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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Commission file number 0-16343
SHELBOURNE PROPERTIES III, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3502381
-------- ----------
(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 788,772 shares of common stock outstanding.
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SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
INDEX
Part I. Financial Information Page
----
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.......................... 25
Item 4. Controls and Procedures............................................................ 25
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K................................................... 26
Signatures.................................................................................... 27
2
SHELBOURNE PROPERTIES III, 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 $ 16,537,337 $ 31,146,000
Investments in joint ventures 10,460,619 37,202,673
Cash and cash equivalents, of which $1,000,824 is restricted cash
at September 30, 2003 2,102,717 260,370
Other assets 366,541 273,333
Receivables, net 20,223 123,997
----------------------- ----------------------
Total Assets 29,487,437 69,006,373
----------------------- ----------------------
LIABILITIES
Accounts payable and accrued expenses 855,615 640,412
Credit Facility - 19,718,457
Fleet Loan 12,611,202 -
Reserve for estimated costs during the period of liquidation 1,103,369 1,500,000
Deferral of gains and incentive fee on real estate assets and joint ventures 8,895,204 28,173,687
COMMITMENTS AND CONTIGENCIES (Notes 8, 10)
CLASS B Partnership Interests - -
CLASS A 5% Preferred Partnership Interests, at liquidation value - 672,178
----------------------- ----------------------
Total Liabilities 23,465,390 50,704,734
----------------------- ----------------------
NET ASSETS IN LIQUIDATION $ 6,022,047 $ 18,301,639
======================= ======================
See notes to consolidated financial statement
3
SHELBOURNE PROPERTIES III, 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 $ 466,568 $ 887,383 $2,019,939 $ 2,714,274
---------------- ---------------- --------------- ------------------
Costs and expenses
Operating expenses 137,160 231,196 718,751 680,645
Depreciation and amortization - 287,030 - 645,302
Asset management fee 50,000 - 150,000 105,863
Transition management fees - 83,300 - 208,250
Purchase of advisory agreements - - - 15,262,114
Administrative expenses 196,904 640,434 886,259 3,486,275
Property management fee 19,892 32,806 54,332 80,997
---------------- ---------------- --------------- ------------------
403,957 1,274,766 1,809,342 20,469,446
---------------- ---------------- --------------- ------------------
Income (loss) before equity income from joint
ventures, gain on sale of real estate, and interest 62,611 (387,383) 210,597 (17,755,172)
Equity income from joint ventures 297,834 712,799 15,758,431 2,117,941
Gain on sale of real estate - - 4,618,972 -
Interest expense (127,568) (210,288) (439,684) (493,115)
Interest income 4,674 17,002 29,895 45,381
---------------- ---------------- --------------- ------------------
Income (loss) from continuing operations 237,552 132,130 20,178,212 (16,084,965)
Loss from discontinued operations - (72,186) - (222,454)
---------------- ---------------- --------------- ------------------
Net income (loss) 237,552 59,944 20,178,212 (16,307,419)
Preferred dividends (8,589) (8,589) (25,487) (21,286)
---------------- ---------------- --------------- ------------------
Net income (loss) available for common shareholders $ 228,963 $ 51,355 20,152,725 $(16,328,705)
================ ================ ==================
Net assets at January 1, 2003 18,301,639
Adjustments to liquidation basis (565,928)
Liquidating dividends - common (31,866,389)
---------------
Net assets in liquidation at September 30, 2003 $6,022,047
===============
Earnings (loss) per share - basic and diluted $ 0.29 $ 0.07 $ 25.55 $ (19.16)
================ ================ =============== ==================
Weighted average common shares 788,772 788,772 788,772 852,271
================ ================ =============== ==================
See notes to consolidated financial statements.
4
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (LIQUIDATION BASIS)
AND SEPTEMBER 30, 2002 (GOING CONCERN BASIS)
(UNAUDITED)
For the Nine Months Ended
September 30,
-----------------------------------------------
2003 2002
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20,178,212 $ (16,307,419)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 645,302
Straight-line adjustment for stepped lease rentals - 31,453
Change in bad debt reserve 83,999 40,000
Purchase of advisory agreement - 15,262,114
Distributions in excess of earnings from joint ventures 11,771,813 9,659,664
Loss from discontinued operations 222,454
Gain on sales of real estate (4,618,972) -
Change in assets and liabilities:
Receivables 19,775 (29,394)
Other assets (93,208) (991,932)
Accounts payable and accrued expenses (496,341) 8,382
Accrued interest 39,366 -
---------------------- ---------------------
Net cash provided by operating activities 26,884,644 8,540,624
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Discontinued operations - (150,654)
Improvements to real estate (143,143) (501,744)
Investment in Accotel (720,791) -
Proceeds from sales of real estate, net 14,820,768 -
---------------------- ---------------------
Net cash provided by (used in) investing activities 13,956,834 (652,398)
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (11,830,337)
Proceeds from Fleet Loan 15,423,374 -
Paydown of Fleet Loan (2,812,172) -
Proceeds from Credit Facility - 19,718,457
Paydown of Credit Facility from sales proceeds (6,524,820) -
Payoff of Credit Facility (13,193,637) -
Payoff of Note Payable from transaction - (14,589,936)
Dividends paid (31,866,389) -
Distributions paid- Class A Unitholder (25,487) -
---------------------- ---------------------
Net cash used in financing activities (38,999,131) (6,701,816)
---------------------- ---------------------
Increase in cash and cash equivalents 1,842,347 1,186,410
Cash and cash equivalents, beginning of period 260,370 2,839,489
---------------------- ---------------------
Cash and cash equivalents, end of period $ 2,102,717 $ 4,025,899
====================== =====================
Supplemental disclosure of cash flow information-
Cash paid for interest $ 400,318 $ 493,115
====================== =====================
See notes to consolidated financial statements
5
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
------------
Shelbourne Properties III, Inc., a Delaware corporation (the
"Corporation"), was formed on April 17, 2001. The Corporation's
wholly-owned operating partnership, Shelbourne Properties III 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 88 (the
"Predecessor Partnership").
In August 2002, the Board of Directors adopted a Plan of Liquidation (the
"Plan of Liquidation") and directed that the Plan of Liquidation be
submitted to the Corporation's stockholders for approval. The
stockholders of the Corporation approved the Plan of Liquidation at a
Special Meeting of Stockholders held on October 29, 2002. The Plan of
Liquidation contemplates the orderly sale of all of the Corporation's
assets for cash or such other form of consideration as may be
conveniently distributed to the Corporation's stockholders and the
payment of (or provision for) the Corporation's liabilities and expenses,
as well as the establishment of a reserve to fund the Corporation's
contingent liabilities. The Plan of Liquidation gives the Corporation's
Board of Directors the power to sell any and all of the assets of the
Corporation without further approval by the stockholders.
The Corporation currently expects that the liquidation will be
substantially completed not later than October 29, 2004, although there
can be no assurance in this regard. As a result, it is currently
anticipated that not later than October 29, 2004, any then remaining
assets and liabilities will be transferred to a liquidating trust. With
the transfer to a liquidating trust, the liquidation will be completed
for federal and state income tax purposes, although one or more
distributions of the remaining cash and net proceeds from future asset
sales may occur subsequent to the establishment of a liquidating trust.
Due to the adoption by the shareholders of the Plan of Liquidation on
October 29, 2002, the Corporation will be required to transfer any
remaining assets on or prior to October 29, 2004 to a liquidating trust
in order to avoid adverse tax consequences. In addition, the holder of
the Class A Units is presently entitled to require the Operating
Partnership to purchase the Class A Unit at a premium if a Class A
Trigger Event occurs (as defined in Note 9) at any time prior to October
29, 2004 (which would occur if the assets were transferred to a
liquidating trust). The Corporation is presently negotiating with the
holder of the Class A Units to shorten this time frame. If the
Corporation is successful in its negotiations, it is expected that the
Corporation will transfer its remaining assets to a liquidating trust as
early as April 2004, thereby eliminating the expenses associated with a
public corporation. There can be no assurance that the Corporation will
be successful in its negotiations with the Class A Unitholder. Finally,
if the Corporation is successful in liquidating all of its assets prior
to October 29, 2004 or such earlier date as may be permitted without
incurring additional expense, the Corporation will make a final
distribution and its affairs will be wound up without utilization of a
liquidating trust.
At such time as the assets of the Company are distributed to a
liquidating trust, which could be as early as the second quarter 2004,
the interests in such trust will be non-transferrable. Accordingly,
investors will not be able to sell their interests in the liquidating
trust but will receive distributions from the liquidating trust as the
remaining assets are liquidated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
---------------------
As a result of the adoption of the Plan of Liquidation and its approval
by the Corporation's stockholders, the Corporation adopted the
liquidation basis of accounting for the period subsequent to October 29,
2002. Under the liquidation basis of accounting, assets are stated at
their estimated net realizable value. Liabilities including the reserves
for estimated costs during the period of liquidation are stated at their
anticipated settlement amounts. The valuation of investments in joint
ventures and real estate held for sale is based upon current contracts,
estimates as
6
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
BASIS OF PRESENTATION (CONTINUED)
---------------------------------
determined by independent appraisals or other indications of sales
values. The valuations for other assets and liabilities under the
liquidation basis of accounting are based on management's estimates as of
September 30, 2003. The actual values realized for assets and settlement
of liabilities may differ materially from the amounts estimated.
The accompanying consolidated financial statements include the accounts
of the Corporation and its wholly owned subsidiaries, the Operating
Partnership and Shelbourne Properties III GP Inc., 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 Livonia, Michigan (note 4), Melrose
Park, Illinois (note 4), Hilliard, Ohio (note 5), New York, New York
(note 5), Indianapolis, Indiana (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. 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 $4,618,972
on the sale of real estate and $14,592,455 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 $19,278,483.
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 $1,500,000 at December 31, 2002 to $1,103,369 at September 30, 2003
as a result of professional costs associated with obtaining the Fleet
Loan of $379,965 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).
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
7
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
USE OF ESTIMATES (CONTINUED)
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 $103,169 and $19,170 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 $356,513 of
deferred straight-line rent was included in other assets that was
subsequently grouped with real estate with no write-off required.
Percentage rents charged to retail tenants based on sales volume are
recognized when earned. Pursuant to Staff Accounting Bulletin No 101,
"Revenue Recognition in Financial Statements," and the Emerging Issues
Task Force's Consensus on Issue 98-9, "Accounting for Contingent Rent in
Interim Financial Periods," the Corporation defers recognition of
contingent rental income (i.e., percentage/excess rent) in interim
periods until the specified target (i.e., breakpoint) that triggers the
contingent rental income is achieved. Recoveries from tenants for taxes,
insurance and other operating expenses are recognized as revenue in the
period the applicable costs are incurred.
INVESTMENTS IN JOINT VENTURES
-----------------------------
Certain properties are or were owned in joint ventures with Shelbourne
Properties I L.P. and/or Shelbourne Properties II 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 III, 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 $614,178 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 $2.50
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
$36.00 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 $1.90 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 III, 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 that
can be settled with shares, the monetary value of which is fixed, tied
solely or predominately to a variable such
10
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
------------------------------------------------
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 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 Corporation's gross asset value as of the last day
of each year. In addition, the Corporation was obligated to (i) pay
$200,000 for non-accountable expenses and (ii) reimburse Shelbourne
Management for expenses incurred in connection with the performance of
its services.
Effective February 14, 2002, in connection with the Transaction (as
described below), PCIC began providing such services for a reduced fee of
$333,333 per annum (the "Transition Management Fee"). Both Shelbourne
Management and PCIC were affiliates of the then management of the
Corporation.
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 III, 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 fee, transition management fee 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 $ - $ 32,667 $ - $ 70,463
Transition Management Fee $ - $ - $ 83,300 $ -
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
Shelbourne Shelbourne
Management Kestrel Management Kestrel
---------- ------- ----------- -------
Expense Reimbursement (1) $ - $ - $ 18,750 $ -
Asset Management Fee $ - $ 150,000 $ 105,863 $ -
Property Management Fee $ - $ 116,224 $ - $ 184,274
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 $13,270,754 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 $25,487, of which $10,705 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 II, Inc. consummated a transaction (the
"Transaction") whereby the Corporation purchased the 385,226 shares of
the Corporation's common stock held by subsidiaries of PCIC and the
Advisory Agreement was contributed to the
12
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Partnership. Pursuant to the Transaction, the Corporation paid
PCIC $11,830,337 in cash and the Operating Partnership issued preferred
partnership interests with an aggregate liquidation preference of
$672,178
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
-----------------------------------------------------------------------
THE TRANSACTION (CONTINUED)
and a note in the amount of $14,589,936. 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 below).
4. REAL ESTATE
-----------
As of September 30, 2003, the Corporation owned one property which is
located in Las Vegas, Nevada which was subsequently sold on November 5,
2003 (see note 11).
On January 29, 2003, Livonia Shopping Plaza located in Livonia, Michigan
was sold for a gross sales price of $12,969,000. The Corporation received
net proceeds in the amount of approximately $7,865,000 after mortgage
repayment, closing adjustments and closing costs. The Corporation
recognized an accounting gain of $4,481,423.
On February 28, 2003, the Corporation sold its property located in
Melrose Park, Illinois for a gross purchase price of $2,164,800. The
Corporation received proceeds of $1,970,000 after closing costs and
adjustments. The Corporation recognized an accounting gain of $137,549.
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 January 1, 2003 the Corporation was invested in three joint ventures,
(568 Broadway, Supervalu, and Tri-Columbus). As of September 30, 2003 the
Corporation was invested in two joint ventures (Tri- Columbus and
Accotel). The joint ventures are accounted for utilizing the equity
method of accounting.
On January 14, 2002, one of the Corporation's joint ventures sold a
supermarket in Edina, Minnesota for $3,500,000 that resulted in a gain on
sale to the Corporation of $649,092. On January 30, 2002, the same joint
venture sold a supermarket in Toledo, OH for $3,600,000 that resulted in
a net loss to the Corporation of $186,380. These amounts are included in
the Corporation's equity earnings from joint ventures.
On January 31, 2003, the Hilliard, Ohio property, which was owned by
Tri-Columbus Associates, in which the Corporation holds a 79.34%
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,
$1,636,784 of which is attributable to the Corporation's interest. The
joint venture recognized no gain or loss on the sale as the joint
venture's property was previously written down to its net realizable
value.
On February 28, 2003, 568 Broadway Joint Venture, a joint venture in
which the Corporation indirectly holds a 22.15% interest, sold its
property located at 568 Broadway, New York, New York for a gross sale
price of $87,500,000. After assumption of the debt encumbering the
property ($10,000,000), closing adjustments and other closing costs, net
proceeds were approximately $73,000,000, approximately $16,169,500 of
which was allocated to the Operating Partnership. The joint venture
recognized an accounting gain of $67,746,480 of which $14,565,894 was
attributable to the Corporation and is reported as equity income from
joint ventures.
13
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVESTMENTS IN JOINT VENTURES (CONTINUED)
-----------------------------------------
On May 8, 2003, Indiana Market Ltd., a joint venture in which the
Corporation holds a 50% interest, consummated the sale of its shopping
center property located in Indianapolis, Indiana commonly referred to as
Indiana Market Place for a purchase price of $700,000. After closing
costs and adjustments, net proceeds were $600,210 of which $300,105 is
allocable to the Corporation. The Corporation recognized an accounting
gain of $26,651 which is included in 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 the 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, net proceeds were $3,938,286. As a
result, the required principal payment was $3,544,457 of which the
Corporation was allocated $2,812,172. The remaining proceeds after the
principal payment were $393,829 of which the Corporation was allocated
$312,464. 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
II, 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
II, 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 Las Vegas, Nevada property and the property held by
Tri-Columbus Associates, as well as certain other properties owned
indirectly by Shelbourne Properties I, Inc. and Shelbourne Properties II,
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.
14
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FLEET LOAN (CONTINUED)
----------------------
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 $12,611,202 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
$52.25 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 November 19, 2002 to
November 12, 2003, the remaining unpaid per share Priority Return at
November 12, 2003 is $5.45.
9. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS
------------------------------------------
In connection with the Transaction, the Operating Partnership issued to
Shelbourne Management 672.178 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 ($672,178). 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 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 $4,374,000 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
15
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
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 II, 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 approximately $2,668,272, of which
$867,806, $1,079,675 and $720,791 was paid by Shelbourne Properties I,
Inc., Shelbourne Properties II, Inc., and the Corporation respectively.
The properties are also subject to existing mortgage indebtedness in the
current principal amount of approximately $74,220,000.
The Companies formed the joint venture and acquired the interest in the
new properties in order to facilitate the disposition of the other
properties of the Companies and the distribution to stockholders of the
sales proceeds in accordance with the Plan of Liquidation. Prior to the
acquisition of the Accor S.A. Properties, the holder of the Class A Units
had the right to cause the Operating Partnerships to purchase the Class A
Units at a substantial premium to their liquidation value (at the time of
the acquisition, a premium of approximately $4,374,000 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 ($14,574,000 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 ($20,100,000 in the case of the
Operating Partnership). These requirements significantly impaired the
ability of the Corporation to sell its properties and make distributions
in accordance with the Plan of Liquidation. In lieu of these
requirements, the operating partnerships acquired the Accor S.A.
Properties for the benefit of the holder of the Class A Units. The holder
of the Class A Units does, however, continue to have the right, under
certain limited circumstances which the Companies do not anticipate will
occur, to cause the operating partnerships to purchase the Class A Units
at the premium as described above.
The terms of the Class A Units were also modified to eliminate the
$2,500,000 aggregate liquidation preferences to which the holder of the
Class A Units was previously entitled ($672,178 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
$670,000 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.
11. SUBSEQUENT EVENTS
-----------------
On November 5, 2003, the Corporation sold its property located in Las
Vegas Nevada for a gross sales price of $17,500,000. The Loan encumbering
the property (see note 7) required a principal payment equal to the
greater of $9,600,000 or 90% of the net proceeds. After closing
adjustments and costs, net proceeds were $17,026,657.
16
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In compliance with the Loan, the required principal payment was
$15,250,000, of which the Corporation is responsible for $12,611,202.
Pursuant to the Indemnity, Contribution and Subrogation Agreements,
Shelbourne
11. SUBSEQUENT EVENTS (CONTINUED)
-----------------------------
Properties I, Inc and Shelbourne Properties II, Inc are obligated to
repay Shelbourne Properties III, Inc $2,638,798 plus any interest due in
accordance with the same terms as the Loan.
The remaining proceeds after the principal payment were $1,776,657. The
Corporation recognized an accounting gain of approximately $9,465,000.
17
SHELBOURNE PROPERTIES III, 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 III, 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 III, 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 III, Inc., a Delaware corporation (the
"Corporation"), was formed on April 17, 2001. The Corporation's
wholly-owned operating partnership, Shelbourne Properties III 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 88
(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 Livonia, Michigan and Melrose Park, Illinois and
its joint venture properties located in Hilliard, Ohio, New York, New
York, Indianapolis, Indiana, and Grove City, Ohio. As a result, the
remaining assets of the Company are a shopping center located in Las
Vegas, Nevada and a 79.34% interest in an industrial building in the
Columbus, Ohio area. In addition, the Company holds a 27.02% interest in
a joint venture that holds 20 motel properties for the benefit of the
Class A Unitholder. See "The Accotel Transaction" below.
The Corporation currently expects that the liquidation will be
substantially completed not later than October 29, 2004, although there
can be no assurance in this regard. As a result, it is currently
anticipated that not later than October 29, 2004, any then remaining
assets and liabilities will be transferred to a liquidating trust. With
the transfer to a liquidating trust, the liquidation will be completed
for federal and state income tax purposes, although one or more
distributions of the remaining cash and net proceeds from future asset
sales may occur subsequent to the establishment of a liquidating trust.
Due to the adoption by the shareholders of the Plan of Liquidation on
October 29, 2002, the Corporation will be required to transfer any
remaining assets on or prior to October 29, 2004 to a liquidating trust
in order to avoid adverse tax consequences. In addition, the holder of
the Class A Units is presently entitled to require the Operating
Partnership to purchase the Class A Unit at a premium if a Class A
Trigger Event occurs (as defined below) at any
18
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
ORGANIZATION (CONTINUED)
------------------------
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 II, Inc. consummated a transaction (the
"Transaction") whereby the Corporation purchased the 385,226 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 $11,830,337 in cash and the Operating
Partnership issued preferred partnership interests with an aggregate
liquidation preference of $672,178 and a note in the amount of
$14,589,936.
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 ($4,374,000 at the January 15, 2003)
unless the Operating Partnership, together with the operating
partnerships of Shelbourne Properties I, Inc. and Shelbourne Properties
II, Inc. (collectively, the "Shelbourne OPs") maintained at least
approximately $54,200,000 of aggregate indebtedness ($14,574,000 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 ($20,100,000 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.,
Shelbourne Properties II L.P. and the Operating Partnership,
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 their respective Class A Units at the premium
described above. These circumstances include the occurrence of any of
the following so long as any of the Class A Units are outstanding; (i)
the filing of bankruptcy by a Shelbourne
19
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
THE ACCOTEL TRANSACTION (CONTINUED)
-----------------------------------
OP; (ii) the failure of a Shelbourne OP to be taxed as a partnership;
(iii) the termination of the Advisory Agreement; (iv) the issuing of a
guaranty by any of the Companies on the debt securing the Accor S.A.
Properties; or (v) the taking of any action with respect to the Accor
S.A. Properties without the consent of the Class A Unitholder (the
"Class A Trigger Events").
The holder of the Class A Units has the right, which right must be
exercised by no later than July 28, 2004, to require that the Shelbourne
OPs acquire other properties for the Class A Unitholder's benefit at an
aggregate cash cost to the Shelbourne OPs of not more than $2,500,000
(approximately $670,000 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.
Livonia Shopping Plaza. On January 29, 2003 Livonia Shopping Plaza,
located in Livonia, Michigan, was sold for $12,969,000. The Corporation
received proceeds of $7,865,000 after repayment of debt ($4,700,000),
closing adjustments and closing costs. The Company realized an
accounting gain of $4,481,423.
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 79.34% 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
$1,824,820), closing adjustments and other closing costs, net proceeds
were approximately $2,063,000, $1,637,784 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 22.15% interest, sold
its property located at 568 Broadway, New York, New York for a gross
sales price of $87,500,000. After assumption of the debt encumbering the
property, closing adjustments and other closing costs, net proceeds were
approximately $73,000,000 of which approximately $16,169,500 was
allocated to the Operating Partnership. The joint venture recognized an
accounting gain of $67,746,480 of which $14,565,894 was attributable to
the Corporation.
Melrose Park. Also on February 28, 2003, the Corporation sold its
property located in Melrose Park, Illinois for a gross purchase price of
$2,164,800. The Corporation received proceeds of $1,970,000 after
closing costs and adjustments. The Company realized an accounting gain
of $137,549.
Indiana Market Ltd. On May 8, 2003, Indiana Market Ltd., a joint venture
in which the Corporation holds a 50% interest, consummated the sale of
its shopping center property located in Indianapolis, Indiana commonly
referred to as Indiana Market Place for a purchase price of $700,000.
After closing costs and adjustments, net proceeds were $600,210 of which
$300,105 is allocable to the Corporation. The Corporation recognized an
accounting gain of $26,251.
20
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
THE PLAN OF LIQUIDATION - PROPERTY SALES (CONTINUED)
----------------------------------------------------
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 the property required a principal
payment equal to the greater of $3,300,000 or 90% of the net proceeds.
After closing adjustments and costs, net proceeds were $3,938,286. As a
result, the required principal payment was $3,544,457 of which the
Corporation was allocated $2,812,172. The remaining proceeds after the
principal payment were $393,829 of which the Corporation was allocated
$312,464 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.
RECENT DEVELOPMENTS
-------------------
On November 5, 2003, the Corporation sold its property located in Las
Vegas Nevada for a gross sales price of $17,500,000. The Loan
encumbering the property (see note 7) required a principal payment equal
to the greater of $9,600,000 or 90% of the net proceeds. After closing
adjustments and costs, net proceeds were $17,026,657.
In compliance with the Loan, the required principal payment was
$15,250,000, of which the Corporation is responsible for $12,611,202.
Pursuant to the Indemnity, Contribution and Subrogation Agreements,
Shelbourne Properties I, Inc and Shelbourne Properties II, Inc are
obligated to repay Shelbourne Properties III, Inc $2,638,798 plus any
interest due in accordance with the same terms as the Loan.
The remaining proceeds after the principal payment were $1,776,657. The
Corporation recognized an accounting gain of approximately $9,465,000.
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 I, Inc. and Shelbourne Properties II,
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 (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% 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
Las Vegas, Nevada property and the property held by Tri-Columbus
Associates, as well as certain other properties owned indirectly by
Shelbourne Properties I, Inc. and Shelbourne Properties II, 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 $13,193,637.
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.
21
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
-------------------------------------------
At September 30, 2003, the outstanding balance due on the Loan was
$31,455,543, of which $12,611,202 was allocable to the Company and the
interest rate on the Loan was 3.875%.
The Company had $2,102,717 in cash and cash equivalents at September 30,
2003 of which $1,000,824 was classified as restricted cash. Cash and
cash equivalents are temporarily invested in short-term instruments. The
Company's level of liquidity based upon cash and cash equivalents
increased by $1,842,347 during the nine months ended September 30, 2003.
As discussed further below, the increase resulted from $26,884,643 of
net cash provided by operating activities and $13,956,834 of net cash
provided by investing activities which were largely offset by
$38,999,130 of net cash used in financing activities.
In addition to the cash and cash equivalents reported at September 30,
2003, the Corporation's joint ventures held cash at September 30, 2003
of which the Corporation's allocable share was $403,279.
Currently, the Corporation's primary sources of funds are rents
collected from tenants, distributions from its joint venture investments
and proceeds from property sales. As a result of the sale of Sunrise
Marketplace in Las Vegas, Nevada in November 2003, it is expected that
the Company will not receive any additional rental revenue after such
sale date as Sunrise Marketplace was the last wholly owned property of
the Company. Rents collected from tenants for the nine months ended
September 30, 2003 amounted to $1,937,748 as compared to $2,690,915 for
the nine months ended September 30, 2002. The decrease is due to the
sale of Livonia Shopping Plaza on January 29, 2003 which is partially
offset by an increase in collections at Sunrise Marketplace of $61,671.
Distributions in excess of earnings from joint ventures increased by
$1,944,150 to $11,603,814 for the nine months ended September 30, 2003
from $9,659,664 for the nine months ended September 30, 2002. The
increase is due to the net cash received from the 2003 sales of
properties owned by 568 Broadway Joint Venture, Tri-Columbus Associates,
and Indiana Market, Ltd.
Cash provided by investing activities resulted from the sales of Livonia
Shopping Plaza and Melrose Crossing II which generated proceeds of
$14,820,768, which were partially offset by the investment in the
Accotel Transaction of $720,791 and improvements to real estate of
$143,143 at Sunrise Marketplace.
Cash used in financing activities consisted of the dividends paid to
shareholders ($31,866,389), distributions made to Class A Unitholders
($25,487), the satisfaction of the Credit Facility ($19,178,457) and
principal payment on the Loan ($2,812,172). These were primarily offset
by the Loan proceeds of $15,423,374.
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 $36,481,430 to $20,152,725 for the nine months ended September 30,
2003 from a net loss of $16,328,705 for the nine months ended September
30, 2002. The increase was due primarily to an increase in gains on
sale, increased equity income from joint ventures and a decrease in
costs and expenses. These items were partially offset by a decrease in
rental revenue and an increase in interest expense. The Corporation's
income before equity income from joint ventures, gain on sale of real
estate, and interest was $210,597 for the nine months ended September
30, 2003, as compared to a loss of $17,755,172 for the nine months ended
September 30, 2002. Melrose Crossing II's activity for the nine months
ended September 30, 2002 is classified as discontinued operations.
Rental Revenue
Rental revenues decreased $694,335 or approximately 26% to $2,019,939
for the nine months ended September 30, 2003 from $2,714,274 for the
nine months ended September 30, 2002 due to the sale of Livonia Shopping
Plaza. This decrease was partially offset by an increase in revenue at
Sunrise Marketplace of $138,597.
22
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Costs and Expenses
Costs and expenses for the nine months ended September 30, 2003 were
$1,809,342, representing a decrease of $18,660,104 from the same period
in 2002. The decrease is due principally to expenses incurred in 2002 of
$15,262,114 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 $5,207,332. Therefore, without giving
effect to the costs incurred in 2002 for the purchase of the Advisory
Agreement, expenses decreased by $3,397,990 for nine months ended
September 30, 2003 compared with the same period in 2002. The decrease
is primarily due to reduced administrative expenses, the cessation of
depreciation and amortization and the reduction of the asset management
fees to $200,000 per year as well as a reduction in operating expense.
Operating expenses increased by $38,106 for the nine months ended
September 30, 2003 as compared to the nine months ended September 30,
2002. The increase in operating costs is the result of an obligation
under the terms of the sale of Livonia Shopping Plaza to pay the real
estate taxes through November 30, 2003. The increase was partially
offset by the reduction in operating costs due to the sale of Livonia
Shopping Plaza.
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 $645,302 for the same
period in 2002.
Partnership asset management fees and transition management fees
decreased to $150,000 for the nine months ended September 30, 2003 from
$314,113 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 $105,863 during 2002, and effective February 14, 2002,
after the Transaction, were based on a fixed 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 $314,113. Effective October 1, 2002, the asset management fee
payable by the Corporation was reduced to $50,000 per quarter.
Administrative costs decreased to $886,259 for the nine months ended
September 30, 2003 from $3,488,470 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 $54,332 from $80,997 for the
periods ending September 30, 2003 and 2002, respectively. The decrease
is due to the sale of Livonia Shopping Plaza in January 2003.
Gain on Sale of Real Estate
The gain on sale of $4,618,972 for the nine months ended September 30,
2003 was due to the sale of Livonia Shopping Plaza and Melrose Crossing
II on January 29, 2003 and February 28, 2003, respectively.
Non-Operating Income and Expenses
Equity income from investments in joint ventures increased by
$13,640,490 to $15,758,431 for the nine months ended September 30, 2003
as compared to $2,117,941 for the nine months ended September 30, 2002.
This is primarily due to 568 Broadway Joint Venture, in which the
Corporation indirectly held a 22.15% indirect interest, selling its
property on February 28, 2003. The joint venture recognized a gain on
sale of $67,746,480 of which $14,565,894 was allocated to the
Corporation.
Excluding the gain on sale, the Corporation experienced a decrease in
equity income from 568 Broadway Joint Venture for the nine months ended
September 30, 2003 as compared to the nine months ended September 30,
2002 of $1,065,540 due to the recognition of only two months of revenue
and expenses in 2003 resulting from the sale of the property on February
28, 2003.
23
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Non-Operating Income and Expenses (Continued)
The Corporation's joint venture investment, SuperValu, in which the
Corporation held a 50% indirect interest, sold its property located in
Indianapolis, Indiana on May 8, 2003. The property had been written down
to its anticipated net realizable value at October 29, 2002 and
recognized a loss in 2002 of $1,448,544. Because the expenses associated
with the sale were less than estimated in 2002, the joint venture
recognized an accounting gain in 2003 of $26,561. Excluding the gain on
the sales, the joint venture experienced an increase in equity income
for the nine months ended September 30, 2003 of $344,859 as compared to
the same period in 2002. The increase is primarily due to cessation of
depreciation and amortization expenses in 2003 in accordance with
liquidation accounting and the recognition by the joint venture of
impairment of its Atlanta, Georgia property which resulted in a $325,000
expense during the nine months ended September 30, 2002.
The Corporation's joint venture investment in Tri-Columbus Associates,
in which the Corporation holds a 79.34% indirect interest, experienced
an increase in equity income of $236,270 for the nine months ended
September 30, 2003 as compared to the same period in 2002. This increase
is primarily 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
$439,684, which consisted of $87,701 paid in connection with the Credit
Facility and $351,983 incurred in connection with the Loan, as compared
to $493,115 for the first nine months of 2002. The interest incurred
during 2002 was comprised of $142,871 related to the notes issued to
Shelbourne Management in connection with the purchase of the Advisory
Agreement and interest of $350,244 in connection with the Credit
Facility.
Interest income decreased to $29,895 during the nine months ended
September 30, 2003 from $45,381 during the nine months ended September
30, 2002 due to slightly lower cash balances being invested and lower
yields.
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
------------------------------------------------------------
Net income
The Corporation's net income available for common shareholders increased
by $177,608 to a net income $228,963 for the three months ended
September 30, 2003 from $51,355 for the three months ended September 30,
2002. The increase was due to a decrease in costs and expenses and a
decrease in interest expense 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
sales of real estate, and interest was $62,611 for the three months
ended September 30, 2003, as compared to a loss of $387,383 for the
three months ended September 30, 2002. Melrose Crossing II's activity
for the three months ended September 30, 2002 is classified as
discontinued operations.
Rental Revenue
Rental revenues decreased $420,815 or approximately 47%, to $466,568 for
the three months ended September 30, 2003 from $887,383 for the three
months ended September 30, 2002 due to the sale of Livonia Shopping
Plaza. The sale of Livonia Shopping Plaza resulted in $400,517 of the
decrease in rental revenue combined with Sunrise Marketplace's rental
revenues decreasing by $20,298.
Costs and Expenses
Costs and expenses for the three months ended September 30, 2003
amounted to $403,957, representing a decrease of $870,809 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 costs and
expenses along with the sale of certain properties.
24
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Costs and Expenses(Continued)
Operating expenses decreased by $94,036 for the three months ended
September 30, 2003 as compared to the three months ended September 30,
2002. The decrease in operating expenses is primarily due to the sale of
Livonia in January 2003.
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 three months ended September 30, 2003 as compared to $287,030 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 $196,904 for the three months ended
September 30, 2003 from $640,434 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 $19,892 from $32,806 for the periods ending September 30,
2003 and 2002, respectively. The decrease is due to the sale of Livonia
Shopping Plaza in January 2003.
Non-Operating Income and Expenses
Equity income from investments in joint ventures decreased by $414,965
to $297,834 for the three months ended September 30, 2003 as compared to
$712,799 for the three months ended September 30, 2002. The Corporation
experienced a decrease of $393,404 in equity income from its joint
venture in 568 Broadway Joint Venture, in which the Corporation held a
22.15% indirect interest, for the three months ended September 30, 2003
as compared to the three months ended September 30, 2002. The decrease
is due to the sale of the property on February 28, 2003.
The Corporation's investment in the Supervalu Joint Venture, in which it
owns a 50% indirect interest, experienced a decrease in equity income of
$4,842 for the three months ended September 30, 2003 as compared to the
same period in 2002. This is due to all properties owned by the Joint
Venture being sold prior to the third quarter of 2003.
The Corporation's joint venture in Tri-Columbus Associates, in which the
Corporation holds a 79.34% indirect interest, experienced a decrease in
equity income of $16,719 for the three months ended September 30, 2003
as compared to the same period in 2002. This decrease is primarily due
to the sale of two of the three buildings owned by the Joint Venture
prior to the third quarter of 2003 which is offset by the cessation of
depreciation and amortization expenses in accordance with liquidation
accounting.
During the third quarter of 2003, interest expense of $127,568 was
incurred in connection with the Loan. The interest expense for the third
quarter of 2002 of $210,288 was incurred in connection with the Credit
Facility.
Interest income decreased to $4,674 during the three months ended
September 30, 2003 from $17,002 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 III, 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 Company is exposed to the risk of
interest rate changes. At September 30, 2003, borrowings allocated to
the Corporation under the Loan totaled $12,611,202 and initially bore an
interest rate of LIBOR plus 2.75%. Due to the sale of the Corporation's
Sunrise Marketplace property on November 5, 2003, the Corporation's
allocated debt balance was reduced to zero and hence has no sensitivity
to interest rate fluctuations. The Corporation does not utilize
derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation 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 wea knesses.
26
SHELBOURNE PROPERTIES III, 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 III, 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 III, Inc.
(Registrant)
Dated: November 12, 2003 By: /S/ Michael L. Ashner
---------------------
Michael L. Ashner
Chief Executive Officer
28
SHELBOURNE PROPERTIES III, 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 30
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32
- ------------------
29
SHELBOURNE PROPERTIES III, INC.
FORM 10Q - SEPTEMBER 30, 2003
(1) incorporated by reference to the Registration Statement of the Company on Form S-4 filed on February 11,
2000, as amended
(2) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 14, 2002
(3) incorporated by reference to the Current Report of the Company on Form 8-K filed on May 14, 2002.
(4) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 2, 2002.
(5) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 8, 2002
(6) incorporated by reference to the Current Report of the Company on Form 8-K filed on August 5, 2002
(7) incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A
filed on September 27, 2002
(8) incorporated by reference to the Quarterly Report on Form 10-Q of the Company filed on November 14, 2002.
(9) incorporated by reference to the Current Report of the Company on Form 8-K filed on January 15, 2003.
(10) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 24, 2003.