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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
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Commission file number 0-16341
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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
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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 894,792 shares of common stock outstanding.
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SHELBOURNE PROPERTIES II, 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................................................ 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk 26
Item 4. Controls and Procedures............................................................ 26
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.................................................. 27
Signatures..................................................................................... 28
2
SHELBOURNE PROPERTIES II, 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 $ 14,531,238 $ 17,091,316
Investments in joint ventures 13,128,528 62,344,354
Cash and cash equivalents, of which $1,926,782 is restricted 2,767,099 10,898,495
cash at September 30, 2003
Other assets 374,638 255,246
Receivables, net 31,946 83,523
-------------------- ---------------------
Total Assets 30,833,449 90,672,934
-------------------- ---------------------
LIABILITIES
Accounts payable and accrued expenses 1,395,587 691,344
Credit Facility - 23,779,343
Fleet Loan 11,349,257 -
Reserve for estimated costs during the period of liquidation 1,078,408 1,600,000
Deferral of gains and incentive fee on real estate assets and joint ventures 5,186,196 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 19,009,448 70,933,510
-------------------- ---------------------
NET ASSETS IN LIQUIDATION $ 11,824,001 $ 19,739,424
==================== =====================
See notes to consolidated financial statements.
3
SHELBOURNE PROPERTIES II, 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 $ 656,272 $ 989,360 $ 1,976,938 $ 3,216,106
Costs and expenses
Operating expenses 310,505 257,751 1,223,600 817,367
Depreciation and amortization - 485,730 - 1,060,685
Asset management fee 50,000 - 150,000 157,582
Transition management fees - 83,300 - 208,250
Purchase of advisory agreements - - - 23,049,398
Administrative expenses 172,336 706,262 822,903 4,087,065
Property management fee 18,780 30,558 53,761 96,575
-------------- -------------- -------------- -----------------
551,622 1,563,601 2,250,264 29,476,922
-------------- -------------- -------------- -----------------
Income loss before equity income from joint ventures,
gain on sale of real estate, interest and other income 104,650 (574,241) (273,326) (26,260,816)
Equity income from joint ventures 285,068 1,147,206 38,042,021 3,111,087
Gain on sale of real estate - - 846,203 -
Interest expense (114,803) (317,701) (494,064) (744,912)
Interest income 7,578 43,759 45,673 139,177
Other income - - 591 548
-------------- -------------- -------------- -----------------
Income (loss) from continuing operations 282,493 299,023 38,167,098 (23,754,916)
Loss from discontinued operations - (69,231) - (288,436)
-------------- -------------- -------------- -----------------
Net income (loss) 282,493 229,792 38,167,098 (24,043,352)
Preferred dividends (12,971) (12,971) (38,491) (32,146)
-------------- -------------- -------------- -----------------
Net income (loss) available for common shareholders $ 269,522 $ 216,821 38,128,607 $ (24,075,498)
============== ============== =================
Net assets at January 1, 2003 19,739,424
Adjustment to liquidating basis (185,940)
Liquidating dividends - common (45,858,090)
--------------
Net assets in liquidation at September 30, 2003 $ 11,824,001
==============
Earnings (loss) per share - basic and diluted $ 0.30 $ 0.24 $ 42.61 $ (25.30)
============== ============== ============== =================
Weighted average common shares 894,792 894,792 894,792 951,351
============== ============== ============== =================
See notes to consolidated financial statements.
4
SHELBOURNE PROPERTIES II, 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 FORM OPERATING ACTIVITIES:
Net income (loss) $ 38,167,098 $ (24,043,352)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization - 1,060,685
Straight-line adjustment for stepped lease rentals - 14,071
Change in bad debt reserve 57,351 -
Purchase of advisory agreements - 23,049,398
Distributions in excess of earnings from joint ventures 11,599,358 5,868,852
Loss from discontinued operations 288,436
Gain on sales of real estate (846,203) -
Change in assets and liabilities:
Receivables 108,928 34,605
Other assets (119,392) (1,366,879)
Accounts payable and accrued expenses (346,153) 109,076
Accrued interest 35,248 -
---------------- ----------------
Net cash provided by operating activities 48,656,235 5,014,892
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Discontinued operations - (350,555)
Improvements to real estate (506,921) (467,164)
Investment in Accotel (1,079,675) -
Proceeds from sales of real estate 3,125,632 -
---------------- ----------------
Net cash provided by (used in) investing activities 1,539,036 (817,719)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (17,866,603)
Proceeds from Fleet Loan 22,081,542 -
Paydown of Fleet Loan (10,732,285) -
Proceeds from Credit Facility - 29,779,343
Paydown of Credit Facility from sales proceeds (475,180) -
Payoff of Credit Facility (23,304,163) -
Payoff note payable from transaction - (22,034,250)
Dividends paid (45,858,090) -
Distributions paid Class A Unitholder (38,491) -
---------------- ----------------
Net cash used in financing activities (58,326,667) (10,121,510)
---------------- ----------------
Decrease in cash and cash equivalents (8,131,396) (5,924,337)
Cash and cash equivalents, beginning of period 10,898,495 17,073,461
---------------- ----------------
Cash and cash equivalents, end of period $ 2,767,099 $ 11,149,124
================ ================
Supplemental disclosure of cash flow information-
Cash paid for interest $ 458,637 $ 744,912
================ ================
See notes to consolidated financial statements.
5
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 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 Integrated Resources 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.
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 determined by independent
appraisals or other indications of sales values. The valuations for
other assets and
6
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
BASIS OF PRESENTATION (CONTINUED)
---------------------------------
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 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.
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 Melrose Park, Illinois (note 4),
Hilliard, Ohio (note 5), New York, New York (note 5), San Diego,
California (note 5) and Grove City, Ohio (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 decreased by $1,068,905 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 incentive 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 $846,203 on the sale of real estate and $36,963,672
included in equity income from joint ventures attributable to real
estate sales. As a result of these sales, the Corporation's deferred
gain was reduced by $37,592,575.
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 $1,600,000 at December 31, 2002 to $1,078,408 at September
30, 2003 as a result of professional costs associated with obtaining
the Fleet Loan of $504,926 and tax planning costs of $16,666 paid to an
affiliate of Presidio Capital Investment Company, LLC in connection
with the Accotel transaction (see note 10).
7
SHELBOURNE PROPERTIES II, 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 $150,044 and $92,693 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 $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.
INVESTMENTS IN JOINT VENTURES
-----------------------------
Certain properties are or were 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, 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 II, 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 $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 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
$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.
On June 19, 2003 the Board of Directors declared a dividend of $6.75
per share. The dividend was paid on July 9, 2003 to the shareholders of
record at the close of business on June 30, 2003.
9
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
which are 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
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
10
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
------------------------------------------------
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 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 (the "Transition Management Fee"). Both
Shelbourne Management and PCIC were affiliates of the then management
of the Corporation.
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 Management by properties owned by joint
ventures in which it has an interest.
11
SHELBOURNE PROPERTIES II, 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 $ - $ 33,149 $ - $ 93,299
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) $ - $ - $ 25,000 $ -
Asset Management Fee $ - $ 150,000 $ 157,582 $ -
Property Management Fee $ - $ 150,400 $ - $ 275,083
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, L.P. ("HX Investors"), an affiliate
of the current Chief Executive Officer of the Corporation, for the nine
months ended September 30, 2003 and 2002 on account of shares of common
stock owned by HX Investors were $19,014,365 and $0, respectively. No
dividends were paid during nine months ended September 30, 2002.
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 $38,491, of which $16,166 was payable by
Shelbourne Management to HX Investors pursuant to their agreement.
THE TRANSACTION
---------------
On February 14, 2002, the Corporation, Shelbourne Properties I, Inc.
and Shelbourne Properties III, Inc. 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
12
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
-----------------------------------------------------------------------
THE TRANSACTION (CONTINUED)
---------------------------
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). 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 two properties. One is
located in Matthews, North Carolina and the other is located in
Richmond, Virginia.
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 $2,934,617 after closing costs and
closing adjustments. The Corporation recognized an accounting gain of
$846,203.
On August 18, 2003, a subsidiary of the Corporation entered into a
contract to purchase two parcels of land adjacent to its property
located in Matthews, North Carolina. The purchase, which is subject to
the Corporation's satisfactory completion of the due diligence process,
is expected to close, if at all, in the fourth quarter of 2003.
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 four joint
ventures, (568 Broadway, Century Park, Seattle Landmark and
Tri-Columbus). As of September 30, 2003, the Corporation was invested
in three joint ventures (Seattle Landmark, Tri-Columbus and Accotel).
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 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 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 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
13
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVESTMENTS IN JOINT VENTURES (CONTINUED)
-----------------------------------------
allocated $4,701,725. The joint venture recognized an accounting gain
of $20,394,138 of which $10,261,579 was attributable to the Corporation
and is reported as equity income from joint ventures.
On June 18, 2003, the Grove City, Ohio property, which was owned by
Tri-Columbus Associates was sold for a gross sales price of $4,090,000.
The Fleet Loan encumbering this property (see note 7) required a
principal payment equal to the greater of $3,300,000 or 90% of the net
proceeds. After closing adjustments and costs the net proceeds were
$3,938,286. As a result, the principal payment was $3,544,457 of which
the Corporation was allocated $732,285. The remaining proceeds after
the principal payment were $393,829 of which the Corporation was
allocated $81,365. 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 September 3, 2003 Tri-Columbus Associates entered into a contract to
sell its property located in Delaware, Ohio. The sale, which is subject
to purchaser's satisfactory completion of its due diligence process, is
expected to close, if at all, in the fourth quarter of 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).
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 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 Richmond, Virginia property, Matthews, North Carolina
property, the property held by Seattle Landmark joint venture and the
property held by Tri-Columbus Associates, as well as certain other
property 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
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
14
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FLEET LOAN (CONTINUED)
----------------------
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 $11,349,257 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 $66.25 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
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.
After giving effect to dividends paid from August 19, 2002 to November
12, 2003, the remaining unpaid per share Priority Return at November
12, 2003 is $3.12.
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 entitle 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, 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 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 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
15
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS (CONTINUED)
------------------------------------------------------
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 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 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
Shelbourne Properties I, Inc., the Corporation 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 $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 preference 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.
16
SHELBOURNE PROPERTIES II, 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 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 Integrated Resources 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, San Diego, California, and Grove City, Ohio. 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 an industrial building 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.
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
17
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
ORGANIZATION (CONTINUED)
------------------------
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 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 I, Inc.
and Shelbourne Properties III, Inc. 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, LLC ("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 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 Shelbourne Properties I L.P., the
Operating Partnership 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 limited
circumstances which the Companies do not anticipate will occur, to
cause the Shelbourne OPs to purchase
18
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
THE ACCOTEL TRANSACTION (CONTINUED)
-----------------------------------
their respective Class A Units at the premium described above. These
circumstances include the occurrence of any 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 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 sales 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 holds 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 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.
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
$26,702,093 was attributable to the Corporation and is reported in
equity income from joint venture.
Melrose Park. Also 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 recognized an accounting gain of $846,203.
Century Park I. On April 29, 2003, Century Park I Joint Venture, a
joint venture in which the Corporation indirectly 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 such
payment, closing adjustments and other closing costs, net proceeds were
$9,403,450 of which the Operating
19
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
THE PLAN OF LIQUIDATION- PROPERTY SALES (CONTINUED)
---------------------------------------------------
Partnership was allocated $4,701,725. The joint venture recognized an
accounting gain of $20,394,138 of which $10,261,579 was allocated to
the Corporation and is reported in equity income from joint venture.
Grove City. On June 18, 2003, the Grove City, Ohio property, which was
owned by Tri-Columbus Associates was sold for a gross sales price of
$4,090,000. The loan encumbering this property required principal
payment equal to the greater of $3,300,000 or 90% of the net proceeds.
After closing adjustments and costs the net proceeds were $3,938,286.
As a result, the required principal payment was $3,544,457 of which the
Corporation was allocated $732,285. The remaining proceeds after the
principal payment were $393,829 of which the Corporation was allocated
$81,365. 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.
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 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 Richmond, Virginia property; Matthews, North Carolina
property, the property held by Seattle Landmark Joint Venture and the
property held by Tri-Columbus Associates, as well as certain other
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
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 $23,304,163.
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 $11,349,257 was allocable to the Company and the
interest rate on the Loan was 3.875%.
The Company had $2,767,099 in cash and cash equivalents at September
30, 2003 of which $1,926,782 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 $8,131,396 during the nine months ended
September 30, 2003. As discussed further below, the decrease resulted
from $58,326,667 of net cash used in investing activities which more
than offset $48,656,235 of net cash provided by operating activities
and $1,539,036 of net cash provided by investing activities.
20
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
-------------------------------------------
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 $322,109.
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
$1,812,298 as compared to $3,293,007 for the nine months ended
September 30, 2002. The decrease is due to the sale of Sutton Square in
December 2002 and Melrose Crossing I on February 28, 2003.
Distributions in excess of earnings from joint venture investments
increased by $5,730,506 to $11,599,358 for the nine months ended
September 30, 2003 from $5,868,852 for the nine months ended September
30, 2002. The reason for the increase is due to the net cash received
from the sale of properties owned by 568 Broadway Joint Venture,
Century Park I Joint Venture and Tri-Columbus Associates during 2003.
Cash provided by investing activities were the result of the sale of
Melrose Crossing I which generated proceeds of $3,125,632 which were
partially offset by the investment in the Accotel transaction of
$1,079,675 and by improvements to real estate at Commerce Plaza of
$505,121 and $1,800 at Melrose Crossing I prior to its sale.
Cash used in financing activities consisted of the dividends paid to
shareholders of ($45,858,090), distributions made to Class A
Unitholders ($38,491), the satisfaction of the Credit Facility
($23,779,343) and principal payments on the Loan ($10,732,285), which
were partially offset by the Loan proceeds of $22,081,542.
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 $62,204,105 to $38,128,607 for the nine months ended
September 30, 2003 from a net loss of $24,075,498 for the nine months
ended September 30, 2002. The increase in net income available for
common shareholders was due to a decrease in expenses as well as
increases in gain on sale and equity income from joint ventures, which
were partially offset by a decrease in rental revenue and a decrease 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 $273,325 for the nine months ended September 30, 2003 as
compared to a net loss of $26,260,816 for the nine months ended
September 30, 2002. Melrose Crossing I's activity for the nine months
ended September 30, 2002 is classified as discontinued operations.
Rental Revenue
Rental revenues decreased by $1,239,168, or approximately 39%, to
$1,976,938 for the nine months ended September 30, 2003 from $3,216,106
for the nine months ended September 30, 2002 due to the sale of Sutton
Square in December 2002. Income for the nine months ended September 30,
2003 included $122,524 related to Sutton Square common area maintenance
recoveries from tenants and percentage rent, compared to Sutton
Square's full operations during the nine months ended September 30,
2002 which generated $1,357,577 in revenues. Additionally, Matthews
Festival and Commerce Plaza combined rental revenue decreased by
$91,727 which was partially offset by Melrose Crossing I's 2003 rental
revenue prior to its sale of $86,153 being included in nine months
ended September 30, 2003 rental revenues due to the Corporation using
liquidation accounting.
Costs and Expenses
Costs and expenses for the nine months ended September 30, 2003 were
$2,250,264, representing a decrease of $27,226,658 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. Excluding expenses
associated with the purchase of the Advisory Agreement, expenses for
the nine months ended September 30, 2002 were $6,427,524. Therefore,
without giving effect to the costs incurred in 2002 for the purchase of
the Advisory Agreement, expenses decreased by $4,177,260 for nine
months ended September 30, 2003
21
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Costs and Expenses (Continued)
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 partially offset by an increase in operating expenses.
Operating expenses increased by $406,233, which was primarily due the
expensing of improvements made to Matthews Festival. These improvements
were expensed instead of capitalized because the incurrence of these
costs did not increase the estimated net realizable value of the
property. The increase was partially offset by the sale of Sutton
Square in December 2002, resulting in the Company incurring no
operating expenses at the property.
Pursuant to the Plan of Liquidation which was adopted 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 $1,214,209
for the same period in 2002.
Partnership asset management fees and transaction management fees
decreased to $150,000 for the nine months ended September 30, 2003 from
$365,832 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 $157,582 during 2002 and effective
February 14, 2002, after the Transaction, were based on 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 $365,832. Effective October
1, 2002, the asset management fee payable by the Corporation was
reduced to $50,000 per quarter.
Administrative costs decreased to $822,903 for the nine months ended
September 30, 2003 from $4,107,466 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 $53,761 from $104,900 for
the nine month periods ending September 30, 2003 and 2002,
respectively. The decrease is due to the sale of Sutton Square in
December 2002 and Melrose Crossing I in February 2003.
Gain on Sale of Real Estate
The gain on sale of $846,202 for the nine months ended September 30,
2003 was due to the sale of Melrose Crossing I during the nine months
ended September 30, 2003.
Non-Operating Income and Expenses
Equity income from investments in joint ventures increased by
$34,930,934 to $38,042,021 for the nine months ended September 30, 2003
as compared to $3,111,087 for the nine months ended September 30, 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. 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. The joint venture recognized a gain on sale of $20,394,138 of
which the $10,261,579 was allocated to the Corporation.
Excluding the gain on sale, the Corporation experienced a decrease in
equity income from 568 Broadway Joint Venture of $1,908,144 for the
nine months ended September 30, 2003 as compared to the nine months
ended September 30, 2002 due to the recognition of only two months of
revenue and expenses in 2003 resulting from the sale of its property on
February 28, 2003.
Excluding the gain on sale, the Corporation experienced a decrease in
equity income from Century Park I Joint Venture of $153,909 for the
nine months ended September 30, 2003 as compared to the nine months
ended
22
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Non-Operating Income and Expenses (Continued)
September 30, 2002 due to the recognition of only four months of
revenue and expenses in 2003 resulting from the sale of its property on
April 29, 2003.
The Corporation's joint venture investment in Seattle Landmark Joint
Venture, in which the Corporation owns a 50% indirect interest,
experienced a decrease in equity income of $37,119. This decrease is
the result of improvements to the property. The cost of these
improvements were expensed instead of capitalized because they are not
expected to increase the property's net realizable value.
The Corporation's joint venture investment in Tri-Columbus Associates,
in which the Corporation holds a 20.66% interest, sold its property
located in Hilliard, Ohio and its property located in Grove City, Ohio.
The joint venture recognized no gain or loss on sale as the as the
joint venture's properties were previously written down to their net
realizable value.
The Corporation experienced an increase in equity income from Tri
Columbus Associates in the amount of $66,433 due to increased rental
revenue and the cessation of depreciation and amortization expenses in
accordance with liquidation accounting.
During the first nine months of 2003, interest expense amounted to
$494,064, which consisted of $122,929 paid in connection with the
Credit Facility and $371,135 incurred in connection with the Loan, as
compared to $744,912 for the first nine months of 2002. The interest
incurred during 2002 was comprised of $215,768 related to the notes
issued to Shelbourne Management in connection with the purchase of the
Advisory Agreement and interest of $529,144 in connection with the
Credit Facility.
Interest income decreased to $45,673 during the nine months ended
September 30, 2003 from $139,177 during the nine months ended September
30, 2002 due to lower cash balances being invested and lower yields.
Other income for the nine months ended September 30, 2003 was $591 as
compared to $548 for the nine months ended September 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
------------------------------------------------------------
Net income
The Corporation's net income available for common shareholders
increased by $52,701 to a net income of $269,522 for the three months
ended September 30, 2003 from $216,821 for the three months ended
September 30, 2002. The increase in net income available to common
shareholders was due to decreases in costs and expenses, interest
expense and loss from discontinued operations, which were partially
offset by a decrease in rental revenue and a decrease in equity income
from joint ventures. The Corporation's income before equity income from
joint ventures, gain on sale of real estate, interest and other income
was $104,650 for the three months ended September 30, 2003 as compared
to a loss of $574,241 for the three months ended September 30, 2002.
Melrose Crossing I's activity for the three months ended September 30,
2002 is classified as discontinued operations.
Rental Revenue
Rental revenues decreased $333,088, or approximately 34%, to $656,272
for the three months ended September 30, 2003 from $989,360 for the
three months ended September 30, 2002. This decrease is due to the sale
of Sutton Square in December 2002 resulting in a decrease in rental
revenue of $430,918 that was partially offset by Matthews Festival and
Commerce Plaza combined rental revenue increasing by $96,202.
23
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Costs and Expenses
Costs and expenses for the three months ended September 30, 2003
amounted to $551,622, representing a decrease of $1,011,979 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 and 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 in costs and expenses along with the sale of certain
properties.
Operating expenses increased by $52,754 for the three months ended
September 30, 2003 as compared to September 30, 2002 primarily as a
result of the expense of $69,742 for improvements to Matthews Festival.
These costs were not capitalized as the improvements are not expected
to increase net realizable value of the property. The increase was
largely offset by the sale of Sutton Square in December 2002 resulting
in the company incurring no operating expenses at the property.
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 September 30, 2003 as compared to $485,730
for the same period in 2002.
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 $172,336 for the three months ended
September 30, 2003 from $719,235 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 $18,780 from $33,384 for the periods ending September 30,
2003 and 2002 respectively. The decrease is due primarily to the sale
of Sutton Square in December 2002 and Melrose Crossing I in February
2003.
Non-Operating Income and Expenses
Equity income from investments in joint ventures decreased by $862,138
to $285,068 for the three months ended September 30, 2003 as compared
to $1,147,206 for the three months ended September 30, 2002. The
Corporation experienced a decrease of $714,716 in equity income from
its joint venture investment in 568 Broadway Joint Venture, in which
the Corporation held a 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 its property on February 28, 2003.
The Corporation experienced a decrease in equity income from Century
Park I Joint Venture of $137,899 for the three months ended September
30, 2003 as compared to the three months ended September 30, 2002 due
to the sale of its property on April 29, 2003.
The Corporation's joint venture investment in Seattle Landmark Joint
Venture, in which the Corporation owns a 50% indirect interest,
experienced a decrease in equity income of $7,477 primarily due to less
rental revenue, which was substantially offset by the cessation of
depreciation and amortization expenses in accordance with liquidation
accounting.
The Corporation experienced a decrease in equity income from
Tri-Columbus Associates in the amount of $2,046 due to less rental
revenue due to the sale of two properties owned by the joint venture
prior to the third quarter, offset by the cessation of depreciation and
amortization expenses in accordance with liquidation accounting.
During the third quarter of 2003 interest expense of $114,803 was
incurred in connection with the Loan. The interest expense for the
third quarter of 2002 of $317,701 was incurred in connection with the
Credit Facility.
24
SHELBOURNE PROPERTIES II, INC.
FORM 10Q- SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Non-Operating Income and Expenses (Continued)
Interest income decreased to $7,578 during the three months ended
September 30, 2003 from $43,760 during the three months ended September
30, 2002 due to lower cash balances being invested and lower yields.
Inflation
Inflation is not expected to have a material impact on the operations
or financial position of the Corporation.
25
SHELBOURNE PROPERTIES II, 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 $11,349,257 and initially bore
an interest rate of LIBOR plus 2.75%. Based on the balance allocated to
the Corporation on 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 $12,768. 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 II, 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 II, 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 II, Inc.
(Registrant)
Dated: November 12, 2003 By: /S/ Michael L. Ashner
---------------------
Michael L. Ashner
Chief Executive Officer
28
SHELBOURNE PROPERTIES II, 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)
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 32
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 34
- ------------------
(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.