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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 SEPTEMBER 30, 2002
Commission file number 0-16345
SHELBOURNE PROPERTIES I, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3502384
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(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
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(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 November 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 -
September 30, 2002 and December 31, 2001....................... 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2002 and 2001......... 4
Condensed Consolidated Statement of Equity -
Nine Months Ended September 30, 2002.......................... 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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........................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 28
Item 4. Controls and Procedures....................................... 28
Part II. Other Information:
Item 1. Legal Proceedings............................................. 29
Item 6. Exhibits and Reports on Form 8-K.............................. 30
Signatures............................................................. 32
Certifications......................................................... 33
Exhibit Index.......................................................... 37
2
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2002
CONDENSED CONSOLIDATED BALANCE SHEETS
(SEE NOTE 1 - BASIS OF PRESENTATION)
(UNAUDITED)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Real estate, net $ 18,826,307 $ 31,783,227
Cash and cash equivalents 2,638,372 14,191,726
Other assets 1,687,599 3,013,830
Receivables, net 165,574 279,777
Investment in joint ventures 19,347,023 -
------------ ------------
TOTAL ASSETS $ 42,664,875 $ 49,268,560
============ ============
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 709,024 $ 783,308
Other liabilities 1,978,222 -
Note payable 23,832,274 -
------------ ------------
Total Liabilities 26,519,520 783,308
------------ ------------
COMMITMENTS AND CONTINGENCIES
CLASS B PARTNERSHIP INTERESTS - -
------------ ------------
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 (18,449,788) 399,723
------------ ------------
Total Equity 15,332,681 48,485,252
------------ ------------
Total Liabilities and Equity $ 42,664,875 $ 49,268,560
============ ============
See notes to condensed consolidated financial statements.
3
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(SEE NOTE 1 - BASIS OF PRESENTATION)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Rental revenues $ 914,766 $ 2,414,141 $ 3,392,446 $ 7,906,552
------------ ------------ ------------ ------------
Cost and Expenses
Operating expenses 387,474 928,904 1,201,084 2,637,555
Depreciation and amortization 263,082 398,976 697,004 1,140,975
Asset management fee - 268,799 135,805 799,893
Transition management fee 83,300 - 208,250 -
Purchase of advisory agreements - - 18,452,133 -
Administrative expenses 688,257 123,921 3,731,224 805,259
Property management fee 27,412 71,572 98,699 236,256
------------ ------------ ------------ ------------
1,449,525 1,792,172 24,524,199 5,619,938
------------ ------------ ------------ ------------
(Loss) income before equity income from joint
ventures, interest and other income (534,759) 621,969 (21,131,753) 2,286,614
Equity income from joint ventures 1,050,495 - 2,858,674 -
Interest expense (254,333) - (596,335) -
Interest income 11,953 115,411 39,760 447,931
Other income 1,927 11,291 5,878 29,257
------------ ------------ ------------ ------------
Net income (loss) 275,283 748,671 (18,823,776) 2,763,802
Preferred dividends (10,384) - (25,735) -
------------ ------------ ------------ ------------
Net income (loss) available for common shares $ 264,899 $ 748,671 $(18,849,511) $ 2,763,802
============ ============ ============ ============
EARNINGS PER SHARE - BASIC AND DILUTED
Net income (loss) per common share $ 0.32 $ 0.59 $ (20.73) $ 2.19
============ ============ ============ ============
Weighted average common shares 839,286 1,263,189 909,160 1,263,189
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 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 - - - (25,735) (25,735)
Net loss - - - (18,823,776) (18,823,776)
------- ----------- ------------ ------------ ------------
Balance, September 30, 2002 $12,632 $48,072,897 $(14,303,060) $(18,449,788) $ 15,332,681
======= =========== ============ ============ ============
See notes to condensed consolidated financial statements.
5
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2002
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2002 2001
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $(18,823,776) $ 2,763,802
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 697,004 1,140,975
Straight-line adjustment for stepped
lease rentals 18,984 23,395
Increase in bad debt reserve 76,882 -
Purchase of advisory agreement 18,452,133 -
Equity income from joint ventures (2,858,674) -
Change in assets and liabilities:
Accounts payable and accrued expenses 326,921 382,770
Other liabilities 1,978,222 -
Receivables (107,206) (98,467)
Due to affiliates - (396,320)
Other assets 4,190,522 (278,352)
------------ ------------
Net Cash Provided by Operating Activities 3,951,012 3,537,803
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES -
Improvements to real estate (85,144) (965,127)
------------ ------------
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 (4,244,377) 2,572,676
------------ ------------
Cash and cash equivalents, beginning of year 14,191,726 13,229,944
Cash and cash equivalents related to investment in joint 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 $ 2,638,372 $ 15,802,620
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 596,335 $ -
============ ============
See notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
L. BASIS OF PRESENTATION
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.
As a result of the Company's incurring debt, the Company is no longer
allowed to account for its investments in joint ventures on a pro-rata
consolidation basis. The Company must instead utilize the equity method
of accounting. As required, the Company's condensed consolidated
statements of operations reflect the equity method of accounting
subsequent to January 1, 2002 and the pro-rata consolidation prior to
that date. (See Note 2 - Investment in Joint Ventures).
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 nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire
year.
As a result of the approval of the Plan of Liquidation (See Note 11 -
Subsequent Events), the Company will adopt liquidation accounting
during the last quarter of 2002.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of short-term, highly liquid debt instruments
with maturities of three months or less at acquisition. Items
classified as cash equivalents include insured bank certificates of
deposit and commercial paper. At times, cash balances at a limited
number of banks may exceed insurable amounts. The company believes it
mitigates its risk by investing in or through major financial
institutions.
Accounts Receivable
Accounts receivable are stated net of allowance for doubtful accounts
of $89,656 and $92,074 as of September 30, 2002 and December 31, 2001,
respectively.
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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
After April 30, 2002, as a result of the Company's incurring debt in
connection with entering into the Note Payable discussed in 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 September 30, 2002 and the Company's condensed consolidated
statements of operations for the three and nine month period ended
September 30, 2002 reflect the equity method of accounting.
If the change to equity accounting had been reflected upon the December
31, 2001 condensed consolidated balance sheet, the changes would have
been 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, managementtakes 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 conversion.
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.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Deferred Leasing and Loan Costs
Cost incurred in the execution of new tenant leases and renewals of
existing leases are amortized over the life of the lease using a
straight lined method. All un-amortized costs, due to early termination
or eviction of existing tenant, are expensed.
Costs incurred with obtaining debt are amortized over the life of the
debt.
Treasury Stock
Treasury stock is stated at cost.
Amounts Per Share
Net income (loss) per share is computed based on weighted average
shares outstanding.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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 Extinguishment 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.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No.
146 is effective prospectively for exit and disposal activities
initiated after December 31, 2002 with earlier adoption encouraged. The
Company does not expect that this statement will have a material 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 of the Company. Pursuant to the transaction, the Company
paid PCIC $14,303,060 in cash and 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 July 1, 2002 to September 30, 2002, the
Company paid $83,300 for transition services and for the period from
February 15, 2002 to September 30, 2002, the Company paid PCIC $208,250
for transition services. As a result of the settlement of the lawsuit
brought by HX Investors, L.P. (see Note 10) this agreement was
terminated effective September 30, 2002. Effective October 1, 2002,
Kestrel Management L.P. ("Kestrel"), an affiliate of the Companies,
entered into an agreement with the Companies to provide the services
that PCIC had previously provided for a fee of $600,000 per year,
$50,000 per month, allocated equally among the Companies.
Prior to the Transaction, under the terms of the Advisory Agreements,
Shelbourne Management provided the Company with all management and
advisory 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.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Upon its disposition of the Advisory Agreements, Shelbourne Management
was entitled to 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 Predecessor 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 ended
September 30, 2001, Shelbourne Management received $37,500 for
non-accountable expenses and $268,799 for the asset management fee. For
the nine months ended September 30, 2001, the managing general partner
received $44,583 and Shelbourne Management received $67,917 for
non-accountable expense. For the nine months ended September 30, 2001,
the managing general partner received $314,102 and Shelbourne
Management received $485,791 for the asset management fee.
Since October 2000, 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 September 30, 2002, Kestrel earned $82,589
that consists of $27,412 earned from wholly owned properties and
$55,177 earned from joint venture investment properties. For the three
months ended September 30, 2001, Kestrel earned $71,572 that consists
of $24,911 earned from wholly owned properties and $46,661 earned from
joint venture investment properties. For the nine months ended
September 30, 2002, Kestrel earned $256,508 that consists of $98,699
earned from wholly owned properties and $157,809 earned from joint
venture investment properties. For the nine months ended September 30,
2001, Kestrel earned $236,256 that consists of $96,343 earned from
wholly owned properties and $139,913 earned from joint venture
investment properties.
At September 30, 2002, $1,978,222 of payables to related joint ventures
are included in other liabilities.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. REAL ESTATE
The following table is a summary of the Company's real estate as of
September 30, 2002:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Land $ 7,505,421 $ 10,370,965
Building and improvements 20,978,672 39,444,906
------------ ------------
28,484,093 49,815,871
Less: Accumulated depreciation (9,657,786) (18,032,644)
------------ ------------
$ 18,826,307 $ 31,783,227
============ ============
See Note 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) which are accounted for under the equity
method. The joint ventures' condensed consolidated statements of
operations for the three and nine months ended September 30, 2002, are
as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Rental revenues $ 4,583,300 $12,861,458
Costs and expenses 2,021,132 6,030,951
----------- -----------
Income before interest and other income 2,562,168 6,830,507
Interest Income 16,686 62,470
----------- -----------
Net income from joint ventures $ 2,578,854 $ 6,892,977
=========== ===========
Equity income from joint ventures for
Shelbourne Properties I, Inc. $ 1,050,495 $ 2,858,674
=========== ===========
6. FEDERAL INCOME TAX CONSIDERATIONS
As of April 18, 2001, the 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.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 the 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 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
1.5% for the portion of the Note Payable secured by mortgages on
certain real properties (Conversion rate) (ii) LIBOR plus 2.5% for the
portion of the Note Payable secured by a pledge of partnership
interests (LIBOR rate) or (iii) the greater of (a) agent's prime rate
or (b) the federal funds rate plus 1.5% (Base rate). 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. There has
been no fee paid to date. Interest is payable monthly in arrears. The
interest rate at September 30, 2002 was approximately 4.16%.
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. If properties are sold,
the Companies must pay a fixed release amount to the lender except in
the case of core properties, which have been defined as 568 Broadway,
Century Park, Seattle Tower and Southport, in which case the Companies
must pay the lender the greater of the net proceeds or the release
amount. In addition, the Companies must maintain
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. CLASS A 5% PREFERRED PARTNERSHIP INTEREST
In connection with the Transaction, the Company's operating partnership
issued to Shelbourne Management 812.674 Class A 5% Preferred
Partnership Units (the "Class A Units"). The Class A Units entitle the
holder to a quarterly distribution equal to 1.25% of the aggregate
liquidation preference of the Class A Units ($812,674). In addition,
upon the liquidation of the operating partnership, each Class A Unit is
entitled to a liquidation preference of $1,000 per unit. The Class A
Units are not convertible into common units of the operating
partnership or shares in the Company and the holders of the Class A
Units do not have voting rights except in limited circumstances.
Although the holders of the Class A Units do not have redemption
rights, pursuant to the terms of the Purchase and Contribution
Agreement entered into in connection with the Transaction, Shelbourne
Management has the right to cause the operating partnership to
reacquire the Class A Units upon the occurrence of certain events
including, without limitation, if the aggregate assets of the Companies
is below approximately $75 million or the outstanding debt under which
the Companies are obligated is less than $55 million, for a purchase
price equal to the liquidation preference plus an amount (the "Put
Premium") which is presently equal to $5,698,795 and declines each
February 13, May 13, August 13 and November 13 until it reaches zero on
May 13, 2007. The Company is currently seeking alternative arrangements
or transactions in an effort to eliminate the Put Premium, if the
Companies assets are less than $75 million, which will enable the
Company to proceed with its Plan of Liquidation.
In connection with the settlement of the lawsuit brought by HX
Investors, Shelbourne Management agreed to pay to HX Investors 42% of
the amounts to Shelbourne Management with respect to the Class A units.
10. SETTLEMENT AGREEMENT
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 settlements, the Company entered into a stock
purchase agreement (the 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
then 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. HX Investors agreed to vote all of its
shares in favor
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the Plan of Liquidation. Under the Plan of Liquidation, HX Investors
was to receive 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. ("Longacre") commenced a
lawsuit individually and derivatively against the Company, Shelbourne
Properties II, Inc., Shelbourne Properties III, Inc., their boards, HX
Investors, and Exeter seeking preliminary and permanent injunctive
relief and monetary damages based on purported violations of the
securities laws and mismanagement related to the tender offer by HX
Investors, the Stock Purchase Agreement, and the plan of liquidation.
The suit was filed in federal court in New York, New York. On August 1,
2002, the court denied Longacre's motion for a preliminary injunction,
and on September 30, 2002, the court dismissed the lawsuit at the
request of Longacre.
Contemporaneous with filing its July 29, 2002 lawsuit, Longacre
publicly announced that its 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, Longacre and HX Investors
submitted competing proposals to the board of directors of the Company
and made those proposals public. On August 4, 2002, Longacre notified
the Company that it was no longer interested in proceeding with its
proposed offer.
On August 5, 2002, the Company entered into an amendment to the 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.
On August 16, 2002, the HX Investors Offer expired, and HX Investors
acquired 251,785 shares representing 30% of the outstanding shares.
On August 19, 2002, as contemplated by the Stock Purchase Agreement,
the existing Board of Directors and executive officer of the Company
resigned, and the Board was reconstituted to consist of six members,
four of whom are independent directors. In addition, new executive
officers were appointed.
Also on August 19, 2002, the Board of Directors of the Company
authorized the issuance by the operating partnership of the Company of
Class B Units to HX Investors which Class B Units provide distribution
rights consistent with the intent and financial terms of the incentive
payment provided for in the Stock Purchase Agreement described above
and which distributions are payable only in the event that the Plan of
Liquidation was adopted. On August 19, 2002, the operating partnership
issued the Class B Units to HX Investors in full satisfaction of the
incentive fee payment otherwise required under the Plan of Liquidation.
11. SUBSEQUENT EVENTS
On October 29, 2002, the Company held a special meeting of the
Stockholders, at which time the Plan of Liquidation was approved by a
majority of the shareholders.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 31, 2002, 568 Broadway Joint Venture, a joint venture in
which the Company indirectly holds a 38.925% interest, entered into a
contract to sell its property located at 568 Broadway, New York, New
York for a gross sales price of $87,500,000. It is anticipated that the
sale of this property will occur during the first quarter of 2003 and
that all or substantially all the proceeds from the sale will be
required to pay off the Note Payable.
On November 5, 2002, the Board of Directors authorized the payment of a
dividend in the amount of $4.50 per common share. The dividend will be
paid to holders of record on November 15, 2002 and will be paid on
November 21, 2002.
16
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.
PCIC TRANSACTION
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 of the Company. Pursuant to the Transaction, the
Company paid PCIC $14,303,060 in cash. In addition, 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.
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.
HYPO LOAN
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.
17
The Companies have the right, from time to time, to elect an annual interest
rate equal to (i) LIBOR plus 1.5% for the portion of the Note Payable secured by
mortgages on certain real properties (Conversion rate) (ii) LIBOR plus 2.5% for
the portion of the Note Payable secured by a pledge of partnership interests
(LIBOR rate) or (iii) the greater of (a) agent's prime rate or (b) the federal
funds rate plus 1.5% (Base rate). 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. There has been no fee paid to date. Interest is payable
monthly in arrears. The interest rate at September 30, 2002 was approximately
4.16%.
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. If properties are sold, the Companies
must pay a fixed release amount to the lender except in the case of core
properties, which have been defined as 568 Broadway, Century Park, Seattle Tower
and Southport, in which case the Companies must pay the lender the greater of
the net proceeds or the release amount. 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 (who, effective
August 19, 2002, became a director and chief executive officer of the Companies)
- - 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 the Company's Current Report on Form 8-K filed on
May 14, 2002, which is incorporated herein by reference.
CHANGE IN CONTROL
On July 1, 2002, the Company, along with Shelbourne Properties II, Inc. and
Shelbourne Properties III, Inc., entered into a settlement agreement with
respect to certain outstanding litigation brought by HX Investors in the
Chancery Court of Delaware against the Companies. At the same time, the Company,
along with Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc.
entered into a letter agreement settling other outstanding litigation brought by
shareholders against the Companies, subject to approval by the court of a
stipulation of settlement. In connection with the settlements, the Company
entered into a stock purchase agreement (the "Stock Purchase Agreement") with HX
Investors and Exeter
18
Capital Corporation ("Exeter"), the general partner of HX Investors, pursuant to
which HX Investors, the then 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. HX
Investors agreed to vote all of its shares in favor of the Plan of Liquidation.
Under the Plan of Liquidation, HX Investors was to receive 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. ("Longacre"), commenced a lawsuit
individually and derivatively against the Company, Shelbourne Properties II,
Inc., Shelbourne Properties III, Inc., their boards, HX Investors, and Exeter
seeking preliminary and permanent injunctive relief and monetary damages based
on purported violations of the securities laws and mismanagement related to the
tender offer by HX Investors, the Stock Purchase Agreement, and the plan of
liquidation. The suit was filed in federal court in New York, New York. On
August 1, 2002, the court denied Longacre's motion for a preliminary injunction,
and the court dismissed the lawsuit on September 30, 2002, at the request of
Longacre.
Contemporaneous with filing his July 29, 2002 lawsuit, Longacre publicly
announced that its 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,
Longacre and HX Investors submitted competing proposals to the board of
directors of the Company and made those proposals public. On August 4, 2002,
Longacre notified the Company that it was no longer interested in proceeding
with its proposed offer.
On August 5, 2002, the Company entered into an amendment to the 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.
On August 16, 2002, the HX Investors Offer expired and HX Investors acquired
251,785 shares representing 30% of the outstanding shares.
On August 19, 2002, as contemplated by the Stock Purchase Agreement, the
existing Board of Directors and executive officer of the Company resigned, and
the Board was reconstituted to consist of six members, four of whom are
independent directors. In addition, new executive officers were appointed.
Also on August 19, 2002, the Board of Directors of the Company authorized the
issuance by the operating partnership of the Company of Class B Units to HX
Investors which Class B Units provide distribution rights to HX Investors only
in the event that the Plan of Liquidation were adopted and consistent with the
intent and financial terms of the incentive payment provided for in Stock
Purchase Agreement described above. On August 19, 2002, the operating
partnership issued the Class B Units to HX Investors in full satisfaction of the
incentive fee payment otherwise required under the Plan of Liquidation.
19
RECENT DEVELOPMENTS
On October 29,2002, the Company held a special meeting of the Stockholders at
which time the Plan of Liquidation was approved by a majority of the
shareholders.
On October 31, 2002, 568 Broadway Joint Venture, a joint venture in which the
Company indirectly holds a 38.925% interest, entered into a contract to sell its
property located at 568 Broadway, New York, NY for a gross sales price of
$87,500,000. It is anticipated that the sale of this property will occur during
the first quarter of 2003 and that all or substantially all of the proceeds from
the sale will be required to pay off the Note Payable.
On November 5, 2002, the Board of Directors authorized the payment of a dividend
in the amount of $4.50 per common share. The dividend will be paid to holders of
record on November 15, 2002 and will be paid on November 21, 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 Notes. 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 September 30, 2002 and December 31, 2001,
the Company had $18,206,307 and $19,238,027 of real estate (net), accounting for
approximately 44% 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 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
20
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 for taxes, insurance and other operating expenses are recognized as
revenue in the period the applicable expenses 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 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", 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. As required, effective January 1, 2002, the Company's
condensed consolidated balance sheet and condensed consolidated statements of
operations reflect the equity method of accounting.
21
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 condensed
consolidated statement of operations for the three and nine months ended
September 30, 2001, both reflecting the impact of the change to equity
accounting for the investments 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
AS 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 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
============ ============ ============
22
CONDENSED CONSOLIDATED PRO-FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
As Pro-forma As Pro-forma
Reported Adjustments Reported Adjustments
2001 2001 Total 2001 2001 Total
Rental revenues $ 2,414,141 $ (1,542,195) $ 871,946 $ 7,906,552 $ (4,624,456) $ 3,282,096
----------- ------------ --------- ----------- ------------ -----------
Costs and expenses 1,792,172 (824,973) 967,199 5,619,938 (2,352,424) 3,267,514
----------- ------------ --------- ----------- ------------ -----------
Income (loss) before equity
income from joint
ventures, interest
and other income 621,969 (717,222) (95,253) 2,286,614 (2,272,032) 14,582
Equity income from
joint ventures - 789,440 789,440 - 2,560,167 2,560,167
Interest income 115,411 (72,218) 43,193 447,931 (288,135) 159,796
Other income 11,291 - 11,291 29,257 - 29,257
----------- ------------ --------- ----------- ------------ -----------
Net income $ 748,671 $ - $ 748,671 $ 2,763,802 $ - $ 2,763,802
=========== ============ ========= =========== ============ ===========
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its working capital reserves and any cash from operations as
its primary source of liquidity. On October 29, 2002, the Company's shareholders
approved the Plan of Liquidation. Accordingly, it is expected that the Company
will seek to sell its properties in the near term. In this regard, on October
31, 2002, 568 Broadway Joint Venture, a joint venture in which the Company
indirectly holds a 38.925% interest, entered into a contract to sell its
property located at 568 Broadway, New York, NY for a gross sales price of
$87,500,000. It is anticipated that the sale of this property will occur during
the first quarter of 2003 and that all or substantially all of the proceeds from
the sale will be required to pay off the Note Payable.
The Company had $2,638,372 in cash and cash equivalents at September 30, 2002.
Cash and cash equivalents are temporarily invested in short-term instruments.
The Company's level of liquidity based upon cash and cash equivalents decreased
by $4,244,377 from $6,882,749 for the year ended December 31, 2001. The decrease
resulted from $8,110,245 of cash used in financing activities and $85,144 of
improvements to real estate (investment activities) that were partially offset
by $3,951,012 of net cash provided by operating activities. Additionally, the
Company's joint ventures held cash at September 30, 2002 of which the Company's
allocable share was approximately $2,858,000.
Cash used in financing activities consisted of $14,303,060 paid to PCIC in
connection with the Transaction and $17,639,459 paid to retire the note that was
issued in relation to the Transaction which was partially offset by the receipt
of proceeds from the initial borrowing under the Credit Facility of $23,832,274.
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
$914,766 and $3,392,446 for the three and nine months ended September 30, 2002.
As disclosed in Item 1. Financial Statements - Note 9, the operating partnership
of the Company has issued Class A Preferred Units (the "Class A Units") which
entitle the holder thereof to certain rights to
23
require the operating partnership to redeem such units at a significant premium
if the aggregate assets of the Companies fall below approximately $75 million or
the outstanding debt under which the Companies are obligated is less than
approximately $55 million. The Company is currently negotiating to acquire an
interest in a joint venture with the other Companies that will hold an interest
in 20 hotels leased to a subsidiary of Accor S.A. (Motel 6) for a purchase price
of $877,770 which hotels will be subject to existing non-recourse debt of
approximately $74.6 million. In connection with this acquisition, the terms of
the Class A units will be amended to delete the right of PCIC (the holder of the
Class A Units) to put the preferred units to the operating partnership in the
event that the value of the Company's assets falls below a certain threshold.
Further, the transaction will provide additional non-recourse debt under which
the Companies will be obligated and will satisfy the debt level requirements for
the Class A unitholders. If the foregoing transaction is not consummated or an
alternative arrangement or transaction is not entered into, the sale of 568
Broadway would enable the holder of the Class A Units to exercise its right to
put the Class A Units to the Company for a price equal to the liquidation
preference for such Class A Units plus the put premium. See "Item 1, Financial
Statements - Note 9."
For the nine months ended September 30, 2002, the Company made $85,144 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. The actual amount
of such expenditures depends upon the level of leasing activity and other
factors that cannot be predicted with certainty. 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.
RESULTS OF OPERATIONS
The management's discussion and analysis compares the results of operations
reflecting the equity method of accounting for the three and nine months ended
September 30, 2002 to the pro-forma statement of operations for the same period
ended September 30, 2001.
Nine months ended September 30, 2002 vs. September 30, 2001
Net income
The Company's net income decreased by $21,587,578 to a net loss of $18,823,776
for the nine months ended September 30, 2002 from a net income of $2,763,802 for
the same period in 2001. This decrease is primarily attributable to expenses
incurred in connection with the Transaction, including the purchase of the
Advisory Agreement, legal fees and consulting fees to Lazard Freres & Co LLC
("Lazard") for its advisory and valuation services for the Company. In addition,
further contributing to this decrease were the legal fees associated with
defending the lawsuits brought in connection with the Transaction. Partially
offsetting the increase in costs and expenses was an increase in rental revenue
of $110,350 and an increase in income from the investment in joint ventures of
$298,507.
Rental Revenues
Rental revenues increased $110,350, or approximately 3%, to $3,392,446 during
the nine months ended September 30, 2002 from $3,282,096 during the nine months
ended September 30, 2001 due to an increase in base rent of $57,988. Percentage
rent increased in the same period due to payments by Eckerd
24
Drugs and Publix Supermarkets at Southport Shopping Center, which increased
cumulatively by $24,032 along with an aggregate increase in all other rental
revenue categories of $28,330.
Costs and Expenses
Costs and expenses, for the nine months ended September 30, 2002 amounted to
$24,524,199 an increase of $21,256,685 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. The remaining costs and expenses amounted
to $6,072,066 for the nine months ended September 30, 2002, an increase of
$2,804,552 from the $3,267,514 incurred for the same period in 2001. The
increase is primarily due to an increase in administrative expenses due to the
Transaction, legal, professional and consulting fees.
Operating expenses increased by $149,949, or 14%, to $1,201,084 for the nine
months ended September 30, 2002 from $1,051,135 for the same period in 2001 due
to increased insurance and real estate tax expense. The Company also experienced
higher depreciation and amortization expense due to real estate improvements and
tenant procurement costs. Property management fees increased slightly due to an
increase in rental collections. Expenses related to the partnership asset
management fees decreased by $453,838 for the nine months ended September 30,
2002 from $799,893 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 nine months ended September 30, 2002, $135,805 in asset
management fees were paid to Shelbourne Management prior to February 14, 2002
and $208,250 to PCIC thereafter in accordance with PCIC's agreement to provide
transition services to the Company upon the consummation of the Transaction.
Non-Operating Income and Expenses
Income from the investment in joint ventures increased by $298,507, or
approximately 12% to $2,858,674 from $2,560,167 for the same period in 2001 due
to increased Net Income from 568 Broadway of $406,353 that was partially offset
by a decrease in aggregate Net Income of Century Park and Seattle Tower of
$107,846.
Interest expense of $172,733 was paid on the note issued in the Transaction. An
additional $423,602 in interest was incurred on the Credit Facility dated May 1,
2002. Interest from the Credit Facility 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.
Interest income decreased by $120,036, or 75%, to $39,760 for the current period
as compared to $159,796 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 nine months ended September 30, 2002 as compared
to the same period ended September 30, 2001 by $23,379, or 80%, to $5,878 from
$29,257 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.
Inflation
Inflation is not expected to have a material impact on the operations or
financial position of Company.
25
Three months ended September 30, 2002 vs. September 30, 2001
Net income
The Company had net income of $275,283 for the three months ended September 30,
2002, a decrease of $473,388, or 63% from $748,671 for the same period in 2001.
This decrease was due to an increase in costs and expenses, primarily due to the
incurrence of legal, professional and consulting fees resulting from lawsuits,
partially offset by an increase in rental revenues of $42,820 and an increase in
income of $261,055 from the investment in joint ventures.
Rental Revenues
Rental revenues increased $42,820, or 5%, from $871,946 during the three months
ended September 30, 2001 to $914,766 during the three months ended September 30,
2002. This was due to an increase in base rent of $19,670, an increase in common
area maintenance charges of $16,540, and an aggregate increase in all other
rental revenue categories of $6,610.
Costs and Expenses
Costs and expenses for the three months ended September 30, 2002 amounted to
$1,449,525, an increase of $482,326 from $967,199 for the three months ended
September 30, 2001. The increase is primarily due to an increase in
administrative expenses due to increased legal, professional and consulting
fees. The remaining costs and expenses, amounted to $761,268 for the three
months ended September 30, 2002, a decrease of $85,997, or 10%, from the same
period in 2001.
Operating expenses increased by $26,615, or 7%, to $387,474 for the three months
ended September 30, 2002 as compared to $360,859 for the same period in 2001 due
to an increase in insurance premiums. The Company also experienced higher
depreciation and amortization expense due to real estate improvements and tenant
procurement costs. Property management fees increased slightly due to an
increase in rental collections. Expenses related to partnership asset management
fees decreased by $185,499 for the three months ended September 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.
Non-Operating Income and Expenses
Equity income from joint ventures increased by $261,055. This is primarily due
to an increase of the Net Income at 568 Broadway.
Interest expense for the three months ended September 30, 2002 on the Credit
Facility dated May 1, 2002 was $254,333. 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.
Interest income decreased $31,240 or 72% 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 September 30, 2002 as compared
to the three months ended September 30, 2001 by $9,364.
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
26
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 the 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.
FFO for the three- and nine-month periods ended September 30, 2002 and 2001 are
summarized in the following table:
THREE MONTHS ENDED, NINE MONTHS ENDED,
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net Income (Loss) (A) $ 275,283 $ 748,671 $(18,823,776) $ 2,763,802
Plus: Depreciation of
real estate assets and
tenant improvements 166,222 164,198 496,864 486,567
Plus: Amortization of leasing
commissions 28,630 28,498 83,335 66,771
Plus: Adjustments for
unconsolidated joint ventures (B) 212,711 206,280 701,986 587,637
------------ ------------ ------------ ------------
Funds From Operations (A) $ 682,846 $ 1,147,647 $(17,541,591) $ 3,904,777
============ ============ ============ ============
(A) Net Income and Funds From Operations for the nine months ended September
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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk the Company faces is interest rate sensitivity. The
Company's long-term debt bears interest at a floating rate, and therefore is
exposed to the risk of interest rate changes. At November 13, 2002, borrowings
under the 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
the credit facility at November 13, 2002 and the interest rate at that date, a
10% increase in LIBOR would increase the interest expense in 2002 by
approximately $25,000. Conversely, a 10% decrease in LIBOR would decrease
interest expense in 2002 by the same amount. The gain or loss the Company
ultimately realizes with respect to interest rate fluctuations will depend on
the actual interest rates during that period. The Company does not believe that
it has any risk related to derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Registrant's principal executive officer and principal financial officer
have, within 90 days of the filing date of this quarterly report, evaluated the
effectiveness of the Registrant's disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14(c) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Registrant's internal controls or in other factors that could significantly
affect such internal controls since the date of evaluation. Accordingly, no
corrective actions have been taken with regard to significant deficiencies or
material weaknesses.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 sought disgorgement of profits, accounting for profits and
rescission of an agreement to repurchase shares of stock held by PCIC and
purchase the Advisory Agreements. On May 15, 2002, the Delaware Plaintiffs filed
a second consolidated and amended class and derivative action complaint that
additionally sought to have the Company consider all available transactions to
maximize shareholder value.
The Delaware Plaintiffs separately filed a class action under Section 211 of the
General Corporation Law of Delaware on May 7, 2002 (i) seeking to compel the
Companies to hold an annual meeting of shareholders 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 and trial on the statutory issues.
A letter agreement settling each of the actions brought by the Delaware
Plaintiffs' was signed by the parties on July 1, 2002, and remains subject to
court approval. 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, implement additional corporate governance
protections, propose and, if approved by shareholders, implement the plan of
liquidation. The settlement also provided for, among other things, a
contribution by Shelbourne Management of up to one million dollars, as approved
by the court, for plaintiffs' attorneys fees.
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 made 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. The court dismissed the lawsuit on September 30, 2002, at
the request of Longacre.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibits furnished pursuant to the requirements of Form 10-Q:
Number Description
- ------ -----------
(2.1) Stock Purchase Agreement among HX Investors, Exeter Capital Corporation
and the Company (4)
(2.2) Amendment No. 1 to Stock Purchase Agreement (6)
(2.3) Plan of Liquidation (7)
(3.1) Amended and Restated Certificate of Incorporation of the Company(1)
(3.2) Amended and Restated Bylaws of the Corporation(1)
(4.1) Amended and Restated Agreement of Limited Partnership of the operating
partnership(1)
(4.2) Shareholder Rights Agreement(1)
(4.3) Amendment to Shareholder Rights Agreement(2)
(4.4) Certificate of Designations, Preferences and Rights of Series A
Preferred Stock(1)
(4.5) Stockholder Agreement, among the Companies and HX Investors, LP and
Exeter Capital Corporation, dated as of April 30, 2002 (3)
(4.6) Amendment No. 2 to Shareholder Rights Agreement (5)
(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 (3)
(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 (3)
(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 (3)
(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 (3)
(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 (3)
(10.6) Form of Mortgage, dated as of April 30, 2002, issued by the Company to
Bayerische Hypo- Und Vereinsbank AG, New York Branch, as agent for
itself and other lenders(3)
30
(10.7) Settlement Agreement and Mutual Release between HX Investors, the
Companies and Shelbourne Management(4)
(10.8) Amendment No. 1 to Settlement Agreement (6)
(99.1) Partnership Unit Designation of the Class A Preferred Partnership Units
of the Operating Partnership(2)
(99.2) Partnership Unit Designation of the Class B Partnership Units of the
Operating Partnership
(99.3) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- --------------
(1) incorporated by reference to the Registration Statement of the Company
on Form S-4 filed on February 11, 2000, as amended
(2) incorporated by reference to the Current Report of the Company on Form
8-K filed on February 14, 2002
(3) incorporated by reference to the Current Report of the Company on Form
8-K filed on May 14, 2002.
(4) incorporated by reference to the Current Report of the Company on Form
8-K filed on July 2, 2002.
(5) incorporated by reference to the Current Report of the Company on Form
8-K filed on July 8, 2002
(6) incorporated by reference to the Current Report of the Company on Form
8-K filed on August 5, 2002
(7) incorporated by reference to Appendix A to the Company's Definitive
Proxy Statement on Schedule 14A filed on September 27, 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 September 30, 2002:
(i) Press release announcing that the Companies had entered into the HX
Investors Stock Purchase Agreement.
Item reported: 5
Dated filed: July 2, 2002
(ii) Amendment to Company's Shareholders Rights Agreement.
Item reported: 5
Dated filed: July 8, 2002
(iii) Amendment to HX Investors Stock Purchase Agreement and Settlement
Agreement.
Item reported: 5
Dated filed: August 5, 2002
(iv) Change in Control of the Company.
Item reported: 1
Dated filed: August 21, 2002
31
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: November 13, 2002 By: /S/ Michael L. Ashner
-------------------------
Michael L. Ashner
(Chief Executive Officer)
32
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q SEPTEMBER 30, 2002
CERTIFICATIONS
I, Michael L. Ashner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties
I, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us,
particularly during the period in which this quarterly report is being
prepared:
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
33
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q SEPTEMBER 30, 2002
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Michael L. Ashner
-----------------------
Michael L. Ashner
Chief Executive Officer
34
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q SEPTEMBER 30, 2002
CERTIFICATIONS
I, Carolyn B. Tiffany, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties
I, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us,
particularly during the period in which this quarterly report is being
prepared:
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
35
SHELBOURNE PROPERTIES I, INC.
FORM 10-Q SEPTEMBER 30, 2002
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Carolyn B. Tiffany
-----------------------
Carolyn B. Tiffany
Chief Financial Officer
36
SHELBOURNE PROPERTIES I INC,
FORM 10-Q SEPTEMBER 30, 2002
EXHIBIT INDEX
Exhibit
- -------
Number Description Page
- ------ ----------- ----
2.1 Stock Purchase Agreement among HX Investors, Exeter Capital Corporation
and the Company (4)
2.2 Amendment No. 1 to Stock Purchase Agreement (6)
2.3 Plan of Liquidation (7)
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Corporation (1)
4.1 Amended and Restated Agreement of Limited Partnership of the operating partnership (1)
4.2 Shareholder Rights Agreement (1)
4.3 Amendment to Shareholder Rights Agreement (2)
4.4 Certificate of Designations, Preferences and Rights of Series A Preferred Stock (1)
4.5 Stockholder Agreement, among the Companies and HX Investors, LP and
Exeter Capital Corporation, dated as of April 30, 2002 (3)
4.6 Amendment No. 2 to Shareholder Rights Agreement (5)
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 (3)
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 (3)
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 (3)
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 (3)
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 (3)
10.6 Form of Mortgage, dated as of April 30, 2002, issued by the Company to
Bayerische Hypo- Und Vereinsbank AG, New York Branch, as agent for
itself and other lenders (3)
37
10.7 Settlement Agreement and Mutual Release between HX Investors,
the Companies and Shelbourne Management (4)
10.8 Amendment No. 1 to Settlement Agreement (6)
99.1 Partnership Unit Designation of the Class A Preferred Partnership
Units of the Operating Partnership (2)
99.2 Partnership Unit Designation of the Class B Partnership Units of the Operating Partnership 39
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 43
- ------------------
(1) incorporated by reference to the Registration Statement of the Company on
Form S-4 filed on February 11, 2000, as amended
(2) incorporated by reference to the Current Report of the Company on Form 8-K
filed on February 14, 2002
(3) incorporated by reference to the Current Report of the Company on Form 8-K
filed on May 14, 2002.
(4) incorporated by reference to the Current Report of the Company on Form 8-K
filed on July 2, 2002.
(5) incorporated by reference to the Current Report of the Company on Form 8-K
filed on July 8, 2002
(6) incorporated by reference to the Current Report of the Company on Form 8-K
filed on August 5, 2002
(7) incorporated by reference to Appendix A to the Company's Definitive Proxy
Statement on Schedule 14A filed on September 27, 2002
38