash equivalents $ 678,196 $ 678,196 $ 407,216 $ 407,216
========== ========== ========== ==========
Liabilities
Mortgage loan payable $1,374,751 $1,466,113 $1,400,259 $1,526,689
========== ========== ========== ==========
3. Real Estate and Accumulated Depreciation
The Company's properties are leased to various tenants, whereby the Company
incurs normal real estate operating expenses associated with ownership. In 1998,
the Company incurred capital expenditures of $140,880. Improvements for new and
existing tenants totaled $47,531. Transfer taxes of $93,349 were paid in
connection with the transfer of the Company's assets to the Operating
Partnership. Such taxes have been capitalized and allocated 20/80 between land
and building and the building portion is being amortized over forty years. In
1997 the Company incurred capital expenditures of $299,985. The improvements
consisted of tenant build-outs and the development of additional parking.
Information regarding the Company's investment in each property is presented in
the Schedule of Real Estate and Accumulated Depreciation that follows.
II-20
3. Real Estate and Accumulated Depreciation (continued)
Information on Real Estate and Accumulated Depreciation
Gross Amount at Which Carried
Initial Cost to Company December 31, 1998
----------------------- ---------------------------
Property Description Subsequent
Name and Location Amount of Buildings & Cost Buildings &
of Property Encumbrance Land Improvements Capitalized Land Improvements
- - --------------------------------------------------------------------------------------------------------------------------------
Germantown Square $ -- $ 678,675 $ 2,284,999 $ 776,702 $ 683,365 $ 3,057,011
Louisville, Kentucky
(Shopping Center)
Corporate Center East -- 475,000 1,746,783 337,610 479,600 2,079,793
Bloomington, Illinois
(Office Building)
Broadbent Business Center 1,374,751 595,000 3,462,950 526,977 599,681 3,985,246
Salt Lake City, Utah
(Office/Service Facility)
Southpoint Parkway Center -- 2,005,495 4,500,000 1,513,576 2,382,059 5,637,012
Jacksonville, Florida
(Office/Service Facility)
- - --------------------------------------------------------------------------------------------------------------------------------
$1,374,571 $3,754,170 $11,994,732 $3,154,865 $4,144,705 $14,759,062
========== ========== =========== ========== ========== ===========
Gross Amount at Which Carried
December 31, 1998
------------------------------
Life on Which
Property Description Depreciation
Name and Location Accumulated Date Date is Computed
of Property Total Depreciation Built Acquired (in years)
- - ----------------------------------------------------------------------------------------------------------
Germantown Square $ 3,740,376 $ 766,575 1988 9/88 10-40
Louisville, Kentucky
(Shopping Center)
Corporate Center East 2,559,393 524,453 1987 3/88 10-40
Bloomington, Illinois
(Office Building)
Broadbent Business Center 4,584,927 1,266,451 1978 3/87 10-40
Salt Lake City, Utah
(Office/Service Facility)
Southpoint Parkway Center 8,019,071 2,140,630 1984 5/86 10-40
Jacksonville, Florida
(Office/Service Facility)
- - ----------------------------------------------------------------------------------------------------------
$18,903,767 $4,698,109
=========== ==========
II-21
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
3. Real Estate and Accumulated Depreciation (continued)
The activity in real estate and related accumulated depreciation for the
three-year period ended December 31, 1998 is summarized in the table below.
Years ended December 31,
1998 1997 1996
- - --------------------------------------------------------------------------------------------
Cost
Beginning of year $18,762,887 $18,462,902 $18,326,583
Additions during year improvements 140,880 299,985 136,319
----------- ----------- -----------
End of year $18,903,767 $18,762,887 $18,462,902
=========== =========== ===========
Accumulated Depreciation
Beginning of year $ 4,217,699 $ 3,755,012 $ 3,318,273
Additions during year depreciation expense 480,410 462,687 436,739
----------- ----------- -----------
End of year $ 4,698,109 $ 4,217,699 $ 3,755,012
=========== =========== ===========
4. Mortgage Loan Receivable
On September 20, 1993, Old Cedar purchased a 30% participation in a promissory
note from Life Investors, an affiliate of AEGON, the Company's former advisor.
The participation was acquired for an investment of $600,000 with a yield of
8.25% to Old Cedar. The promissory note which was to mature in August 2000, and
was secured by a deed of trust on the Woodbury Office Plaza in Woodbury,
Minnesota, was repurchased by Life Investors, as permitted under the note, for
cash in the amount of $561,920 on March 30, 1998.
Information on Mortgage Loan Receivable
Periodic Payment
Terms
----------------
Carrying
Face Amount of Amount of
Stated Final Annual Balloon Mortgage Mortgage
Property Description Date of Interest Maturity Principal Payment at Receivable at December 31,
Name and Property Location Mortgage Rate Date and Interest March 1998 Acquisition 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
Woodbury Plaza
Woodbury, Minnesota 8-1-93 8.25% 8-1-00 $56,577 $561,920 $600,000 --
II-22
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
4. Mortgage Loan Receivable (continued)
The activity for the mortgage loan receivable for the three-year period ended
December 31, 1998, is summarized as follows:
Years ended December 31,
Mortgage Loan Receivable 1998 1997 1996
- - ----------------------------------------------------------------------
Principal
Beginning of year $ 564,437 $573,991 $582,769
Deductions during year
scheduled payments (2,517) (9,554) (8,778)
Purchase (561,920) - -
--------- -------- --------
End of year $ - $564,437 $573,991
========= ======== ========
5. Leased Assets
The Company's properties are leased to tenants under short-term, non-cancelable
operating lease agreements. Future minimum lease rentals to be received under
the terms of these lease agreements are approximately as follows:
Year Amount
---------------------------------------------
1999 $1,878,600
2000 1,264,300
2001 1,014,300
2002 678,700
2003 429,300
Thereafter 1,696,200
----------
$6,961,400
==========
Contingent rentals (expense recoveries) provided by various leases were included
in rental income for 1998, 1997 and 1996 of $281,874, $284,219 and $238,461
respectively.
The Company derived 10% or more of its revenue from two major tenants in 1998.
Revenues from GSA, a tenant at Southpoint, was $534,648 in 1998. Revenues from
Winn Dixie, a tenant at Germantown, was $349,466 in 1998.
II-23
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
6. Mortgage Loan Payable
On October 30, 1992 the Company borrowed $1,500,000 to finance an existing
property. As of December 31, 1998, the mortgage outstanding principal balance is
$1,374,751. This loan is collateralized by Broadbent Business Center, with a
carrying amount of $3,318,485. The mortgage requires the repayment of principal
based on a 30 year amortization schedule at an interest rate of 9.375% and
matures November 1, 2002. At maturity there will be a balloon payment of
$1,254,779. There is a prepayment provision which states from 10/97 to 10/98
5% will be charged which declines by 1% per year thereafter.
Principal payments on the outstanding balance due in the next four years are
summarized as follows:
Principal
Year Payments
---------------------------
1999 $ 28,004
2000 30,742
2001 33,755
2002 1,282,250
----------
$1,374,751
==========
7. Related Party Transactions
The Company has entered into an agreement with Cedar Bay Realty Advisors, Inc.
("Cedar Bay") to provide administrative and advisory services for a monthly base
fee of 1/12 of 3/4 of 1% of the estimated current value of real estate plus 1/12
of 1/4 of 1% of the estimated current value of all assets of the Company other
than real estate, and an annual subordinated incentive fee equal to 15% of the
gain on property sold subject to certain limitation. This agreement is
substantially the same as the previous agreement entered into with AEGON, which
expired on April 3, 1998. Cedar Bay also provides real estate acquisition
services for a fee equal to 5% of the gross purchase price of property acquired
and disposition services for a fee equal to 3% of the gross sales price of
property sold, subject to certain limitations. The administrative and advisory
agreement is for a period of one year, automatically renewed annually and
cancelable on 60 days' written notice by either party.
With the exception of Germantown Square Shopping Center in Louisville, Kentucky
("Germantown Square"), Brentway Management LLC (the "Property Manager") provides
property management services to the Company's real property for a monthly fee
equal to 5% of the gross income from properties managed. The Property Manager
also provides leasing services to the Company for a fee of up to 6% of the rent
to be paid during the term of the lease procured. The management agreement is
for a period of one year, automatically renewed annually and cancelable on 60
days' written notice by either party. This agreement is essentially the same as
II-24
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
7. Related Party Transactions (continued)
the previous agreement with AEGON. Due to Life Investors' continuing ownership
of the other 50% co-tenancy therein, AEGON continues to manage
Germantown Square upon similar terms as described above.
The Company, has entered into a Financial Advisory Agreement with HVB Capital
Markets Inc., as successor to B.V. Capital Markets, Inc. pursuant to which HVB
has agreed to perform the following services as financial advisor to the
Company: (a) advise on acquisition financing and/or lines of credit for future
acquisitions; (b) advise on acquisitions of United States real property
interests and the consideration to be paid therefor; (c) advise on private
placements of the shares of the Company; (d) assist the Board of Directors in
developing suitable investment parameters for the Company; (e) develop and
maintain contacts on behalf of the Company with institutions with substantial
interests in real estate and capital markets; (f) advise the Board with respect
to additional private or public offerings of equity securities of the Company;
(g) review certain financial policy matters with consultants, accountants,
lenders, attorneys and other agents of the Company; and (h) prepare periodic
reports of its performance of the foregoing services. As compensation for the
foregoing services, the Company is required to pay HVB, (i) .25% of the
Company's net asset value, less any indebtedness affecting such net value, but
in any event, not less than $100,000 per year; (ii) a one-time payment of 1.5%
of 90% of the agreed value of properties contributed to the Company or its
affiliates by persons introduced to the Company by HVB; and (iii) upon the
Company becoming self-administered, a one-time payment equal to five times the
annual fee income attributable to fee receipts from clients or contacts of HVB
that have contributed property to the Company. The term of the HVB Agreement is
for a period of one (1) year and is automatically renewed for an additional year
subject to the right of either party to cancel at the end of any year upon 60
days' written notice. One of the directors of the Company is an officer of HVB.
In September 1993, the Company purchased participations in promissory notes
owned by various affiliates of AEGON. In March 1998, the affiliates of AEGON
exercised their right to repurchase the entire mortgage receivable from the
Company. The Company invested the proceeds in the Company's money market fund.
The Company received interest income from the participations of $2,517, $46,933
and $47,691 for the first quarter of 1998, and the full years 1997 and 1996
respectively.
II-25
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
7. Related Party Transactions (continued)
The following schedule represents amounts paid to related parties:
Cedar Income Fund, Ltd.
Schedule of Management, Administrative and Advisory and Leasing Fees
Years ended December 31,
Jan 1 - Apr 1 -
Mar 31, 1998 Dec 31, 1998 1997 1996
-------------------------------------------------------
Management Fees
AEGON $31,952 $16,440 $119,328 $106,093
Brentway - 44,587 - -
Leasing Fees
AEGON 23,561 - 44,906 36,901
Administrative and Advisory
Cedar Bay - 73,404 - -
AEGON 25,770 - 101,192 100,363
HVB - 58,808 - -
8. Co-tenancy Interest
On September 28, 1988, the Company purchased a 50% co-tenancy interest in
Germantown Square Shopping Center in Louisville, Kentucky. The remaining 50%
co-tenancy interest is owned by Life Investors an affiliate of AEGON. Germantown
is managed solely by AEGON. The Company paid management fees of $16,440 for the
period April 1, 1998 to December 31, 1998. As of December 31, 1998, due to
co-tenancy partner, and due from co-tenancy partner was $46,570 and 61,323,
respectively.
9. Segment Disclosures
The Company owns all of the interests in real estate properties through the
Operating Partnership. The Company's portfolio consists of three commercial
properties and one retail property, located respectively in Illinois, Utah,
Florida and Kentucky. Each of the properties are evaluated on an individual
basis by the President and Treasurer, who have been identified as the Chief
Operating Decision Makers because of their final authority over resource
allocation.
The following table sets forth the components of the Company's revenue and
expenses and other related disclosures as required by FAS Statement No.131 for
the year ended December 31, 1998:
II-26
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
9. Segment Disclosures (continued)
Cedar Income Fund, Ltd.
Combined Statement of Operations
Year ended December 31, 1998
Southpoint Corporate Broadbent Germantown Financial Consolidated
Parkway Center East Business Center Square and Other Totals
REVENUES
Rents $ 967,978 $ 298,586 $ 619,127 $ 337,807 $ - $ 2,223,498
Expense recoveries 11,437 24,841 166,566 79,030 - 281,874
Interest - - - - 59,653 59,653
---------- ---------- ---------- ---------- --------- -----------
Total revenues 979,415 323,427 785,693 416,837 59,653 2,565,025
---------- ---------- ---------- ---------- --------- -----------
EXPENSES
Real estate tax 113,633 50,710 60,669 37,749 262,761
Repairs and maintenance 122,763 22,388 83,384 23,785 252,320
Utilities 92,043 35,696 27,404 8,136 163,279
Management fee 48,981 16,303 39,249 21,987 126,520
Insurance 7,271 1,385 6,787 2,893 18,336
Other 30,016 13,840 23,658 6,223 73,737
Depreciation 216,171 73,556 112,326 78,357 480,410
Interest - - 130,197 - 130,197
Directors' fees and expenses - - - - 56,188 56,188
Administrative fee - - - - 99,180 99,180
Other administrative expenses - 632,199 632,199
---------- ---------- ---------- ---------- --------- -----------
Total expenses 630,878 213,878 483,674 179,130 787,567 2,295,127
---------- ---------- ---------- ---------- --------- -----------
Net income (loss)
from operations before
limited partner's interest $ 348,537 $ 109,549 $ 302,019 $ 237,707 $(727,914) $ 269,898
========== ========== ========== ========== ========= ===========
Total assets $6,061,972 $2,119,423 $3,393,240 $3,102,363 $ 646,317 $15,323,315
========== ========== ========== ========== ========= ===========
II-27
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements (continued)
10. Selected Quarterly Financial Data (Unaudited)
Quarter Ended
------------------------------------------------------------ Year Ended
Year 3/31 6/30 9/30 12/31 12/31
- - ------------------------------------------------------------------------------------------------------------------------------------
1998
Revenue $670,324 $644,278 $635,612 $614,811 $2,565,025
Net income (loss) 175,726 20,686 (8,581) (7,883) 179,948
Basic and diluted net income per share .08 .01 .00 .00 .10
- - ------------------------------------------------------------------------------------------------------------------------------------
1997
Revenue $560,915 $623,622 $626,237 $657,084 $2,467,858
Net income 124,207 182,421 181,052 12,506 500,186
Basic and diluted net income per share .06 .08 .08 .00 .22
- - ------------------------------------------------------------------------------------------------------------------------------------
1996
Revenue $582,292 $544,903 $557,005 $532,826 $2,217,026
Net income 166,021 128,924 132,676 133,995 561,616
Basic and diluted net income per share .07 .06 .06 .06 .25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
II-28
Part III.
Item 10. Directors and Executive Officers of the Registrant
LEO S. ULLMAN, age 59, is Chairman of the Board and President of the Company and
has been President of SKR Management Corp. from 1994 through the current date;
Chairman of Brentway Management LLC from 1994 through the current date;
President of Cedar Bay Realty Advisors, Inc. since its formation in January
1998. Mr. Ullman has also been the President and sole director of Selbridge
Corp. and Buttzville Corp. (the two partners of CBC) from 1994 through the
current date. From 1992 through 1995, Mr. Ullman was President of API Management
Services Corp. and API Asset Management, Inc. Mr. Ullman has been involved in
real estate property and asset management for approximately twenty years. Mr.
Ullman has been a member of the New York Bar since 1966. From 1993 until the end
of 1998, Mr. Ullman served as "of counsel" to the New York office of the law
firm Schnader Harrison Segal & Lewis, LLP. Mr. Ullman became Chairman of the
Board of Directors of the Company in 1998.
J.A.M.H. DER KINDEREN, age 58, was the Director of Investments from 1984 through
1994 for Rabobank Pension Fund, and has been or is Chairman of the Board of the
following entities: Noro America Real Estate B.V. (1995-present); Noro Amerika
Vast Goed B.V. (1985-present); Mass Mutual Pierson (M.M.P.) (1988-present); and,
from 1996 to the present, a director of Warner Building Corporation. Mr. der
Kinderen became a Director of the Company in 1998.
EVERETT B. MILLER, III, age 51, is currently the Senior Vice President and Chief
Executive Officer of Commonfund Realty, Inc. a regulated investment advisor.
Prior to that, starting in March 1997, Mr. Miller was the Senior Vice President
and Chief Executive Officer of two finite REITs, Endowment Realty Investors and
Endowment Realty Investors II. From January 1995 through March 1997, Mr. Miller
was the Principal Investment Officer for Real Estate and Alternative Investment
at the Office of the Treasurer of the State of Connecticut. Prior to that, Mr.
Miller was employed for twenty years at Travelers Realty Investment Co., at
which his last position was Senior Vice President. Mr. Miller became a Director
of the Company in 1998.
BRENDA J. WALKER, age 46, is Vice President and Treasurer of the Company and has
been Vice President of SKR Management Corp. from 1994 through the current date;
President of Brentway Management LLC from 1994 through the current date; Vice
President of API Management Services Corp. and API Asset Management, Inc. from
1992 through 1995. Ms. Walker has been involved in real estate property and
asset management for approximately twenty years. Ms. Walker became Vice
President, Treasurer and Director of the Company in 1998.
III-1
Item 10. Directors and Executive Officers of the Registrant (continued)
JEAN-BERNARD WURM, age 49, has been a Director of HVB Capital Markets, Inc. and
its predecessor, B.V. Capital Markets, Inc. since January 1, 1993. Mr. Wurm
began his career with J.P. Morgan in Paris in the International Money Management
Group in Frankfurt as a corporate lending officer before moving to the U.S. in
1979. In 1986, Mr. Wurm started advising European investors in the U.S. real
estate market. From 1989 to 1992, Mr. Wurm was the President of U.S. Land which
provided European lenders with expertise and support in the workout or
disposition of their U.S. real estate assets. Mr. Wurm has been a member of the
finance committee of the GMHC since 1986 and has also been Treasurer of the
Sciences-Po Alumni Association for the last two years and a member of the Board
since 1988. Mr. Wurm became a Director of the Company in 1998.
THEODORE FICHTENHOLZ, age 52, has been a private practicing attorney since 1993.
His offices are located in central Connecticut. He was first admitted to the Bar
in 1974 in New York. Mr. Fichtenholz's practice specializes in real estate and
financing matters. From 1985 until 1993, Mr. Fichtenholz was Managing Attorney
for Chase Enterprises, a privately held real estate company. From 1977 until
1985, Mr. Fichtenholz was a partner in a New York City law firm. Prior to 1977,
Mr. Fichtenholz held various positions with the City of New York. Mr.
Fichtenholz became a Director of the Company in 1998.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company believes that during 1998 all of its officers, directors and holders
of more than 10% of its Common Stock complied with all filing requirements under
Section 16(a) of the Securities Exchange Act of 1934, except as follows: Messrs.
der Kinderen, Miller and Wurm have not yet filed their Forms 3 reporting on
their election as directors of the Company.
Item 11. Executive Compensation
The officers and directors of the Company who are also affiliated with CBC do
not receive any remuneration for their services to the Company other than
reimbursement of travel and other expenses incurred in connection with their
duties. During 1998, directors not affiliated with CBC, Mr. Miller, Mr. Wurm and
Mr. der Kinderen received a prorated annual fee of $3,750 plus $750 for each
board meeting attended. Mr. Fichtenholz received a prorated annual fee of $1,250
plus $750 for each board meeting attended.
The Company established a stock option plan (the "Plan") for the purpose of
attracting and retaining executive officers, directors and other key employees.
As of December 31, 1998, 500,000 of the Company's authorized shares of Common
Stock have been reserved for issuance under the Plan. The Plan is administered
by a committee of the Board of Directors, which committee will, among other
things, select the number of shares subject to each grant, the vesting period
for each grant and the exercise price (subject to applicable regulations with
respect to incentive stock options) for the options. As of December 31, 1998, no
options have been granted under the Plan.
III-2
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each person and group
(as that term is used in Section 13(d)(3) of the Securities Exchange Act of
1934) known by the Company to be the beneficial owner of more than five percent
(5%) of the outstanding Shares of the Company as of March 1, 1999. Each such
owner has sole voting and investment powers with respect to the Shares owned by
it.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
Cedar Bay Company (1) 1,893,037 84%
c/o Brentway Management LLC
44 South Bayles Avenue, #304
Port Washington, New York 11050
Security Ownership of Management
The following table sets forth the number of shares of the Company beneficially
owned as of March 1, 1999 by each director, nominee, and officer and by all
Directors, nominees and officers as a group (6 persons).
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
Leo S. Ullman (2) 1,893,037 84%
Brenda J. Walker 100 *
J.A.M. H. der Kinderen 100 *
Everett B. Miller, III 100 *
Jean-Bernard Wurm 0
Theodore Fichtenholz 0
*Such holdings represent less than one percent of the outstanding shares.
(1) Represent 189,737 shares of New Common Stock and 1,703,300 limited
partnership units in the Operating Partnership.
(2) Mr. Ullman may be deemed to be the beneficial owner of 1,893,037 shares
owned by CBC. Mr. Ullman disclaims beneficial ownership of such shares.
III-3
Item 13. Certain Relationships and Related Transactions
The Company has no employees and has contracted with Cedar Bay Realty Advisors,
Inc., a New York corporation, ("Cedar Bay") to provide the Company with
administrative, advisory, acquisition, divestiture, property management, leasing
and stockholder services. A description of the agreements between Cedar Bay and
certain of its affiliates and the Company follows. The description of the
agreements is qualified in its entirety by reference to the terms and provisions
of such agreements. CBC is a New York general partnership. The Point Associates,
L.P. a Pennsylvania limited partnership, and Triangle Center Associates, L.P. a
Pennsylvania limited partnership, are the sole partners of CBC. The general
partner of The Point Associates, L.P. is Selbridge Corp., a Delaware
corporation. The general partner of Triangle Center Associates is Buttzville
Corp., a Delaware corporation. Leo S. Ullman is the sole limited partner in each
of The Point Associates, L.P. and Triangle Center Associates, L.P. and is an
executive officer and a Director of each of Selbridge Corp. and Buttzville Corp.
Cedar Bay is wholly-owned by Mr. Ullman. Mr. Ullman is President and a Director
of, and Brenda J. Walker is Vice President of, Cedar Bay.
Brentway Management LLC, a New York limited liability company ("Brentway"), is
owned by Mr. Ullman and Ms. Walker. Mr. Ullman is Chairman and Ms. Walker is
President of Brentway.
Administrative and Advisory Services
Cedar Bay provides administrative, advisory, acquisition and divestiture
services to the Company pursuant to an Administrative and Advisory Agreement
(the "Advisory Agreement"). The term of the Advisory Agreement is for one (1)
year and is automatically renewed annually for an additional year subject to the
right of either party to cancel the Advisory Agreement upon 60 days' written
notice.
Under the Advisory Agreement, Cedar Bay is obligated to: (a) provide office
space and equipment, personnel and general office services necessary to conduct
the day-to-day operations of the Company; (b) select and conduct relations with
accountants, attorneys, brokers, banks and other lenders, and such other parties
as may be considered necessary in connection with the Company's business and
investment activities, including, but not limited to, obtaining services
required in the acquisition, management and disposition of investments,
collection and disbursement of funds, payment of debts and fulfillment of
obligations of the Company, and prosecuting, handling and settling any claims of
the Company; (c) provide property acquisition and disposition services,
research, economic and statistical data, and investment and financial advice to
the Company; and (d) maintain appropriate legal, financial, tax, accounting and
general business records of activities of the Company and render appropriate
periodic reports to the directors and stockholders of the Company and to
regulatory agencies, including the Internal Revenue Service, the Securities and
Exchange Commission, and similar state agencies.
III-4
Item 13. Certain Relationships and Related Transactions (continued)
Cedar Bay receives fees for its administrative and advisory services as follows:
(a) a monthly administrative and advisory fee 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; (b) an
acquisition fee equal to 5% of the gross purchase price (before expenses and
without deducting indebtedness assumed) of any real property acquired during the
term of the Advisory Agreement; provided that the total of all such acquisition
fees plus acquisition expenses in connection with the purchase of any real
property shall be reasonable and shall not exceed 6% of the amount paid or
allocated to the purchase, development, construction or improvement of a
property, exclusive of acquisition fees and acquisition expenses; and (c) a
disposition fee equal to 3% of the gross sales price (before expenses but
without deducting any indebtedness against the property) of any real property
disposed of during the term of the Advisory Agreement; provided that no
disposition fee shall be paid unless and until the stockholders have received
certain distributions from the Company. In addition, Cedar Bay may receive
one-half of the brokerage commission on such a disposition but only up to 3% of
the price actually paid for the property, subject to certain limitations.
Furthermore, if the Advisory Agreement is terminated prior to the liquidation of
the Company, Cedar Bay will be entitled to payment of disposition fees based on
the ratio of the number of years the Advisory Agreement was operative to the
number of years from the date the Advisory Agreement was entered into that such
fee became payable. The Company paid its former advisor approximately $101,000
in administrative fees for 1997. The Company paid $99,180 to Cedar Bay in 1998.
No incentive, acquisition or disposition fees were paid in 1997 or 1998.
Management Services
With the exception of Germantown Square, Brentway provides property management
and leasing services to the Company's real property pursuant to the management
agreement. The term of the agreement is for one (1) year and is automatically
renewed annually for an additional year subject to the right of either party to
cancel upon 60 days' written notice. Under the agreement, Brentway is obligated
to provide property management services, which include leasing and collection of
rent, maintenance of books and records, establishment of bank accounts and
payment of expenses, maintenance and operation of property, reporting and
accounting to the Company regarding property operations, and maintenance of
insurance. All of the duties of Brentway are to be fulfilled at the Company's
expense; provided, however, that the Company is not required to reimburse
Brentway for personnel expenses other than for on-site personnel at the
properties managed. Brentway receives fees for its property management services
as follows: a monthly management fee equal to 5% of the gross income from
properties managed and leasing fees up to 6% of the aggregate rent to be paid
during the term of the lease procured. Due to Life Investors' ownership of the
other 50% undivided interest therein, AEGON continues to manage the retail
property, Germantown Square on terms similar to the above. As did the former
manager in 1997, Brentway has subcontracted with various local management
companies for site management and leasing services. Brentway was paid $44,587 in
property management fees in 1998. (See Note 7).
III-5
Item 13. Certain Relationships and Related Transactions (continued)
Financial Advisory Agreement
The Company has entered into a Financial Advisory Agreement (the "HVB
Agreement") with HVB Capital Markets Inc., as successor to B.V. Capital Markets,
Inc. ("HVB") pursuant to which HVB has agreed to perform the following services
as financial advisor to the Company: (a) advise on acquisition financing and/or
lines of credit for future acquisitions; (b) advise on acquisitions of United
States real property interests and the consideration to be paid therefor; (c)
advise on private placements of the shares of the Company; (d) assist the Board
of Directors in developing suitable investment parameters for the Company; (e)
develop and maintain contacts on behalf of the Company with institutions with
substantial interests in real estate and capital markets; (f) advise the Board
with respect to additional private or public offerings of equity securities of
the Company; (g) review certain financial policy matters with consultants,
accountants, lenders, attorneys and other agents of the Company; and (h) prepare
periodic reports of its performance of the foregoing services. As compensation
for the foregoing services, the Company is required to pay HVB, (i) .25% of the
Company's net asset value, less any indebtedness affecting such net value, but
in any event, not less than $100,000 per year; (ii) a one-time payment of 1.5%
of 90% of the agreed value of properties contributed to the Company or its
affiliates by persons introduced to the Company by HVB; and (iii) upon the
Company becoming self-administered, a one-time payment equal to five times the
annual fee income attributable to fee receipts from clients or contacts of HVB
that have contributed property to the Company. The term of the HVB Agreement is
for a period of one (1) year and is automatically renewed for an additional year
subject to the right of either party to cancel at the end of any year upon 60
days' written notice. HVB was paid $58,808 for financial advisory services in
1998.
III-6
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents
1. Financial Statements.
The following financial statements are included in Item 8:
Consolidated Balance Sheets, December 31, 1998 and 1997.
Consolidated Statements of Operations, Years ended December 31, 1998, 1997 and
1996.
Consolidated Statements of Shareholders' Equity, Years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Cash Flows, Years ended December 31, 1998, 1997 and
1996.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All other schedules have been omitted because they are not required, or because
the required information, where material, is included in the financial
statements or accompanying notes.
IV-1
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
3. Exhibits
(3.1) Articles of Incorporation.
(3.2) By-laws.
(3.3) Agreement of Limited Partnership for the Operating Partnership.
(10.1) Administrative and Advisory Agreement dated April 2, 1998 between
Cedar Bay Realty Advisors, Inc. and the Company.
(10.2) Management Agreement dated April 2, 1998 between Brentway Management
LLC and the Company.
(10.3) Financial Advisory Agreement dated June 1, 1998 between BV Capital
Markets, Inc. and the Company.
(b) Reports on Form 8-K.
None
(c) The required exhibits applicable to this section are listed in Item 14(a)3.
(d) There are no financial statement schedules applicable to this section.
IV-2
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.
/s/ Leo S. Ullman /s/ Brenda J. Walker
- - ------------------------------ --------------------------------------
Leo S. Ullman Brenda J. Walker
Chairman of the Board Vice President, Treasurer and Director
(principal executive officer) (principal financial officer)
/s/ Ann Maneri
--------------------------------------
Ann Maneri
Controller
(principal accounting officer)
March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and as of the date indicated.
/s/ Jean-Bernard Wurm /s/ Everett B. Miller, III
- - ------------------------------ --------------------------------------
Jean-Bernard Wurm Everett B. Miller, III
Director Director
/s/ J.A.M.H. der Kinderen /s/ Theodore Fichtenholz
- - ------------------------------ --------------------------------------
J.A.M.H. der Kinderen Theodore Fichtenholz
Director Director
March 30, 1999
IV-3
EXHIBIT INDEX
Exhibit
Item Title or Description
- - ------- --------------------
(3.1) Articles of Incorporation.
(3.2) By-laws.
(3.3) Agreement of Limited Partnership for the Operating Partnership.
(10.1) Administrative and Advisory Agreement dated April 2, 1998 between
Cedar Bay Realty Advisors, Inc. and the Company.
(10.2) Management Agreement dated April 2, 1998 between Brentway Management
LLC and the Company.
(10.3) Financial Advisory Agreement dated June 1, 1998 between BV Capital
Markets, Inc. and the Company.
(b) Reports on Form 8-K.
None
(c) The required exhibits applicable to this section are listed in Item 14(a)3.
(d) There are no financial statement schedules applicable to this section.
IV-4