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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, 2003
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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Indicated by check whether registrant is an accelerated filer (as identified in
Rule 12b-2 of the Exchange Act). Yes No X
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As of November 12, 2003, there were 839,286 shares of common stock outstanding.
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SHELBOURNE PROPERTIES I, INC.
FORM 10Q-SEPTEMBER 30, 2003
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Statements of Net Assets (Liquidation Basis) as of
September 30, 2003 and December 31, 2002........................................... 3
Consolidated Statements of Operations and Changes in Net Assets
for the Three and Nine months Ended September 30, 2003 (Liquidation Basis) and
Consolidated Statements Operations for the Three and Nine months Ended
September 30, 2002 (Going Concern Basis)........................................... 4
Consolidated Statements of Cash Flows for the
Nine months Ended September 30, 2003 (Liquidation Basis) and
the Nine months Ended September 30, 2002 (Going Concern Basis)..................... 5
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 18
Item 3. Quantitative and Qualitative Disclosure about Market Risk........................... 26
Item 4. Controls and Procedures............................................................. 26
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders................................. 27
Item 6. Exhibits and Reports on Form 8-K.................................................... 27
Signatures..................................................................................... 28
2
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF NET ASSETS (LIQUIDATION BASIS)
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
ASSETS
Real estate held for sale $ 9,270,625 $ 30,341,402
Investments in joint ventures 10,345,652 57,791,273
Cash and cash equivalents, of which $1,326,101 is
restricted cash at September 30, 2003 1,506,871 550,061
Other assets 531,539 359,699
Receivables, net 41,336 166,723
--------------- ---------------
Total Assets 21,696,023 89,209,158
--------------- ---------------
LIABILITIES
Accounts payable and accrued expenses 905,221 386,903
Credit Facility - 23,832,274
Fleet Loan 7,495,084 -
Reserve for estimated costs during the period of liquidation 895,767 1,300,000
Deferral of gains and incentive fee on real estate assets and joint
ventures 7,588,403 52,537,883
COMMITMENTS AND CONTIGENCIES (Notes 8, 10)
CLASS B Partnership Interests -- -
CLASS A 5% Preferred Partnership Interests, at liquidation value -- 812,674
--------------- ---------------
Total Liabilities 16,884,475 78,869,734
--------------- ---------------
NET ASSETS IN LIQUIDATION $ 4,811,548 $ 10,339,424
=============== ===============
See notes to consolidated financial statements.
3
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN
NET ASSETS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
(LIQUIDATION BASIS) AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
(GOING CONCERN BASIS)
(UNAUDITED)
For the Three Months Ended For the Nine months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
Rental revenues $ 328,098 $ 914,766 $ 1,738,680 $ 3,392,446
------------ ------------ ------------ ------------
Costs and expenses
Operating expenses 92,090 387,474 460,740 1,201,084
Depreciation and amortization -- 263,082 -- 697,004
Asset management fee 50,000 -- 150,000 135,805
Transition management fees -- 83,300 -- 208,250
Purchase of advisory agreements -- -- -- 18,452,133
Administrative expenses 228,697 688,257 792,862 3,731,224
Property management fee 9,024 27,412 53,947 98,699
------------ ------------ ------------ ------------
379,811 1,449,525 1,457,549 24,524,199
------------ ------------ ------------ ------------
Income (loss) before equity income from joint ventures,
gain on sale of real estate, interest and other income (51,713) (534,759) 281,131 (21,131,753)
Equity income from joint ventures 209,309 1,050,495 37,398,925 2,858,674
Gain on sale of real estate -- -- 9,285,661 --
Interest expense (75,816) (254,333) (317,571) (596,335)
Interest income 6,994 11,953 33,168 39,760
Other income -- 1,927 9,193 5,878
------------ ------------ ------------ ------------
Net income (loss) 88,774 275,283 46,690,507 (18,823,776)
Preferred dividends (10,384) (10,384) (30,814) (25,735)
Class B Unitholder distributions (444,328) -- (722,551) --
------------ ------------ ------------ ------------
Net income (loss) available for common shareholders $ (365,938) $ 264,899 45,937,142 $(18,849,511)
============ ============ ============ ============
Net assets at January 1, 2003 10,339,424
Liquidating dividends - common (51,465,018)
------------
Net assets in liquidation at September 30, 2003 $ 4,811,548
============
Earnings (loss) per share - basic and diluted $ (0.44) $ 0.32 $ 54.73 $ (20.73)
============ ============ ============ ============
Weighted average common shares 839,286 839,286 839,286 909,160
============ ============ ============ ============
See notes to consolidated financial statements.
4
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (LIQUIDATION BASIS) AND
SEPTEMBER 30, 2002 (GOING CONCERN BASIS)
(UNAUDITED)
For the Nine months Ended
September 30,
--------------------------------
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 46,690,507 $(18,823,776)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization -- 697,004
Straight-line adjustment for stepped lease rentals -- 18,984
Change in bad debt reserve 25,665 76,882
Purchase of advisory agreement -- 18,452,133
Distributions in excess of earnings from joint ventures 10,308,348 4,489,125
Gain on sale of real estate (9,285,661) --
Change in assets and liabilities:
Receivables 151,052 (107,205)
Other assets (171,840) (1,179,056)
Accounts payable and accrued expenses (317,752) 326,921
Accrued interest 23,396 --
------------ ------------
Net cash provided by operating activities 47,423,715 3,951,012
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Improvements to real estate (222,381) (85,144)
Investment in Accotel (867,806) --
Proceeds from sale of real estate 23,178,855 --
------------ ------------
Net cash provided by (used in) investing activities 22,088,668 (85,144)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock -- (14,303,060)
Proceeds from Fleet Loan 17,495,084 --
Paydown of Fleet Loan (10,000,000) --
Proceeds from Credit Facility -- 23,832,274
Paydown of Credit Facility from sales proceeds (22,981,815) --
Payoff of Credit Facility (850,459) --
Payoff note payable from Transaction -- (17,639,459)
Class B Unitholder distributions (722,551) --
Dividends paid (51,465,018) --
Distributions paid Class A Unitholder (30,814) --
------------ ------------
Net cash used in financing activities (68,555,573) (8,110,245)
------------ ------------
Increase (decrease) in cash and cash equivalents 956,810 (4,244,377)
Cash and cash equivalents, beginning of period 550,061 6,882,749
------------ ------------
Cash and cash equivalents, end of period $ 1,506,871 $ 2,638,372
============ ============
Supplemental disclosure of cash flow information-
Cash paid for interest $ 294,175 $ 596,335
============ ============
See notes to consolidated financial statements.
5
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Shelbourne Properties I, Inc., a Delaware corporation (the "Corporation"),
was formed on April 18, 2001. The Corporation's wholly-owned operating
partnership, Shelbourne Properties I 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 18, 2001, the Operating
Partnership became the successor by merger to Integrated Resources High
Equity Partners, Series 85, a California Limited Partnership, (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.
Due to the adoption by the shareholders of the Plan of Liquidation on
October 29, 2002, the Corporation will be required to transfer any
remaining assets on or prior to October 29, 2004 to a liquidating trust in
order to avoid adverse tax consequences. In addition, the holder of the
Class A Units is presently entitled to require the Operating Partnership to
purchase the Class A Unit at a premium if a Class A Trigger Event occurs
(as defined in Note 9) at any time prior to October 29, 2004 (which would
occur if the assets were transferred to a liquidating trust). The
Corporation is presently negotiating with the holder of the Class A Units
to shorten this time frame. If the Corporation is successful in its
negotiations, it is expected that the Corporation will transfer its
remaining assets to a liquidating trust as early as April 2004, thereby
eliminating the expenses associated with a public corporation. There can be
no assurance that the Corporation will be successful in its negotiations
with the Class A Unitholder. Finally, if the Corporation is successful in
liquidating all of its assets prior to October 29, 2004 or such earlier
date as may be permitted without incurring additional expense, the
Corporation will make a final distribution and its affairs will be wound up
without utilization of a liquidating trust.
At such time as the assets of the Company are distributed to a liquidating
trust, which could be as early as the second quarter 2004, the interests in
such trust will be non-transferrable. Accordingly, investors will not be
able to sell their interests in the liquidating trust but will receive
distributions from the liquidating trust as the remaining assets are
liquidated.
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
6
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
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 September 30, 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 I 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.
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 the
properties located in Ft. Lauderdale, Florida (note 4), New York, New York
(note 5) and San Diego, California (note 5), the valuation of investments
in joint ventures and real estate held for sale have been adjusted to
reflect the remaining estimated costs of carrying out the liquidation as of
September 30, 2003. Further adjustments were included in the September 30,
2003 Consolidated Statement of Changes in Net Assets. The valuation is
based on current contracts, estimates as determined by independent
appraisals or other indications of sales value, net of estimated selling
costs and capital expenditures anticipated during the liquidation period.
The valuations of other assets and liabilities are based on management's
estimates as of September 30, 2003. During the nine months ended September
30, 2003 the deferred gain was increased by $610,649 to reflect revisions
to the carrying value of real estate and joint ventures. The actual values
realized for assets and settlement of liabilities may differ materially
from amounts estimated.
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 distribution payments to the Class B Unitholder associated with the
adjustment in value of these real estate properties have been deferred
until such time as a sale occurs. During the nine months ended September
30, 2003, the Corporation recognized actual gains of $9,285,661 on the sale
of real estate and $36,611,052 included in equity income from joint
ventures attributable to real estate sales. As a result of those sales, the
Corporation reduced the deferred gains by $45,560,129.
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 accrued costs do not include costs incurred in connection with
ordinary operations.
The reserve for additional costs associated with liquidation was reduced
from $1,300,000 at December 31, 2002 to $895,767 at September 30, 2003 as a
result of professional costs associated with obtaining the Fleet Loan of
$387,565 and tax planning costs of $16,668 paid to an affiliate of Presidio
Capital Investment Company, LLC in connection with the Accotel transaction
(see note 10).
7
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
$52,106 and $26,441 as of September 30, 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 $254,181 of deferred straight-line
rent was included in other assets that was 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.
INVESTMENTS IN JOINT VENTURES
Certain properties are or were owned in joint ventures with Shelbourne
Properties II 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, reflect the equity method of accounting. Subsequent to the adoption
of the liquidation basis of accounting, the valuations of investments in
joint ventures were adjusted to net realizable value.
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.
8
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Upon the adoption of the liquidation basis of accounting, deferred loan
fees of $700,832 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 September 30, 2003 and December 31, 2002 reasonably approximate the fair
values for cash and cash equivalents, other assets, receivables, accounts
payable, accrued expenses and notes 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 their fair value. In making such assessments, 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 paid 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. There are no potentially
dilutive securities outstanding so basic and diluted earnings per share are
the same for all periods presented.
DIVIDENDS PER SHARE
On January 13, 2003, the Board of Directors declared a dividend of $3.50
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 $52.00
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 sale of the New York, New York property, as well as cash reserves.
On June 19, 2003, the Board of Directors declared a dividend of $2.82 per
share. The dividend was paid on July 9, 2003 to the shareholders of record
at the close of business on June 30, 2003. The stockholders' Priority
Return
9
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS PER SHARE (CONTINUED)
(defined in note 8 below) as of July 9, 2003 was $0.94 per share, which was
satisfied on that date. Consequently, the Class B Unitholder, which is
entitled to receive distributions only after the satisfaction of the
Priority Return, was paid a distribution of $278,223 on July 9, 2003. All
of the Class B Units are held by HX Investors, L.P. ("HX Investors"), an
affiliate of the Corporation's current Chief Executive Officer.
On August 1, 2003 the Corporation's Board of Directors declared a dividend
of $3.00 per share. The dividend was paid on August 21, 2003 to its
shareholders of record at the close of business on August 11, 2003. The
dividend was paid out of the Corporation's cash reserve.
The Class B Unitholder, HX Investors, was paid a distribution in the amount
of $444,328 on August 21, 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("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, effective for fiscal
years beginning after May 15, 2002. This statement had no effect on the
Corporation's consolidated financial statements.
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. 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." This 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 were 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 interests 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 on December
31, 2003. The Corporation does not expect that this will have an impact on
the Corporation's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative
10
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The Corporation does not expect that this statement
will have an impact on the Corporation's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
The statement improves the accounting for certain financial instruments
that under previous guidance, issuers could account for as equity. The new
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects the issuer's
accounting for three types of freestanding financial instruments. One type
is mandatorily redeemable shares, which the issuing company is obligated to
buy back in exchange for cash and other assets. A second type, which
includes put options and forward purchase contracts, involves instruments
that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominately
to a variable such as a market index, or varies inversely with the value of
the issuer's shares. SFAS No. 150 does not apply to features embedded in a
financial instrument that is not a derivative in its entirety. In addition
to its requirements for the classification and measurement of financial
instruments in its scope, SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the
guidance in SFAS No. 150 is effective for all financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Corporation does not expect that this statement will have an impact on the
Corporation's financial statements.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
During the three and nine months ended September 30, 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 Corporation's current Chief Executive Officer.
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 asset management fee, payable quarterly,
equal to 1.25% of the gross asset value 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 (the "Transition Management Fee"). Both Shelbourne
Management and PCIC were affiliates of the then management of the
Corporation.
11
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
ASSET MANAGEMENT SERVICES (CONTINUED)
Effective October 1, 2002, as contemplated by 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, which will continue until the Corporation is liquidated. Following
the liquidation of the Corporation, any amounts payable for asset
management fees will be determined by the trustee of the liquidating trust.
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 September 30, 2003 by Kestrel and during the three months
ended September 30, 2002 by PCIC as described above.
PROPERTY MANAGEMENT SERVICES
The Operating Partnership has contracted with affiliates to provide
Property Management Services pursuant to agreements that provide for a fee
of 3% of cash receipts. Kestrel provided Property Management Services
during the three and nine months ended September 30, 2003 and 2002. All
numbers in the tables below include the Corporation's share of fees paid to
Kestrel by properties owned by joint ventures in which it has an interest.
12
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
PROPERTY MANAGEMENT SERVICES (CONTINUED)
The following table summarizes the amounts paid to affiliates for expense
reimbursements, Asset Management Fees, Transition Management Fees and Property
Management Fees for the three and nine month periods ended September 30, 2003
and 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 THREE MONTHS ENDED SEPTEMBER 30, 2002
Shelbourne Shelbourne
Management Kestrel Management Kestrel
---------- ------- ---------- -------
Asset Management Fee $ -- $50,000 $ -- $ --
Property Management Fee $ -- $20,067 $ -- $ --
Transition Management Fee $ -- $ - $83,300 $ --
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
Shelbourne Shelbourne
Management Kestrel Management Kestrel
---------- ------- ---------- -------
Expense Reimbursement (1) $ -- $ -- $ 18,750 $ --
Asset Management Fee $ -- $150,000 $135,805 $ --
Property Management Fee $ -- $140,534 $ -- $256,508
Transition Management Fee $ -- $ -- $208,250 $ ---
(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 for the nine months ended September 30,
2003 and 2002 on account of shares of common stock owned by HX Investors
were $21,614,380 and $0, respectively. No dividends were paid during the
nine months ended September 30, 2002.
The stockholders' Priority Return (defined in note 8 below) was satisfied
on July 9, 2003. Consequently, the Class B Unitholder, HX Investors, which
is entitled to receive distributions only after the satisfaction of the
Priority Return, has received distribution payments totaling $722,551 since
the Priority Return was satisfied.
In addition, in connection with the settlement of the lawsuit brought by HX
Investors, Shelbourne Management agreed to pay to HX Investors
approximately 42% of the amounts paid to Shelbourne Management with respect
to the Class A units. Distributions paid to Shelbourne Management on
account of its Class A units for the nine months ended September 30, 2003
were $30,814 of which $12,941 is payable by Shelbourne Management to HX
Investors pursuant to their agreement.
13
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
THE TRANSACTION
On February 14, 2002, the Corporation, Shelbourne Properties II, Inc. and
Shelbourne Properties III, Inc. consummated a transaction (the
"Transaction") whereby the Corporation purchased the 423,903 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 $14,303,060 in cash and the
Operating Partnership issued preferred partnership interests with an
aggregate liquidation preference of $812,674 and a note in the amount of
$17,639,459. This note was satisfied in April 2002 from the proceeds of the
Credit Facility (see note 6). The liquidation preference was eliminated on
January 15, 2003 in connection with the Accotel Transaction (see note 10).
4. REAL ESTATE
As of September 30, 2003, the Corporation owned one property that is
located in Towson, Maryland.
On January 21, 2003, the Corporation sold Southport Shopping Center located
in Ft. Lauderdale, Florida for a gross sales price of $23,430,000. The
Corporation received proceeds of $23,178,855 after closing costs. Under the
terms of the Credit Facility, which was in place at the time of the sale,
all of the net proceeds from the sale were paid to reduce the amount due
under the Credit Facility. The Corporation recognized the previously
deferred gain and realized an accounting gain of $9,285,661.
On August 1, 2003 the Corporation entered into a contract to sell its
property located in Towson, Maryland. The sale, which is subject to the
purchaser's satisfactory completion of its due diligence process, is
expected to close, if at all, in the first quarter of 2004.
5. INVESTMENTS 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, with the
unrealized gain deferred until an actual sale occurs.
At December 31, 2002 the Corporation was invested in three joint ventures,
(568 Broadway, Century Park, and Seattle Landmark). As of September 30,
2003 the Corporation was invested in two joint ventures (Seattle Landmark
and Accotel). The joint ventures are accounted for utilizing the equity
method of accounting.
On February 28, 2003, 568 Broadway Joint Venture, a joint venture in which
the Company held a 38.925% interest, sold its property located at 568
Broadway, New York, New York for a gross sale 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 $26,478,493 was attributable to the Corporation and is
reported as equity income from joint ventures.
On April 29, 2003, Century Park I Joint Venture, a joint venture in which
the Company held a 50% interest, sold its 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 $9,403,450 of which the Operating Partnership was
allocated $4,701,725. The joint venture recognized an accounting gain of
$20,394,138 of which $10,132,559 was attributable to the Corporation and is
reported as equity income from joint ventures.
14
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CREDIT FACILITY
On May 1, 2002, the Operating Partnership and certain of its subsidiaries,
as well as the operating partnership of Shelbourne Properties II, 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).
7. FLEET LOAN
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") and their respective operating
partnerships (the "Shelbourne OPs") in implementing their respective plans
of liquidation and to 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% (3.875% at September 30, 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.
As of September 30, 2003, the Loan was secured by mortgages on the
Company's Towson, Maryland property, the property held by Seattle Landmark
Joint Venture, as well as certain other properties owned indirectly by
Shelbourne Properties II, 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 Shelbourne OPs and the 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.
Pursuant to the terms of the Loan, each Borrower is jointly and severally
liable for the repayment of the entire principal, interest and other
amounts due under the Loan. Accordingly, the Borrowers, the Companies and
the Shelbourne OPs 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. The principal benefit derived from obtaining
one loan instead of three separate loans is that the interest rate on the
Loan and the costs associated with the Loan are less than that which would
have been incurred for three separate smaller loans.
At September 30, 2003, the outstanding balance due on the Loan was
$31,455,543, of which $7,495,084 was allocable to the Company and the
interest rate at September 30, 2003 on the Loan was 3.875%.
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 Unitholder is 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 $59.00 per share to
stockholders of the Corporation plus interest thereon compounded quarterly
at 6% (from August 19, 2002) per annum until the priority return is paid in
full (the "Priority Return"). On August 19, 2002, the Board of
15
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CLASS B PARTNERSHIP INTERESTS (CONTINUED)
Directors of the Corporation authorized the issuance by the Operating
Partnership of, and the Operating Partnership issued, Class B Units to 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. The Priority Return as of
July 9, 2003 was $0.94 per share and was satisfied on that date.
Consequently, HX Investors as the Class B Unitholder is entitled to receive
distributions on account of its Class B Units which replaced the Incentive
Fee. The distribution paid on July 9, 2003 to the Class B Unitholder was
$278,223.
On August 1, 2003, the Board of Directors declared a dividend to the common
shareholders of $3.00 per share. The Class B Unitholder was entitled to a
distribution of $444,328. The dividend and distribution was paid on August
21, 2003. The total amount of distributions received by the Class B
Unitholder since the Priority Return was satisfied on July 9, 2003 is
$722,551.
9. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS
In connection with the Transaction, the 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, prior to the modification described
below, 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 and prior to the modification described below, 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 if the outstanding debt under which the Companies are
obligated was less than $55 million, for a purchase price equal to the
liquidation preference plus an amount (the "Put Premium") which was equal
to approximately $5,286,000 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 can cause the Operating Partnership to purchase the
Class A Units at a premium. These circumstances include the occurrence of
any of the following if 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 (see below); or (v) the taking of
any action with respect to the Accor S.A. properties without the consent of
the Class A Unitholder (the "Class A Trigger Events").
In connection with the settlement of the lawsuit brought by HX Investors,
Shelbourne Management agreed to pay to HX Investors approximately 42% of
the amounts paid to Shelbourne Management with respect to the Class A
Units. (See note 3)
10. ACCOTEL TRANSACTION
On January 15, 2003, a joint venture owned by the Operating Partnership and
the operating partnerships of Shelbourne Properties II, 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, which are triple net leased to an affiliate of Accor S.A (the
"Accor S.A. Properties"). 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 the Corporation, Shelbourne
16
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. ACCOTEL TRANSACTION (CONTINUED)
Properties II, Inc., and Shelbourne Properties III, Inc., respectively. The
Accor S.A. 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 $5,286,000 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 ($17,600,000 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 ($24,300,000 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 preference to which the holder of the Class A Units
was previously entitled ($812,674 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
$812,000 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.
17
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 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 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.
ORGANIZATION
Shelbourne Properties I, Inc., a Delaware corporation (the
"Corporation"), was formed on April 18, 2001. The Corporation's
wholly-owned operating partnership, Shelbourne Properties I 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 18, 2001, the Operating Partnership became the successor by
merger to Integrated Resources High Equity Partners, Series 85, a
California Limited Partnership, (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
property located in Ft. Lauderdale, Florida and its joint venture
properties located in New York, New York and San Diego, California. As
a result, the remaining assets of the Company are a shopping center
located in Towson, Maryland and a 50% interest in an office building in
Seattle, Washington. In addition, the Company holds a 32.52% 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.
Due to the adoption by the shareholders of the Plan of Liquidation on
October 29, 2002, the Corporation will be required to transfer any
remaining assets on or prior to October 29, 2004 to a liquidating trust
in order to avoid adverse tax consequences. In addition, the holder of
the Class A Units is presently entitled to require the Operating
Partnership to purchase the Class A Unit at a premium if a Class A
Trigger Event occurs (as defined below) at any time prior to October
29, 2004 (which would occur if the assets were transferred to a
liquidating trust). The
18
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ORGANIZATION (CONTINUED)
Corporation is presently negotiating with the holder of the Class A
Units to shorten this time frame. If the Corporation is successful in
its negotiations, it is expected that the Corporation will transfer its
remaining assets to a liquidating trust as early as April 2004, thereby
eliminating the expenses associated with a public corporation. There
can be no assurance that the Corporation will be successful in its
negotiations with the Class A Unitholder. Finally, if the Corporation
is successful in liquidating all of its assets prior to October 29,
2004 or such earlier date as may be permitted without incurring
additional expense, the Corporation will make a final distribution and
its affairs will be wound up without utilization of a liquidating
trust.
At such time as the assets of the Company are distributed to a
liquidating trust, which could be as early as the second quarter 2004,
the interests in such trust will be non-transferrable. Accordingly,
investors will not be able to sell their interests in the liquidating
trust but will receive distributions from the liquidating trust as the
remaining assets are liquidated.
THE TRANSACTION
On February 14, 2002, the Corporation, Shelbourne Properties II, Inc.
and Shelbourne Properties III, Inc. consummated a transaction (the
"Transaction") whereby the Corporation purchased the 423,903 shares of
the Corporation's common stock held by subsidiaries of Presidio Capital
Investment Company, LLC ("PCIC") and the Advisory Agreement was
contributed to the Operating Partnership. Pursuant to the Transaction,
the Corporation paid PCIC $14,303,060 in cash and the Operating
Partnership issued preferred partnership interests with an aggregate
liquidation preference of $812,674 and a note in the amount of
$17,639,459.
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 ($5,286,000 at the January 15, 2003)
unless the Operating Partnership, together with the operating
partnerships of Shelbourne Properties II, Inc. and Shelbourne
Properties III, Inc. (collectively, the "Shelbourne OPs") maintained at
least approximately $54,200,000 of aggregate indebtedness ($17,600,000
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 ($24,300,000 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, which are triple net leased to an affiliate of Accor
S.A. (the "Accor S.A. Properties"). 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 the Operating Partnership,
Shelbourne Properties II L.P. and Shelbourne Properties III L.P.,
respectively. The Accor S.A. 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
19
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
THE ACCOTEL TRANSACTION(CONTINUED)
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 any of the following so long as 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 "Class A
Trigger Events").
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 $812,000 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 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.
Southport Shopping Center. On January 31, 2003, the Corporation
completed the sale of Southport Shopping Center, in Ft. Lauderdale,
Florida for a gross sales price of $23,430,000. Pursuant to the terms
of the Credit Facility, which was in place at the time of the sale, all
of the net proceeds after closing adjustments from the sale of
$22,981,815 were required to be paid to the Lender to reduce the
outstanding balance on the Credit Facility. The Corporation recognized
an accounting gain of $9,285,661.
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, 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
$26,478,493 was attributable to the Corporation and is reported in
equity income from joint venture.
Century Park I. On April 29, 2003, Century Park I Joint Venture, a
joint venture in which the Corporation held indirectly a 50% interest,
sold its 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 such
payment was made, closing adjustments and closing costs, net proceeds
were $9,403,450 of which the Operating Partnership was allocated
$4,701,725. The joint venture recognized an accounting gain of
$20,394,138 of which $10,132,559 was allocated to the Corporation and
is reported in equity income from joint venture.
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
20
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Properties II, Inc. and Shelbourne Properties III, Inc. (collectively,
the "Companies") in implementing their respective plans of liquidation
and to enable them to distribute 100% of the net proceeds from the sale
of the New
York, New York property, direct and indirect subsidiaries of each of
the Companies (the "Borrowers") 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% 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 September 30, 2003, the Loan is secured by mortgages on the
Company's Towson, Maryland property, the property held by Seattle
Landmark I Joint Venture, as well as certain other properties owned
indirectly by Shelbourne Properties II, 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 Shelbourne OPs and
the 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 $850,459.
Pursuant to the terms of the Loan, each Borrower is jointly and
severally liable for the repayment of the entire principal, interest
and other amounts due under the Loan. Accordingly, the Borrowers, the
Companies and the Shelbourne OPs 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. The
principal benefit derived from obtaining one loan instead of three
separate loans is that the interest rate on the Loan and the costs
associated with the Loan are less than that which would have been
incurred for three separate smaller loans.
At September 30, 2003, the outstanding balance due on the Loan was
$31,455,543, of which $7,495,084 was allocable to the Company and the
interest rate on the Loan was 3.875%.
The Company had $1,506,871 in cash and cash equivalents at September
30, 2003 of which $1,326,101 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 increased by $956,810 during the nine months ended
September 30, 2003. As discussed further below, the increase resulted
from $47,423,715 of net cash provided by operating activities and
$22,088,668 of net cash provided by investing activities which were
largely offset by $68,555,573 of net cash used in financing activities.
In addition to the cash and cash equivalents reported at September 30,
2003, the Corporation's joint ventures held cash at September 30, 2003
of which the Corporation's allocable share was $225,827.
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 nine months ended September 30, 2003 amounted to
$1,773,984 as compared to $3,226,728 for the nine months ended
September 30, 2002. The decrease is due to the sale of Southport
Shopping Center on January 21, 2003. Distributions in excess of
earnings from joint venture investments increased by $5,819,223 to
$10,308,348 for the nine months ended September 30, 2003 from
$4,489,125 for the nine months ended September 30, 2002. The primary
reason for this increase was proceeds generated by the sale of
properties owned by 568 Broadway and Century Park I Joint Venture.
Cash provided by investing activities was the result of the sale of
Southport Shopping Center which generated proceeds of $23,178,855 that
were slightly offset by the investment in the Accotel transaction of
$867,806 and
21
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
improvements made to real estate prior to the sale at Loch Raven Plaza
in Townson, Maryland and Southport Shopping Center of $214,478 and
$7,903, respectively.
Cash used in financing activities consisted of dividends paid to common
stockholders ($51,465,018), distributions made to the Class A
Unitholders ($30,814), distributions made to Class B Unitholders
($722,551), satisfaction of the Credit Facility ($23,832,274), and
principal payments on the Loan ($10,000,000) which were partially
offset by proceeds from the Loan $17,495,084.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
Net income
The Corporation's net income available for common shareholders
increased by $64,786,653 to $45,937,142 for the nine months ended
September 30, 2003 from a net loss of $18,849,511 for the nine months
ended September 30, 2002. The increase in net income was primarily due
to a decrease in costs and expenses as well as an increase in equity
income from joint ventures and gains on the sale of real estate. The
Corporation's income before equity income from joint ventures, gain on
sale of real estate, interest and other income was $281,131 for the
nine months ended September 30, 2003 as compared to a net loss of
$21,131,753 for the nine months ended September 30, 2002.
Rental Revenues
Rental revenues decreased by $1,653,766, or approximately 49%, to
$1,738,680 for the nine months ended September 30, 2003 from $3,392,446
for the nine months ended September 30, 2002 due to the January 2003
sale of Southport Shopping Center. Because of the sale, base rental
revenue, excluding percentage rent, declined by $1,635,828 for the nine
months ended September 30, 2003 to $1,134,358 from $2,770,186 for the
nine months ended September 30, 2002. Percentage rent decreased by
$17,938 for the nine months ended September 30, 2003 as compared to the
same period in 2002 as a result of reduced percentage rent payments by
Eckerd Drugs and Publix Supermarkets at Southport Shopping Center
offset by Loch Raven collecting a total of $4,858 in percentage rent
from tenants. These decreases were partially offset by an increase in
rental revenue at Loch Raven Plaza for the nine months ended September
30, 2003 to $955,708 from $943,206 for the nine months ended September
30, 2002.
Costs and Expenses
Costs and expenses for the nine months ended September 30, 2003 were
$1,457,549, representing a decrease of $23,066,650 from the same period
in 2002. The decrease is due principally to non-recurring expenses
incurred in 2002 of $18,452,133 associated with the purchase of the
Advisory Agreement that was consummated on February 14, 2002. Excluding
expenses associated with the purchase of the Advisory Agreement,
expenses for the nine months ended September 30, 2002 were $6,072,066.
Therefore, without giving effect to the costs incurred in 2002 for the
purchase of the Advisory Agreements, expenses decreased by $4,614,517
for the nine months ended September 30, 2003 compared with the same
period in 2002. The decrease is primarily due to reduced administrative
expenses, the cessation of depreciation and amortization and the
reduction of the asset management fees to $200,000 per year as well as
a reduction in operating expenses. The sale of Southport Shopping
Center in January 2003 also contributed to the decrease in costs and
expenses.
Operating expenses decreased by $740,344 for the nine months ended
September 30, 2003 as compared to the nine months ended September 30,
2002, primarily due to the sale of Southport Shopping Center on January
21, 2003. The decrease was partially offset by an increase in operating
expenses of $99,800 at Loch Raven Plaza. This increase resulted
primarily from parking lot maintenance due to above average snowfall.
22
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
Costs and Expenses (Continued)
Pursuant to the Plan of Liquidation which was adopted on October 29,
2002, depreciation and amortization expenses ceased as of that date.
Therefore, the Corporation incurred no depreciation and amortization
for the nine months ended September 30, 2003 as compared to $697,004
for the same period in 2002.
Partnership asset management fees and transition management fees
decreased to $150,000 for the nine months ended September 30, 2003 from
$344,055 for the same period in 2002. In 2002, prior to the
Transaction, the fees were based on 1.25% of the Corporation's gross
asset value, which amounted to $135,805 during 2002, and effective
February 14, 2002, after the Transaction, were based on a fixed asset
management fee of $27,778 per month which amounted to $208,250 for the
period beginning February 15, 2002 through September 30, 2002. The
total asset management fee and transition management fees paid for the
nine months ended September 30, 2002 were $344,055. Effective October
1, 2002, the asset management fee payable by the Corporation was
reduced to $50,000 per quarter.
Administrative costs decreased to $792,862 for the nine months ended
September 30, 2003 from $3,731,224 for the same period in 2002. This
reduction is due to certain costs incurred in 2002 in connection with
the Transaction and legal, professional and consulting fees incurred in
2002. Property management fees decreased to $53,947 from $98,699 for
the nine month periods ending September 30, 2003 and 2002,
respectively. The decrease is due to the sale of Southport Shopping
Center in January 2003.
Gain on Sale of Real Estate
The gain on sale of $9,285,661 for the nine months ended September 30,
2003 was due to the sale of Southport Shopping Center.
Non-Operating Income and Expenses
Equity income from investments in joint ventures increased by
$34,540,251 to $37,398,925 for the nine months ended September 30, 2003
as compared to $2,858,674 for the nine months ended September 30, 2002
due to the sale of properties owned by 568 Broadway Joint Venture and
Century Park I Joint Venture, in which the Corporation indirectly held
a 38.925% and 50% interest, respectively. 568 Broadway Joint Venture
sold its property on February 28, 2003 and the joint venture recognized
a gain on sale of $67,746,480 of which $26,478,493 was allocated to the
Corporation. The increase in income from investments in joint ventures
is also attributable to the Corporation's joint venture investment in
Century Park I Joint Venture, in which the Corporation held a 50%
indirect interest, which sold its property located in San Diego, CA on
April 29, 2003. Century Park I was sold on April 29, 2003 and the joint
venture recognized a gain on sale of $20,394,138 of which $10,132,559
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 nine months ended
September 30, 2003 as compared to the nine months ended September 30,
2002 of $1,886,706 due to the sale of the property on February 28,
2003.
Excluding the gain on sale, the Corporation experienced a decrease in
equity income from Century Park I Joint Venture for the nine months
ended September 30, 2003 as compared to the nine months ended September
30, 2002 of $148,798 due to the sale of the property on April 29, 2003.
The Corporation's remaining joint venture investment, Seattle Landmark
Joint Venture, experienced a decrease in equity income of $35,296 for
the nine months ended September 30, 2003 as compared to the same period
in 2002.
The decrease is a result of certain improvements to the property. These
improvements were expensed instead of capitalized because they are not
expected to increase the property's net realizable value. These
expenses were partially offset due to the cessation of depreciation and
amortization in accordance with liquidation accounting.
23
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
Non-Operating Income and Expenses (Continued)
During the first nine months of 2003, interest expense amounted to
$317,571, which consisted of $52,314 paid in connection with the Credit
Facility and $265,257 incurred in connection with the Loan, as compared
to $596,335 the first nine months of 2002. The interest incurred during
2002 was comprised of $172,733 related to the notes issued to
Shelbourne Management in connection with the purchase of the Advisory
Agreement and interest of $423,602 in connection with the Credit
Facility.
Interest income decreased slightly to $33,168 during the nine months
ended September 30, 2003 from $39,760 during the nine months ended
September 30, 2002 due to lower cash balances invested with lower
yields.
Other income increased to $9,193 for the nine months ended September
30, 2003 from $5,878 for the nine months ended September 30, 2002 due
to the refund of utility charges due to the sale of Southport Shopping
Center. These refunds are due to final readings being less than the
estimated bills that were previously paid.
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
Net income
The Corporation's net income available for common shareholders
decreased by $630,837 to a net loss of $365,938 for the three months
ended September 30, 2003 from $264,899 for the three months ended
September 30, 2002. The decrease was due to decreases in rental income,
equity income from joint ventures, and interest income. These decreases
were offset partially by decreases in costs and expenses and interest
expense. The Corporation's loss before equity income from joint
ventures, gain on sale of real estate, interest and other income was
$51,713 for the three months ended September 30, 2003 as compared to a
loss of $534,759 for the three months ended September 30, 2002.
Rental Revenue
Rental revenues decreased $586,668, or approximately 64%, to $328,098
for the three months ended September 30, 2003 from $914,766 for the
three months ended September 30, 2002 due to the January 2003 sale of
Southport Shopping Center. The decrease was partially offset by Loch
Raven Plaza's rental revenue increasing for the three months ended
September 30, 2003 by $4,560 to $327,790 from $323,230 for the three
months ended September 30, 2002.
Costs and Expenses
Costs and expenses for the three months ended September 30, 2003
amounted to $379,811, representing a decrease of $1,069,714 from the
same period in 2002. The decrease is primarily due to reduced
administrative expenses as a result of legal, professional and
consulting fees incurred during the three months ended September 30,
2002, not incurred during the three months ended September 30, 2003.
The cessation of depreciation and amortization and the reduction of the
asset management fees to $200,000 per year also contributed to the
reduction of costs and expenses as well as the sale of Southport
Shopping Center in January 2003.
Operating expenses decreased by $295,384 for the three months ended
September 30, 2003 as compared to September 30, 2002, primarily due to
the sale of Southport Shopping Center on January 21, 2003.
Pursuant to the Plan of Liquidation which was adopted on October 29,
2002, depreciation and amortization expenses ceased as of that date.
Therefore, the Corporation incurred no depreciation and amortization
for the three months ended September 30, 2003 as compared to $263,082
for the same period in 2002.
24
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
Costs and Expenses (Continued)
Partnership asset management fees decreased to $50,000 for the three
months ended September 30, 2003 from $83,300 for the same period in
2002 due to a reduction in the fixed asset management fee effective
October 1, 2002 from $83,300 to $50,000 per quarter.
Administrative costs decreased to $228,697 for the three months ended
September 30, 2003 from $688,257 for the same period in 2002. This
reduction is due to the legal, professional and consulting costs not
incurred in 2003 that were incurred in 2002. Property management fees
decreased to $9,024 from $27,412 for the periods ending September 30,
2003 and 2002, respectively. The decrease is due to the sale of
Southport Shopping Center in January 2003.
Non-Operating Income and Expenses
Equity income from investments in joint ventures decreased by $841,186
to $209,309 for the three months ended September 30, 2003 as compared
to $1,050,495 for the three months ended September 30, 2002. The
Corporation experienced a decrease of $697,665 in equity income from
its joint venture investment in 568 Broadway Joint Venture, in which
the Corporation held 38.925% indirect interest, for the three months
ended September 30, 2003 as compared to the same period ended in 2002.
This decrease is due to the sale of the property on February 28, 2003.
The Corporation experienced a decrease in equity income from Century
Park I Joint Venture of $136,925 for the three months ended September
30, 2003 as compared to the three months ended September 30, 2002 due
to the sale of the property on April 29, 2003.
The Corporation's joint venture investment known as Seattle Landmark
Joint Venture, in which the corporation owns a 50% interest,
experienced a decrease in equity income of $7,226 primarily due to less
rental revenue, which was substantially offset by the cessation of
depreciation and amortization expenses in accordance with liquidation
accounting.
During the third quarter of 2003, interest expense of $75,816 was
incurred in connection with the Loan. The interest expense for the
third quarter of 2002 of $254,333 was incurred in connection with the
Credit Facility.
Interest income decreased slightly to $6,994 during the three months
ended September 30, 2003 from $11,953 during the three months ended
September 30, 2002 due to lower cash balances invested and lower
yields.
No other income was earned during the three months ended September 30,
2003 compared to $1,927 earned during the three months ended September
30, 2002. This is a result of the sale of Southport Shopping Center in
January 2003.
Inflation
Inflation is not expected to have a material impact on the operations
or financial position of the Corporation.
25
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk the Corporation faces is interest rate
sensitivity. The Corporation's long-term debt bears interest at a
floating rate, and therefore the Corporation is exposed to the risk of
interest rate changes. At September 30, 2003, borrowings allocated to
the Corporation under the Loan totaled $7,495,084 and initially bore an
interest rate of LIBOR plus 2.75%. Based on the balance allocated to
the Corporation of the Loan at November 12, 2003 and the interest rate
at that date, a 10% increase in LIBOR would increase the Corporation's
interest expense in 2003 by approximately $8,432. Conversely, a 10%
decrease in LIBOR would decrease the Corporation's interest expense in
2003 by the same amount. The gain or loss the Corporation ultimately
realizes with respect to interest rate fluctuations will depend on the
actual interest rates during that period. The Corporation does not
utilize derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation'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 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.
26
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 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
No reports on Form 8-K were filed on behalf of the Registrant during the quarter
ended September 30, 2003.
27
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 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 I, Inc.
(Registrant)
Dated: November 12, 2003 By: /s/ Michael L. Ashner......
---------------------------
Michael L. Ashner
Chief Executive Officer
28
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 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)
4.6 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
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 33
- ------------------
SHELBOURNE PROPERTIES I, INC.
FORM 10Q - SEPTEMBER 30, 2003
(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
(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.