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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-16345
SHELBOURNE PROPERTIES I, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3502384
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 9507, 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114
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(Address of principal executive offices)
(617) 570-4600
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of August 13, 2002, there were 839,286 shares of common stock outstanding.
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1
The financial information contained in this Form 10-Q for the periods prior to
April 18, 2001 are those of Shelbourne Properties I, Inc.'s predecessor in
interest, Integrated Resources High Equity Partners, Series 85, A California
Limited Partnership (the "Predecessor Partnership"). On April 18, 2001, the
Predecessor Partnership was merged with and into Shelbourne Properties I, L.P. a
limited partnership wholly owned, directly and indirectly, by Shelbourne
Properties I, Inc.
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001............................ 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2002 and 2001.............. 4
Condensed Consolidated Statement of Equity -
Six Months Ended June 30, 2002................................. 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001........................ 6
Notes to Condensed Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................... 24
Part II. Other Information:
Item 1. Legal Proceedings......................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................... 26
Signatures......................................................... 28
2
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q - JUNE 30, 2002
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2002 December 31, 2001
--------------------- -----------------------
ASSETS
Real estate, net $ 18,963,674 $ 31,783,227
Cash and cash equivalents 4,606,591 14,191,726
Other assets 1,786,559 3,013,830
Receivables, net of allowances of
$95,114 and $92,074, respectively 209,128 279,777
Investment in joint ventures 18,296,528 -
--------------------- -----------------------
TOTAL ASSETS $ 43,862,480 $ 49,268,560
===================== =======================
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 2,167,221 $ 783,308
Other liabililities 1,978,222 -
Note payable 23,832,274 -
--------------------- -----------------------
Total Liabilities 27,977,717 783,308
--------------------- -----------------------
COMMITMENTS AND CONTINGENCIES
CLASS A 5% PREFERRED PARTNERSHIP INTERESTS,
AT LIQUIDATION VALUE 812,674 -
--------------------- -----------------------
EQUITY
Common Stock:
$.01 par value share; authorized 2,500,000 shares;
issued 1,263,189 shares; outstanding 839,286 and
1,263,189, respectively 12,632 12,632
Additional capital 48,072,897 48,072,897
Treasury stock, at cost (14,303,060) -
Retained earnings (18,710,380) 399,723
--------------------- -----------------------
Total Equity 15,072,089 48,485,252
--------------------- -----------------------
TOTAL LIABILITIES AND EQUITY $ 43,862,480 $ 49,268,560
===================== =======================
See notes to condensed consolidated financial statements.
3
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q - JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------------- -------------- ---------------- --------------
Rental revenues $ 870,132 $ 2,432,586 $ 2,477,679 $ 5,492,411
---------------- -------------- ---------------- --------------
Costs and Expenses
Operating expenses 435,425 835,568 815,290 1,652,443
Depreciation and amortization 239,606 359,938 429,613 741,999
Asset management fee - 267,524 135,805 531,094
Transition management fee 83,300 - 124,950 -
Purchase of advisory agreements - - 18,452,133 -
Administrative expenses 2,292,623 275,325 3,041,288 737,548
Property management fee 25,373 77,043 71,286 164,684
---------------- -------------- ---------------- --------------
3,076,327 1,815,398 23,070,365 3,827,768
---------------- -------------- ---------------- --------------
(Loss) income before equity income from joint
ventures, interest and other income (2,206,195) 617,188 (20,592,686) 1,664,643
Equity income from joint ventures 888,308 - 1,808,180 -
Interest expense (239,727) - (342,002) -
Interest income 12,938 149,440 27,805 332,522
Other income 1,959 2,320 3,951 17,966
---------------- -------------- ---------------- --------------
Net (loss) income (1,542,717) 768,948 (19,094,752) 2,015,131
Preferred dividends (10,272) - (15,351) -
---------------- -------------- ---------------- --------------
Net (loss) income available for common shares $ (1,552,989) $ 768,948 $ (19,110,103) $ 2,015,131
================ ============== ================ ==============
Earnings per share - basic and diluted
Net (loss) income per common share $ (1.85) $ 0.61 $ (20.23) $ 1.60
================ ============== ================ ==============
Weighted average common shares 839,286 1,263,189 944,676 1,263,189
================ ============== ================ ==============
See notes to condensed consolidated financial statements.
4
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q - JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
Common Additional Treasury Retained
Stock Capital Stock Earnings Totals
---------- -------------- -------------- -------------- ---------------
Balance, January 1, 2002 $ 12,632 $ 48,072,897 $ - $ 399,723 $ 48,485,252
Purchase of treasury stock - - (14,303,060) - (14,303,060)
Preferred dividends - - - (15,351) (15,351)
Net loss - - - (19,094,752) (19,094,752)
---------- -------------- -------------- --------------- ---------------
Balance, June 30, 2002 $12,632 $48,072,897 $(14,303,060) $(18,710,380) $ 15,072,089
========== ============== ============== =============== ===============
See notes to condensed consolidated financial statements.
5
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q - JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------------------
2002 2001
---------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) Income $ (19,094,752) $ 2,015,131
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 429,613 741,999
Straight-line adjustment for stepped
lease rentals 15,550 22,309
Increase in bad debt reserve 50,000 -
Purchase of advisory agreement 18,452,133 -
Equity income from joint ventures (1,808,180) -
Change in assets and liabilities:
Accounts payable and accrued expenses 1,795,502 246,352
Other liabilities 1,978,222
Receivables (123,877) (20,910)
Due to affiliates - (396,320)
Other assets 4,195,340 (312,844)
---------------- ----------------
Net Cash Provided by Operating Activities 5,889,551 2,295,717
---------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Improvements to real estate (55,464) (622,325)
CASH FLOW FROM FINANCING ACTIVITIES:
Purchase of treasury stock (14,303,060) -
Proceeds from note payable 23,832,274 -
Payoff of note payable (17,639,459) -
---------------- ----------------
Net Cash Used in Financing Activities (8,110,245) -
---------------- ----------------
(Decrease) Increase in cash and cash equivalents (2,276,158) 1,673,392
Cash and cash equivalents, beginning of year 14,191,726 13,229,944
---------------- ----------------
Cash and cash equivalents related to investment
in joing ventures (7,308,977) -
---------------- ----------------
Adjusted cash and cash equivalents,
beginning of year 6,882,749 13,229,944
---------------- ----------------
Cash and cash equivalents, end of quarter $ 4,606,591 $ 14,903,336
================ ================
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 342,002 $ -
================ ================
See notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
l. GENERAL
The accompanying condensed consolidated financial statements, notes
and discussions should be read in conjunction with the consolidated
financial statements, related notes and discussions contained in the
Annual Report on Form 10-K of Shelbourne Properties I, Inc., a
Delaware corporation (the "Company"), for the year ended December 31,
2001.
The financial information contained herein is condensed and unaudited;
however, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of such financial information have been included. Results
of operations for the three months and six months ended June 30, 2002
are not necessarily indicative of the results to be expected for the
entire year.
2. SIGNIFICANT ACCOUNTING POLICIES
Investment in Joint Ventures
Certain properties are owned in joint ventures with Shelbourne
Properties II, L.P. and/or Shelbourne Properties III, L.P. Prior to
April 30, 2002, the Company owned an undivided interest in the assets
owned by these joint ventures and was severally liable for
indebtedness it incurred in connection with its ownership interest in
those properties. Therefore, for periods prior to April 30, 2002, the
Company's condensed consolidated financial statements presented the
assets, liabilities, revenues and expenses of the joint ventures on a
pro rata basis in accordance with the Company's percentage of
ownership.
After April 30, 2002, as a result of the Company's incurring debt in
connection with entering into the Note Payable discussed in Note 8,
the Company is no longer allowed to account for its investments in
joint ventures on a pro-rata consolidation basis in accordance with
its percentage of ownership but must instead utilize the equity method
of accounting. Accordingly, the Company's condensed consolidated
balance sheet at June 30, 2002 and the Company's condensed
consolidated statements of operations for the three and six month
period ended June 30, 2002 reflect the equity method of accounting.
The impact of the change to equity accounting on the December 31, 2001
condensed consolidated balance sheet was to reduce real estate by
$12.5 million, cash and cash equivalents by $7.3 million, receivables
by $0.1 million, accounts payable and accrued expenses by $0.4 million
and to increase other assets by $3.1 million and investment in joint
ventures by $16.4 million.
Real Estate
Real estate is carried at cost, net of adjustments for impairment.
Repairs and maintenance are charged to expense as incurred.
Replacement and betterments are capitalized. The Company evaluates the
recoverability of the net carrying value of its real estate and
related assets at least annually, and more often if circumstances
dictate. If this review indicates that the carrying value of a
property might not be recoverable, the Company prepares estimates of
the future undiscounted cash flows expected to result from the use of
the property and its eventual disposition, generally over a five-year
holding period. In performing this review, management
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
takes into account, among other things, the existing occupancy, the
expected leasing prospects of the property and the economic situation
in the region where the property is located.
If the sum of the expected future cash flows, undiscounted, is less
than the carrying amount of the property, the Company recognizes an
impairment loss and reduces the carrying amount of the property to its
estimated fair value. Fair value is the amount at which the property
could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
Management estimates fair value using discounted cash flows or market
comparables as most appropriate for each property. Independent
certified appraisers are utilized to assist management when warranted.
Impairment write-downs recorded by the Company prior to April 18, 2001
did not affect the tax basis of the assets and were not included in
the determination of taxable income or loss. No additional write-downs
have been recorded since the effective date of the merger.
Because the expected cash flows used to evaluate the recoverability of
the property and their fair values are based upon projections of
future economic events, such as property occupancy rates, rental
rates, operating cost inflation and market capitalization rates, the
amounts ultimately realized at disposition may differ materially from
the net carrying values at the balance sheet dates. The cash flows and
market comparables used in this process were based on good faith
estimates and assumptions developed by management. Unanticipated
events and circumstances may occur and some assumptions may not
materialize; therefore, actual results may vary materially from the
estimates. The Company may in the future provide additional
write-downs, which could be material, if real estate markets or local
economic conditions change.
Treasury Stock
Treasury stock is stated at cost.
Amounts Per Share
Net income (loss) per share is computed based on average shares
outstanding.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting
for intangible assets acquired, except for those acquired in a
business combination. SFAS No. 142 presumes that goodwill and certain
intangible assets have indefinite useful lives. Accordingly, goodwill
and certain intangibles will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 also addresses
accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. The Company has adopted this
statement, which did not materially affect the Company's financial
statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operations - Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. The provisions of this
Statement generally are to be applied prospectively. The Company has
adopted this statement, which did not materially effect the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections," which updates, clarifies and simplifies
existing accounting pronouncements. In part, this statement rescinds
SFAS 4, "Reporting Gains and Losses from Exstinguishment of Debt."
FASB No. 145 will be effective for fiscal years beginning after May
15, 2002. Under adoption, enterprises must reclassify prior period
items that do not meet the extraordinary item classification criteria
in APB opinion No. 30. The Company does not expect that this statement
will have an effect on the Company's financial statements.
3. RELATED PARTY TRANSACTIONS
On February 14, 2002, the Company, Shelbourne Properties II, Inc. and
Shelbourne Properties III, Inc. (the "Companies") consummated a
transaction (the "Transaction") whereby the Company purchased an
advisory agreement (the "Advisory Agreement") between the Company and
Shelbourne Management LLC ("Shelbourne Management"), an affiliate of
Presidio Capital Investment Company, LLC ("PCIC"), and the 423,903
shares of the Company's common stock held by subsidiaries of PCIC.
PCIC is controlled and principally owned by affiliates of former
senior management and one current director of the Company. The
Company's operating partnership, Shelbourne Properties I, L.P., issued
preferred partnership interests with an aggregate liquidation
preference of $812,674 and a note in the amount of $17,639,459.
Shelbourne Management's obligations under the contract terminated as
of the effective date of the Transaction.
In conjunction with the Transaction, PCIC entered into an agreement
with the Companies and their respective operating partnerships to
provide transition services, namely, accounting, asset management,
investor services and treasury and cash management, for a period up to
one year from the date of the agreement (until February 14, 2003) for
a fee of $83,300 per month. This fee is allocated equally among the
Companies. For the period from April 1, 2002 to June 30, 2002, the
Company paid $83,300 for transition services and for the period from
February 15, 2002 to June 30, 2002, the Company paid PCIC $124,950 for
transition services. As a result of the settlement of all lawsuits
(see note 8) this agreement was terminated effective September 30,
2002 and all 3rd quarter transition fees owed were required to be paid
in full by the Company in July 2002. The Company paid all transition
fees owed on July 11, 2002.
Prior to the Transaction, under the terms of the Advisory Agreements,
Shelbourne Management provided the Company with all management,
advisory and property management services. For providing these
services, Shelbourne Management received (1) an annual asset
management fee, payable quarterly, equal to 1.25% of the gross asset
value of the Company as of the last day of each year, (2) property
management fees of up to 6% of property revenues, (3) $150,000 for
non-accountable expenses and (4) reimbursement of expenses incurred in
connection with the performance of its services.
Upon its disposition of the Advisory Agreements, Shelbourne Management
was entitled to
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
receive reimbursement for non-accountable expenses for the period from
January 1, 2002 through February 14, 2002. For that period Shelbourne
Management received $18,750. Shelbourne Management was also entitled
to receive an asset management fee for the period of January 1, 2002
through February 14, 2002 equal to 1.25% of the gross asset value of
the Company. For that period, Shelbourne Management received $135,805.
On April 18, 2001, High Equity Partners LP Series 85, (the
"Predecessor Partnership") was converted into a Real Estate Investment
Trust. With the conversion, the Managing General Partner of the
predecessor partnership was no longer entitled to receive fees for the
administration of the partnership. As of the conversion date,
Shelbourne Management was entitled to receive the fees formerly paid
to the Managing General Partner. During the three months June 30,
2001, the Managing General Partner received $7,083 for non-accountable
expenses and $50,532 for the asset management fee. Shelbourne
Management received $30,417 for non-accountable expenses and $216,992
for the asset management fee. For the six months ended June 30, 2001,
the Managing General Partner received $44,583 and Shelbourne
Management received $30,417 for non-accountable expense. For the six
months ended June 30, 2001 the Managing General Partner received
$314,102 and Shelbourne Management received $216,992 for the asset
management fee.
Since October 2000, Kestrel Management L.P. ("Kestrel") has performed
all property management services directly for the Predecessor
Partnership and, as of April 18, 2001, the Company. The Transaction
did not have any effect on the property management services contract
between the Company and Kestrel. For the three months ended June 30,
2002 and 2001, Kestrel earned $25,373 and $28,537, respectively. For
the six months ended June 30, 2002 and 2001, Kestrel earned $71,286
and $71,432, respectively.
At June 30, 2002, $1,978,222 of payables to related joint ventures
are included in other liabilities.
4. REAL ESTATE
The following table is a summary of the Company's real estate as of
June 30, 2002:
June 30, 2002 December 31, 2001
(Unaudited)
Land $ 7,505,421 $ 10,370,965
Building and improvements 20,948,992 39,444,906
------------ -------------
28,454,413 49,815,871
Less: Accumulated depreciation (9,490,739) (18,032,644)
------------ -------------
$18,963,674 $ 31,783,227
============ =============
See footnote 2 "Investment in Joint Ventures" for the impact on real
estate as a result of the change to equity accounting for joint
ventures.
5. INVESTMENT IN JOINT VENTURES
The Company invests in three joint ventures, (568 Broadway, Century
Park and Seattle Landmark). The joint ventures condensed consolidated
statement of operations for the three and six months ending June 30,
2002, are as follows:
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2002
---------------------- --------------------
Rental Revenues $4,166,656 $8,278,158
Costs and Expenses 2,068,105 4,032,372
---------- ----------
Income before interest and other income 2,098,551 4,245,786
Interest Income 6,980 45,783
---------- ----------
Net income for joint ventures $2,105,532 $4,291,569
========== ==========
Equity Income from joint ventures for
Shelbourne Properties I, Inc. $ 888,308 $1,808,180
========== ==========
6. FEDERAL INCOME TAX CONSIDERATIONS
As of April 18, 2001, our Predecessor Partnership was converted into a
corporation that elected to be taxed as a real estate investment trust
(REIT) under the provisions of the Internal Revenue Code. As a result,
the shareholders of the REIT are required to include their
proportionate share of any distribution of taxable income on their
returns. REITs are required to distribute at least 90% of their
ordinary taxable income to shareholders and meet certain income, asset
and shareholder ownership requirements.
7. CONVERSION
As the first step in reorganizing the Predecessor Partnership into a
publicly-traded REIT, a registration statement was filed with the
Securities and Exchange Commission on February 11, 2000. On or about
February 15, 2001, a prospectus/consent solicitation statement was
mailed to the limited partners of the Predecessor Partnership seeking
their consent to the reorganization of the Predecessor Partnership
into a real estate investment trust. The consent solicitation period
expired on April 16, 2001, and holders of a majority of the
partnership units approved the conversion.
On April 18, 2001 the conversion was accomplished by merging the
Predecessor Partnership into our operating partnership. Pursuant to
the merger, each limited partner received three shares of stock of the
Company for each unit they owned, and the general partners received an
aggregate of 63,159 shares of stock of the Company in exchange for
their general partner interests. The common stock of the Company is
listed on the American Stock Exchange under the symbol HXD.
8. NOTE PAYABLE
On May 1, 2002, the operating partnerships of the Companies and
certain of the operating
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
partnerships' subsidiaries entered into a $75,000,000 revolving credit
facility with Bayerische Hypo-Und Vereinsbank AG, New York Branch, as
agent for itself and other lenders (referred to as the "Credit
Facility" or the "Note Payable"). The Credit Facility has a term of
three years and is prepayable in whole or in part at any time without
penalty or premium. The Companies initially borrowed $73,330,075 under
the Credit Facility. The Company's share of the proceeds amounted to
$23,832,274, of which $17,639,459 was used to repay the note issued in
the Transaction, $172,733 to pay associated accrued interest and
$667,145 to pay costs related to the Credit Facility. The excess
proceeds of $5,352,937 were deposited into the Company's operating
cash account. The Companies have the right, from time to time, to
elect an annual interest rate equal to (i) LIBOR plus 2.5% or (ii) the
greater of (a) agent's prime rate or (b) the federal funds rate plus
1.5%. The Companies are required to pay the lenders, from time to
time, a commitment fee equal to .25% of the unborrowed portion of the
Credit Facility. Interest is payable monthly in arrears. The interest
rate at June 30, 2002 was approximately 4.19%.
The Credit Facility is secured by (i) a pledge by the operating
partnerships of their membership interest in their wholly-owned
subsidiaries that hold their interests in joint ventures with the
other Company and (ii) mortgages on certain real properties owned
directly or indirectly by the operating partnerships. All of the
properties of the Companies are security for the Credit Facility.
Under the terms of the Credit Facility, the Companies may only sell
the pledged property if certain conditions are met. In addition, the
Companies must maintain certain debt yield maintenance ratios and
comply with restrictions relating to engaging in certain equity
financings, business combinations and other transactions that may
result in a change of control (as defined under the Credit Facility).
The Companies are jointly and severally liable under the Credit
Facility but have entered into a Contribution and
Cross-Indemnification Agreement.
9. SUBSEQUENT EVENTS
On July 1, 2002, the Company, along with Shelbourne Properties II,
Inc. and Shelbourne Properties III, Inc., entered into settlement
agreements with respect to certain outstanding litigation involving
the Companies. In connection with the settlement, the Company entered
into a stock purchase agreement (the "HX Investors Stock Purchase
Agreement") with HX Investors, L.P. ("HX Investors") and Exeter
Capital Corporation ("Exeter"), the general partner of HX Investors,
pursuant to which HX Investors, the owner of approximately 12% of the
outstanding common stock of the Company, agreed to conduct a tender
offer for up to an additional 30% of the Company's outstanding stock
at a price per share of $53.00 (the "HX Investors Offer"). The tender
offer commenced on July 5, 2002 following the filing of the required
tender offer documents with the Securities and Exchange Commission by
HX Investors.
Pursuant to the Stock Purchase Agreement, the board of directors of
the Company approved a plan of liquidation for the Company (the "Plan
of Liquidation") and agreed to submit the Plan of Liquidation to its
stockholders for approval at the 2002 annual meeting of stockholders
to be held on September 9, 2002 (the "Annual Meeting"). HX Investors
agreed to vote all of its shares in favor of the Plan of Liquidation
at the Annual Meeting. Under the Plan of Liquidation, HX Investors
would have received an incentive payment of 25% of gross proceeds
after the payment of a priority return of approximately $59.00 per
share was made to the stockholders of the Company.
Subsequently, on July 29, 2002, Longacre Corp., an affiliate of Carl
C. Icahn ("Icahn"),
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
commenced a litigation against the Company, and Icahn publicly
announced that his related companies, together with outside investors,
were prepared to initiate a competing tender offer for the same number
of shares of common stock of the Company as were tendered for under
the HX Investors Offer, at a price per share of $58.30. Over the
course of the next several days, Icahn and HX Investors submitted
competing proposals to the board of directors of the Company and made
those proposals public. On August 4, 2002, Icahn notified the Company
that he was no longer interested in proceeding with his proposed
offer.
On August 5, 2002, the Company entered into an amendment to the HX
Investors Stock Purchase Agreement. Pursuant to the terms of the
amendment, the purchase price per share offered under the HX Investors
Offer was increased from $53.00 to $63.15. The amendment also reduced
the incentive payment payable to HX Investors under the Plan of
Liquidation from 25% to 15% of gross proceeds after payment of the
approximately $59.00 per share priority return to stockholders of the
Company, and included certain corporate governance provisions.
The HX Investors Offer is scheduled to expire at midnight on Friday,
August 16, 2002.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. Statements contained herein may constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Any statements contained herein
which are not statements of historical facts and that address
activities, events or developments that Shelbourne Properties I, Inc.
expects, believes or anticipates will or may occur in the future shall
be deemed to be forward-looking statements. Forward-looking statements
are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events, actual results and performance financial
and otherwise, could differ materially from those set forth in or
contemplated by the forward-looking statements herein. Factors that
could cause actual results to differ materially from those in
forward-looking statements include the terms of future property sales,
investments and financings, general economic and business conditions
and various other risk factors listed in the registration statement of
Shelbourne Properties I, Inc. filed with the Securities and Exchange
Commission.
This item should be read in conjunction with the financial statements
and other items contained elsewhere in the report.
On February 14, 2002, the Companies announced the consummation of the
Transaction whereby the Companies (i) purchased each of the Advisory
Agreements between the Companies and PCIC and (ii) repurchased all of
the shares of capital stock in the Companies held by PCIC (the
"Shares").
Pursuant to the Transaction, the Company paid PCIC $14,303,060 in cash
and its operating partnership, Shelbourne Properties I, L.P. issued
preferred partnership interests with an aggregate liquidation
preference of $812,674 and issued a note in the amount of $17,639,459.
The Transaction was unanimously approved by the Boards of Directors of
each of the Companies after recommendation by their respective Special
Committees comprised of the Companies' three independent directors.
Houlihan Lokey Howard & Zukin Capital served as financial advisor to
the Special Committees of the Companies and rendered a fairness
opinion to the Special Committees with respect to the Transaction.
On May 1, 2002, the operating partnerships of the Companies and
certain of the operating partnerships' subsidiaries entered into a
$75,000,000 revolving credit facility with Bayerische Hypo-Und
Vereinsbank AG, New York Branch, as agent for itself and other lenders
(the "Credit Facility"). The Credit Facility has a term of three years
and is prepayable in whole or in part at any time without penalty or
premium. The Companies initially borrowed $73,330,075 under the Credit
Facility. The Company's share of the proceeds amounted to $23,832,274,
of which $17,639,459 was used to repay the note issued in the
Transaction, $172,733 to pay associated accrued interest and $667,145
to pay costs related to the Credit Facility. The excess proceeds of
$5,352,937 were deposited into the Company's operating cash account.
The Companies have the right, from time to time, to elect an annual
interest rate equal to (i) LIBOR plus 2.5% or (ii) the greater of (a)
the agent's prime rate or (b) the federal funds rate plus 1.5%. The
Companies are
14
required to pay the lenders, from time to time, a commitment fee equal
to .25% of the unborrowed portion of the Credit Facility.
The Credit Facility is secured by (i) a pledge by the operating
partnerships of their membership interest in their wholly-owned
subsidiaries that hold their interests in joint ventures with the
other Companies and (ii) mortgages on certain real properties owned
directly or indirectly by the operating partnerships. All of the
properties of the Company are security for the Credit Facility.
Under the terms of the Credit Facility, the Companies may only sell
the pledged property if certain conditions are met. In addition, the
Companies must maintain certain debt yield maintenance ratios and
comply with restrictions relating to engaging in certain equity
financings, business combinations and other transactions that may
result in a change of control (as defined under the Credit Facility).
The Companies are joint and severally liable under the Credit Facility
but have entered into a Contribution and Cross-Indemnification
Agreement.
At the request of HX Investors, L.P. ("HX Investors") - the largest
stockholder of the Company and an entity controlled by Mr. Michael
Ashner - the board of directors of the Company waived a provision in
its certificate of incorporation (as it applies to HX Investors) that
otherwise prohibits a stockholder from beneficially owning more than
8% of the common stock of the Company to allow HX Investors to own up
to 12% of the common stock of the Company. Pursuant to a Stockholder
Agreement among the Company, Shelbourne Properties II, Inc.,
Shelbourne Properties III, Inc., HX Investors and the general partner
of HX Investors, HX Investors agreed that until January 1, 2003, with
respect to all matters submitted for the approval of the Company's
stockholders (1) with the approval and recommendation of the Company's
board of directors or (2) by HX Investors or its affiliates, HX
Investors and its affiliates would vote all shares beneficially owned
by them in excess of the 8% threshold in proportion to the votes cast
by the stockholders of the Company (including the 8% of the shares
beneficially owned by HX Investors). Mr. Ashner is associated with
Kestrel, the property manager for the Company's properties.
The foregoing description of the Stockholder Agreement and the Credit
Facility are qualified in their entirety by reference to such
agreements, copies of which are attached as exhibits to our Current
Report on Form 8-K filed on May 14, 2002, which is incorporated herein
by reference.
Recent Developments
On July 1, 2002, the Company, along with Shelbourne Properties II,
Inc. and Shelbourne Properties III, Inc., entered into settlement
agreements with respect to certain outstanding litigation involving
the Companies. In connection with the settlement, the Company entered
into a stock purchase agreement (the "HX Investors Stock Purchase
Agreement") with HX Investors and Exeter, the general partner of HX
Investors, pursuant to which HX Investors, the owner of approximately
12% of the outstanding common stock of the Company, agreed to conduct
a tender offer for up to an additional 30% of the Company's
outstanding stock at a price per share of $53.00 (the "HX Investors
Offer"). The tender offer commenced on July 5, 2002 following the
filing of the required tender offer documents with the Securities and
Exchange Commission by HX Investors.
Pursuant to the Stock Purchase Agreement, the board of directors of
the Company approved a plan of liquidation for the Company (the "Plan
of Liquidation") and agreed to submit the Plan of
15
Liquidation to its stockholders for approval at the 2002 annual
meeting of stockholders to be held on September 9, 2002 (the "Annual
Meeting"). HX Investors agreed to vote all of its shares in favor of
the Plan of Liquidation at the Annual Meeting. Under the Plan of
Liquidation, HX Investors would have received an incentive payment of
25% of gross proceeds after the payment of a priority return of
approximately $59.00 per share was made to the stockholders of the
Company.
Subsequently, on July 29, 2002, Longacre Corp., an affiliate of Carl
C. Icahn ("Icahn"), commenced a litigation against the Company, and
Icahn publicly announced that his related companies, together with
outside investors, were prepared to initiate a competing tender offer
for the same number of shares of common stock of the Company as were
tendered for under the HX Investors Offer, at a price per share of
$58.30. Over the course of the next several days, Icahn and HX
Investors submitted competing proposals to the board of directors of
the Company and made those proposals public. On August 4, 2002, Icahn
notified the Company that he was no longer interested in proceeding
with his proposed offer.
On August 5, 2002, the Company entered into an amendment to the HX
Investors Stock Purchase Agreement. Pursuant to the terms of the
amendment, the purchase price per share offered under the HX Investors
Offer was increased from $53.00 to $63.15. The amendment also reduced
the incentive payment payable to HX Investors under the Plan of
Liquidation from 25% to 15% of gross proceeds after payment of the
approximately $59.00 per share priority return to stockholders of the
Company, and included certain corporate governance provisions.
The HX Investors Offer is scheduled to expire at midnight on Friday,
August 16, 2002.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying financial statements and related
footnotes. In preparing these financial statements, management has
made its best estimates and judgments of certain amounts included in
the financial statements, giving due consideration to materiality. The
Company does not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies
described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
Impairment of long-lived assets. At June 30, 2002 and December 30,
2001, the Company had $18,963,674 and $19,238,027 of real estate
(net), accounting for approximately 43% and 39%, respectively, of the
Company's total assets. Property and equipment is carried at cost net
of adjustments for impairment. The fair value of the Operating
Partnership's property and equipment is dependent on the performance
of the properties.
The Company evaluates recoverability of the net carrying value of its
real estate and related assets at least annually, and more often if
circumstances dictated. If there is an indication that the carrying
value of a property might not be recoverable, the Company prepares an
estimate of the future undiscounted cash flows expected to result from
the use of the property and its eventual disposition, generally over a
five-year holding period. In performing this review, management takes
into account, among other things, the existing occupancy, the expected
leasing prospects of the property and the economic situation in the
region where the property was located.
If the sum of the expected future undiscounted cash flows is less than
the carrying amount of the
16
property, the Company recognizes an impairment loss, and reduces the
carrying amount of the asset to its estimated fair value. Fair value
is the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced
or liquidation sale. Management estimates fair value using discounted
cash flows or market comparables, as most appropriate for each
property. Independent certified appraisers are utilized to assist
management, when warranted.
For the years ended December 31, 2001, 2000, and 1999, no impairment
losses have been recorded. Cumulative impairment losses from previous
years for all properties included in real estate in the accompanying
balance sheets would amount to $9,700,000. Impairment write-downs
recorded by the Corporation do not affect the tax basis of the assets
and are not included in the determination of taxable income or loss.
Because the cash flows used to evaluate the recoverability of the
assets and their fair values are based upon projections of future
economic events, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates which are
inherently subjective, the amounts ultimately realized at disposition
may differ materially from the net carrying values at the balance
sheet dates. The cash flows and market comparables used in this
process are based on good faith estimates and assumptions developed by
management.
Unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore, actual results may vary from the
estimates and variances may be material. The Company may provide
additional write-downs, which could be material in subsequent years if
real estate markets or local economic conditions change.
Useful lives of long-lived assets. Property and equipment, and certain
other long-lived assets are amortized over their useful lives.
Depreciation and amortization are computed using the straight-line
method over the useful life of the property and equipment. The cost of
properties represents the initial cost of the properties to the
Company plus acquisition and closing costs less impairment
adjustments. Tenant improvements and leasing costs are amortized over
the applicable lease term. Useful lives are based upon management's
estimate over the period that the assets will generate revenue.
Revenue Recognition. Base rents are recognized on a straight-line
basis over the terms of the related leases. Percentage rents charged
to retail tenants based on sales volume are recognized when earned
pursuant to Staff Accounting Bulletin No 101, "Revenue Recognition in
Financial Statements," issued by the Securities and Exchange
Commission in December 1999, and the Emerging Issues Tax Force's
consensus on Issue 98-9, "Accounting for Contingent Rent in Interim
Financial Periods." The Company defers recognition of contingent
rental income (i.e., percentage/excess rent) in interim periods until
the specified target (i.e., breakpoint) that triggers the contingent
rental income is achieved. Recoveries from tenants or taxes, insurance
and other operating expenses are recognized as revenue in the period
the applicable taxes are incurred.
New Accounting Policies
Certain properties are owned in joint ventures with Shelbourne
Properties II, L.P. and/or Shelbourne Properties III, L.P. Prior to
April 30, 2002, the Company owned an undivided interest in the assets
owned by these joint ventures and was severally liable for
indebtedness it incurred in connection with its ownership interest in
those properties. Therefore, for periods prior to April 30, 2002, the
Company's condensed consolidated financial statements presented the
17
assets, liabilities, revenues and expenses of the joint ventures on a
pro rata basis in accordance with the Company's percentage of
ownership.
After April 30, 2002, as a result of the Company's incurring debt in
connection with entering into the Note Payable discussed in Note 8 in
the "Notes to Condensed Consolidated Financial Statements", after
April 30, 2002, the Company is no longer allowed to account for its
investments in joint ventures on a pro-rata consolidation basis in
accordance with its percentage of ownership but must utilize the
equity method of accounting. Accordingly, the Company's condensed
consolidated balance sheet at June 30, 2002 and the Company's
condensed consolidated statements of operations for the three and six
month period ended June 30, 2002 reflect the equity method of
accounting.
Pro Forma Information
The following tables show (i) the pro-forma condensed consolidated
balance sheet as of December 31, 2001 and (ii) the pro-forma statement
of operations for the three and six months ended June 30, 2001, both
reflecting the impact of the change to equity accounting for the
investment in joint ventures. The pro forma information is provided
for the purpose of comparing results of operations in the review of
management's discussion and analysis. The Company's total equity did
not change.
CONDENSED CONSOLIDATED PRO-FORMA BALANCE SHEET INFORMATION
Previously Reported Pro-Forma Equity Method
December 31, 2001 Adjustments December 31, 2001
---------------------- -------------------- ----------------------
ASSETS
Real estate, net $ 31,783,227 $ (12,545,200) $ 19,238,027
Cash and cash equivalents 14,191,726 (7,308,977) 6,882,749
Other assets 3,013,830 3,083,415 6,097,245
Receivables, net of allowances of
$95,114 and $92,074, respectively 279,777 (144,526) 135,251
Investment in joint ventures - 16,488,348 16,488,348
---------------------- ------------------- ----------------------
TOTAL ASSETS $ 49,268,560 $ (426,940) $ 48,841,620
====================== =================== ======================
LIABILITIES
Accounts payable and accrued expenses $ 783,308 $ (426,940) $ 356,368
---------------------- ------------------- ----------------------
Total Liabilities $ 783,308 $ (426,940) $ 356,368
====================== =================== ======================
18
CONDENSED CONSOLIDATED PRO-FORMA STATEMENTS OF OPERATIONS
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
Previously Pro forma Previously Pro forma
reported Adjustments reported Adjustments
2001 2001 Total 2001 2001 Total
Rental revenues $2,432,586 (1,583,693) $ 848,893 $ 5,492,411 (3,082,261) $ 2,410,150
---------- ------------ --------- ----------- ----------- -----------
Costs and expenses 1,815,398 (761,099) 1,054,299 3,827,768 (1,527,453) 2,300,315
---------- ------------ --------- ----------- ----------- -----------
Income (loss) before equity
income from joint ventures
interest and other income 617,188 (822,594) (205,406) 1,664,643 (1,554,808) 109,835
---------- ------------ --------- ----------- ----------- -----------
Equity income from joint ventures - 920,924 920,924 - 1,770,726 1,770,726
Interest income 149,440 (98,330) 51,110 332,522 (215,918) 116,604
Other income 2,320 - 2,320 17,966 - 17,966
---------- ------------ --------- ----------- ----------- -----------
Net income $ 768,948 $ - $ 768,948 $ 2,015,131 $ - $ 2,015,131
========== ============ ========= =========== ============ ===========
Liquidity and Capital Resources
The Company uses its working capital reserves and any cash from
operations as its primary source of liquidity. Unlike the Predecessor
Partnership, which could not incur indebtedness or issue additional
equity, the Company has as potential sources of liquidity, in addition
to cash, capital raised by either borrowing money on a long-term or
short-term basis or issuing additional equity securities. Due to the
restriction on the incurrence of debt on the Predecessor Partnership
and the resulting lack of mortgage debt on the properties, it is
anticipated that the Company will have significantly enhanced capital
resources as compared to the Predecessor Partnership. The Company's
use of these sources of capital may result in the encumbrance of its
current and future assets with substantial amounts of indebtedness. As
a result, the Company may have an increased risk of default on its
obligations and thus a decrease in its long-term liquidity.
The Company had $4,606,591 in cash and cash equivalents at June 30,
2002. Cash and cash equivalents are temporarily invested in short-term
instruments. The Company's level of liquidity is based upon cash and
cash equivalents decreased by $2,276,158 from $6,882,749 for the year
ended December 31, 2001. The decrease is due to $14,303,060 paid to
Presidio in connection with the Transaction. The Company also incurred
$55,464 in expenses related to improvements to real estate. The
Company received proceeds from the initial borrowing under the Credit
Facility of $23,832,274, of which $17,639,459 was used to retire the
note that was issued in relation to the Transaction. These
expenditures were offset by $5,889,551 of cash provided by operating
activities.
Currently, the Company's primary source of funds is cash flow from the
operation of its properties, principally rents billed to tenants,
which amounted to $870,132 and $2,477,679 for the three and six months
ended June 30, 2002. In the event the Company acquires additional
assets, its cash flow from operations would be derived from a larger,
more diverse, and potentially riskier group of assets than currently
owned. Likewise, the Company's ability to pay dividends
19
may be affected by the leveraging of its assets and reinvestment of
sale and financing proceeds for the acquisition of additional assets.
For the six months ended June 30, 2002, the Company made $55,464 in
capital expenditures that were funded from cash flow and the Company's
working capital reserves. The Company's primary capital expenditures
were for tenant improvements at the properties.
The budgeted expenditures for 2002 capital improvements and
capitalized tenant procurement costs in 2002 are an aggregate of
$253,647. These costs are expected to be incurred in the normal course
of business and are funded from cash flows from the operation of the
properties and working capital reserves that are temporarily invested
in short-term money market instruments. Other sources of capital could
include including financing proceeds and the issuance of additional
equity. The actual amount of such expenditures depends upon the level
of leasing activity and other factors that cannot be predicted with
certainty. In the event that the Company were to purchase additional
real estate assets or incur additional mortgage indebtedness, the
Company's expenses would increase, which would raise the risk that the
Company would be unable to fund the necessary capital and tenant
procurement costs at its properties.
Except as discussed herein, management is not aware of any other
trends, events, commitments or uncertainties that will have a
significant impact on the Company's liquidity. If, however, real
estate market conditions deteriorate in any areas where properties are
located, there is substantial risk that future cash flow may be
insufficient to fund the capital improvements and lease procurement
costs of the properties. In that event, the Company would utilize its
remaining working capital reserves, reduce distributions, raise
additional capital through financing or the issuance of equity, or
sell one or more properties.
Results of Operations
Six months ended June 30, 2002 vs. June 30, 2001
Net income
The Company's net income decreased by $21,109,883 to a net loss of
$(19,094,752) for the six months ended June 30, 2002 from a net income
of $2,015,131 for the same period in 2001. This is primarily due to
fees incurred in connection with the Transaction, as well as legal
fees related to the Transaction and the subsequent lawsuits, and the
payment of consulting fees to Lazard Freres & Co LLC ("Lazard"). The
Company paid $18,452,133 in relation to the Transaction, consisting of
a note payable in the amount of $17,639,459 and a Class A 5%
cumulative preferred partnership interest with a liquidation
preference of $812,674. Legal costs associated with the Transaction
and litigation for the six months were $1,556,323, $1,176,219 higher
than for legal services rendered during the first six months of 2001.
The Company also incurred $878,827 in fees to Lazard for consulting
services.
The decrease in net income was also a result of an increase in
operating expenses of $181,491 to $815,290 for the six months ended
June 30, 2002 from $633,799 for the same period in 2001 primarily due
to an increase in insurance costs as a result of an increase in
insurance rates stemming from the terrorist attacks of September 11,
2001 and to the incurrence of additional real estate taxes. The
increases in expenses were partially offset by an increase in rental
revenue of $67,529 due to increases in base rent, percentage rent and
common area maintenance charges.
20
Rental Revenues
Rental revenues increased $67,529, or 3%, to $2,477,679 during the six
months ended June 30, 2002 from $2,410,150 during the six months ended
June 30, 2001 due to an increase in base rent of $38,317. Percentage
rent increased in the same period due to payments by Eckerd Drugs and
Publix Supermarkets at Southport Shopping Center, which increased
cumulatively by $24,032 along with an aggregate increase in all rental
revenue categories of $5,180.
Income
Income (defined as rental revenue, equity income from joint ventures,
interest and other income) increased by $2,169, or less than 1%, to
$4,317,615 for the six months ended June 30, 2002 from $4,315,446 for
the same period in 2001. Income from the investment in joint ventures
increased by $37,454, or 2% to $1,808,180 from $1,770,726 for the same
period in 2001 due to increased rental revenue from 568 Broadway. The
increase in rental revenues and joint venture income was offset by the
decrease in interest income and other income. Interest income
decreased by $88,799, or 76%, to $27,805 for the current period as
compared to $116,604 for the comparable period in 2001 due to
significantly lower cash balances due to the Transaction and other
fees paid. Other income decreased for the six months ended June 30,
2002 as compared to the same period ended June 30, 2001 by $14,015, or
78%, to $3,951 from $17,966 due to the absence, as a result of the
conversion of the Predecessor Partnership into a REIT, of transfer
fees that were previously generated by the transfer of partnership
interests.
Costs and Expenses
Total costs and expenses, including interest expense, for the six
months ended June 30, 2002 amounted to $23,412,367 an increase of
$21,112,052 from the same period in 2001. This increase consists of a
one-time expense of $18,452,133 in relation to the purchase of the
Advisory Agreements and interest expense of $172,733 incurred on the
note issued in the Transaction and $169,269 in interest on the
proceeds received from the initial borrowing under the Credit
Facility. The remaining costs and expenses amounted to $4,618,232 for
the six months ended June 30, 2002, an increase of $2,317,917 from the
$2,300,315 incurred for the same period in 2001. The increase is
primarily due to an increase in general and administrative expenses
due to the Transaction, legal, professional and consulting fees.
Operating expenses increased by $181,491, or 28.6%, to $815,290 for
the six months ended June 30, 2002 from $633,799 for the same period
in 2001 due to increased premiums as a result of the September 11,
2001 terrorist attacks and to the incurrence of additional real estate
taxes. The Company also experienced higher depreciation and
amortization expense due to real estate improvements and tenant
procurement costs. Property management fees decreased slightly due to
a decrease in rental collections. Expenses related to the partnership
asset management fees decreased by $270,339 for the six months ended
June 30, 2002 from $531,094 for the same period in 2001 as the
obligation to pay the partnership asset management fee terminated with
the consummation of the Transaction. For the six months ended June 30,
2002, $260,755 in asset management fees were paid to Shelbourne
Management prior to February 14, 2002 and to PCIC thereafter in
accordance with PCIC's agreement to provide transition services to the
Company upon the consummation of the Transaction.
21
Inflation
Inflation is not expected to have a material impact on the operations
or financial position of Company.
Three months ended June 30, 2002 vs. June 30, 2001
Net income
The Company incurred a net loss of $1,542,717 for the three months
ended June 30, 2002, a decrease of $2,311,665, or 200% from $768,948
for the same period in 2001. This was primarily due to the incurrence
of legal, professional and consulting fees resulting from lawsuits.
The decrease in net income was also due to an increase in operating
expenses of $112,867 primarily due to an increase in insurance costs
as a result of an increase in insurance stemming from the terrorist
attacks of September 11, 2001 and to the incurrence of additional real
estate taxes. The increases in expenses were partially offset by an
increase in rental revenue of $21,239 due to increases in base rent
and common area maintenance charges. The Company incurred $169,269 of
interest expense on the proceeds of the initial borrowing under the
Credit Facility and $70,458 in interest expense on the note issued in
the Transaction.
Rental Revenues
Rental revenues increased $21,239, or 2.5%, from $848,893 during the
three months ended June 30, 2001 to $870,132 during the three months
ended June 30, 2002 due to an increase in base rent.
Income
Income (defined as rental revenue, equity income from joint ventures,
interest and other income) decreased by $49,910, or 27%, to $1,773,337
for the three months ended June 30, 2002 from $1,823,247 for the same
period in 2001. Equity income from joint ventures decreased by $32,616
due to an increase in vacancies at the Seattle Tower property.
Interest income decreased by $38,172, or 74.7%, as compared to the
same period in 2001 due to significantly lower cash balances due to
the Transaction. Other income decreased for the three months ended
June 30, 2002 as compared to the same period ended June 30, 2001 by
$361. These decreases were offset by an increase in rental revenues of
$21,239.
Costs and Expenses
Total costs and expenses, including interest expense, for the three
months ended June 30, 2002 amounted to $2,300,315, an increase of
$2,261,755 from $1,054,299 in the same period in 2001. The increase is
primarily due to an increase in general and administrative expenses
due to increased legal, professional and consulting fees. The
remaining costs and expenses, including interest expense, amounted to
$1,023,431 for the three months ended June 30, 2002, an increase of
$224,329, or 128%, from the same period in 2001.
Operating expenses increased by $112,867, or 26%, to $435,425 for the
three months ended June 30, 2002 as compared to $322,558 for the same
period in 2001 due to an increase in insurance premiums as a result of
the September 11, 2001 terrorist attacks and to the incurrence of
additional real estate taxes. The Company also experienced higher
depreciation and amortization expense due to real estate improvements
and tenant procurement costs. Property management fees decreased
slightly due to a decrease in rental collections. Expenses related to
partnership
22
asset management fees decreased by $184,224 for the three months ended
June 30, 2002 from the same period in 2001 as the obligation to pay
the partnership asset management fee terminated with the consummation
of the Transaction.
Interest expense for the three months ended June 30, 2002 on the note
issued to PCIC in relation to the Transaction was $70,458 and on the
funds borrowed by the Company under the Credit Facility on May 1, 2002
was $169,269. This is a first-time expense because prior to the
conversion from a partnership to a REIT, no debt was allowed on any of
the properties.
Funds From Operations
Management believes that Funds From Operations ("FFO") is helpful to
investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities
and investing activities, it provides investors with an understanding
of the ability of the Company to incur and service debt, to make
capital expenditures and to fund other cash needs.
FFO, which is a commonly used measurement of the performance of an
equity REIT, as defined by the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT"), is net income (computed in
accordance with accounting principles generally accepted in the United
States), excluding gains (or losses) from debt restructurings, asset
valuation provisions and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships
and joint ventures.
The Company's FFO may not be comparable to FFO reported by other REITs
that do not define the term in accordance with the current NAREIT
definition or that interpret the NAREIT definition differently. FFO
does not represent cash generated from operating activities determined
in accordance with accounting principles generally accepted in the
United States and should not be considered as an alternative to net
income (determined in accordance with accounting principles generally
accepted in the United States) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash
distributions.
23
Three Months Ended, Six Months Ended,
30-Jun-02 30-Jun-01 30-Jun-02 30-Jun-01
-------------- ------------- ---------------- ------------
Net (Loss) Income (A) $ (1,542,717) $ 768,948 $ (19,094,752) $ 2,015,131
Plus: Depreciation of
real estate assets and
tenant improvements 166,326 161,272 329,817 322,370
Plus: Amortization of leasing
commissions 28,189 19,212 54,706 38,274
Plus: Adjustments for
unconsolidated joint
ventures (B) 285,521 179,454 489,275 381,355
-------------- -------------- ----------------- -------------
Funds From Operations (A) $ (1,062,681) $ 1,128,886 $ (18,220,954) $ 2,757,130
============== ============== ================= =============
(A) Net Income and Funds From Operations for the six months ended June
30, 2002 includes $18,452,133 related to the purchase of the Advisory
Agreements.
(B) Adjustments for unconsolidated joint ventures includes all
adjustments to convert the Company's share of net income from
unconsolidated joint ventures to FFO.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk we face is interest rate sensitivity. Our long-term debt
bears interest at a floating rate, and therefore we are exposed to the risk of
interest rate changes. At August 13, 2002, borrowings under our secured
revolving credit facility totaled $23,832,274 and initially bore an interest
rate of LIBOR plus 2.5%. Based on the balance outstanding on our credit facility
at August 13, 2002 and the interest rate at that date, a 10% increase in LIBOR
would increase our interest expense in 2002 by approximately $41,300.
Conversely, a 10% decrease in LIBOR would decrease our interest expense in 2002
by the same amount. The gain or loss we ultimately realize with respect to
interest rate fluctuations will depend on the actual interest rates during that
period. We do not believe that we have any risk related to derivative financial
instruments.
24
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
HX Investors, L.P. Litigation
HX Investors, L.P. ("HX Investors") and other plaintiffs filed an action on May
22, 2002 against the Company, Shelbourne Properties II and Shelbourne Properties
III (collectively, the "Companies") seeking an order directing that each of the
Companies hold a stockholder election for the purpose of electing directors to
nine seats on the boards of each of the Companies. The action (i) sought to
compel the holding of an annual meeting of stockholders and (ii) challenged an
action taken by the boards of directors of the Companies reclassifying the
boards of each company from nine to four directors and reappointing three
directors in connection with such reclassification.
A stipulation of dismissal, with prejudice, was entered on July 3, 2002. In
connection with the settlement, HX Investors agreed to conduct tender offers for
up to 30% of the outstanding common stock (the "HX Investors Offer"), and the
board of directors approved plans of liquidation for each of the Companies,
subject to stockholder approval. Also pursuant to the settlement, the parties
agreed that the board of directors of each of the Companies would be increased
to six members, with two directors designated by HX Investors, and four
directors would be independent.
Delaware Plaintiffs Litigation
As previously disclosed in the Company's report on Form 10-Q filed May 15, 2002,
a group of plaintiffs (the "Delaware Plaintiffs") brought suit derivatively on
behalf of the Companies against NorthStar, PCIC, Shelbourne Management and eight
former and present directors of the boards of directors of the Companies (the
"Individual Defendants"). The Delaware Plaintiffs filed a consolidated class and
derivative complaint on April 10, 2002 alleging that the boards of directors of
the Companies mismanaged the Companies making it less likely that they could pay
dividends. Plaintiffs seek disgorgement of profits, accounting for profits and
rescission of an agreement to repurchase shares of stock held by PCIC and
purchase the Advisory Agreements.
The Delaware Plaintiffs also filed an action under Section 211 of the General
Corporation Law of Delaware on May 7, 2002 (i) seeking to compel the holding of
an annual meeting of stockholders and (ii) challenging an action taken by the
Companies' boards of directors in which the boards of directors of each company
were reclassified from nine to four directors. This matter was consolidated with
the HX Investors action described above, for the limited purpose of discovery on
the statutory issues.
A letter of agreement of settlement was signed by the parties on July 1, 2002. A
stipulation of settlement was entered on July 3, 2002. The principal terms of
the settlement were that the Companies and their boards of directors would
facilitate the completion of the HX Investors Offer; conduct annual meetings on
September 9, 2002 and expand the board of directors of each of the Companies
from four members to six, four of whom would be independent directors as well as
implementing corporate governance protections. The settlement also provided for
a contribution by Shelbourne Management of 42% of the Preferred Operating Units
of the Companies to HX Investors with the purpose of providing funds to HX
Investors in connection with the HX Investors Offer, as well as allowing for a
contribution of up to one million dollars, as approved by the court, for
plaintiffs' attorneys fees.
Icahn Litigation
As previously disclosed in the Company's report on Form 10-Q filed May 15, 2002,
in February 2002, Carl C. Icahn ("Icahn") brought suit derivatively in the New
York State Supreme Court on behalf of the
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Companies against NorthStar, PCIC, Shelbourne Management and the Individual
Defendants. On or about March 8 and March 12, 2002, Icahn filed a motion seeking
leave to intervene in the unconsolidated actions in Delaware. On May 16, 2002,
Icahn filed a Derivative Complaint in Intervention. The matter has been settled
with respect to NorthStar and the actions in Delaware have been dismissed
without prejudice.
Longacre Corp. Litigation
Longacre Corp. ("Longacre") filed an action on July 29, 2002 in the United
States District Court for the Southern District of New York against the
Companies seeking (i) a declaration that HX Investors violated Sections 13(e)
and 14(d) and (e) of the Securities and Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder, and that the 25% liquidation
premium to be paid to HX Investors and Exeter Capital Corporation upon
liquidation of the Companies is invalid and illegal; and (2) an injunction
enjoining HX Investors from proceeding with the HX Investors Offer until HX
Investors makes the appropriate filings and disclosures. A hearing on Longacre's
Motion for an Injunction was held on August 1, 2002, and a preliminary
injunction was denied.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits furnished pursuant to the requirements of Form 10-Q:
Number Description
(3.1) Amended and Restated Certificate of Incorporation of the Company*
(3.2) Amended and Restated Bylaws of the Corporation*
(4.1) Amended and Restated Agreement of Limited Partnership of the operating
partnership*
(4.2) Shareholder Rights Agreement*
(4.3) Amendment to Shareholder Rights Agreement**
(4.4) Certificate of Designations, Preferences and Rights of Series A
Preferred Stock*
(4.5) Stockholder Agreement, among the Companies and HX Investors, LP and
Exeter Capital Corporation, dated as of April 30, 2002 ***
(10.1) Revolving Credit Agreement, dated as of April 30, 2002, among the
operating partnerships of the Companies, such operating partnerships'
wholly-owned subsidiaries, the lenders from time to time party thereto
and Bayerische Hypo-Und Vereinsbank AG, New York branch, as agent for
itself and the other lenders ***
(10.2) Promissory note, dated April 30, 2002, issued by the operating
partnerships of the Companies and such operating partnerships'
wholly-owned subsidiaries in favor of each lender in the aggregate
principal amount of $75,000,000 ***
(10.3) Cash Management Agreement, dated as of April 30, 2002, among
the operating partnerships of the Companies, such operating
partnerships' wholly-owned subsidiaries, the agent and Deposit Bank
(as defined therein), as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time ***
(10.4) Contribution and Cross-Indemnification Agreement, dated as of
April 30, 2002, among
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the operating partnerships of the Companies and such operating
partnerships' wholly-owned subsidiaries ***
(10.5) Pledge and Security Agreement, dated as of April 30, 2002, by
the operating partnerships of the Companies and such operating
partnerships' wholly-owned subsidiaries in favor of the lenders ***
(10.6) Form of Mortgage, dated as of April 30, 2002, issued by
Shelbourne Properties II, Inc. to Bayerische Hypo- Und Vereinsbank AG,
New York Branch, as agent for itself and other lenders, with respect
to its real property located in Fort Lauderdale, Florida and Townson,
Maryland ***
(99.1) Partnership Unit Designation of the Class A Preferred Partnership
Units of the Operating Partnership**
(99.2) Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
* incorporated by reference to the Registration Statement of the Company on
Form S-4 filed on February 11, 2000, as amended
** incorporated by reference to the Current Report of the Company on Form 8-K
filed on February 14, 2002
*** incorporated by reference to the Current Report of the Company on Form 8-K
filed on May 14, 2002.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed on behalf of the Registrant during
the quarter ended June 30, 2002:
(i) Press release announcing that the Companies had entered into a Revolving
Credit Facility with Hypo-Und Vereinsbank, AG.
Item reported: 5
Dated filed: April 14, 2002
(ii) Press release announcing that the Companies had retained Lazard Freres &
Co. as a strategic advisor.
Item reported: 5
Date filed: April 23, 2002
(iii) Press release announcing the date of the Annual Meeting of Stockholders of
the Company.
Item reported: 5
Date filed: May 9, 2002
(iv) Press release announcing a change in the date of the Annual Meeting of
Stockholders of the Company.
Item reported: 5
Date filed: June 5, 2002
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SIGNATURES
Pursuant to the requirements 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.
Shelbourne Properties I, Inc.
(Registrant)
Dated:August 19, 2002 By: /s/ Michael L. Ashner
-------------------------------
Michael L. Ashner
Chief Executive Officer
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EXHIBIT INDEX
Number Description
(3.1) Amended and Restated Certificate of Incorporation of the Company*
(3.2) Amended and Restated Bylaws of the Corporation*
(4.1) Amended and Restated Agreement of Limited Partnership of the operating
partnership*
(4.2) Shareholder Rights Agreement*
(4.3) Amendment to Shareholder Rights Agreement**
(4.4) Certificate of Designations, Preferences and Rights of Series A
Preferred Stock*
(4.5) Stockholder Agreement, among the Companies and HX Investors, LP and
Exeter Capital Corporation, dated as of April 30, 2002 ***
(10.1) Revolving Credit Agreement, dated as of April 30, 2002, among the
operating partnerships of the Companies, such operating partnerships'
wholly-owned subsidiaries, the lenders from time to time party thereto
and Bayerische Hypo-Und Vereinsbank AG, New York branch, as agent for
itself and the other lenders ***
(10.2) Promissory note, dated April 30, 2002, issued by the operating
partnerships of the Companies and such operating partnerships'
wholly-owned subsidiaries in favor of each lender in the aggregate
principal amount of $75,000,000 ***
(10.3) Cash Management Agreement, dated as of April 30, 2002, among
the operating partnerships of the Companies, such operating
partnerships' wholly-owned subsidiaries, the agent and Deposit Bank
(as defined therein), as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time ***
(10.4) Contribution and Cross-Indemnification Agreement, dated as of
April 30, 2002, among the operating partnerships of the Companies and
such operating partnerships' wholly-owned subsidiaries ***
(10.5) Pledge and Security Agreement, dated as of April 30, 2002, by
the operating partnerships of the Companies and such operating
partnerships' wholly-owned subsidiaries in favor of the lenders ***
(10.6) Form of Mortgage, dated as of April 30, 2002, issued by
Shelbourne Properties II, Inc. to Bayerische Hypo- Und Vereinsbank AG,
New York Branch, as agent for itself and other lenders, with respect
to its real property located in Fort Lauderdale, Florida and Townson,
Maryland ***
(99.1) Partnership Unit Designation of the Class A Preferred Partnership
Units of the Operating Partnership**
(99.2) Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
* incorporated by reference to the Registration Statement of the Company on
Form S-4 filed on February 11, 2000, as amended
** incorporated by reference to the Current Report of the Company on Form 8-K
filed on February 14, 2002
*** incorporated by reference to the Current Report of the Company on Form 8-K
filed on May 14, 2002.
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