Back to GetFilings.com
================================================================================
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 MARCH 31, 2003
--------------
Commission file number 0-16341
-------
SHELBOURNE PROPERTIES II, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3502382
-------- ----------
(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
-----------------------------------------------------------------------
(Address of principal executive offices)
(617) 570-4600
--------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicated by check whether registrant is an accelerated filer (as identified in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 12, 2003, there were 894,792 shares of common stock
outstanding.
================================================================================
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Statements of Net Assets (Liquidation Basis) for
March 31, 2003 and December 31, 2002............................... 3
Consolidated Statement of Operations and Changes in Net Assets
(Liquidation Basis) for the Three Months Ended March 31, 2003 and
Consolidated Statement Operations (Going Concern) for the
Three Months Ended March 31, 2002 (Restated)....................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 (Liquidation Basis) and
the Three Months Ended March 31, 2002 (Going Concern) (Restated)... 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......... 22
Item 4. Controls and Procedures............................................ 22
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K................................... 23
Signatures................................................................... 24
2
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
CONSOLIDATED STATEMENTS OF NET ASSETS (LIQUIDATION BASIS)
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
ASSETS
Real estate held for sale $13,985,882 $17,091,316
Investments in joint ventures 29,365,829 62,344,354
Cash and cash equivalents, of which $2,641,114 is restricted
cash at March 31, 2003 5,026,437 10,898,495
Other assets 120,226 255,246
Receivables, net 108,635 83,523
----------- -----------
Total Assets 48,607,009 90,672,934
----------- -----------
LIABILITIES
Accounts payable and accrued expenses 1,373,082 691,344
Note payable 22,081,542 23,779,343
Reserve for estimated costs during the period of liquidation 1,086,209 1,600,000
Deferral on gains on real estate assets and joint ventures 16,340,932 43,847,675
COMMITMENTS AND CONTINGENCIES (Notes 8, 10)
CLASS B Partnership Interests - -
CLASS A 5% Preferred Partnership Interests, at liquidation value - 1,015,148
----------- -----------
Total Liabilities 40,881,765 70,933,510
----------- -----------
NET ASSETS IN LIQUIDATION $ 7,725,244 $19,739,424
=========== ===========
See notes to consolidated financial statements.
3
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
CONSOLIDATED STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (LIQUIDATION BASIS) AND
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (GOING CONCERN BASIS)
(UNAUDITED)
For the Three Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
(Restated-
see note 2)
Rental Revenues $ 779,401 $ 1,200,724
------------ ------------
Costs and Expenses
Operating expenses 719,419 441,984
Depreciation and amortization - 297,665
Asset management fee 50,000 157,582
Transition management fees - 41,650
Purchase of advisory agreements - 23,049,398
Administrative expenses 228,725 877,392
Property management fee 19,662 32,984
------------ ------------
1,017,806 24,898,655
------------ ------------
Loss before equity income from joint ventures, gain on sale of real estate,
interest and other income (238,405) (23,697,931)
Equity income from joint ventures 27,408,546 994,357
Gain on sale of real estate 846,203 -
Interest expense (223,282) (127,757)
Interest income 23,691 51,030
Other income - 548
------------ ------------
Net income (loss) 27,816,753 (22,779,753)
Preferred dividends (12,689) (6,345)
------------ ------------
Net income (loss) available for common shares 27,804,064 $(22,786,098)
============
Net assets at January 1, 2003 19,739,424
Liquidating dividends - common (39,818,244)
------------
Net assets at March 31, 2003 $ 7,725,244
============
Earnings (loss) per share - basic and diluted $ 31.07 $ (21.37)
============ ============
Weighted average common shares $ 894,792 $ 1,066,354
============ ============
See notes to consolidated financial statements.
4
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (LIQUIDATION BASIS)
AND MARCH 31, 2002 (GOING CONCERN BASIS)
(UNAUDITED)
For the Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ------------
(Restated-
see note 2)
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income (loss) $ 27,816,753 $(22,779,753)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization - 297,666
Straight-line adjustment for stepped lease rentals - 7,170
Change in bad debt reserve 44,159 (11,132)
Purchase of advisory agreements - 23,049,398
Distributions in excess of earnings from joint ventures 7,400,272 7,885,333
Gain on sales of real estate (846,203) -
Change in assets and liabilities:
Receivables (69,271) (8,063)
Other assets 135,020 (143,722)
Accounts payable and accrued expenses (947,554) (156,304)
Accrued interest 100,353 127,757
------------ ------------
Net cash provided by operating activities 33,633,529 8,268,350
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (22,810) (152,017)
Investment in Accotel (1,079,675) -
Proceeds from sales of real estate 3,125,632 -
------------ ------------
Net cash provided by (used in) investing activities 2,023,147 (152,017)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (17,866,603)
Proceeds from Fleet Loan 22,081,542 -
Paydown of Credit Facility from sales proceeds (475,180) -
Payoff of Credit Facility (23,304,163) -
Dividends paid - preferred and common (39,830,933) -
------------ ------------
Net cash used in financing activities (41,528,734) (17,866,603)
------------ ------------
Decrease in cash and cash equivalents (5,872,058) (9,750,270)
Cash and cash equivalents, beginning of period 10,898,495 17,073,461
------------ ------------
Cash and cash equivalents, end of period $ 5,026,437 $ 7,323,191
============ ============
Supplemental disclosure of cash flow information-
Cash paid for interest $ 122,929 $ -
============ ============
See notes to consolidated financial statements.
5
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Shelbourne Properties II, Inc., a Delaware corporation (the "Corporation")
was formed on April 17, 2001. The Corporation's wholly-owned operating
partnership, Shelbourne Properties II L.P., a Delaware limited partnership
(the "Operating Partnership", and together with the Corporation, the
"Company"), holds directly and indirectly all of the Company's properties.
Pursuant to a merger that was consummated on April 17, 2001, the Operating
Partnership became the successor by merger to High Equity Partners, L.P.-
Series 86 (the "Predecessor Partnership").
In August 2002, the Board of Directors adopted a Plan of Liquidation (the
"Plan of Liquidation") and directed that the Plan of Liquidation be
submitted to the Corporation's stockholders for approval. The stockholders
of the Corporation approved the Plan of Liquidation at a Special Meeting of
Stockholders held on October 29, 2002. The Plan of Liquidation contemplates
the orderly sale of all of the Corporation's assets for cash or such other
form of consideration as may be conveniently distributed to the
Corporation's stockholders and the payment of (or provision for) the
Corporation's liabilities and expenses, as well as the establishment of a
reserve to fund the Corporation's contingent liabilities. The Plan of
Liquidation gives the Corporation's Board of Directors the power to sell
any and all of the assets of the Corporation without further approval by
the stockholders.
The Corporation currently expects that the liquidation will be
substantially completed not later than October 29, 2004, although there can
be no assurance in this regard. As a result, it is currently anticipated
that not later than October 29, 2004 any then remaining assets and
liabilities will be transferred to a liquidating trust. With the transfer
to a liquidating trust, the liquidation will be completed for federal and
state income tax purposes, although one or more distributions of the
remaining cash and net proceeds from future asset sales may occur
subsequent to the establishment of a liquidating trust.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As a result of the adoption of the Plan of Liquidation and its approval by
the Corporation's stockholders, the Corporation adopted the liquidation
basis of accounting for the period subsequent to October 29, 2002. Under
the liquidation basis of accounting, assets are stated at their estimated
net realizable value. Liabilities including the reserves for estimated
costs during the period of liquidation are stated at their anticipated
settlement amounts. The valuation of investments in joint ventures and real
estate held for sale is based upon current contracts, estimates as
determined by independent appraisals or other indications of sales values.
The valuations for other assets and liabilities under the liquidation basis
of accounting are based on management's estimates as of March 31, 2003. The
actual values realized for assets and settlement of liabilities may differ
materially from the amounts estimated.
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly owned subsidiaries, the Operating
Partnership and Shelbourne Properties II GP LLC, the general partner of the
Operating Partnership and a wholly owned subsidiary of the Corporation.
Intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated statements of operations and cash flows for the three
months ended March 31, 2002 have been restated from the pro-rata method of
accounting to reflect the equity method of accounting.
6
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes the statement of operations line items
impacted by the restatement:
For the Three Months Ended
March 31,
Previously
Reported Restated
2002 2002
------------ ------------
Rental revenues $ 3,085,623 $ 1,200,724
Costs and expenses (25,809,867) (24,898,655)
Equity income from joint ventures - 994,357
Interest expense (127,757) (127,757)
Interest income 71,700 51,030
Other income 548 548
------------ ------------
Net Loss $(22,779,753) $(22,779,753)
============ ============
ADJUSTMENTS TO LIQUIDATION BASIS OF ACCOUNTING
On October 30, 2002, in accordance with the liquidation basis of
accounting, assets were adjusted to estimated net realizable value and
liabilities were adjusted to estimated settlement amounts, including
estimated costs associated with carrying out the liquidation. Since the
sale of Melrose Crossing I (note 4), Hilliard, Ohio (note 5) and 568
Broadway (note 5), the valuation of investments in joint ventures and real
estate held for sale have been updated to reflect the remaining estimated
costs of carrying out the liquidation as of March 31, 2003 without any
additional adjustment required. The valuation of investments in joint
ventures and real estate held for sale on current contracts, estimates as
determined by independent appraisals or other indications of sales value,
net of estimated selling costs and capital expenditures of anticipated
during the liquidation period. The valuations of other assets and
liabilities are based on management's estimates as of March 31, 2003. The
actual values realized for assets and settlement of liabilities may differ
materially from amounts estimated. Significant increases (decreases) in the
carrying value of net assets are summarized as follows:
Decrease to reflect estimated net realizable values of
certain real estate properties $ (848,811)
Recognition of deferred gain and incentive fees on
real estate properties 848,811
Decrease to reflect net realizable value of investments
in joint ventures (26,657,932)
Recognition of deferred gain and incentive fees on
investments in joint ventures 26,657,932
------------
Adjustment to reflect changes since December 31, 2002
to net carrying value $ -
============
Adjusting assets to estimated net realizable value resulted in the write-up
in the value of certain real estate properties. The anticipated gains net
of any incentive fees associated with the adjustment in value of these real
estate properties have been deferred until such time as a sale occurs.
During the quarter ended March 31, 2003, the Corporation recognized actual
gains of $846,203 on the sale of real estate and $26,702,093 included in
equity income from joint ventures attributable to real estate sales.
7
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESERVE FOR ESTIMATED COSTS DURING THE PERIOD OF LIQUIDATION
Under liquidation accounting, the Corporation is required to estimate and
accrue the costs associated with executing the Plan of Liquidation. These
amounts can vary significantly due to, among other things, the timing and
realized proceeds from property sales, the costs of retaining agents and
trustees to oversee the liquidation, the costs of insurance, the timing and
amounts associated with discharging known and contingent liabilities and
the costs associated with cessation of the Company's operations. These
costs are estimates and are expected to be paid out over the liquidation
period. Such costs do not include costs incurred in connection with
ordinary operations.
The reserve for additional costs associated with liquidation was reduced
from $1,600,000 at December 31, 2002 to $1,086,209 at March 31, 2003 due to
professional costs associated with obtaining the Fleet Loan of $497,125 and
tax planning costs of $16,666 paid to an affiliate of Presidio Capital
Investment Company, LLC in connection with the Accor transaction (see note
10).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates.
CASH EQUIVALENTS
The Corporation considers all short-term investments that have original
maturities of three months or less from the date of acquisition to be cash
equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of an allowance for doubtful accounts of
$136,852 and $92,693 as of March 31, 2003 and December 31, 2002,
respectively.
REVENUE RECOGNITION
Prior to the adoption of the liquidation basis of accounting, base rents
were recognized on a straight-line basis over the terms of the related
leases. Subsequent to the adoption of the liquidation basis of accounting,
the amount of the previously deferred straight-line rent was grouped with
real estate for purposes of comparing such balances to their net realizable
value and, if such amounts when aggregated with real estate exceeded the
net realizable value, the amount of the excess was included in the
write-off of other assets as part of the adjustment to the liquidation
basis of accounting. At October 29, 2002, the date prior to the adoption of
liquidation accounting, approximately $299,737 of deferred straight-line
rent was included in other assets that were subsequently grouped with real
estate with no write-off required.
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," and the Emerging Issues Task
Force's Consensus on Issue 98-9, "Accounting for Contingent Rent in Interim
Financial Periods," the Corporation 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
costs are incurred.
8
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN JOINT VENTURES
Certain properties are owned in joint ventures with Shelbourne Properties I
L.P. and/or Shelbourne Properties III L.P. Accordingly, the Corporation's
consolidated balance sheet at December 31, 2002 and the Corporation's
consolidated statements of operations commencing January 1, 2002, as
restated, reflect the equity method of accounting.
REAL ESTATE
Subsequent to the adoption of the liquidation basis of accounting, real
estate assets were adjusted to their net realizable value and classified as
real estate held for sale. Additionally, the Corporation suspended
recording any further depreciation expense.
DEPRECIATION AND AMORTIZATION
Upon the adoption of the liquidation basis of accounting, deferred loan
fees of $892,599 were written off to reflect the balances at their net
realizable value. Direct lease costs associated with the real estate were
grouped with real estate for purposes of comparing carrying amounts to
their net realizable value, and if such amounts, when aggregated with real
estate exceeded the net realizable value, these costs were written off.
Prior to the Corporation adopting the liquidation basis of accounting,
depreciation was computed using the straight-line method over the useful
life of the property, which was estimated to be 40 years. The cost of
properties represented the initial cost of the properties to the Company
plus acquisition and closing costs less impairment adjustments. Tenant
improvements, leasing costs and deferred loan fees were amortized over the
applicable lease term.
FINANCIAL INSTRUMENTS
The carrying values reflected in the consolidated statements of net assets
at March 31, 2003 and December 31, 2002 reasonably approximate the fair
values for cash and cash equivalents, other assets, receivables, accounts
payable, accrued expenses and note payable. Additionally, as the
Corporation currently expects that the liquidation will be substantially
completed not later than October 2004, the net realizable value of notes
payable approximates the fair value. In making such assessment, the
Corporation has utilized discounted cash flow analyses, estimates, and
quoted market prices as deemed appropriate.
INCOME TAXES
The Corporation is operating with the intention of qualifying as a real
estate investment trust ("REIT") under Sections 856-860 of the Internal
Revenue Code of 1986 as amended. Under those sections, a REIT which pays at
least 90% of its ordinary taxable income as a dividend to its stockholders
each year and which meets certain other conditions will not be taxed on
that portion of its taxable income which is distributed to its
stockholders.
For federal income tax purposes, the cash dividends distributed to
stockholders after October 29, 2002 have been and will be characterized as
liquidating distributions.
AMOUNTS PER SHARE
Basic earnings (loss) per share is computed based on weighted average
common shares outstanding during the period.
9
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS PER SHARE
On January 13, 2003, the Board of Directors declared a dividend of $14.50
per share. The dividend was paid on January 31, 2003 to stockholders of
record at the close of business on January 23, 2003.
On February 28, 2003, the Board of Directors declared a dividend of $30.00
per share. The dividend was paid on March 18, 2003 to stockholders of
record at the close of business on March 10, 2003. The dividend was funded
from proceeds of the Fleet Loan (see note 7) and from proceeds generated by
the sales of the New York, New York property and the Melrose Park, Illinois
property, as well as cash reserves.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 which are effective for fiscal years beginning after May 15,
2002. This statement had no effect on the Corporation's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term
of the related guarantee. The disclosure provisions of this Interpretation
are effective for the Corporation's December 31, 2002 financial statements.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. This Interpretation had no effect on
the Corporation's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application
of existing accounting pronouncements to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. The provisions of the Interpretation will be immediately effective
for all variable interest in variable interest entities created after
January 31, 2003, and the Corporation will need to apply its provisions to
any existing variable interest in variable interest entities by no later
than December 21, 2004. The Corporation does not expect that this will have
an impact on the Corporation's consolidated financial statements.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
During the three months ended March 31, 2003 and 2002, property management
services (the "Property Management Services") and asset management
services, investor relation services and accounting services (the "Asset
Management Services") have been provided to the Company by affiliates of
the Company.
ASSET MANAGEMENT SERVICES
For the period from January 1, 2002 through February 14, 2002, Shelbourne
Management LLC ("Shelbourne Management"), a wholly-owned subsidiary of
Presidio Capital Investment Company, LLC ("PCIC"), provided Asset
Management Services to the Company pursuant to the terms of an Advisory
Agreement (the "Advisory Agreement") between the Corporation, the Operating
Partnership and Shelbourne Management. Pursuant to the terms of the
Advisory Agreement, the Corporation was obligated to pay for Asset
Management Services an annual
10
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
asset management fee, payable quarterly, equal to 1.25% of the gross asset
value of the Corporation as of the last day of each year. In addition, the
Corporation was obligated to (i) pay $200,000 for non-accountable expenses
and (ii) reimburse Shelbourne Management for expenses incurred in
connection with the performance of its services. Effective February 14,
2002, in connection with the Transaction (as described below), PCIC began
providing such services for a reduced fee of $333,333 per annum. Both
Shelbourne Management and PCIC were affiliates of the then management of
the Corporation.
Effective October 1, 2002, as contemplated by in the Plan of Liquidation,
the agreement with PCIC was terminated and Kestrel Management, L.P.
("Kestrel") began providing the Asset Management Services for a fee of
$200,000 per annum. Kestrel is an affiliate of the Corporation's current
Chief Executive Officer.
Asset Management Services were provided to the Corporation during the three
months ended March 31, 2003 and 2002 as follows:
o Effective January 1, 2002 through February 13, 2002, pursuant to the
terms of the Advisory Agreement, by Shelbourne Management.
o Effective February 14, 2002 through the end of the fiscal quarter
and thereafter through September 30, 2002, by PCIC.
o Effective October 1, 2002 and thereafter including for the fiscal
quarter ended March 31, 2003, as contemplated by the Plan of
Liquidation, by Kestrel.
PROPERTY MANAGEMENT SERVICES
The Operating Partnership has contracted with affiliates to provide Property
Management Services pursuant to agreements that provide for a fee of up to
6% of property revenue. Kestrel provided Property Management Services during
the fiscal quarters ended March 31, 2003 and 2002.
The following table summarizes the amounts paid to affiliates for Expense
Reimbursements, Asset Management Fee, Transition Management Fee and Property
Management Fees for the three-month periods ended March 31, 2003 and 2002.
THREE MONTHS ENDED MARCH 31, 2003
Shelbourne
Management Kestrel
---------- -------
Asset Management Fee $ - $50,000
Property Management Fee $ - $83,821
11
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002
Shelbourne
Management Kestrel
---------- -------
Expense Reimbursement (1) $ 25,000 $ -
Asset Management Fee 157,582 -
Transition Management Fee 41,650 -
Property Management Fee $ - $ 87,848
(1) The asset management fees were modified in connection with the
Transaction to eliminate expense reimbursement.
ALLOCATION OF DIVIDENDS BY THE CORPORATION
Dividends payable to HX Investors, L.P. ("HX Investors"), an affiliate of
the current Chief Executive Officer of the Corporation, for the three months
ended March 31, 2003 and 2002 on account of shares of common stock owned by
HX Investors were $16,510,034 and $0, respectively.
In addition, in connection with the settlement of the lawsuit brought by HX
Investors, Shelbourne Management agreed to pay to HX Investors 42% of the
amounts paid to Shelbourne Management with respect to the Class A units.
THE TRANSACTION
On February 14, 2002, the Corporation, Shelbourne Properties I, Inc. and
Shelbourne Properties III, Inc. (the "Companies") consummated a transaction
(the "Transaction") whereby the Corporation purchased the 343,124 shares of
the Corporation's common stock held by subsidiaries of PCIC and the Advisory
Agreement was contributed to the Operating Partnership. Pursuant to the
Transaction, the Corporation paid PCIC $17,866,603 in cash and the Operating
Partnership issued preferred partnership interests with an aggregate
liquidation preference of $1,015,148 and a note in the amount of
$22,034,250. This note was satisfied in April 2002 from the proceeds of the
Credit Facility. (See note 6).
4. REAL ESTATE
The following table is a summary of the Corporation's real estate as of:
MARCH 31,
2003 DECEMBER 31,
LIQUIDATION BASIS 2002
(UNAUDITED) LIQUIDATION BASIS
----------------- -----------------
Real estate held for sale $13,985,882 $17,091,316
=========== ===========
On February 28, 2003, the Corporation sold its property located in Melrose
Park, Illinois for a gross sales price of $3,247,200. The Corporation
received proceeds of $3,125,632 after closing costs. After closing
adjustments, net proceeds were $2,934,617. The Corporation realized an
accounting gain of $846,203.
12
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVESTMENT IN JOINT VENTURES
On October 30, 2002, the Corporation adopted the liquidation basis of
accounting. Subsequent to the adoption of the liquidation basis of
accounting, the investments in joint ventures were adjusted to their net
realizable value based on current contracts, estimates as determined by
independent appraisals or other indications of sales value.
At January 1, 2003 the Corporation was invested in four joint ventures,
(568 Broadway, Century Park, Seattle Landmark and Tri-Columbus). As of
March 31, 2003, the corporation was invested in three operating joint
ventures (Century Park, Seattle Landmark and Tri-Columbus). The joint
ventures are accounted for utilizing the equity method of accounting.
On January 31, 2003, the Hilliard, Ohio property, which was owned by
Tri-Columbus Associates, in which the Corporation holds a 20.66% interest,
was sold for a gross sales price of $4,600,000. After satisfying the debt
encumbering the property, closing adjustments and other closing costs, net
proceeds were approximately $2,063,000, $426,330 of which is attributable
to the Corporation's interest. The joint venture recognized no gain or loss
on the sale as the joint venture's property was previously written down to
its net realizable value.
On February 28, 2003, 568 Broadway Joint Venture, a joint venture in which
the Corporation indirectly held a 38.925% interest, sold its property
located at 568 Broadway, New York, New York for a gross price of
$87,500,000. After assumption of the debt encumbering the property
($10,000,000), closing adjustments and other closing costs, net proceeds
were approximately $73,000,000 approximately $28,415,250 of which was
allocated to the Operating Partnership. The joint venture recognized an
accounting gain of $67,746,480 of which $26,702,093 was attributable to the
Corporation and is reported as equity income from joint ventures.
On February 25, 2003 Century Park I Joint Venture, a joint venture in which
the Corporation indirectly holds a 50% interest, entered into a contract to
sell its property located at Century Park Court, San Diego, California for
a gross sales price of $29,750,000. The sale closed on April 29, 2003.
6. CREDIT FACILITY
On May 1, 2002, the Operating Partnership and certain of its subsidiaries,
as well as the operating partnership of Shelbourne Properties I, Inc. and
the operating partnership of Shelbourne Properties III, Inc., and certain
of their 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 was
subsequently satisfied on February 20, 2003. (See note 7 below).
7. FLEET LOAN
On February 20, 2003, in a transaction designed to provide flexibility to
the Corporation, Shelbourne Properties I, Inc. and Shelbourne Properties
III, Inc., (collectively, the "Companies") and their respective operating
partnerships (the "Shelbourne OPs") in implementing their respective plans
of liquidation and enable them to distribute 100% of the net proceeds from
the sale of the New York, New York property, direct and indirect
subsidiaries (the "Borrowers") of each of the Companies entered into a Loan
Agreement with Fleet National Bank, as agent for itself and other lenders
("Fleet") pursuant to which the Borrowers obtained a $55,000,000 loan (the
"Loan"). The Companies believed that by entering into a single loan
transaction instead of three separate loan transactions they were able to
obtain a larger loan at a more favorable interest rate. The Loan bears
interest at the election of the Borrowers at a rate of either LIBOR plus
2.75% (4.09% at March 31, 2003) or Fleet's prime rate (but not less than
5%) plus 100 basis points. At present the Borrowers have elected that the
Loan bear interest at LIBOR plus 2.75%. The Loan matures on February 19,
2006, subject to two one year extensions. The Loan is prepayable in whole
or in part at anytime without penalty or premium.
13
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FLEET LOAN (CONTINUED)
As of March 31, 2003, the Loan was secured by mortgages on the Company's
Richmond, Virginia property, Matthews, North Carolina property, the
property held by Century Park I joint venture, the property held by Seattle
Landmark joint venture, and the properties held by Tri-Columbus Associates,
as well as certain other real properties owned indirectly by Shelbourne
Properties I, Inc. and Shelbourne Properties III, Inc. The Borrowers are
jointly and severally liable for the repayment of the amounts due under the
Loan and the Operating Partnership and the Corporation (as well as the
other operating partnerships and Companies) have guaranteed the repayment
of the Loan. A portion of the Loan proceeds, as well as the balance of a
note in the amount of $10,000,000 secured by the 568 Broadway property,
were used to satisfy the Credit Facility that had a balance due of
$37,417,249 as of February 20, 2003.
At March 31, 2003, the outstanding balance due on the Loan was $55,000,000,
of which $22,081,542 was allocable to the Company and the interest rate at
March 31, 2003 on the Loan was 4.09%. The outstanding principal balance was
subsequently reduced by $20,000,000 on April 29, 2003 in connection with
the sale of property jointly owned by the Corporation and Shelbourne
Properties I, Inc.
Since the Borrowers are jointly and severally liable for the repayment of
the entire principal, interest and other amounts due under the Loan, the
Borrowers, the Companies and the operating partnerships have entered into
Indemnity, Contribution and Subrogation Agreements, the purpose and intent
of which was to place the operating partnerships in the same position (as
among each other) as each would have been had the lender made three
separate loans, one to each of the operating partnerships; each of which
loans would have been in a smaller amount than the Loan, would have been
the obligation/liability only of the operating partnership to which it was
made and would have been secured only by certain of such operating
partnership's assets.
8. CLASS B PARTNERSHIP INTERESTS
Under the Plan of Liquidation which has been approved by the Corporation's
Board of Directors and stockholders, the Class B Unitholders are entitled
to receive an incentive payment of 15% of (i) the cash and other proceeds
generated from operating the assets and properties of the Company, plus the
aggregate fair value of all consideration received from the disposal of the
assets and properties of the Company less (ii) the sum of all direct costs
incurred in connection with such disposal (the "Incentive Fee"), after the
payment of a priority return of approximately $66.25 per share to
stockholders of the Corporation plus interest thereon compounded quarterly
at 6% (from August 19, 2002) per annum (the "Priority Return"). On August
19, 2002, the Board of Directors of the Corporation authorized the issuance
by the Operating Partnership of, and the Operating Partnership issued,
Class B Units to HX Investors L.P. ("HX Investors") which Class B Units
provide distribution rights to HX Investors consistent with the intent and
financial terms of the Incentive Fee. The Class B Units entitle the holder
thereof to receive distributions equal to 15% of gross proceeds after the
Priority Return. After giving effect to dividends paid from August 19, 2002
to May 12, 2003, the remaining unpaid per share Priority Return at May 12,
2003 is $9.74.
9. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS
In connection with the Transaction, the Operating Partnership issued to
Shelbourne Management 1,015.148 Class A 5% Preferred Partnership Units (the
"Class A Units"). The Class A Units entitled the holder to a quarterly
distribution equal to 1.25% of the aggregate liquidation preference of the
Class A Units ($1,015,148). In addition, upon the liquidation of the
Operating Partnership, each Class A Unit was 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 Corporation 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 had 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
14
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS (CONTINUED)
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 was equal to approximately $6,605,000 at December 31,
2002 and declined each February 13, May 13, August 13 and November 13 until
it reached zero on May 13, 2007.
The terms of the Class A Units were subsequently modified to eliminate the
liquidation preference and limit the circumstances under which the holders
of the Class A Units could cause the Operating Partnership to purchase the
Class A Units at a premium. These circumstances include the occurrence of
the following while any of the Class A Units are outstanding; (i) the
filing of bankruptcy by a Shelbourne OP; (ii) the failure of a Shelbourne
OP to be taxed as a partnership; (iii) the termination of the Advisory
Agreement; (iv) the issuing of a guaranty by any of the Companies on the
debt securing the Accor S.A. properties; or (v) the taking of any action
with respect to the Accor S.A. properties (see below) without the consent
of the Class A Unitholder.
In connection with the settlement of the lawsuit brought by HX Investors,
Shelbourne Management agreed to pay to HX Investors 42% of the amounts paid
to Shelbourne Management with respect to the Class A units.
10. ACCOR S.A. PROPERTIES TRANSACTION
On January 15, 2003, a joint venture owned by the Operating Partnership and
the operating partnerships of Shelbourne Properties I, Inc. and Shelbourne
Properties III, Inc. acquired from Realty Holdings of America, LLC, an
unaffiliated third party, a 100% interest in an entity that owns 20 motel
properties triple net leased to an affiliate of Accor SA. The cash purchase
price, which was provided from working capital, was $2,668,272, of which
$867,806, $1,079,675 and $720,791 was paid by Shelbourne Properties I,
Inc., the Corporation and Shelbourne Properties III, Inc., respectively.
The properties are also subject to existing mortgage indebtedness in the
current principal amount of approximately $74,220,000.
The Companies formed the joint venture and acquired the interest in the new
properties in order to facilitate the disposition of the other properties
of the Companies and the distribution to stockholders of the sales proceeds
in accordance with the Plan of Liquidation. Prior to the acquisition of the
Accor S.A. properties, the holder of the Class A Units had the right to
cause the Operating Partnerships to purchase the Class A Units at a
substantial premium to their liquidation value (at the time of the
acquisition, a premium of approximately $6,605,000 in the case of the
Operating Partnership and approximately $16,265,000 for all three operating
partnerships) unless the operating partnerships maintained at least
approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the
case of the Operating Partnership) guaranteed by the holder of the Class A
Units and secured by assets having an aggregate market value of at least
approximately $74,800,000 ($30,400,000 in the case of the Operating
Partnership). These requirements significantly impaired the ability of the
Corporation to sell its properties and make distributions in accordance
with the Plan of Liquidation. In lieu of these requirements, the operating
partnerships acquired the Accor S.A. properties for the benefit of the
holder of the Class A Units. The holder of the Class A Units does, however,
continue to have the right, under certain limited circumstances which the
Companies do not anticipate will occur, to cause the operating partnerships
to purchase the Class A Units at the premium as described above. The terms
of the Class A Units were also modified to eliminate the $2,500,000
aggregate liquidation preferences to which the holder of the Class A Units
was previously entitled ($1,015,148 in the case of the Operating
Partnership).
The holder of the Class A Units has the right to require the operating
partnerships to acquire other properties for its benefit at an aggregate
cash cost to the operating partnerships of $2,500,000 (approximately
$1,015,000 of which would be paid by the Operating Partnership). In that
event the Accor S.A. properties would not be held for the benefit of the
holder of the Class A Units and would be disposed of as part of the
liquidation of the Companies.
15
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SUBSEQUENT EVENTS
On April 16, 2003, Tri-Columbus Associates, a joint venture in which the
Corporation indirectly owns a 20.66% interest, entered into a contract to
sell its building in Grove City, Ohio for a gross sales price of
$4,090,000. The closing of the sale, if at all, is expected to occur in
early June 2003.
On April 29, 2003, Century Park I Joint Venture, a joint venture in which
the company held a 50% interest, sold its only property located in San
Diego, California for a gross sales price of $29,750,000. The loan
encumbering this property required that a payment of $20,000,000 be made to
pay down the loan. After the required paydown, closing adjustments and
other closing costs, net proceeds were approximately $9,400,000 of which
the Operating Partnership was allocated $4,700,000. The joint venture
anticipates an accounting gain of approximately $20,000,000 of which 50%
will be allocated to the Corporation.
16
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
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 II, 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 II, 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.
ORGANIZATION
Shelbourne Properties II, Inc., a Delaware corporation (the
"Corporation") was formed on April 17, 2001. The Corporation's
wholly-owned operating partnership, Shelbourne Properties II L.P., a
Delaware limited partnership (the "Operating Partnership", and together
with the Corporation, the "Company"), holds directly and indirectly all
of the Company's properties. Pursuant to a merger that was consummated
on April 17, 2001, the Operating Partnership became the successor by
merger to High Equity Partners, L.P.- Series 86 (the "Predecessor
Partnership").
In August 2002, the Board of Directors adopted a Plan of Liquidation
(the "Plan of Liquidation") and directed that the Plan of Liquidation be
submitted to the Corporation's stockholders for approval. The
stockholders of the Corporation approved the Plan of Liquidation at a
Special Meeting of Stockholders held on October 29, 2002. The Plan of
Liquidation contemplates the orderly sale of all of the Corporation's
assets for cash or such other form of consideration as may be
conveniently distributed to the Corporation's stockholders and the
payment of (or provision for) the Corporation's liabilities and
expenses, as well as the establishment of a reserve to fund the
Corporation's contingent liabilities. The Plan of Liquidation gives the
Corporation's Board of Directors the power to sell any and all of the
assets of the Corporation without further approval by the stockholders.
Since the adoption of the Plan of Liquidation, the Company has sold its
properties located in Raleigh, North Carolina and Melrose Park, Illinois
and its joint venture properties located in Hilliard, Ohio, New York,
New York, and San Diego, California. As a result, the remaining assets
of the Company are an office building located in Richmond, Virginia, a
shopping center in Matthews, North Carolina, 50% interest in an office
building in Seattle, Washington and a 20.66% interest in two industrial
buildings in the Columbus, Ohio area. In addition, the Company holds a
40.46% interest in a joint venture that holds 20 motel properties for
the benefit of the Class A Unitholder. See "The Accotel Transaction"
below.
The Corporation currently expects that the liquidation will be
substantially completed not later than October 29, 2004, although there
can be no assurance in this regard. As a result, it is currently
anticipated that not later than October 29, 2004, any then remaining
assets and liabilities will be transferred to a liquidating trust. With
the transfer to a liquidating trust, the liquidation will be completed
for federal and state income tax purposes, although one or more
distributions of the remaining cash and net proceeds from future asset
sales may occur subsequent to the establishment of a liquidating trust.
17
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
THE TRANSACTION
On February 14, 2002, the Corporation, Shelbourne Properties I, Inc. and
Shelbourne Properties III, Inc. (the "Companies") consummated a transaction (the
"Transaction") whereby the Corporation purchased the 343,124 shares of the
Corporation's common stock held by subsidiaries of Presidio Capital Investment
Company ("PCIC") and the Advisory Agreement was contributed to the Operating
Partnership. Pursuant to the Transaction, the Corporation paid PCIC $17,866,603
in cash and the Operating Partnership issued preferred partnership interests
with an aggregate liquidation preference of $1,015,148 and a note in the amount
of $22,034,250.
THE ACCOTEL TRANSACTION
In connection with the Transaction, the Operating Partnership issued the Class A
Units to Shelbourne Management. Pursuant to the terms of the Purchase and
Contribution Agreement in which the Class A Units were issued, the holder of the
Class A Units had the right to cause the Operating Partnership to purchase the
Class A Units at a substantial premium to their liquidation value ($6,605,000 at
the January 15, 2003) unless the Operating Partnership, together with the
operating partnerships of Shelbourne Properties I, Inc. and Shelbourne
Properties III, Inc. collectively, the "Shelbourne OPs") maintained at least
approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the case of
the Operating Partnership) guaranteed by the holder of the Class A Units and
secured by assets having an aggregate market value of at least approximately
$74,800,000 ($30,400,000 in the case of the Operating Partnership) (the "Debt
and Asset Covenant"). These requirements significantly impaired the ability of
the Corporation to sell its properties and pay dividends in accordance with the
Plan of Liquidation.
Accordingly, in a transaction (the "Accotel Transaction") designed to facilitate
the liquidation of the Corporation and provide dividends to stockholders, on
January 15, 2003, a joint venture owned by the Shelbourne OPs acquired from
Realty Holdings of America, LLC, an unaffiliated third party, a 100% interest in
an entity that owns 20 motel properties triple net leased to an affiliate of
Accor S.A. The cash purchase price, which was provided from working capital, was
$2,668,272, of which $867,806, $1,079,675 and $720,791 was paid by Shelbourne
Properties I L.P., the Operating Partnership and Shelbourne Properties III L.P.,
respectively. The properties were also subject to existing mortgage indebtedness
in the principal amount of approximately $74,220,000.
The Accor S.A. properties were acquired for the benefit of the holder of the
Class A Units as they provide sufficient debt to be guaranteed by the holder of
the Class A Units. Except as indicated below, the Class A Unitholder will
ultimately be the sole owner of the joint venture. In connection with the
Accotel Transaction, the terms of the Class A Units were amended to (i)
eliminate the liquidation preferences (as the cost of the interest in the Accor
S.A. properties which was borne by the Shelbourne OPs satisfied the liquidation
preference) and (ii) eliminate the Debt and Asset Covenant. The holder of the
Class A Units does, however, continue to have the right, under certain limited
circumstances which the Companies do not anticipate will occur, to cause the
Shelbourne OPs to purchase their respective Class A Units at the premium
described above. These circumstances include the occurrence of the following
while any of the Class A Units are outstanding; (i) the filing of bankruptcy by
a Shelbourne OP; (ii) the failure of a Shelbourne OP to be taxed as a
partnership; (iii) the termination of the Advisory Agreement; (iv) the issuing
of a guaranty by any of the Companies on the debt securing the Accor S.A.
properties; or (v) the taking of any action with respect to the Accor S.A.
properties without the consent of the Class A Unitholder.
The holder of the Class A Units has the right, which right must be exercised by
no later than July 28, 2004, to require that the Shelbourne OPs acquire other
properties for the Class A Unitholder's benefit at an aggregate cash cost to the
Shelbourne OPs of not more than $2,500,000 (approximately $1,015,000 of which
would be paid by the Operating Partnership). In that event, the Accor S.A.
properties would not be held for the benefit of the holder of the Class A Units
and the Companies would seek to dispose of these properties as part of the
liquidation of the Companies. Accordingly, if the Class A Unitholder were to
exercise this option, there is a risk that the Companies interest in the Accor
S.A. properties could not be sold for their original purchase price.
The foregoing description of the transaction does not purport to be complete,
and is qualified in its entirety by reference to the Purchase Agreement (and all
exhibits thereto) dated as of January 15, 2003, the Modification Agreement,
dated as of January 15, 2003 and the Amended and Restated Partnership Unit
Designation, copies of
18
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
which are attached as exhibits to the Corporation's Current Report on Form 8-K
filed on January 16, 2003, which are incorporated herein by reference.
THE PLAN OF LIQUIDATION- PROPERTY SALES
On October 29, 2002, the Corporation's stockholders approved the Plan of
Liquidation. Accordingly the Corporation began selling its properties. Since the
adoption of the Plan of Liquidation, the Company has sold the following
properties.
Sutton Square. On December 20, 2002, Shelbourne Raleigh Company LLC, a limited
liability company wholly-owned by the Operating Partnership, sold its property
located in Raleigh, North Carolina commonly referred to as Sutton Square for a
gross purchase price of $16,750,000. After satisfying the loan encumbering the
property of $6,000,000, adjustments for taxes and rents and a credit to the
purchaser for improvements, as well as closing costs, net proceeds to the
Operating Partnership were approximately $10,000,000.
TMR Warehouse, Hilliard, Ohio. On January 31, 2003, the Hilliard, Ohio,
property, which was owned by Tri-Columbus Associates, a joint venture in which
the Corporation held a 20.66% interest, was sold for a gross sales price of
$4,600,000. After satisfying the debt encumbering the property of $2,300,000 (of
which the Corporation was responsible for $475,180), closing adjustments and
other closing costs, net proceeds were $2,063,553, $426,330 of which is
attributable to the Corporation's interest. The joint venture recognized no gain
or loss on the sale as the joint venture's property was previously written down
to its net realizable value.
568 Broadway. On February 28, 2003, 568 Broadway Joint Venture, a joint venture
in which the Corporation indirectly held a 38.925% interest, sold its property
located at 568 Broadway, New York, New York for a gross sales price of
$87,500,000. After assumptions of the debt encumbering the property (see above),
closing adjustments and other closing costs, net proceeds were approximately
$73,000,000 of which approximately $28,415,250 was allocated to the Operating
Partnership. The joint venture recognized an accounting gain of $67,746,480 of
which $26,702,093 was attributable to the Corporation.
Melrose Park. Also on February 28, 2003, the Corporation sold its property
located in Melrose Park, Illinois for a gross purchase price of $3,247,200. The
Corporation received proceeds of $3,125,632 after closing costs. After closing
adjustments, net proceeds were $2,934,617. The Corporation realized an
accounting gain of $846,203.
RECENT DEVELOPMENTS
On April 16, 2003, Tri-Columbus Associates, a joint venture in which the
Corporation indirectly owns a 20.66% interest, entered into a contract to sell
its building in Grove City, Ohio for a gross sales price of $4,090,000. The
closing of the sale, if at all, is expected to occur in early June 2003.
On April 29, 2003, Century Park I Joint Venture, a joint venture in which the
company held a 50% interest, sold its only property located in San Diego,
California for a gross sales price of $29,750,000. The loan encumbering this
property required that a payment of $20,000,000 be made to pay down the loan.
After the required paydown, closing adjustments and other closing costs, net
proceeds were approximately $9,400,000 of which the Operating Partnership was
allocated $4,700,000. The joint venture anticipates an accounting gain of
approximately $20,000,000 of which 50% will be allocated to the Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its working capital reserves and any cash from operations as
its primary source of liquidity. In addition, on February 20, 2003, in a
transaction designed to provide flexibility to the Corporation, Shelbourne
Properties II, Inc. and Shelbourne Properties III, Inc. (collectively, the
"Companies") in implementing their respective plans of liquidation and enable
them to distribute 100% of the net proceeds from the sale of the New York, New
York property, direct and indirect subsidiaries (the "Borrowers") of each of the
Companies entered into a Loan Agreement with Fleet National Bank, as agent for
itself and other lenders ("Fleet") pursuant to which the Borrowers obtained a
$55,000,000 loan (the "Loan"). The Companies believed that by entering into a
single loan transaction instead of three separate loan transactions they were
able to obtain a larger loan at a more favorable
19
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
interest rate. The Loan bears interest at the election of the Borrowers at a
rate of either LIBOR plus 2.75% or Fleet's prime rate (but not less than 5%)
plus 1%. At present the Borrowers have elected that the Loan bear interest at
LIBOR plus 2.75%. The Loan matures on February 19, 2006, subject to two one year
extensions. The Loan is prepayable in whole or in part at anytime without
penalty or premium.
At March 31, 2003, the outstanding balance due on the Loan was $55,000,000, of
which $22,081,542 was allocable to the Company and the interest rate on the Loan
was 4.09%. The outstanding principal balance was subsequently reduced by $20
million on April 29, 2003 in connection with the sale of property jointly owned
by the Corporation and Shelbourne Properties I, Inc.
At March 31, 2003, the Loan is secured by mortgages on the Company's Richmond,
Virginia property; Matthews, North Carolina property, the property held by
Century Park I Joint Venture; Seattle Landmark Joint Venture and the properties
held by Tri-Columbus Associates, as well as certain other real properties owned
indirectly by Shelbourne Properties I, Inc. and Shelbourne Properties III, Inc.
The Borrowers are jointly and severally liable for the repayment of the amounts
due under the Loan and the Operating Partnership and the Corporation (as well as
the other operating partnerships and Companies) have guaranteed the repayment of
the Loan. A portion of the Loan proceeds, as well as the balance of a note in
the amount of $10,000,000 secured by the 568 Broadway property, were used to
satisfy the Credit Facility that had a balance due of $37,417,249 of which the
Corporation was responsible for $23,304,163.
Since the Borrowers are jointly and severally liable for the repayment of the
entire principal, interest and other amounts due under the Loan, the Borrowers,
the Companies and the operating partnerships have entered into Indemnity,
Contribution and Subrogation Agreements, the purpose and intent of which was to
place the operating partnerships in the same position (as among each other) as
each would have been had the lender made three separate loans, one to each of
the operating partnerships; each of which loans would have been in a smaller
amount than the Loan, would have been the obligation/liability only of the
operating partnership to which it was made and would have been secured only by
certain of such operating partnership's assets.
The Company had $5,026,437 in cash and cash equivalents at March 31, 2003 of
which $2,641,114 was classified as restricted cash. 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 $5,872,058 for the
three months ended March 31, 2003 as compared to December 31, 2002. As discussed
further below, the decrease resulted from $41,528,734 of cash used in financing
activities offset by $33,633,529 of cash provided by operating activities and
$2,023,147 of cash provided by investing activities.
In addition to the cash and cash equivalents reported at March 31, 2003, the
Corporation's joint ventures held cash at March 31, 2003 of which the
Corporation's allocable share was $694,082.
Currently, the Corporation's primary sources of funds are rents collected from
tenants, distributions from its joint venture investments and proceeds from
property sales. Rents collected from tenants for the three months ended March
31, 2003 amounted to $678,367 as compared to $1,102,554 for the three months
ended March 31, 2002. This is due to the sale of Sutton Square in December 2002
and Melrose Crossing I on February 28, 2003.
Cash provided from investing activities were a result of the proceeds from the
sale of Melrose Crossing of $3,125,632 that were offset by the investment in
Accotel of $1,079,675 and by improvements to real estate at Commerce Plaza of
$21,010 and $1,800 at Melrose Crossing I prior to its sale.
Cash used in financing activities consisted of the dividends paid to
stockholders of $39,818,244, preferred dividends in the amount of $12,689 and
the payoff of the Credit Facility which was funded by proceeds generated from
the sale of Hilliard, Ohio of $475,180 and Fleet Loan proceeds of $22,081,542.
20
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
RESULTS OF OPERATIONS
Three months ended March 31, 2003 vs. March 31, 2002
Net income
The Corporation's net income increased by $50,590,162 to a net income of
$27,804,064 for the three month's ended March 31, 2003 from a net loss of
$22,786,098 for the three months ended March 31, 2002. The increase was due to a
decrease in expenses and increases in gain on sale and equity income from joint
ventures partially offset by a decrease in rental revenue and an increase in
interest expense. The Corporation's net loss before equity income from joint
ventures, interest and other income and net gain on sale of real estate was
$238,405 for the three months ended March 31, 2003 as compared to a net loss of
$23,697,931 for the three months ended March 31, 2002.
Gain on Sale
The gain on sale of $846,203 for the three months ended March 31, 2003 was due
to the sale of Melrose Crossing I during the three months ended March 31, 2003.
Rental Revenue
Rental revenues decreased $421,323, or approximately 35%, to $779,401 for the
three months ended March 31, 2003 from $1,200,724 for the three months ended
March 31, 2002 due to the sale of Sutton Square in December 2002 and Melrose
Crossing on February 28, 2003. Income for the three months ended March 31, 2003
included $121,917 related to Sutton Square common area maintenance recoveries
from tenants and percentage rent, compared to Sutton Square's full operations
during the three months ended March 31, 2002 which generated $547,568 in
revenues. The $425,651 decrease was slightly offset by Matthews Festival and
Commerce Plaza combined rental revenue increasing by $47,696. In addition, the
sale of Melrose Crossing I resulted in a further decrease in rental revenue of
$43,278 due to only having two months of operation in 2003 as compared to three
months in 2002.
Costs and Expenses
Costs and expenses for the three months ended March 31, 2003 amounted to
$1,017,806, representing a decrease of $23,880,849 from the same period in 2002.
The decrease is due principally to expenses incurred in 2002 of $23,049,398
associated with the purchase of the Advisory Agreement that was consummated on
February 14, 2002. The remaining expenses from 2002 amounted to $1,849,257.
Therefore, without giving effect to the costs incurred in 2002 for the Advising
Agreements, expenses decreased by $831,451 for three months ended March 31, 2003
compared with the same period in 2002. The decrease is primarily due to reduced
administrative expenses, the cessation of depreciation and amortization and
reduction of the asset management fees to $200,000 per year. The sale of Sutton
Square in December 2002 and the sale of Melrose Crossing February 2003 also
contributed to the decrease in costs and expenses.
Operating expenses increased by $277,435 primarily due to the of expensing of
Matthews Festival and Seattle Tower's additions as to not effect the net
realizable value of the properties due the Corporation being in the liquidation
process of $312,289. This increase in expense was partially offset by the sale
of Sutton Square in December 2002 and Melrose Crossing in February 2003.
Pursuant to the Plan of Liquidation which was adopted October 29, 2002,
depreciation and amortization expenses ceased as of that date. Therefore for the
Corporation incurred no depreciation and amortization for the three months ended
March 31, 2003 as compared to $297,665 for the same period in 2002. Partnership
asset management fees decreased to $50,000 for the three months ended March 31,
2003 from $199,232 for the same period in 2002. In 2002, prior to the
Transaction, the fees were based on 1.25% of gross asset value of the
Corporation, which amounted to $157,582 during 2002, and after the Transaction,
there was a flat fee of $27,778 per month which amounted to $41,650 for the
balance of the first quarter of 2002. Effective October 1, 2002, the asset
management fee payable by the Corporation was reduced to $50,000 per quarter.
21
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
Administrative costs decreased to $228,725 for the three months ended March 31,
2003 from $877,392 for the same period in 2002. This reduction is due to the
costs not incurred in 2003 that were incurred in 2002 in connection with the
Transaction to purchase the Advisory Agreements. Property Management fees
decreased to $19,662 from $32,984 for the periods ending March 31, 2003 and 2002
respectively. The decrease is due to the sale of Sutton Square in December 2002
and Melrose Crossing I in February 2003.
Non-Operating Income and Expenses
Income from investments in joint ventures increased by $26,414,189 to
$27,408,546 for the three months ended March 31, 2003 as compared to $994,357
for the three months ended March 31, 2002. This is primarily due to 568 Broadway
Joint Venture, in which the Corporation indirectly held a 38.925% interest,
selling its property on February 28, 2003. The joint venture recognized a gain
on sale of $67,746,480 of which $26,702,093 was allocated to the Corporation.
Excluding the gain on sale, the Corporation experienced a decrease in equity
income from 568 Broadway Joint Venture for the three months ended March 31, 2003
as compared to the three months ended March 31, 2002 of $483,680 due to the sale
of the entity on February 28, 2003.
The Corporation's other three investments in joint ventures, Century Park I JV,
Seattle Landmark Joint Venture and Tri-Columbus associates, excluding the sale
of the Hilliard, Ohio property, experienced a combined increase in equity income
of $195,776 for the three months ended March 31, 2003 as compared to the same
period in 2002. This increase is primarily due to the cessation of depreciation
and amortization expenses in accordance with liquidation accounting.
During the first quarter of 2003, interest expense amounted to $223,282, which
consisted of $122,929 paid in connection with the Credit Facility and $100,353
incurred in connection with the Loan, as compared to $127,757 for the first
quarter 2002. The interest in 2002 was incurred on the notes issued to
Shelbourne Management in connection with the purchase of the Advisory Agreements
on February 14, 2002.
Interest income decreased to $23,691 during the three months ended March 31,
2003 from $51,030 during the three months ended March 31, 2002 due to lower cash
balances being invested.
The Corporation experienced no other income for the three months ended March 31,
2003 as compared to $548 for the three months ended March 31, 2002.
Inflation
Inflation is not expected to have a material impact on the operations or
financial position of Company.
22
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk we face is interest rate sensitivity. Our
long-term debt bears interest at a floating rate, and therefore we are
exposed to the risk of interest rate changes. At May 10, 2003,
borrowings under our secured loan totaled $22,081,542 and initially bore
an interest rate of LIBOR plus 2.75%. Based on the balance outstanding
on our credit facility at May 12, 2003 and the interest rate at that
date, a 10% increase in LIBOR would increase our interest expense in
2003 by approximately $29,589. Conversely, a 10% decrease in LIBOR would
decrease our interest expense in 2003 by the same amount. The gain or
loss we ultimately realize with respect to interest rate fluctuations
will depend on the actual interest rates during that period. We do not
believe that we have any risk related to derivative financial
instruments.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer have,
within 90 days of the filing date of this quarterly report, evaluated
the effectiveness of the Corporation'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 Corporation'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.
23
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached Exhibit
Index.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed on behalf of the Registrant
during the quarter ended March 31, 2003:
(i) Acquisition of Accotel Properties.
Item reported: 2
Dated filed: January 16, 2003
(ii) Sale of Hilliard, Ohio Property.
Item reported: 2
Dated filed: February 4, 2003
(iii) Fleet Loan.
Item reported: 5
Dated filed: February 24, 2003
(iv) Sale of New York, New York and Melrose, Illinois Properties.
Issuance of Dividend.
Item reported: 5
Dated filed: March 3, 2003
24
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
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 II, Inc.
(Registrant)
Dated: May 14, 2003 By: /S/ Michael L. Ashner
-------------------------
Michael L. Ashner
Chief Executive Officer
25
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
CERTIFICATIONS
I, Michael L. Ashner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties
II, 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
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: May 14, 2003 /s/ Michael L. Ashner
---------------------------
Michael L. Ashner
Chief Executive Officer
26
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
CERTIFICATIONS
I, Carolyn B. Tiffany, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties,
II 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
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: May 14, 2003 /s/ Carolyn B. Tiffany
---------------------------
Carolyn B. Tiffany
Chief Financial Officer
27
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
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 Limited Partnership of the operating partnership (1)
4.2 Stockholder Rights Agreement (1)
4.3 Amendment to Stockholder Rights Agreement (2)
4.4 Restated Partnership Unit Designation for 5% Class A Preferred (9)
Partnership Units (incorporated by reference to Exhibit E-1 of Exhibit 10.4)
4.5 Stockholder Agreement, among the Companies and (3)
HX Investors, LP and Exeter Capital Corporation, dated as of April 30, 2002
4.6 Amendment No. 2 to Stockholder Rights Agreement (5)
4.7 Partnership Unit Designation of the Class B Partnership Units of the Operating Partnership (8)
10.1 Settlement Agreement and Mutual Release between
HX Investors, the Companies and Shelbourne Management (4)
10.2 Amendment No. 1 to Settlement Agreement (6)
10.3 Purchase Agreement, dated as of January 15, 2003, (9)
between the Shelbourne JV LLC and Realty Holdings of America, LLC
10.4 Agreement, dated as of January 15, 2003, among . (9)
Presidio Capital Investment Company, LLC (and certain of its subsidiaries),
Shelbourne Management, NorthStar Capital Investment Corp., each of the
Shelbourne REITs and its operating partnership and HX Investors, L.P
10.5 Loan Agreement, dated as of February 19, 2003, among Shelbourne Properties I L.P., (10)
Shelbourne Properties II L.P., Shelbourne Properties III L.P., Shelbourne Richmond
Company LLC, Shelbourne Matthews Company LLC, Shelbourne
Las Vegas Company LLC, Century Park I Joint Venture, Seattle Landmark
Joint Venture, Tri-Columbus Associates and Fleet National Bank and the other
lending institutions which may become party thereto and Fleet National Bank, as agent
10.6 Form of Guaranty, dated as of February 19, 2003, from Shelbourne Properties III, Inc. and (10)
Shelbourne Properties III L.P.
10.7 Form of Indemnity, Contribution and Subrogation Agreement, dated as of February (10)
19, 2003, among the REITs and the operating partnerships
10.8 Form of Deed of Trust, Assignment of Leases and Rents, Security Agreement (10)
and Fixture Filing with respect to the Collateral Properties dated as of February 19, 2003
in favor of Fleet National Bank
10.9 Cash Management Agreement, dated February 19, 2003, among Shelbourne Properties (10)
I L.P., Shelbourne Properties II L.P., Shelbourne Properties III L.P., Fleet National Bank,
as agent for itself and the Lenders, and various subsidiaries of the Shelbourne OP's listed
on Exhibit A thereto
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30
- ------------------
(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.
28
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- MARCH 31, 2003
(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
(8) incorporated by reference to the Quarterly Report on Form 10-Q of the
Company filed on November 14, 2002.
(9) incorporated by reference to the Current Report of the Company on Form 8-K
filed on January 15, 2003.
(10) incorporated by reference to the Current Report of the Company on Form 8-K
filed on February 24, 2003.
29