Item 1. Business
In this Form 10-K, the terms "we," "us," "our" and "our company" refer to the combined operations of all of Shelbourne Properties III, Inc., Shelbourne Properties III GP, LLC and Shelbourne Properties III, LP.
Overview
Our company, Shelbourne Properties III, Inc., a Delaware corporation (the "Corporation"), was formed on February 8, 2001 and is engaged in the business of operating and holding for investment previously acquired income-producing properties. Currently, we operate and hold one office building, three shopping centers, two retail stores (supermarkets) and three industrial warehouses. See "Item 2.
Item 2. Properties
Property Portfolio
The Corporation owned the following properties as of December 31, 2001 and March 25, 2002:
(1) 568 BROADWAY
On December 2, 1986, a joint venture (the "Broadway Joint Venture") comprised of the High Equity Partners L.P. - Series 86 ("HEP-86") and Integrated Resources high Equity Partners L.P. - Series 85 ("HEP-85") acquired a fee simple interest in 568-578 Broadway ("568 Broadway"), a commercial building in New York City, New York. Until February 1, 1990, the HEP-86 and HEP-85 each had a 50% interest in the Broadway Joint Venture. On February 1, 1990, the Broadway Joint Venture admitted a third joint venture partner, the Predecessor Partnership, which contributed $10,000,000 for a 22.15% interest in the joint venture. In a transaction similar to the merger described under "Item 1. Business - Recent Developments" above, on February 14, 2001, Shelbourne Properties I, LP became the successor in interest to HEP-85's assets (Shelbourne I and HEP-85 are collectively referred to as Shelbourne I) and Shelbourne Properties II, LP became the successor in interest to HEP-86's assets (Shelbourne II and HEP-86 are collectively referred to as Shelbourne II), including their respective interests in the Broadway Joint Venture. The Shelbourne Properties I, LP and Shelbourne Properties II, LP each retain a 38.925% interest in the joint venture.
568 Broadway is located in the SoHo district of Manhattan on the northeast corner of Broadway and Prince Street. 568 Broadway is a 12-story plus basement and sub-basement building constructed in 1898. It is situated on a site of approximately 23,600 square feet, has a rentable square footage of approximately 300,000 square feet and a floor size of approximately 26,000 square feet. Formerly catering primarily to industrial light manufacturing, the building has been converted to an office building and is currently being leased to art galleries, photography studios, retail and office tenants. 568 Broadway competes with several other buildings in the SoHo area.
Further to the transaction described under "Item 1. Business - Recent Developments", as of February 14, 2002 we granted a security interest in our joint venture interest in 568 Broadway to Shelbourne Management LLC as security for the note we issued as a distribution to a preferred shareholder of the Operating Partnership. For more information concerning this security interest, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" below.
(2) LIVONIA PLAZA
On June 28, 1989, the Predecessor Partnership purchased a fee simple interest in Livonia Plaza, a shopping center that was completed in December 1989, located in Livonia, Michigan.
Livonia Plaza is a 133,198 square foot neighborhood shopping center situated on a 13.9 acre site near the intersection of Five Mile Road and Bainbridge Avenue in Livonia, a western suburb of Detroit. In October 1996, the Predecessor Partnership signed an agreement to expand the Kroger store to 56,337 square feet and purchased 1.77 acre of land adjacent to the center to facilitate the Kroger expansion. The expansion was completed in 1997 and Kroger incurred the costs of the building and parking lot construction.
Further to the transaction described under "Item 1. Business - Recent Developments", as of February 14, 2002 we granted a mortgage on Livonia Plaza to Shelbourne Management LLC as security for the note we issued as a distribution to a preferred shareholder of the Operating Partnership. For more information concerning this mortgage, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" below.
(3) MELROSE CROSSING SHOPPING CENTER - PHASE II
On February 3, 1989, the Predecessor Partnership purchased the fee simple interest in Phase II of the Melrose Crossing Shopping Center ("Melrose-Phase II"). Melrose-Phase II, located in Melrose Park, Illinois, previously consisted of a 88,616 square foot retail store located on a parcel totaling 7.02 acres.
Melrose-Phase II lies to the north of Melrose Crossing on which an 88,000 square foot department store is located as well as 138,355 square feet of retail space that is owned by Shelbourne II. Melrose-Phase II is situated in Melrose Park, Illinois, an older working-class neighborhood near O'Hare Airport at the intersection of Mannheim Road and North Avenue, less than 10 miles from Chicago's Loop.
(4) SUNRISE MARKETPLACE
On February 15, 1989, the Predecessor Partnership purchased the fee simple interest in Sunrise Marketplace ("Sunrise"), a 176,661 square foot neighborhood shopping center in Las Vegas, Nevada. The center is situated on 15.15 acres of land at the northeast corner of Nellis Boulevard and Stewart Avenue.
Further to the transaction described under "Item 1. Business - Recent Developments", as of February 14, 2002 we granted a mortgage on Sunrise to Shelbourne Management LLC as security for the note we issued as a distribution to a preferred shareholder of the Operating Partnership. For more information concerning this mortgage, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" below.
(5) SUPER VALU STORES
On February 16, 1989, the Predecessor Partnership acquired joint venture interests in four supermarkets (the "Properties") owned by Super Valu Stores ("Super Valu") located in Edina, Minnesota; Toledo, Ohio; Norcross, Georgia and Indianapolis, Indiana. A fee simple interest in the Predecessor Properties was acquired pursuant to a contract of sale among the seller, the Predecessor Partnership and American Real Estate Holdings Limited Partnership ("AREH"). AREH is 99% owned by American Real Estate Partners L.P., a public partnership originally sponsored by Integrated. At the closing, AREH and the Predecessor Partnership assigned their contract rights with respect to each of the Properties to three joint venture entities each of which has AREH and the Predecessor Partnership as a 50% owner. Cub Foods, a tenant Norcross, GA and Indianapolis, IN, has declared bankruptcy. The lease in Norcross GA was rejected as of January 31, 2002, which will result in a loss of future revenue of $738,042. As a result, the REIT will be maintaining the vacant building until it either can be sold or relet. The lease in Indianapolis has not been rejected. In January 2002, two of the SuperValu properties, one in Edina, Minnesota and one in Toledo, Ohio, were sold.
(6) TMR WAREHOUSES
On September 15, 1988, Tri-Columbus Associates ("Tri-Columbus"), a joint venture comprised of the Predecessor Partnership, Shelbourne II and IR Columbus Corp. ("Columbus Corp."), at the time a wholly-owned subsidiary of Integrated, purchased the fee simple interest in three warehouses (the "TMR Warehouses") located in Columbus, Ohio. The Predecessor Partnership originally purchased a 58.68% interest in Tri-Columbus on September 15, 1988. On June 29, 1990, the Predecessor Partnership closed in escrow on the purchase of an additional 20.66% interest in Tri-Columbus. The Predecessor Partnership purchased the additional joint venture interest from Columbus Corp. at approximately 86% of Columbus Corp.'s original cost, pursuant to a right of first refusal contained in the joint venture agreement. Due to Integrated's bankruptcy, the transaction was submitted to the bankruptcy court for review, the approval of the bankruptcy court was obtained on September 6, 1990 and the funds were released from escrow. Purchase of this additional 20.66% interest increased our interest in Tri-Columbus from 58.68% to 79.34%. The remaining 20.66% is held by Shelbourne II.
We entered into an agreement with Volvo in late 2000 pursuant to which Volvo agreed to extend its lease term until December 31, 2010. The rent through December 31, 2002 will remain at its current rate of $1,418,825 and then increase to $1,533,290 per annum through December 31, 2005. Annual rent from 2006 through 2010 will be $1,614,910. We agreed to spend up to $2,000,000 for capital improvements and to connect the property with an adjacent property. Any expenditures made by us will be pro rated over the remaining term of the lease and reimbursed by Volvo as additional rent.
The TMR Warehouses are distribution and light manufacturing facilities located in Orange, Grove City and Hilliard, all suburbs of Columbus, Ohio and comprise 1,010,500 square feet of space in the aggregate, with individual square footage of 583,000 square feet, 190,000 square feet and 237,500 square feet, respectively.
Further to the transaction described under "Item 1. Business - Recent Developments", as of February 14, 2002 we granted a mortgage on the TMR Warehouses to Shelbourne Management LLC as security for the note we issued as a distribution to a preferred shareholder of the Operating Partnership. For more information concerning this mortgage, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" below.
Occupancy
The following table lists the occupancy rates of our properties at the end of each of the last three years.
OCCUPANCY PROPERTY 12/31/2001 12/31/2000 12/31/1999 - -------- ---------- ---------- ---------- 568 Broadway Office Building 97% 100% 100% Livonia Plaza 92% 91% 89% Melrose Crossing Phase II 0% 0% 0% Sunrise Marketplace 96% 92% 94% SuperValu Stores (1) 78% 76% 100% Tri-Columbus-Grove City 100% 100% 100% Tri-Columbus-Hilliard 100% 100% 0% Tri-Columbus-Orange 100% 100% 100%
(1) Two of the four Super Valu properties, one in Edina, Minnesota, and one in Toledo, Ohio, were sold in January 2002.
The following table contains information for each tenant that occupies ten percent or more of the rentable square footage of any of our properties.
Capital Improvements
See "Item 7. Management's Discussion and Analysis and Results of Operations."
Item 3.
Item 3. Legal Proceedings
On February 22, 2002, Carl Icahn and Longacre Corp. brought a derivative shareholder suit in the New York State Supreme Court against NorthStar Capital Investment Corp., PCIC, Shelbourne Management, Peter W. Ahl, David Hamamoto, David G. King, Jr., Dallas E. Lucas, W. Edward Scheetz, Michael T. Bebon, Donald W. Coons and Robert Martin, and nominal defendants the Corporation, Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc. for, inter alia, breach of fiduciary duties relating to the approval of the stock repurchase transaction between the Corporation and NorthStar Capital Investment Corp. described in "Item 1. Business" under the heading "Recent Developments." On March 4, 2002, Icahn and Longacre brought a motion for expedited discovery, reversal of priority of discovery and injunctive relief by Order to Show Cause. Thereafter, the defendants moved to dismiss the case for, among other reasons, the failure to make a demand on the Board of Directors prior to commencing the action. At a hearing held on March 11, the court authorized limited discovery in connection with
defendant's motion to dismiss. The court also scheduled a hearing for April 29, 2002 on defendant's motion to dismiss.
In addition, two shareholder derivative actions have been filed in Delaware against the same defendants. Those actions have now been consolidated, and defendants have moved to dismiss the consolidated action.
With respect to the allegations in the lawsuits, we believed at the time the Special Committee approved the transaction, and we continue to believe, that the stock repurchase was fair and reasonable and in the best interests of the Corporation and its shareholders.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
During 2001, matters were submitted to a vote of our security holders on one occasion. The consent of limited partners was sought to approve the conversion of the Predecessor Partnership into the Operating Partnership. The consent solicitation expired April 16, 2001 and holders of a majority of the Units approved the conversion. On April 17, 2001, the conversion was completed as described in "Item 1. Business - Corporate History" on page 3 above.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Our Common Stock
In May 2001, our Common Stock began trading on the American Stock Exchange under the symbol "HXF". Prior to that date, there was no established trading market for interests in the Predecessor Partnership.
The high and low sales prices per share of Common Stock are set forth below for the periods indicated.
QUARTER ENDED HIGH LOW - --------------------------------------------------------------------------------
June 30, 2001 $33.50 $24.94
September 30, 2001 $32.11 $25.23
December 31, 2001 $28.50 $23.13
On March 25, 2002, the closing sale price of the Common Stock as reported by the ASE was $40.30. The Corporation had approximately 1,536 holders of record of Common Stock as of March 25, 2002.
The Corporation has authorized 2,500,000 shares of Common Stock, issued 1,173,998 and 788,772 shares are outstanding as of March 25, 2002. Prior to the merger of the Operating Partnership and the Predecessor Partnership on April 17, 2001, the Predecessor Partnership had 371,766 Units issued and outstanding and approximately 10,455 holders of record of Units.
Dividends
Our management expects that any taxable income remaining after the regular quarterly or other dividends on its Common Stock will be distributed annually to the holders of the Common Stock on or prior to the date of the first regular quarterly dividend payment date of the following taxable year. The dividend policy with respect to the Common Stock is subject to revision by the Board of Directors. All distributions in excess of those required for the Corporation to maintain its REIT status will be made by the Corporation at the sole discretion of the Board of Directors and will depend on the taxable earnings of the Corporation, the financial condition of the Corporation, and such other factors as the Board of Directors deems relevant. The Board of Directors has not established any minimum distribution level. In order to maintain its qualifications as a REIT, the Corporation intends to make regular quarterly dividends to its shareholders that, on an annual basis, will represent at least 90% of its taxable income (which may not necessarily equal net income as calculated in accordance with generally accepted accounting principles), determined without regard to the deduction for dividends paid and excluding any net capital gains.
Holders of Common Stock will be entitled to receive distributions if, as and when the Board of Directors authorizes and declares distributions. However, rights to distributions may be subordinated to the rights of holders of preferred stock, when preferred stock is issued and outstanding. In any liquidation, dissolution or winding up of the Corporation, each outstanding share of Common Stock will entitle its holder to a proportionate share of the assets that remain after the Corporation pays its liabilities and any preferential distributions owed to preferred shareholders.
The following table sets forth the dividends paid or declared by the Corporation on its Common Stock (or distributions on the Predecessor Partnership's Units prior to April 17, 2001) for the previous three years:
STOCKHOLDER RECORD DIVIDEND / SHARE (1) PERIOD ENDED DATE - -------------------------- ----------------------------- ----------------------- March 30, 1999 October 1, 1998 $.85 / share (2) June 30, 1999 March 31, 1999 $.85 / share (2) August 31, 1999 June 30, 1999 $.85 / share (2) - -------------------------- ----------------------------- ----------------------- December 31, 2001 December 17, 2001 $1.87 / share (2)
Explanatory Note:
(1) Commencing with the third quarter of 1999, distributions were suspended while the requirements of the class action and derivative litigation involving the Predecessor Partnership were completed. Distributions resumed in December of 2001.
(2) We converted from a partnership to a REIT in April 2001. Each partnership unit was converted to three shares of stock. All dividends in this chart are reflected on a per share basis.
Distributions to shareholders will generally be taxable as ordinary income, although a portion of such dividends may be designated by the Corporation as capital gain or may constitute a tax-free return of capital. The Corporation annually furnishes to each of its shareholders a statement setting forth the distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital.
The Corporation intends to continue to declare quarterly distributions on its Common Stock. No assurance, however, can be given as to the amounts or timing of future distributions, as such distributions are subject to our earnings, financial condition, capital requirements and such other factors as our Board of Directors deems relevant.
Recent Sales of Unregistered Securities
There were no securities sold by the registrant in 2001 that were not registered under the Securities Act.
Item 6.
Item 6. Selected Financial Data
The following financial data are derived from our audited consolidated financial statements. The financial data set forth below should be read in conjunction with "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with "Forward-Looking Statements" and our combined consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
Overview
The Corporation was formerly a Delaware limited partnership, High Equity Partners L.P. - Series 88 ("HEP-88"), which was converted to a REIT on April 17, 2001 by merging with Shelbourne Properties III LP, a Delaware limited partnership, which is currently the operating partnership of the Corporation (the "Operating Partnership"). The Corporation holds its investment in the properties through its Operating Partnership in which it had a 99% direct interest at December 31, 2001. The other 1% is held indirectly through the general partner of the Operating Partnership, Shelbourne Properties III GP, Inc. (the "General Partner").
On February 14, 2002, we repurchased the shares of a major stockholder, PCIC and paid $11,830,337 in cash. As part of that repurchase, Shelbourne Management, a wholly-owned subsidiary of PCIC, contributed the advisory agreement between the Corporation and the Operating Partnership and Shelbourne Management LLC, dated as of April 17, 2001, (the "Advisory Agreement") pursuant to which it had provided financial and investment advisory services to the Corporation and the General Partner. As consideration for the Advisory Agreement, the Operating Partnership and issued 672,178 5% Class A Preferred Partnership Units (with a liquidation preference of $1,000 per unit) to Shelbourne Management LLC. As a result, until those Preferred Units are redeemed, Shelbourne Management LLC is entitled to receive quarterly distributions from the Operating Partnership at a rate of 5% per annum of the aggregate liquidation preference of its preferred units. The agreement governing the repurchase provides for pre-payment penalties in the event that the Operating Partnership redeems these preferred units prior to February 14, 2007. The preferred units may be automatically redeemed upon the occurrence of certain events of default by the Corporation on its obligations under that agreement, which may result in our having to pay a pre-payment penalty.
As an initial distribution on the Preferred Units, the Corporation issued a note to Shelbourne Management LLC (the "Note") in the principal amount of $15,665,421, except that if the Note is repaid in full on or prior to April 30, 2002, the principal amount will be reduced to $14,589,936 and if the Note is repaid in full after April 30, 2002 and on or prior to May 15, 2002, the principal amount shall be reduced to $14,858,807. As security for the note, mortgages were placed on the following properties owned by the Corporation: Livonia Plaza, Sunrise Marketplace and the TMR warehouses. In addition, the Operating Partnership granted Shelbourne Management Company LLC a security interest in its joint venture interest in the 568 Broadway Office Building. We agreed to repay the Note entirely from the proceeds of new third party borrowings, which Presidio will have the option to guaranty.
We intend to be taxed as a REIT for U.S. federal income tax purposes for the year ended December 31, 2001. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. As a REIT, if we distribute 100% of our taxable income and comply with a number of organization and operational requirements, we generally will not be subject to U.S. federal income tax.
Our primary business objective is to maximize the value of our common stock. We seek to achieve this objective by managing our existing properties, making capital improvements to and/or selling properties and by making additional real estate-related investments. We may invest in a variety of real estate-related investments, including undervalued assets and value-enhancing situations, in a broad range of property types and geographical locations. We may raise additional capital by mortgaging existing properties or by selling equity or debt securities. We may acquire investments for cash or by issuing equity securities, including limited partnership interests in the Operating Partnership. The Board of Directors may retain an independent consulting firm to assist it in ascertaining the most effective means of achieving these objectives.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Corporation does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Impairment of long-lived assets. At December 31, 2001 and December 31, 2000, the Corporation had approximately $40.5 million and $44.6 million of real estate (net) as well as dollars of real estate held for sale, accounting for approximately 77% and 79%, respectively, of the Corporation's total assets. Property and equipment is carried at cost net of adjustments for impairment. The fair value of Operating Partnership's property and equipment is dependent on the performance of the properties.
The Corporation evaluates recoverability of the net carrying value of its real estate and related assets at least annually, and more often if circumstances dictated. If there is an indication that the carrying value of a property might not be recoverable, the Corporation prepares an estimate of the future undiscounted cash flows expected to result from the use of the property and its eventual disposition, generally over a five-year holding period. In performing this review, management takes into account, among other things, the existing occupancy, the expected leasing prospects of the property and the economic situation in the region where the property was located.
If the sum of the expected future undiscounted cash flows is less than the carrying amount of the property, the Corporation recognizes an impairment loss, and reduces the carrying amount of the asset to its estimated fair value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Management estimates fair value using discounted cash flows or market comparables, as most appropriate for each property. Independent certified appraisers are utilized to assist management, when warranted.
For the years ended December 31, 2001, 2000, and 1999, no impairment losses have been recorded. Cumulative impairment losses from previous years amount to $19,638,700. Impairment write-downs recorded by the Corporation do not affect the tax basis of the assets and are not included in the determination of taxable income or loss.
Because the cash flows used to evaluate the recoverability of the assets and their fair values are based upon projections of future economic events, such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying values at the balance sheet dates. The cash flows and market comparables used in this process are based on good faith estimates and assumptions developed by management.
Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and variances may be material. The Corporation may provide additional write-downs, which could be material in subsequent years if real estate markets or local economic conditions change.
Useful lives of long-lived assets. Property and equipment, and certain other long-lived assets are amortized over their useful lives. Depreciation and amortization are computed using the straight-line method over the useful life of the property and equipment. The cost of properties represents the initial cost of the properties to the Corporation plus acquisition and closing costs less impairment adjustments. Tenant improvements and leasing costs are amortized over the applicable lease term. Useful lives are based upon management's estimate over the period that the assets will generate revenue.
Revenue Recognition. Base rents are recognized on a straight-line basis over the terms of the related leases. Percentage rents charged to retail tenants based on sales volume are recognized when earned pursuant to Staff Accounting Bulletin No 101, "Revenue Recognition in Financial Statements," issued by the Securities and Exchange Commission in December 1999, and the Emerging Issues Tax Force's consensus on Issue 98-9, "Accounting for Contingent Rent in Interim Financial Periods," The 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 or taxes, insurance and other operating expenses are recognized as revenue in the period the applicable taxes are incurred.
Investments in Joint Ventures. Certain properties were purchased in joint venture ownership with affiliated REITS. The Corporation owns an undivided interest and is severally liable for indebtedness it incurs with connection with its ownership interest in those properties. Therefore, the Corporation's financial statements present the assets, liabilities, revenues and expenses of the joint ventures on a pro rata basis in accordance with the percentage of ownership.
New Accounting Policies
In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under the purchase method of accounting. SFAS No. 141 also changes the criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. There was no effect from this statement on the Corporation's financial statements.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses accounting and reporting for intangible assets acquired, except for those acquired in a business combination. SFAS No. 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles will not be amortized but rather will be tested at least annually for impairment. SFAS No. 142 also addresses accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. This statement will not effect the Corporation's financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The Corporation does not expect that this statement will have a material effect on the Corporation's financial statements.
Effective January 1, 2001 the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". Because the Corporation does not currently utilize derivatives of engage in hedging activities, this standard did not have a material effect on the Corporation's financial statements.
Liquidity And Capital Resources
Our objective is to ensure that there are sufficient resources to fund ongoing operating expenses and capital expenditures and to make the distributions required to maintain REIT status. In the next year, we believe our needs will be funded through existing cash balances and cash flows provided by operating activities.
Real Estate
We own all of, or an interest in, one office building, three shopping centers, four retail stores (supermarkets), two of which were sold in January 2002 and three industrial warehouses. Subsequent to December 31, 2001, some of these properties became subject to mortgages or security interests as discussed above. When the Note is refinanced, the new lender may take a security interest in some or all of the properties we own. We generate rental revenues from our commercial properties and are responsible for each property's operating expenses as well as the Operating Partnership's and our own administrative expenses.
These encumbrances on our properties may limit our ability to raise capital to fund capital improvement projects or acquisitions. In addition, we will have to use cash flow from operations to repay our obligation under the Note or any subsequent loan it undertakes to refinance the Note.
We use working capital reserves and any undistributed cash from operations as the primary source of liquidity. For the year ended December 31, 2001, all capital expenditures were funded from cash flow from operations and working capital reserves. As of December 31, 2001, total remaining working capital reserves amounted to approximately $10,305,552. Working capital reserves are temporarily invested in short-term instruments and are expected, together with operating cash flow, to be sufficient to fund anticipated capital improvements to the Corporation's properties.
We had $11,122,456 of cash and cash equivalents at December 31, 2001, as compared to $10,222,394 at December 31, 2000. During the year ended December 31, 2001 cash and cash equivalents increased $900,062 as a result of $3,377,382 in cash provided by operations, which was offset by $281,944 of capital and tenant improvements to the properties and $2,195,376 in cash distributions to shareholders. Our primary source of funds is cash flow from operation of our properties, principally rents received from tenants.
Capital Improvements and Capitalized Tenant Procurement Costs
The following table sets forth, for each of the last three fiscal years, the our expenditures at each of our properties for capital improvements and capitalized tenant procurement costs:
Years Ended December 31,
PROPERTY 2001 2000 1999 - ------------------------------------------------------------------------ 568 Broadway $133,654 $86,130 $87,985
Livonia Plaza 28,250 80,846 12,868
Melrose-Phase II - - -
Sunrise 179,058 38,421 74,738
Super Valu - - -
TMR Warehouse 282,378 94,985 112,560 - ------------------------------------------------------------------------ Totals: $623,340 $300,382 $288,151 ======== ======== ========
Capital improvement projects for the year 2001 consisted solely of ordinary course expenditures. Capital expenditures budgeted for 2002 consist primarily of approximately $129,000 in facade improvements and exterior painting and approximately $28,000 in corridor and restroom upgrades and window repairs at 568 Broadway, approximately $186,000 for the replacement of the roof at Livonia Plaza, and approximately $113,000 in landscaping upgrades, exterior painting and roof replacement at Sunrise Marketplace. These are all considered expenditures in the ordinary course and, where applicable, will be split among the co-venturers in the joint venture according to the percentage of their interest therein.
Certain properties require periodic investments of capital for tenant costs related to new and renewal leasing. The most significant tenant procurement costs budgeted for 2002 include approximately $118,000 in costs associated with making the sub-cellar at 568 Broadway into leaseable space (this space is currently utilized only for storage and is not revenue-producing), approximately $1,005,000 in tenant improvements obligations associated with the Tri-Columbus property leased to Volvo and other existing leases at Sunrise Marketplace, 568 Broadway and Livonia Plaza as well as approximately $76,000 in projected tenant improvements costs anticipated in conjunction with the procurement of new leases at Sunrise Marketplace and Livonia Plaza. Leasing commissions associated with these leases are budgeted to be approximately $129,000 for 2002. Where applicable, these costs will be split among the co-venturers in the joint venture according to the percentage of their interest therein.
Overall, the Corporation has budgeted expenditures for capital improvements and capitalized tenant procurement costs of $1,819,067 in 2002. These costs are expected to be incurred in the normal course of business and are expected to be funded from cash flow from operations and working capital reserves. However, such expenditures will depend upon the level of leasing activity and other factors that cannot be predicted with certainty.
We expect to continue to utilize a portion of cash flow from operations to pay for various future capital and tenant improvements to the properties and leasing commissions, the amount of which cannot be predicted with certainty. Capital and tenant improvements may in the future exceed the Corporation's cash flow from operations that would otherwise be available for distributions. We believe current working capital is sufficient for any near term needs of the Corporation. In the event that it is not, we would utilize the remaining working capital reserves, borrow funds or sell one or more properties to meet those needs.
Real Estate Market
In the markets in which our properties are located, the market values of existing properties continue to recover from the effects of the substantial decline in the real estate market in the early 1990's. However, in select markets, values have been slow to recover, and high vacancy rates continue to exist in some areas. The geographic diversity of our properties decreases the risk of a significant devaluation resulting from an isolated market slump in a particular region.
The outlook continues to be particularly positive for 568 Broadway as office and retail space in the Midtown South sub-market in which 568 Broadway is located is becoming increasingly popular. Little new office space inventory have been introduced to offset demand in the area, resulting in a favorable operating environment for the property. Rents are thus anticipated to continue to increase at the property for the foreseeable future.
Our Super Valu property at Norcross, Georgia was previously occupied by Cub Foods Stores. In January 2002, Cub Foods declared bankruptcy, rejected the lease and ceased paying rent at the property. The property is currently being marketed for sale or lease, and preliminary indications are that the property is well-positioned to benefit from generally favorable market conditions upon a sale or relet.
Our Super Valu property in Indianapolis, Indiana was occupied by Cub Foods Stores until July 2001 at which time Cub ceased operating a store at the property. While Cub continues to pay rent and is obligated under a lease that does not expire until August, 2003, the Corporation currently expects that Cub will not renew its lease and that the Corporation will need either to sell or relet the property at that time. The competition for tenants and buyers in the sub-market in which the property is located is considered to be extremely high, with a number of comparable vacant properties that compete with the Corporation's property.
The expectations are also positive for improving market conditions in Columbus, Ohio, a market in which the we have an interest in three warehouse properties (the TMR Warehouse properties). Columbus has become a hub for North American distribution facilities and substantial construction activity is producing increased competition for our properties. Nevertheless, values are expected to continue to improve for properties comparable to those in which we have an interest. The realization of any market appreciation will however be subject to the terms of the existing leases, which are not due to expire for several years at our properties in these locations.
We also own a property in Livonia, Michigan, a suburb of Detroit. After suffering significant losses in the early 1980's, the regional economy has diversified and is in the midst of a continuing steady recovery. The property is located on an established commercial and retail corridor near both downtown Detroit and the Detroit Metropolitan Airport. Accordingly, indications are that the property is well positioned to benefit from the anticipated growth in the area.
The Las Vegas sub market in which Sunrise Marketplace is located is likewise improving with strong population growth and household development. A recent review of the property's position suggests however that Sunrise Marketplace is not located within one of the region's primary growth paths, and its competition continues to be traditional neighborhood shopping centers with grocery or discount store anchors. It is therefore not anticipated that Sunrise Marketplace will fully benefit from the expected general appreciation in the real estate market in the area.
Our property in Melrose Park, Illinois continues to experience extremely poor operating conditions. While the broader Chicago market is experiencing economic and population growth which is creating a positive environment for real estate appreciation, the trade area in which the property is located is experiencing a decline in population. This decline coupled with the related flight from the area by big box retailers has left many retail properties, including our property, suffering from high vacancy and low rental rates. Vehicular access to the property is also difficult, further contributing to the negative outlook for the property in the foreseeable future.
Technological changes are also occurring which may reduce the space needs of many tenants and potential tenants and may alter the demand for amenities and power supplies at our properties. As a result of these changes
and the continued risk for overall market volatility, our potential for realizing the full value of its investment in the properties is at continued risk.
Impairment Of Assets
The Corporation evaluates the recoverability of the net carrying value of our real estate and related assets at least annually, and more often if circumstances dictate as required by SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." If there is an indication that the carrying amount of a property may not be recoverable, the Corporation prepares an estimate of the future undiscounted cash flows expected to result from the use of the property and its eventual disposition, generally over a five-year holding period. In performing this review, management takes into account, among other things, the existing occupancy, the expected leasing prospects of the property and the economic situation in the region where the property is located.
If the sum of the expected future undiscounted cash flow is less than the carrying amount of the property, the Corporation recognizes an impairment loss, and reduces the carrying amount of the asset to its estimated fair value as required by SFAS No. 144. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Management estimates fair value using discounted cash flows or market comparables, as most appropriate for each property. Independent certified appraisers are utilized to assist management, when warranted.
Impairment adjustments to reduce the carrying value of the real estate assets recorded by the Corporation do not affect the tax basis of the assets and are not included in the determination of taxable income or loss.
Management is not aware of any other current trends, events, or commitments that will have a significant impact on the long-term value of the properties. However, because the cash flows used to evaluate the recoverability of the assets and their fair values are based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying values at the balance sheet dates. The cash flows and market comparables used in this process are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize. Actual results may vary from the estimates, and the variances may be material.
All of our properties have experienced varying degrees of operating difficulties and the Corporation recorded significant impairment adjustments in prior years. Improvements in the real estate market and in property operations resulted in no adjustments for impairment being needed from 1996 through December 31, 2001.
The following table represents the historical cost less accumulated depreciation, the December 31, 2001 carrying value and the impairment adjustments recorded to date against our properties held as of December 31, 2001:
HISTORICAL COST ADJUSTMENT 12/31/01 LESS ACCUMULATED FOR CARRYING DESCRIPTION DEPRECIATION IMPAIRMENT VALUE - -------------------------------------------------------------------------------- 568 Broadway Office Building $9,391,127 $6,157,700 $3,233,427 (22.15% owned)
Livonia Plaza, Shopping Center, 9,914,039 2,100,000 7,814,039 Livonia, Michigan
Melrose Crossing, Phase II, 4,876,406 2,881,000 1,995,406 Melrose, Illinois
Sunrise Marketplace Shopping Center, 15,839,671 8,500,000 7,339,671 Clark County, Nevada
SuperValu Stores (Retail) 6,985,497 -- 6,985,497 (50% interest)
TMR Warehouses, Grove City and Delaware, Ohio 16,086,438 -- 16,086,438 (79.34% owned) ------------------------------------------- Total: $63,093,178 $19,638,700 $43,454,478 =========== =========== ===========
Funds from Operations
Management believes that funds from operations, as defined by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, to be an appropriate measure of performance for an equity REIT. While funds from operations is a relevant and widely used measure of operating performance of equity REITs, it does not represent cash flows from operations or net income as defined by GAAP, and it should not be considered as an alternative to these indicators in evaluating our liquidity or operating performance.
Funds from Operations for the years ended December 31, 2001, 2000 and 1999 are summarized in the following table:
2001 2000 1999 - -------------------------------------------------------------------------------- Net Income $2,526,685 $2,537,241 $1,895,156
Plus: Depreciation and amortization 1,663,483 1,593,250 1,609,183 related to real estate
Funds from Operations: $4,190,168 $4,130,491 $3,504,339 ========== ========== ==========
Results of Operations
The following discussion is based on our financial statements for the years ended December 31, 2001, 2000 and 1999.
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
Net Income
The net income of the Corporation remained relatively constant for the year ended December 31, 2001 as compared to 2000. Net income decreased to $2,526,685 for the year ended December 31, 2001 as compared to $2,537,241 for the year ended December 31, 2000 primarily due to an increase in costs and expenses and a decrease in interest income, which was partially offset by an increase in other income and the cash distribution of $2,195,376 to shareholders.
Rental Revenue
Rental revenue increased by $424,217, or 5.6%,during the year ended December 31, 2001 to $8,065,011 from $7,640,794 in 2000. The increase in rental revenue was attributable to an increase in base rental income on all properties of a combined $425,735 together with a slight increase in escalations of $4,518.
Interest and Other Income
Interest income decreased by $16,553, or 3.81%, to $417,638 in 2001 due to lower interest rates paid on our short-term investment instruments. Other income increased by $12,743, or 36%, during the year ended December 31, 2001 to $47,882 compared to $35,139 in 2000 due to a prior year real estate tax abatement from 4251 Leap Road (which is part of the Tri-Columbus properties) offset by the decrease in transfer fee income from transfers of partnership interests due to the conversion.
Costs and Expenses
Costs and expenses increased by $430,963, or 7.73%, for the year ended December 31, 2001 to $6,003,846 compared to $5,572,883 in 2000 due to higher administrative expenses, asset management fees, operating expenses and property management fees. Administrative expenses for the year ended December 31, 2001 increased by $187,500, or 18.88%, compared to 2000 due to the added legal expenses incurred with the conversion of the Predecessor Partnership into a REIT and expenses incurred for the first time that were solely associated with the operation of the REIT. Operating expenses increased by $99,893 or 5.11% during the year ended December 31, 2001 compared to 2000 due primarily to increases in insurance costs, which were partially offset by decreases in utilities, repairs and maintenance. Asset management fees increased 8.50% in 2001 to $871,863 due to an increase in the gross asset value of the Corporation. Depreciation and amortization expenses and property management fees rose slightly.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999
Net Income
The Predecessor Partnership experienced an increase in net income of $642,085, or 33.9%, for the year ended December 31, 2000 compared to 1999. Net income increased to $2,537,241 for the year ended December 31, 2000 from net income of $1,895,156 for the year ended December 31, 1999 primarily due to an increase in interest income and a decrease in costs and expenses, which more than offset a decrease in other income.
Rental Revenues
Rental revenue increased slightly during the year ended December 31, 2000 to $7,640,794 from $7,625,731 in 1999. The increase in rental revenue was attributable to an increase in base rent of $190,918, which was partially offset by decreases in step lease rental adjustments recorded for accounting purposes (adjustments to account for the recognition of rent on a straight-line basis) of $148,950 and escalation rent. Escalation rent consists of reimbursements of property level operating expenses received by the Predecessor Partnership from the tenants at the property. Escalation rent decreased in 2000 as compared to 1999 due to reduced operating expenses at the properties.
Interest and Other Income
Interest income increased by $163,752, or 60.6%, to $434,191 in 2000 from $270,439 in 1999 due to higher cash balances and interest rates during the current year compared to 1999. Other income decreased $57,967, or 62.3% during the year ended December 31, 2000 to $35,139 compared to $93,106 in 1999 due to a decrease in fees from investor servicing primarily related to a decrease in investor transfers.
Costs and Expenses
Costs and expenses decreased by $521,237, or 8.55%, for the year ended December 31, 2000 to $5,572,883 compared to $6,094,120 in 1999 due to the lower administrative expenses and operating expenses, which more than offset an increase in partnership asset management fees. Operating expenses decreased $353,494 or 15.3% during the year ended December 31, 2000 from $2,306,635 in 2000 to $1,953,141 in 1999 due primarily to savings in real estate tax expenses as well as repairs and maintenance which were partially offset by an increase in utilities. Administrative expenses for the year ended December 31, 2000 decreased by 19.1% or $234,921 compared to 1999 due to lower professional fees related to the settlement of the litigation and reorganization of the Predecessor Partnership. Partnership asset management fees increased 11.7% in 2000 to $803,487 due to an amendment to the partnership agreement, which significantly reduced the amount payable in 1999 and changed the method of calculating such fee in subsequent years. Depreciation and amortization expenses and property management fees remained relatively constant.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. As of December 31, 2001, we did not have any debt outstanding or any investments in long-term financial instruments that exposed us to market risks. However, as described under "Item 1. Business - Recent Developments", as of February 14, 2002, we issued a note to Shelbourne Management LLC (the "Note") in the principal amount of $15,665,421 with a maturity date of August 14, 2002. If the Note is repaid from third party indebtedness, it will bear an effective rate of interest equal to the initial rate of interest applicable to that third party indebtedness. If the Note is not repaid from third party indebtedness, the interest rate payable at maturity or earlier repayment is 8% per annum. As such, our exposure to market risk for changes in interest rates is contingent upon refinancing this indebtedness. If we do refinance this indebtedness, our exposure will depend on the level of interest rates at the time of that potential refinancing. If we do not refinance this indebtedness, we will not be exposed to market risks from changing interest rates.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our consolidated balance sheets as of December 31, 2001 and 2000, and the related consolidated statements of operations, equity and cash flows for the years ended December 31, 2001, 2000 and 1999, and the notes thereto, and the independent auditor's report thereon and the financial statement schedule are set forth on page through and S-1 and S-2 of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers
The table below sets forth certain information relating to the current directors and executive officers of the Corporation. The Corporation currently has three directors, Donald W. Coons, Robert Martin and W. Edward Scheetz and one executive officer, Dallas Lucas, who serves as treasurer.
The table below sets forth information relating to all directors and officers who served the Corporation for any period from February 8, 2001, the date of incorporation through December 31, 2001 but who no longer have those positions.
Pursuant to our certificate of incorporation, the directors are classified into three classes, as equal in number as possible, with respect to the term for which they hold office. The terms of the current directors will expire at the annual meeting of stockholders as follows: Robert Martin in 2003, Edward Scheetz in 2003 and Donald W. Coons in 2004.
Until March 27, 2002, our audit committee consists solely of independent directors, Michael Bebon, Donald Coons, Robert Martin. As our audit committee charter requires that three directors serve on our audit committee, subsequent to Michael Bebon's resignation on March 27, the Board of Directors elected Edward Scheetz to serve on the audit committee. Our audit committee is charged with recommending to the Board of Directors the independent public accountants to be selected to audit the Corporation's annual financial statements, approving (i) any special assignments given to such accountants, (ii) such
accountant's letter of comments and management's responses thereto and (iii) any major accounting changes made or contemplated, and reviewing the effectiveness and adequacy of the Corporation's internal accounting controls.
Robert Martin and Donald Coons are the members of the corporate governance committee and the compensation committee.
The following is a summary of the background of each director and officer who served the Corporation for some period during 2001.
Peter Ahl. Mr. Ahl has been a Vice President of NorthStar Capital Investment Corp. since 1997. Prior to joining NorthStar, he was a director in the Alternate Investment Group of AEW Capital Management, L.P. Mr. Ahl is a Level 3 Chartered Financial Analyst.
Michael Ashner. Mr. Ashner has been the Chief Executive Officer of Winthrop Financial Associates, a limited partnership since 1996 as well as the Chief Executive Officer of the New Kirk Group from 1997. From 1994 to 1996, Mr. Ashner was a Director, President and Co-chairman of National Property Investors, Inc., a real estate investment company. In addition, since 1981, Mr. Ashner has been President of Exeter Capital Corporation, a firm that has organized and administered real estate limited partnerships. Mr. Ashner currently serves as a director of Interstate Hotel Corporation, Nexthealth Corp., Great Bay Hotel and Casino Inc., Burnham Pacific Properties, Inc. and NBTY, Inc.
Michael Bebon. Mr. Bebon is a Vice President of Sales at each of Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation, both subsidiaries of LandAmerica Financial Group, Inc., a New York Stock Exchange listed title insurance company. Mr. Bebon has been a Vice President of Lawyers Title Insurance Corporation for more than five years.
Peter Braverman. Mr. Braverman has been a Vice President of Presidio AGP Corp. since November 1999. Mr. Braverman has served as the Executive Vice President of Winthrop Financial Associates and its affiliates since January 1996. Mr. Braverman also serves as the Executive Vice President of The Newkirk Group. From June 1995 until January 1996, Mr. Braverman was a Vice President of National Property Investors, Inc. and NPI Property Management Corporation.
Donald W. Coons. Mr. Coons is a director and the President and Chief Executive Officer of The Loyalist Insurance Group, a public company that trades on the Canadian Venture Exchange. Mr. Coons is also the President of Loyalist Insurance Brokers Limited and Loyalist Insurance Managers and a director and the President of Canadian Shortline Insurance Services and The Loyalist Insurance Company. Mr. Coons serves as a director of American Special Risks Limited.
David T. Hamamoto. Mr. Hamamoto is a co-founder and Co-Chief Executive Officer of NorthStar Capital Investment Corp. Prior to founding NorthStar in 1997, he was a co-head of the Whitehall Funds, a real estate principal investment business at Goldman Sachs & Co., and a partner at Goldman Sachs as well. Mr. Hamamoto is a director of Emeritus Corporation, one of the largest publicly traded owners and operators of assisted living facilities, and of U.S. Franchise Systems, a publicly traded franchising concern.
Steven B. Kauff. Mr. Kauff has been a Vice President of NorthStar Capital Investment Corp. since July 1999. He is also a Vice President of Presidio Capital Corp. Prior to joining NorthStar Capital Investment Corp., Mr. Kauff was with Arthur Andersen LLP in the Real Estate and Hospitality Services Group from 1996 to 1999, where he specialized in transaction consulting, due diligence and tax products for real estate ventures, including real estate investment trust and partnerships. From 1994 to 1996, Mr. Kauff was with Price Waterhouse LLP in the Real Estate Industry Services Group.
David G. King, Jr. Mr. King has been a Vice President and Assistant Treasurer of NorthStar Capital Investment Corp. since November 1997, as well as a Vice President of Presidio Capital Corp. Prior to joining NorthStar Capital Investment Corp., Mr. King was a Senior Vice President of Finance at Olympia & York Companies (USA).
Dallas Lucas. Mr. Lucas has been a director, Vice President, Treasurer and Chief Financial Officer of NorthStar Capital Investment Corp. since August 1998. He is also a Vice President of Presidio Capital Corp. From 1994 until August 1998, he was the Chief Financial Officer and Senior Vice President of Crescent Real Estate Equities Company. Mr. Lucas is a Certified Public Accountant.
Robert Martin. Mr. Martin is an Executive Managing Director at Insignia/ESG., Inc., a global commercial real estate brokerage firm, where he has been employed since 1995. Prior to joining Insignia/ESG, Mr. Martin was a managing director at Grubb & Ellis, a commercial real estate brokerage firm.
W. Edward Scheetz. Mr. Scheetz is Co-Chief Executive Officer of NorthStar Capital Investment Corp., a company he co-founded in July 1997. From 1993 to 1997, Mr. Scheetz was a partner at Apollo Real Estate Advisors, where he was responsible for the investment activities of Apollo Real Estate Investment Funds I and II. From 1989 to 1993, Mr. Scheetz was a principal with Trammell Crow Ventures where he was responsible for that firm's opportunistic real estate investment activities.
Lara Sweeney. Ms. Sweeney has been a Vice President and Secretary of Presidio AGP Corp. since November 1999. Ms. Sweeney has been a Senior Vice President of Winthrop Financial Associates since 1996. Ms. Sweeney was Director of Investor Relations for National Property Investors, Inc. from 1994 until 1996.
Carolyn Tiffany. Ms. Tiffany has been a Vice President and Treasurer of Presidio AGP Corp. since November 1999 and has been with Winthrop Financial Associates since January 1993. From 1995 to 1997, she was a Vice President in the asset management and investor relations departments of Winthrop Financial Associates and became Chief Operating Officer of Winthrop Financial Associates in December 1997. Ms. Tiffany is also the Chief Operating Officer of The Newkirk Group.
There are no family relationships among the current or former directors and officers of the Corporation.
Item 11.
Item 11. Compensation
(a) Executive Compensation.
None of our executive officers received compensation from us in 2001. Our executive officers were compensated by Shelbourne Management LLC in their capacities as officers and employees of that company. Please see "Item 1 - Business" and "Item 13 - Certain Relationships and Related Transactions" for a description of those arrangements between us and Shelbourne Management LLC.
(b) Director Compensation.
Our independent directors, currently Donald W. Coons and Robert Martin, receive $6,667 annually for their services as directors. In addition, solely for their services as members of the Special Committee, which was organized to review and evaluate the fairness of the repurchase by the Corporation of the shares of common stock held by PCIC, Michael Bebon, Donald W. Coons and Robert Martin received a one-time payment of $20,000. All directors are reimbursed for travel expenses and other out-of-pocket expenses incurred in connection with their serving as directors of the Corporation.
Item 12.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
(a) Security Ownership of Certain Beneficial Owners.
Except as set forth below, no person or group that is known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock at March 26, 2002:
Name of Beneficial Owner Number of Shares owned % of Class - -------------------------------------------------------------------------------- HX Investors, L.P (1) 63,072 7.996%
(1) The principal business address of HX Investors, L.P. is 100 Jericho Quadrangle, Suite 214, Jericho, New York 11753. The sole general partner of HX Investors LP is Exeter Capital Corporation. Mr. Michael L. Ashner is the sole shareholder and director of Exeter Capital. Mr. Ashner is principally employed as the Chief Executive Officer of Winthrop Financial Associates, a limited partnership affiliated with the management company that provides all management services for the Corporation.
(b) Security Ownership of Management.
Except as set forth below, no member of the management of the Corporation is known to be a beneficial holder of its stock.
Name of Beneficial Owner Number of Shares owned % of Class - -------------------------------------------------------------------------------- Michael Bebon, Director 1,500 0.19%
Robert Martin, Director 1,300 0.16%
(1) On March 27, 2001, Michael Bebon resigned from his position as director of the Corporation.
(c) Changes in Control.
There exists no arrangement known to the Corporation the operation of which may at a subsequent date result in a change in control of the Corporation.
Item 13.
Item 13. Certain Relationships and Related Transactions
Compensation for Services
The Predecessor General Partners and certain affiliated entities have, during the year ended December 31, 2001, earned or received compensation or payments for services or reimbursements from us, the Predecessor Partnership, or Presidio subsidiaries as follows:
(1) $59,444 represents payment for non-accountable expenses of the Predecessor Managing General Partner and $394,808 represents a Partnership Management Fee for managing the affairs of the Predecessor Partnership and the Corporation. Furthermore, under the Predecessor Partnership's Limited Partnership Agreement which was in effect until April 17, 2001, 5% of the Predecessor Partnership's net income and net loss is allocated to the General Partners (0.1% to the Predecessor Associate General Partner and 4.9% to the Predecessor Managing General Partner). Pursuant thereto, for the year ended December 31, 2001, $34,401 of the Predecessor Partnership's net income was allocated to the Predecessor Managing General Partner.
(2) For the year ended December 31, 2001, $702 of the Predecessor Partnership's net income was allocated to the Predecessor Associate General Partner.
(3) This amount was earned pursuant to a management agreement with Kestrel Management, L.P. for performance of certain functions relating to the management of our properties.
(4) This amount was earned pursuant to an advisory agreement with Shelbourne Management LLC for performance of certain functions relating to the management of our business. $140,556 represents reimbursement for expenses and $477,055 represents payment of an asset management fee pursuant to the advisory agreement.
Recent Developments
On February 14, 2002, the Corporation, Shelbourne Properties I, Inc. and Shelbourne Properties II, Inc. (together the "Companies") announced the consummation of a transaction whereby the Companies (i) purchased each of the advisory agreements between the Companies and an affiliate of PCIC and (ii) repurchased all of the shares of capital stock in the Companies held by PCIC. Pursuant to the Transaction, for the Advisory Agreements and the Shares, the Companies paid PCIC an aggregate of $44 million in cash, preferred partnership interests in their respective operating partnerships with a liquidation preference of $2.5 million, and notes with a stated amount of between $54.3 million and $58.3 million, depending upon the timing of the repayment of the notes. For further details concerning this transaction, please see "Item 1. Business - Recent Developments" on page 3 above.
On March 27, 2001, Michael Bebon resigned from his position as director of the Corporation.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Equity for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
(2) Financial Statement Schedules
III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or not required.
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibit Number Description ------ ----------- 2.1 Form of Merger Agreement*
3.1 Amended and Restated Certificate of Incorporation of the Corporation*
3.2 Amended and Restated Bylaws of the Corporation*
4.1 Amended and Restated Agreement of Limited Partnership of the Operating Partnership*
4.2 Shareholder Rights Agreement*
4.3 Amendment of Shareholder Rights Agreement between Shelbourne Properties III, Inc. and American Stock Transfer & Trust Company, as rights agent, dated as of February 14, 2002.**
4.3 Certificate of Designations, Preferences and Rights of Series A Preferred Stock*
10.1 Indemnification Agreement between the Corporation and each of its directors and executive officers*
21.1 Listing of Subsidiaries
99.1 Purchase and Contribution Agreement, dated as of February 14, 2002, by and among PCIC, certain subsidiaries of PCIC, Northstar Capital Investment Corp., Shelbourne Management, the Companies, the Operating Partnership, Shelbourne Properties I, L.P. and Shelbourne Properties II, L.P.**
99.2 Secured Promissory Note between the Operating Partnership and Shelbourne Management dated as of February 14, 2002**
99.3 Partnership Unit Designation of the Class A Preferred Partnership Units of the Operating Partnership**
99.4 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits (Las Vegas, Nevada) dated as of February 14, 2002 among the Operating Partnership, Shelbourne Management and United Title of Nevada as Trustee
99.5 Mortgage, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits (Livonia, Michigan) dated as of February 14, 2002
99.6 Security Agreement dated as of February 14, 2002 between the Operating Partnership and Shelbourne Management
99.7 First Amendment to Security Agreement dated as of March 15, 2002 between the Operating Partnership and Shelbourne Management
99.8 Negative Covenant and Declaration by Tri-Columbus Associates, as Declarant, to Shelbourne Management, as Beneficiary, dated as of March 15, 2002.
* incorporated by reference to the Registration Statement of the Corporation on form S-4 filed on February 11, 2000 as amended
** incorporated by reference to the Current Report of the Corporation on form 8-K filed on February 14, 2002
(d) Financial Statements.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 29, 2002 By: /s/ Dallas Lucas --------------------------------------- Name: Dallas Lucas Title: Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: March 29, 2002 By: /s/ Donald W. Coons --------------------------------------- Name: Donald W. Coons Title: Director
By: /s/ Robert Martin --------------------------------------- Name: Robert Martin Title: Director
By: /s/ W. Edward Scheetz --------------------------------------- Name: W. Edward Scheetz Title: Director
Annual Report on 10-K Item 8 and 14(a)(2)
SHELBOURNE PROPERTIES III, INC. ------------------------------- A DELAWARE CORPORATION ---------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- YEARS ENDED DECEMBER 31, 2001, 2000 and 1999 -------------------------------------------- I N D E X ---------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Shelbourne Properties III, Inc.
We have audited the accompanying balance sheets of Shelbourne Properties III, Inc. (formerly High Equity Partners L.P. - Series 88), (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a) 2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company's and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts March 25, 2002
SHELBOURNE PROPERTIES III, INC. ------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES III, INC. ------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES III, INC. ------------------------------- CONSOLIDATED STATEMENTS OF EQUITY ---------------------------------
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES III, INC. ------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION ------------ High Equity Partners L.P. - Series 88 (the "Predecessor Partnership"), a limited partnership, was formed on February 24, 1987 under the Uniform Limited Partnership Laws of the State of Delaware, for the purpose of investing in, holding and operating income-producing real estate was converted to a Real Estate Investment Trust ("REIT") on April 17, 2001 named Shelbourne Properties III, Inc. ("Shelbourne" or the "Corporation") by merging with Shelbourne Properties III LP, a Delaware limited partnership, that would be the operating partnership of the REIT. Shelbourne began the year invested in one office building, three shopping centers, four retail stores (supermarkets) and three industrial warehouses. Subsequently in 2002 two of the supermarkets were sold. Edina, Minnesota was sold on January 6, 2002 and Toledo, Ohio was sold on January 30, 2002. Neither of the sold properties or any of the remaining properties were encumbered by debt as of December 31, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Basis of Presentation --------------------- The consolidated financial statements include the accounts of Shelbourne Properties III, Inc. and its wholly owned subsidiaries, Shelbourne Properties III, L.P. and Shelbourne Properties III GP, LLC. Intercompany accounts and transactions have been eliminated in consolidation.
Financial Statements -------------------- The financial statements are prepared on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents ------------------------- Shelbourne considers all short-term investments, which have maturities of three months or less from the date of issuance, to be cash equivalents.
Revenue Recognition ------------------- Base rents are recognized on a straight-line basis over the terms of the related leases. Percentage rents charged to retail tenants based on sales volume are recognized when earned pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," issued by the Securities and Exchange Commission in December 1999, and the Emerging Issues Task Force's consensus on Issues 98-9, "Accounting for Contingent Rent in Interim Financial Periods," Shelbourne 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 were purchased in joint venture ownership with an affiliated REIT. Shelbourne owns an undivided interest and is severally liable for indebtedness it incurs in connection with its ownership interest in those properties. Therefore, Shelbourne's financial statements present the assets, liabilities, revenues and expenses of the joint ventures on a pro rata basis in accordance with the REIT's percentage of ownership.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------------------ Real Estate ----------- Real estate is carried at cost, net of adjustments for impairment. Repairs and maintenance are charged to expense as incurred. Replacements and betterments are capitalized. Shelbourne evaluates the recoverability of the net carrying value of its real estate and related assets at least annually, and more often if circumstances dictate. If there is an indication that the carrying amount of a property may not be recoverable, Shelbourne prepares an estimate of the future undiscounted cash flows expected to result from the use of the property and its eventual disposition, generally over a five-year holding period. In performing this review, management takes into account, among other things, the existing occupancy, the expected leasing prospects of the property and the economic situation in the region where the property is located.
If the sum of the expected undiscounted future cash flows is less than the carrying amount of the property, Shelbourne recognizes an impairment loss, and reduces the carrying amount of the asset to its estimated fair value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Management estimates fair value using discounted cash flows or market comparables, as most appropriate for each property. Independent certified appraisers are utilized to assist management, when warranted.
Impairment write-downs recorded by Predecessor Partnership do not affect the tax basis of the assets and are not included in the determination of taxable income or loss.
Because the cash flows used to evaluate the recoverability of the assets and their fair values are based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying values at the balance sheet dates. The cash flows and market comparables used in this process are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and the variances may be material. Shelbourne may provide additional write-downs, which could be material in subsequent years if real estate markets or local economic conditions change.
Depreciation and Amortization ----------------------------- Depreciation is computed using the straight-line method over the useful life of the property, which is estimated to be 40 years. The cost of properties represents the initial cost of the properties to Shelbourne plus acquisition and closing costs less impairment adjustments. Tenant improvements and leasing costs are amortized over the applicable lease term.
Income Taxes ------------ Shelbourne is operating with the intention of qualifying as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes 90% of its taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Shelbourne distributed to its shareholders an amount greater than its taxable income therefore no provision for Federal income taxes is required.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------------------ For federal income tax purpose, the cash dividends distributed to shareholders are characterized as follows:
---- -------------------------------------------------------------------- Ordinary Income 80% Return of Capital 20% ------------------------------------ Total: 100% ====================================
Prior to conversion, no provision has been made for federal, state and local income taxes since they are the personal responsibility of the partners. A final tax return and K-1s were issued for the short tax year ending April 17, 2001.
Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of rental income and depreciation. As a result of these differences, and the impairment of long-lived assets and the initial write off of organization costs for book purposes, the tax basis of Shelbourne's net assets exceeds its book value by $24,447,813 and $25,579,963 at December 31, 2001 and 2000, respectively.
Amounts Per Share ----------------- Basic earnings per share is computed based on average shares outstanding. The number of limited partnership interest units outstanding prior to the conversion have been restated to reflect effects of the conversion.
Distributions Per Share ----------------------- On December 7, 2001 the Board of Directors declared a dividend of $1.87 per share. The distribution was subsequently paid on December 21, 2001 to all shareholders of record as of December 17, 2001.
Net Income and Distributions per Unit of Limited Partnership Interest --------------------------------------------------------------------- Prior to Conversion ------------------- Prior to the conversion, net income and distributions per unit of limited partnership interest were calculated based upon the number of limited partnership units outstanding (371,766) for each of the years ended December 31, 2000, and 1999. No distributions were paid in 2000.
Recently Issued Accounting Standards ------------------------------------ Effective January 1, 2001 Shelbourne adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". Because Shelbourne does not currently utilize derivatives or engage in hedging activities, this standard did not have a material effect on Shelbourne's financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under the purchase method of accounting. SFAS No. 141 also changes the criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. There was no effect from this statement on Shelbourne's financial statements.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses accounting and reporting for intangible assets acquired, except for those acquired in a business combination. SFAS No. 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles will not be amortized but rather will be tested at least annually for impairment. SFAS No. 142 also addresses accounting and reporting for goodwill and other
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------------------ intangible assets subsequent to their acquisition. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. This statement will not effect Shelbourne's financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. Shelbourne does not expect that this statement will have a material effect on Shelbourne's financial statements.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES ----------------------------------------------------------- Due to the conversion of the Predecessor Partnership into a REIT (as described in Note 1 above) on April 17, 2001, the nature of the relevant conflicts of interest and related party transactions changed during the fiscal year ended December 31, 2001. In addition, the stock repurchase described at Note 7 again affected the relevant conflicts of interest and changed the nature of some related party transactions. This Note 3 is divided into two sections: (A) Prior to April 17, 2001 and (B) April 17, 2001 to December 31, 2001.
A. Prior to April 17, 2001
Until April 17, 2001, the General Partners of the Predecessor Partnership were entitled to receive certain fees and reimbursement for expenses as permitted under the terms of the Predecessor Partnership's partnership agreement. The Managing General Partner of the Predecessor Partnership, Resources High Equity Inc., is a wholly owned subsidiary of Presidio Capital Corp. ("Presidio"). Presidio AGP Corp., which is also a wholly owned subsidiary of Presidio, is the Associate General Partner (together with the Managing General Partner, the "Predecessor General Partners").
Affiliates of the Predecessor General Partners were engaged in businesses related to the acquisition and operation of real estate.
Presidio is the parent of other corporations that are or may in the future be engaged in business that may be in competition with Shelbourne. Accordingly, conflicts of interest may have arisen between the Predecessor Partnership and such other businesses. Subject to the rights of the Limited Partners under the Limited Partnership Agreement (the "Agreement"), Presidio controlled the Predecessor Partnership through its indirect ownership of all the shares of the Predecessor General Partners. Effective July 31, 1998, Presidio was indirectly controlled by NorthStar Capital Investment Corp., a Maryland Corporation.
Effective as of August 28, 1997, Presidio had a management agreement with NorthStar Presidio Management Company LLC ("NorthStar Presidio"), an affiliate of NorthStar Capital Investment Corp., pursuant to which NorthStar Presidio provided the day-to-day management of Presidio and its direct and indirect subsidiaries and affiliates. For the years ended December 31, 2001, 2000 and 1999, reimbursable expenses incurred by NorthStar Presidio, which is related to the Predecessor Partnership amounted to approximately $0, $0 and $56,018 respectively. Effective October 21, 1999, Presidio entered into a Services Agreement with AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was retained to provide asset management and investor relation services to the Predecessor Partnership and other entities affiliated with the Predecessor Partnership.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (Continued) ----------------------------------------------------------------------- As a result of this agreement, the Agent had the duty to direct the day-to-day affairs of the Predecessor Partnership, including, without limitation, reviewing and analyzing potential sale, financing or restructuring proposals regarding the Predecessor Partnership's assets, preparation of all reports, maintaining records and maintaining bank accounts of the Predecessor Partnership. The Agent was not permitted, however, without the consent of Presidio, or as otherwise required under the terms of the Limited Partnership Agreement to, among other things, cause the Predecessor Partnership to sell or acquire an asset or file for bankruptcy protection.
In order to facilitate the Agent's provision of the asset management services and the investor relation services, effective October 25, 1999, the officers and directors of the Predecessor General Partner resigned and nominees of the Agent were elected as the officers and directors of the Predecessor Partnership (and subsequently of Shelbourne). The Agent is an affiliate of Winthrop Financial Associates, a Boston based company that provides asset management services, investor relation services and property management services to over 150 limited partnerships which own commercial property and other assets.
The fees payable to the Predecessor General Partners prior to April 17, 2001 and to Shelbourne Management from and after April 17, 2001 consist of (i) a maximum non-accountable expense reimbursement of $150,000 per year, (ii) an annual management fee of 1.25% of the Gross Asset Value of the Partnership/Company (as defined), (iii) property management fees of up to 6% of property revenues, and (iv) reimbursement of expenses incurred in connection with the performance of its services. Gross Asset Value is the gross asset value of all assets owned by the Operating Partnership based on the latest appraisal of real estate assets by an independent appraiser of national reputation selected by the advisor and the amount of other assets as reflected on the balance sheet. Since the asset management fee was based on gross assets, the amount payable to Shelbourne Management increased to the extent Shelbourne acquired new investments, whether for cash, or by causing Shelbourne to incur indebtedness or otherwise.
Prior to the merger in April 2001, the Predecessor Partnership had a property management services agreement with Resources Supervisory Management Corp. ("Resources Supervisory"), an affiliate of the Managing General Partner, to perform certain functions relating to the management of the properties of the Partnership. Portions of the property management fees were paid to unaffiliated management companies, which were engaged for the purpose of performing the management functions for certain properties. Effective October 2000, Kestrel Management L.P. ("Kestrel"), and affiliate of the Agent began performing all property management services directly for the Predecessor Partnership. For the years ended December 31, 2000, and 1999, Resources Supervisory was entitled to receive an aggregate of $165,338, and $231,048 respectively, of which $99,189 was received by Kestrel in 2000 and $66,149, and $115,352 was paid to unaffiliated management companies, respectively. From October 1, 2000 through December 31, 2000 Kestrel received $64,737. For the year ended December 31, 2001 Kestrel received $235,036.
For the administration of the Predecessor Partnership the Managing General Partner was entitled to receive non-accountable reimbursement of expenses of a maximum of $200,000 per year.
Pursuant to the amendment to the Agreement, which became effective on August 20, 1999, the annual partnership management fee for 1999 was reduced to $719,411. Further, the Agreement was amended (for the year 2000 and beyond) so that the partnership management fee will be calculated equal to 1.25% of the Gross Asset Value of the Partnership. For the years ended December 31, 2000, and 1999 the Managing General Partner earned $803,487, and $719,411 respectively.
Prior to the conversion, the General Partners were allocated 5% of the net income of the Predecessor Partnership that amounted to $126,862 and $94,758 in 2000 and 1999, respectively. The General Partners were also entitled to receive 5% of distributions that amounted to $39,581 in 1999. There were no distributions were paid in 2000.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (Continued) ----------------------------------------------------------------------- In connection with a tender offer for units of the Predecessor Partnership made March 12, 1998 (the "Offer") by Olympia Investors, L.P., a Delaware limited partnership controlled by Carl Ichan ("Olympia"), Olympia and Presidio entered into an agreement dated March 6, 1998 (the "Olympia Agreement"). Subsequent to the expiration of the offer, Olympia announced that it had accepted for payment 14,955 units properly tendered pursuant to the Offer. Pursuant to the Olympia Agreement, Presidio purchased 50% of the units owned by Olympia as a result of the Offer, or 7,478 units, for $132.26 per unit. Presidio may be deemed to beneficially own the remaining units owned by Olympia as a consequence of the Olympia Agreement
Subsequent to the expiration of the tender offer described above, Millennium Funding IV Corp. purchased 12,396 limited partnership units from August 1998 through February 1999. The total of these purchases and the units purchased from Olympia (as described above) represents approximately 18.1% of the outstanding limited partnership units of the Predecessor Partnership.
As required by the settlement (see Note 6), an affiliate of the Predecessor General Partners, Millennium Funding IV, LLC, made a tender offer to limited partners to acquire up to 25,034 Units (representing approximately 6.7% of the outstanding Units) at a price of $113.15 per Unit. The offer closed in January 2000 and all 25,034 Units were acquired in the offer.
B. April 17, 2001 to December 31, 2001
On April 17, 2001, further to the settlement of litigation described in Note 6, the Predecessor Partnership was converted to a REIT as described in Note 1.
Effective April 17, 2001, Shelbourne entered into a contract with Shelbourne Management, LLC ("Shelbourne Management"), which contract has a term of 10 years, pursuant to which Shelbourne Management agreed to provide Shelbourne with all management, advisory and property management services. Shelbourne Management is owned by Presidio Capital Investment Company, LLC ("PCIC"), an entity controlled and principally owned by affiliates of former senior management of the Corporation. For providing these services, Shelbourne Management was to receive (1) an annual asset management fee, payable quarterly, equal to 1.25% of the gross asset value of Shelbourne as of the last day of each year, (2) property management fees of up to 6% of property revenues, (3) $150,000 for non-accountable expenses and (4) reimbursement of expenses incurred in connection with the performance of its services. This agreement was terminated on February 14, 2002 as part of the transaction described in Note 7 below.
Subsequent to the conversion, all Partnership units owned were converted to common stock at three shares for 1 partnership unit. Affiliates of the Predecessor General Partner of the Partnership owned 385,220 shares and received a distribution in the amount of $720,373 in 2001.
In August 2001, the nominees of the Agent resigned as officers and directors of Shelbourne, and certain officers of Presidio were elected as officers of Shelbourne, though the Agent continued to provide services to Shelbourne.
The following table summarizes the amounts paid to the Predecessor General Partners and Shelbourne Management on account of such fees for the twelve-month periods ended December 31, 2001, December 31, 2000 and 1999.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (Continued) -----------------------------------------------------------------------
4. REAL ESTATE ----------- The following table is a summary of Shelbourne's real estate as of:
December 31, ----------------------------------- 2001 2000 ---------------- -------------- Land $ 8,040,238 $ 8,040,238 Buildings and Improvements 50,134,222 53,985,169 ---------------- -------------- 58,174,460 62,025,407
Less: Accumulated depreciation (17,681,128) (17,391,634)
$ 40,493,332 $ 44,633,773 ============== ===============
As of December 31, 2001, two properties were being held for sale. The supermarkets in Edina, Minnesota and the Toledo, Ohio have been subsequently sold in January 2002 for $3,500,000 and $3,600,000 respectively. The Edina sale resulted in a generally accepted accounting principles (GAAP) gain on sale of $635,150. Toledo's sale however resulted in a loss on sale of $185,790.
During 2001, revenues at the Tri-Columbus, Sunrise, Livonia, and 568 Broadway properties represented 27%, 25%, 18% and 24% of gross revenues, respectively. During 2000, revenues at the Tri-Columbus, Sunrise, Livonia, and 568 Broadway properties represented 25%, 26, 19% and 23% of gross revenues, respectively. During 1999, revenues at the Tri-Columbus, Sunrise, Livonia, and 568 Broadway properties represented 22%, 25%, 19% and 23% of gross revenues, respectively. No single tenant accounted for more than 10% of Shelbourne's rental revenues.
The following is summary of Shelbourne's share of anticipated future receipts under noncancellable leases:
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. REAL ESTATE (Continued) ----------------------- Shelbourne recorded substantial write-downs for impairment prior to 1996. No write-downs were required for 2001, 2000 or 1999. The table below summarizes write-downs recorded on the properties:
Property -------- 568 Broadway $ 6,157,700 Sunrise 8,500,000 Livonia Plaza 2,100,000 Melrose-Phase II 2,881,000 ----------- $19,638,700
5. DUE TO AFFILIATES ----------------- December 31, ---------------------- 2001 2000 ---- ----
Predecessor Partnership asset management fee $ - $ 285,041 Predecessor Partnership administration fee - 50,000 ------- --------- $ - $ 335,041 ======= =========
6. SETTLEMENT OF LAWSUIT --------------------- In April 1999, the California Superior Court approved the terms of the settlement of a class action and derivative litigation involving the Predecessor Partnership. Under the terms of the settlement, the former General Partners agreed to take the actions described below subject to first obtaining the consent of limited partners to amendments to the Agreement of Limited Partnership of the Predecessor Partnership summarized below. The settlement became effective in August 1999 following approval of the amendments. As amended, the Partnership Agreement (a) provided for a Partnership Asset Management Fee equal to 1.25% of the gross asset value of the Predecessor Partnership and a fixed 1999 Partnership Asset Management Fee of $719,411 or $160,993 less than the amount that would have been paid for 1999 under the prior formula and (b) fixed the amount that the Predecessor General Partners would liable to pay to limited partners upon liquidation of the Predecessor Partnership as repayment of fees previously received (the "Fee Give-Back Amount"). As amended, the Partnership Agreement provided that, upon a reorganization of the Predecessor Partnership into a real estate investment trust or other public entity, the Predecessor General Partners will have no further liability to pay the Fee Give-Back Amount.
As required by the settlement, as discussed above, Millennium Funding IV LLC made a tender offer to limited partners to acquire up to 25,034 Units (representing approximately 6.7% of the outstanding Units) at a price of $113.15 Unit. The offer closed in January 2000, and all 25,034 Units were acquired in the offer. On a post-conversion basis, the tender offer was for the equivalent of 75,012 Shares at a price of $37.71 per share.
The final requirement of the settlement obligated the Predecessor General Partners to use their best efforts to reorganize the partnership into a real estate investment trust or other entity whose shares were listed on a national securities exchange or on the NASDAQ National Market System. A Registration Statement was filed with the Securities and Exchange Commission on February 11, 2000 with respect to the restructuring of the Predecessor Partnership into a publicly-traded real estate investment trust. On or about February 15, 2001, a prospectus/consent solicitation statement was mailed to the limited partners of the Predecessor Partnership seeking their consent to the reorganization of the Predecessor Partnership into a real estate investment trust.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SETTLEMENT OF LAWSUIT (Continued) --------------------------------- The consent of limited partners was sought to approve the conversion of the Predecessor Partnership into a publicly-traded real estate investment trust called Shelbourne Properties III, Inc. ("Shelbourne").
The consent solicitation period expired on April 16, 2001, and holders of a majority of the Units approved the conversion.
On April 17, 2001 the conversion was accomplished by merging the Predecessor Partnership into the Operating Partnership. Pursuant to the merger, each limited partner received three shares of stock in the Corporation for each unit they owned, and the general partners received an aggregate of 58,701 shares of stock in the Corporation in exchange for their general partner interests. The common stock of the Corporation is listed on the American Stock Exchange under the symbol HXF.
7. SUBSEQUENT EVENTS ----------------- On February 14, 2002, Shelbourne, Shelbourne Properties I, Inc. and Shelbourne Properties II, Inc. (together the "Companies") announced the consummation of a transaction (the "Transaction") whereby the Companies (i) purchased each of the advisory agreements (the "Advisory Agreements") between the Companies and an affiliate of PCIC and (ii) repurchased all of the shares of capital stock in the Companies held by PCIC (the "Shares").
Pursuant to the Transaction, Shelbourne paid PCIC $11,830,337 in cash and its operating partnership, Shelbourne Properties I LP issued preferred partnership interests with an aggregate liquidation preference of $672,178 and issued a note with an aggregate stated amount of $15,665,421.
The Transaction was unanimously approved by the Boards of Directors of each of the Companies after recommendation by their respective Special Committees comprised of the Companies' three independent directors.
Houlihan Lokey Howard & Zukin Capital served as financial advisor to the Special Committees of the Companies and rendered a fairness opinion to the Special Committees with respect to the Transaction.
On February 22, 2002, Carl Icahn and Longacre Corp. brought a derivative shareholder suit in the New York State Supreme Court against NorthStar Capital Investment Corp., PCIC, Shelbourne Management, Peter W. Ahl, David Hamamoto, David G. King, Jr., Dallas E. Lucas, W. Edward Scheetz, Michael T. Bebon, Donald W. Coons and Robert Martin, and nominal defendants the Corporation, Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc. for, inter alia, breach of fiduciary duties relating to the approval of the stock repurchase transaction between the Corporation and NorthStar Capital Investment Corp. described in "Item 1. Business" under the heading "Recent Developments." On March 4, 2002, Icahn and Longacre brought a motion for expedited discovery, reversal of priority of discovery and injunctive relief by Order to Show Cause. Thereafter, the defendants moved to dismiss the case for, among other reasons, the failure to make a demand on the Board of Directors prior to commencing the action. At a hearing held on March 11, the court authorized limited discovery in connection with defendant's motion to dismiss. The court also scheduled a hearing for April 29, 2002 on defendant's motion to dismiss.
In addition, two shareholder derivative actions have been filed in Delaware against the same defendants. Those actions have now been consolidated, and defendants have moved to dismiss the consolidated action.
With respect to the allegations in the lawsuits, we believed at the time the Special Committee approved the transaction, and we continue to believe, that the stock repurchase was fair and reasonable and in the best interests of the Corporation and its shareholders.
On March 27, 2002, Michael Bebon resigned from the Board of Directors.
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. QUARTERLY DATA -------------- The following table presents the unaudited financial data by quarter for the years ended December 31, 2001 and December 30, 2000:
SHELBOURNE PROPERTIES III, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
INDEX
Page Number ------
Additional financial information furnished pursuant to the requirements of Form 10-K:
Schedules - December 31, 2001, 2000 and 1999
Schedule III - Real estate and accumulated depreciation S-1
Note to Schedule III - Real estate and accumulated depreciation S-2
SHELBOURNE PROPERTIES III, INC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001
Gross Amount at which Carried at Close of Period ------------------------------------ Buildings And Accumulated Date Land Improvements Total Depreciation Acquired ---------- ------------- ----------- ------------ -------- RETAIL:
Melrose II $ 638,742 $ 1,953,407 $ 2,592,149 $ 596,743 1989 Shopping Center
Sunrise 1,811,849 9,407,773 11,219,622 3,879,951 1989 Marketplace
SuperValu 1,935,936 7,442,041 9,377,977 2,392,480 1989 Stores (1) 1,536,441 9,365,445 10,901,886 3,087,847 1989 Livonia Plaza ---------- ------------ ----------- ------------ ---------- 5,922,968 28,168,666 34,091,634 9,957,021
OFFICE:
568 Broadway 651,057 4,574,178 5,225,235 1,991,808 1986 Office Building
INDUSTRIAL:
TMR Warehouses 1,466,213 21,524,269 22,990,482 6,904,044 1988 ---------- ------------- ----------- ------------ ----------
$8,040,238 $ 54,267,113 $62,307,351 $ 18,852,873
(1) SuperValu stores are reported as real estate held for sale.
Note: The aggregate cost for Federal income tax purposes is $78,401,334 at December 31, 2001.
S-1
SHELBOURNE PROPERTIES III, INC.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 - --------------------------------------------------------------------------------
(A) RECONCILIATION OF REAL ESTATE OWNED:
(1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING COSTS.
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
(1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE METHOD OVER THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE 40 YEARS AND ON TENANT IMPROVEMENTS OVER THE ESTIMATED TERM OF THE RELATED LEASE.
S-2