ITEM 1. BUSINESS
In this Form 10-K, the terms "we," "us," "our" and "our company" refer either to the combined operations of all of Shelbourne Properties II, Inc., Shelbourne Properties II GP LLC and Shelbourne Properties II L.P. or to Shelbourne Properties II, Inc. independently, as the context requires.
OVERVIEW
Our company, Shelbourne Properties II, 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. As of March 24, 2003, we operate and hold three office buildings, one shopping centers, and two industrial warehouses. In addition, the Corporation owns an interest in 20 motel properties that are triple-net leased to an affiliate of Accor S.A. See "Corporate History-The Accotel Transaction" and "Item 2.
ITEM 2. PROPERTIES
PROPERTY PORTFOLIO
The Corporation owned or held a Joint Venture interest in the following properties as of December 31, 2002 and unless otherwise indicated March 24, 2003:
(1) 568 BROADWAY
On December 2, 1986, a joint venture (the "Broadway Joint Venture") comprised of the Predecessor Partnership and Integrated Resources High Equity Partners L.P. - Series 85 ("HEP-85"), the Predecessor in interest to Shelbourne Properties I, L.P. acquired a fee simple interest in 568-578 Broadway ("568 Broadway"), a commercial building in New York, New York. Until February 1, 1990, the Predecessor Partnership 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, High Equity Partners L.P. - Series 88 ("HEP-88"), the Predecessor in interest to Shelbourne Properties III, L.P. The Operating Partnership and Shelbourne Properties I, L.P. 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.
On February 28, 2003, Broadway Joint Venture sold the property to an unaffiliated third party for a gross purchase price of $87,500,000, which consisted of the assumption of $10,000,000 loan encumbering the property and the balance in cash. Net proceeds, after closing costs and adjustments, from the sale were approximately $73,000,000 of which $28,415,250 is attributable to the Operating Partnership's interest in the property).
(2) CENTURY PARK I
On November 7, 1986, a joint venture (the "Century Park Joint Venture") comprised of the Predecessor Partnership and HEP-85, the predecessor to Shelbourne Properties I, L.P., purchased the fee simple interest in Century Park I ("Century Park I"), an office complex.
Century Park I, situated on approximately 8.6 acres, is located in the center of San Diego County in Kearny Mesa, California, directly adjacent to Highway 163 at the northeast corner of Balboa Avenue and Kearny Villa Road. Century Park I is part of an office park consisting of six office buildings and two parking garages, in which Century Park Joint Venture owns three buildings, comprising 200,002 net rentable square feet and one garage with approximately 810 parking spaces. One of the three buildings was completed in the latter half of 1985, and the other two buildings were completed in February 1986.
Century Park I competes with other office parks and office buildings in the Kearny Mesa sub-market. New competition in the sub-market includes the redevelopment of the adjacent property into the Cabrillo Technology Center with 141,800 square feet available plus an additional 284,000 square feet planned and redevelopment of the 234 acre former General Dynamics site, now known as New Century Center. Plans for New Century Center call for development of the site with mixed use commercial, industrial, retail and entertainment areas.
On February 25, 2003, Century Park Joint Venture entered into an agreement to sell its property to an unaffiliated third party for a purchase price of $29,750,000. The sale is subject to the buyer completing its due diligence review. If the property is sold, pursuant to the terms of the Loan, $20,000,000 of the proceeds from the sale will be required to be paid to Fleet on account of the Loan. The sale is expected to be consummated, if at all, during the second quarter of 2003.
Further to the transaction described under "Item 1. Business-Recent Developments-Fleet Loan", we granted a mortgage on Century Park I to Fleet as security for the loan made by Fleet to 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) COMMERCE PLAZA I
On April 23, 1987, the Predecessor Partnership purchased a fee simple interest in Commerce Plaza I located in Richmond, Virginia. Commerce Plaza I is located in the Commerce Center Business Park, an office park situated at the intersection of I-64, Glenside Drive and Broad Street in Henrico County, northwest of Richmond, Virginia. This area, referred to as the West End, contains established residential neighborhoods as well as corporate headquarters and many of Richmond's suburban office parks. Commerce Plaza I's building is constructed of steel with red brick facade and insulated bronze tinted glass. It is situated on a site of approximately 4.2 acres, has a net rentable area of approximately 85,000 square feet and provides parking for approximately 300 cars.
Further to the transaction described under "Item 1. Business-Recent Developments-Fleet Loan", we granted a mortgage on Commerce Plaza to Fleet as security for the loan made by Fleet to 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.
(4) MATTHEWS TOWNSHIP FESTIVAL
On February 23, 1988, the Predecessor Partnership purchased a fee simple interest in Matthews Township Festival ("Matthews Festival"), a community shopping center in suburban Charlotte, North Carolina in the town of Matthews. Completed in November 1987, Matthews Festival contains 127,403 square feet of rentable space. During 1990 the A&P anchor store closed and the center has suffered a lower level of consumer traffic, sales and occupancy as a result. A&P remains obligated pursuant to the terms of its lease until 2007 and continues to pay rent. In October 2000, a tenant leasing approximately 29% of the property and operating a movie theater defaulted on its lease obligations as a result of its bankruptcy filing. The tenant has rejected the lease in its bankruptcy and, accordingly, the space is now vacant.
Matthews Festival is part of a larger overall retail complex containing approximately 55 acres and zoned for 550,000 square feet of retail space. During 1996, construction of Phase II of the overall complex and a concept restaurant on an out-parcel in front of the center were completed by the original developer.
Further to the transaction described under "Item 1. Business-Recent Developments-Fleet Loan", we granted a mortgage on Matthews Festival to Fleet as security for the loan made by Fleet to 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) MELROSE CROSSING SHOPPING CENTER
On January 5, 1988, the Predecessor Partnership purchased a fee simple interest in Melrose Crossing, a neighborhood shopping center located in Melrose Park, Illinois. Completed in January 1987, Melrose Crossing contains 138,355 square feet of rentable space in addition to 88,000 square feet that is leased to Wolf Flea Market. This store anchors both Melrose Crossing and Phase II of Melrose Crossing Shopping Center which is to the north of Melrose Crossing and is owned by Shelbourne Properties III, LP. It is situated on approximately 11.6 acres and has parking space for 1,150 cars.
Melrose Crossing is located 10 miles west of Chicago's Loop, adjacent to another parcel of land purchased by the Predecessor Partnership known as the "Melrose Out Parcel" (described more fully below), in an area comprised primarily of heavy industrial and dense residential properties. The area is virtually 100% developed.
On February 28, 2003, this property was sold to an unaffiliated third party for a gross purchase price of $3,247,200. Net proceeds, after closing costs and adjustments, from the sale were approximately $2,900,000.
(6) THE MELROSE OUT PARCEL
On November 3, 1988, the Predecessor Partnership purchased the fee simple interest in a parcel of vacant land (the "Melrose Out Parcel") adjacent to the Melrose Crossing Shopping Center, located in Melrose Park, Illinois. (See "Melrose Crossing" above). The parcel consists of approximately 18,000 square feet of vacant land. In 1993, the Predecessor Partnership entered into a ten year ground lease with Rally's Hamburgers, Inc. ("Rally's") which constructed a drive-through hamburger restaurant on the site at its own cost. In January 1995, Rally's ceased operating due to low sales volume. The Predecessor Partnership and Rally's negotiated a settlement whereby Rally's paid the Predecessor Partnership $100,000, and the Predecessor Partnership agreed to release Rally's from its obligations under the lease.
The Melrose Out Parcel was sold as part of the Melrose Crossing Shopping Center sale discussed above.
(7) SEATTLE TOWER
On December 16, 1986, a joint venture (the "Seattle Landmark Joint Venture") comprised of the Predecessor Partnership and Shelbourne I acquired a fee simple interest in Seattle Tower, a commercial office building located in downtown Seattle ("Seattle Tower"). The Operating Partnership and Shelbourne Properties I, L.P. each have a 50% interest in the Seattle Landmark Joint Venture.
Seattle Tower is located at Third Avenue and University Street on the eastern shore of Puget Sound in the financial and retail core of the Seattle central business district. Seattle Tower, built in 1928, is a 27-story commercial building containing approximately 167,000 rentable square feet, including almost 10,000 square feet of retail space and approximately 2,211 square feet of storage space. The building also contains a 55-car garage. Seattle Tower, formerly Northern Life Tower, represented the first appearance in Seattle of a major building in the Art Deco style. It was accepted into the National Register of Historic Places in 1975. There are approximately seventy tenants occupying the building. Leasing efforts are focused on consolidating space to create single floor tenants.
In February 2001, the Seattle area was hit with an earthquake. Seattle Tower suffered some damage in the earthquake. Repairs have been undertaken and completed on all tenant spaces, with approximately 75% of the repairs completed overall. The costs of the repairs are fully covered by insurance, subject to a $25,000 deductible which has been satisfied.
We believe that Seattle Tower's primary direct competition comes from three office buildings of similar size or age in the immediate vicinity of Seattle Tower, which buildings have current occupancy rates which are comparable to Seattle Tower's.
Further to the transaction described under "Item 1. Business-Recent Developments-Fleet Loan", we granted a mortgage on Seattle Tower to Fleet as security for the loan made by Fleet to 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.
(8) 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."), a wholly owned subsidiary of Integrated, purchased the fee simple interest in three warehouses (the "TMR Warehouses"), located in Columbus, Ohio. We have a 20.66% undivided interest in Tri-Columbus. Columbus Corp. subsequently sold its interest in Tri-Columbus to Shelbourne Properties III, L.P. Our ownership was not affected by the transfer of Columbus Corp.'s interest in the venture to Shelbourne Properties III, L.P. 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 remained at its then current rate of $1,418,825 and increased 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. From January 1, 2001 through March 24, 2003, $212,759 has been spent for such capital improvements.
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.
On January 31, 2003, the Hilliard, Ohio property was sold to an unaffiliated third party for a gross sales price of $4,600,000. After satisfying the debt encumbering the property, closing adjustments and other closing costs, net proceeds were approximately $2,063,500, $426,330 of which is attributable to the Company's interest.
Further to the transaction described under "Item 1. Business-Recent Developments-Fleet Loan", we granted a mortgage on the TMR Warehouses located in Orange and Grove City to Fleet as security for the loan made by Fleet to 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 12/31/2002 12/31/2001 12/31/2000 - -------- ---------- ---------- ---------- 568 Broadway Office Building (2) 99% 97% 100% Century Park I Office Complex 100% 100% 100% Commerce Plaza I 74% 73% 82% Matthews Township Festival 68% 64% 63% Melrose Crossing Shopping Center (2) 51% 27% 12% Melrose Out Parcel (2) 0% 0% 0% Seattle Tower Office Building 80% 90% 95% Tri-Columbus-Grove City 100% 100% 100% Tri-Columbus-Hilliard(1) 100% 100% 100% Tri-Columbus-Orange 100% 100% 100%
(1) Property was sold in January 2003.
(2) Property was sold in February 2003.
The following table contains information for each tenant that occupies ten percent or more of the rentable square footage of any of our properties.
(1) Tenant has vacated property but continues to pay rent pursuant to terms of the lease.
CAPITAL IMPROVEMENTS
See "Item 7. Management's Discussion and Analysis and Results of Operations."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Delaware Plaintiffs Litigation, Court of Chancery of the State of Delaware (C.A. No. 19442- NC, and C.A. No. 19611).
On February 26 and March 6, 2002, respectively, plaintiffs Thomas Hudson and Ruth Grening filed individual and derivative action lawsuits, which were subsequently consolidated, on behalf of the Companies against NorthStar Capital Investment Corp. ("NorthStar"), several of its affiliates, and the members of the boards of directors of the Companies as of February 13, 2002 in the Court of Chancery of the State of Delaware. The two actions challenged the propriety of transactions consummated on February 14, 2002, by which the Companies and their respective operating partnerships agreed to purchase from NorthStar approximately 30% of the then outstanding shares of each of the Companies as well as the right to terminate certain management services agreements.
On May 7, 2002, plaintiffs Grening and Hudson jointly filed a separate individual and class action in Delaware Chancery Court alleging that the Companies and the members of the Boards at that time had violated 8 Del. C. ss. 211 by failing to call and hold annual meetings of the stockholders within 13 months of the incorporation of the Companies, and had breached their fiduciary duties and the provisions of the Companies' Amended and Restated Certificates of Incorporation, by, inter alia, reducing and reorganizing the Companies' boards and issuing allegedly false and/or misleading statements and omissions of material facts in press releases and the 2001 Annual Reports filed with the SEC by each of the Companies. On May 29, 2002, the Court consolidated the claims pursuant to 8 Del. C. ss. 211 for purposes of discovery and trial with similar claims in a lawsuit brought in the same forum by HX Investors L.P., and other stockholders against the Companies.
The Companies vigorously defended all of the litigation, and, on July 1, 2002, HX Investors, L.P., the additional stockholders, the Companies, the additional defendants, and Ms. Grening entered into several related agreements pursuant to which the aforementioned actions by plaintiffs Grening, Hudson, and HX Investors, L.P. were settled, subject, with respect to the class and derivative actions, to the approval of the Court. In connection with the settlement, among other things, NorthStar agreed to contribute up to $1 million for the payment of the class and derivative plaintiffs' attorneys' fees, expenses, and incentive fees as approved by the Court.
The settlement with Ms. Grening was memorialized by letter agreement dated July 1, 2002, setting forth the agreement in principle. By letter agreement dated October 28, 2002, Plaintiff Thomas Hudson joined in the agreement in principle. Confirmatory discovery and drafting of the full settlement agreement is proceeding, after which Court approval for the settlement must be obtained and notice and the opportunity to opt-out of the class provided to relevant current and former stockholders. A class member who elects to opt-out would not be bound by the terms of the settlement agreement and would have the right to bring a similar action on his own behalf. The Company does not anticipate that a substantial number of class members will opt-out or that any action brought by any class members who opt-out would have a material adverse affect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 29, 2002, the Corporation held a special meeting of the Stockholders, at which time the Plan of Liquidation was approved by a majority of the stockholders. See "Item 1. Business-Corporate History-The HX Transaction; Plan of Liquidation."
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 "HXE". 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 $46.50 $31.55
September 30, 2001 $43.02 $32.95
December 31, 2001 $40.52 $33.00
March 31, 2002 $52.80 $35.00
June 30, 2002 $54.25 $50.10
September 30, 2002 $72.00 $53.75
December 31, 2002 $64.50 $53.25
On March 24, 2003, the closing sale price of the Common Stock as reported by the American Stock Exchange was $34.10. The Corporation had approximately 2,532 holders of record of Common Stock as of March 24, 2003.
The Corporation has authorized 2,500,000 shares of Common Stock, issued 1,237,916 shares, with 894,792 shares outstanding at March 24, 2003.
DIVIDENDS
As a result of the adoption of the plan of liquidation, our management expects that dividends of cash from operations and property sales will be made on a timely basis, subject only to maintaining adequate reserves. It is expected that such dividends will be sufficient to maintain our status as a REIT under the Internal Revenue Code. The dividend policy with respect to our Common Stock is subject to revision by the Board of Directors. All dividends in excess of those required for us to maintain our REIT status will be made by us at the sole discretion of the Board of Directors and will depend on our taxable earnings, financial condition, 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 our qualifications as a REIT, we intend to periodically evaluate the dividends made to ensure that dividends made, on an annual basis, will represent at least 90% of our 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 dividends if, as and when the Board of Directors authorizes and declares dividends. In connection with the settlement of the lawsuit brought by HX Investors, L.P., the Operating Partnership issued to HX Investors Class B units which entitle HX Investors to receive 15% of all
gross proceeds after payment of the approximately $66.25 (plus interest) per share priority dividend. After giving effect to dividends paid from August 19, 2002 through March 24, 2003, the remaining unpaid per share priority return is $9.66.
The following table sets forth the dividends paid or declared by the Corporation on its Common Stock for the previous three years:
Explanatory Note:
(1) Commencing with the third quarter of 1999, dividends were suspended while the requirements of the class action and derivative litigation involving the Predecessor Partnership were completed. Dividends resumed in December of 2001.
In addition to the foregoing dividends, a dividend of $14.50 was made on January 31, 2003 to stockholders of record on January 23, 2003 and a dividend of $30.00 was paid on March 18, 2003, to the stockholders of records on March 10, 2003.
RECENT SALES OF UNREGISTERED SECURITIES
There were no securities sold by us in 2002 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
Shelbourne Properties II, Inc. was formerly a Delaware limited partnership, High Equity Partners L.P. - Series 86 ("HEP-86"), which was merged on April 17, 2001 with and into Shelbourne Properties II L.P., a Delaware limited partnership (the "Operating Partnership"). The Corporation holds its investment in its properties through the Operating Partnership in which it held a 99% direct interest and a 1% indirect interest at December 31, 2002. The 1% is held indirectly through the general partner of the Operating Partnership, Shelbourne Properties II GP LLC (the "General Partner"), of which the Corporation is the sole member.
On February 14, 2002, the Corporation repurchased the shares of a major stockholder, Presidio Capital Investment Company LLC ("PCIC"). As part of that repurchase, Shelbourne Management LLC, a wholly-owned subsidiary of PCIC, contributed to the Operating Partnership, the advisory agreement between the Corporation, the Operating Partnership, and Shelbourne Management LLC, dated as of April 17, 2001 (the "Advisory Agreement"), pursuant to which Shelbourne Management LLC had provided financial and investment advisory services to the Corporation and the Operating Partnership. As consideration for the purchase of the shares and the contribution of the Advisory Agreement, the Corporation paid $17,866,603 in cash and the Operating Partnership issued a note in the amount of $22,034,250 and issued 1,015.148 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. As a result of a transaction that was consummated in January 2003, the 5% Class A Preferred Partnership Units were reclassified as Class A Partnership Units and modified to eliminate the liquidation preference and to significantly limit the events that could create a pre-payment penalty. The Class A Preferred Partnership Units are still entitled to receive quarterly distributions at a rate of 5% per annum.
During July and August 2002, the Corporation entered into a settlement agreement with HX Investors, L.P. ("HX Investors"), a stockholder in the Corporation, with respect to a lawsuit brought by HX Investors and others against the Companies. In connection with this settlement:
o HX Investors made a tender offer for up to 30% of the outstanding shares of Common Stock. Upon consummation of the offer, HX Investors acquired 268,444 Common Shares. As a result of the tender offer and subsequent market acquisitions, HX Investors holds 41.46% of the outstanding Common Stock.
o On August 19, 2002, the existing Board of Directors and executive officer of the Corporation resigned, and the Board was reconstituted to consist of six members, four of whom are independent directors. In addition, new executive officers were appointed.
o HX Investors was issued by the Operating Partnership Class B Units that entitle the holder thereof to receive 15% of the Operating Partnership's gross proceeds after the payment of a priority return of approximately $66.25 (plus interest at 6% per annum, subject to certain increases) per share to the stockholders of the Corporation.
o A Plan of Liquidation of the Corporation was adopted by the prior Board of Directors.
On October 29, 2002, the stockholders of the Corporation approved the Plan of Liquidation. As a result, the Corporation adopted liquidation accounting and the Operating Partnership has been seeking, and will seek, to sell its remaining properties at such time as it is believed that the sale price for such property can be maximized. Since the adoption of the Plan of Liquidation, the Corporation has sold its properties located in Raleigh, North Carolina; Hillard, Ohio; New York, New York; and Melrose Park, Illinois and has paid dividends of $58.50 per share (including a dividend of $14.50 per share paid in January 2003 and of $30.00 per share paid in March 2003). In addition, its property located in San Diego, California is under contract for sale. Pursuant to the Plan of
Liquidation, if all of the assets of the Corporation are not sold prior to October 29, 2004, the remaining assets will be placed in a liquidating trust and the stockholders of the Corporation will receive a beneficial interest in such trust in total redemption for their shares in the Corporation.
The Corporation is operating with the intention of qualifying as a real estate investment trust for U.S. Federal Income Tax purposes ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which pays at least 90% of its ordinary taxable income as a dividend to its stockholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its stockholders.
We have adopted a plan of liquidation that requires us to liquidate all of our assets and liabilities by October 29, 2004. Dividends made by us to you and our other stockholders during our liquidation generally will not be taxable to you until the dividends exceed your adjusted tax basis in your shares, and then will be taxable to you as long-term capital gain assuming you hold your shares as capital assets and have held them for more than 12 months when you receive the dividend as a result of the adoption of the plan of liquidation. If our assets are not completely liquidated by October 29, 2004, our assets will be transferred to a liquidating trust on such date and in lieu of owning shares, you will own a beneficial interest in the liquidating trust of an equivalent percentage. The transferability of interests in the trust will be significantly restricted as compared to the shares in the Corporation, and you will be required to include in your own income your pro rata share of the trust's taxable income whether or not that amount is actually distributed by the trust to you in that year.
As a result of the adoption of the Plan of Liquidation, our primary business objective is to maximize the value of our common stock. Prior to October 29, 2002, we sought 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.
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. 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.
REAL ESTATE HELD FOR SALE AND ADJUSTMENT TO LIQUIDATION BASIS OF ACCOUNTING
On October 30, 2002, in accordance with the liquidation basis of accounting, assets were adjusted to estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of investments in joint ventures and real estate held for sale is based on current contracts, estimates as determined by independent appraisals or other indications of sales value, net of estimated selling costs (including brokerage commissions, transfer taxes, legal costs) and capital expenditures of approximately $4,144,092 anticipated during the liquidation period. The valuations of other assets and liabilities are based on management's estimates as of December 31, 2002. The actual values realized for assets and settlement of liabilities may differ materially from amounts estimated. The net adjustment at October 30, 2002, required to convert from the going concern (historical cost) basis to the liquidation basis of accounting, totaled $2,743,237, which is included in the consolidated statement of changes in net assets (liquidation basis) for the period October 30, 2002 to December 31, 2002. Significant increases (decreases) in the carrying value of net assets are summarized as follows:
(1) Such costs do not include costs incurred in connection with ordinary operations.
Adjusting assets to estimated net realizable value resulted in the adjustment in value of certain real estate properties. The anticipated gains associated with the write-up of these real estate properties have been deferred until such time as a sale occurs. The write down of other assets included amounts for unamortized lease commissions and straight line rent.
RESERVE FOR ESTIMATED COSTS DURING THE PERIOD OF LIQUIDATION
Under liquidation accounting, the Corporation is required to estimate and accrue the non-operating costs associated with executing the Plan of Liquidation. These amounts can vary significantly due to, among other things, the timing and realized proceeds from property sales, the costs of retaining agents and trustees to oversee the liquidation, including the costs of insurance, the timing and amounts associated with discharging known and contingent liabilities and the non-operating costs associated with cessation of the Corporation's operations. These non-operating costs are estimates and are expected to be paid out over the liquidation period. Such costs do not include costs incurred in connection with ordinary operations.
INVESTMENTS IN JOINT VENTURES
Certain properties are owned in joint ventures with Shelbourne Properties I L.P. and/or Shelbourne Properties III L.P. Prior to April 30, 2002, the Corporation owned an undivided interest in the assets owned by these joint ventures and was severally liable for indebtedness it incurred in connection with its ownership interest in those properties. Therefore, for periods prior to April 30, 2002, the Corporation's consolidated financial statements had presented the assets, liabilities, revenues and expenses of the joint ventures on a pro-rata basis in accordance with the Corporation's percentage of ownership.
After April 30, 2002, as a result of the Operating Partnership incurring debt in connection with entering into the note payable discussed in Note 6 to the Consolidated Financial Statements annexed hereto, the Corporation was no longer allowed to account for its investments in joint ventures on a pro-rata consolidation basis in accordance with its percentage of ownership but must instead utilize the equity method of accounting. Accordingly, the Corporation's consolidated balance sheet at December 31, 2002 and the Corporation's consolidated statements of operations commencing on January 1, 2002 reflect the equity method of accounting.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 did not have a material effect on the financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," which updates, clarifies and simplifies existing accounting pronouncements, which will be effective for fiscal years beginning after May 15, 2002. This statement will not have a material effect on the Corporation's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Corporation's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This Interpretation had no effect on the Corporation's financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interest in variable interest entities created after January 31, 2003, and the Corporation will need to apply its provisions to any existing variable interest in variable interest entities by no later than December 21, 2004. The Corporation does not expect that this will have an impact on the Corporation's consolidated financial statements.
PRO-FORMA INFORMATION
The pro-forma information is provided for the purpose of facilitating the comparison of the 2002 and 2001 results of operations in the review of management's discussion and analysis. Investments in joint ventures were reported in 2001 under the pro-rata consolidated method of accounting which presented the assets and liabilities and revenues and expenses of the joint ventures on a pro-rata basis in accordance with the Corporation's percentage of ownership together with the assets and liabilities and revenues and expenses of the Corporation's wholly-owned properties. In 2002, under the equity method of accounting, the Corporation's share of assets and liabilities and revenues and expenses in joint ventures is presented as a single item on the balance sheet and statement of operations. The Corporation's total equity and net income did not change as a result of the conversion. The following tables show (i) the pro-forma condensed consolidated balance sheet as of December 31, 2001 and (ii) the pro-forma condensed consolidated statement of operations for the year ended December 31, 2001 both reflecting the pro-forma impact had the change to equity accounting for the investments in joint ventures occurred in 2001.
SHELBOURNE PROPERTIES II, INC. CONDENSED CONSOLIDATED PRO-FORMA BALANCE SHEET
CONDENSED CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Corporation uses its working capital reserves and any cash from operations as its primary source of liquidity. On October 29, 2002, the Corporation's stockholders approved the Plan of Liquidation. Accordingly, the Corporation began to sell its properties. In this regard, on October 31, 2002, 568 Broadway Joint Venture, a joint venture in which the Corporation indirectly held a 38.925% interest, entered into a contract to sell its property located at 568 Broadway, New York, New York for a gross sales price of $87,500,000. The sale of this property occurred on February 28, 2003. In addition, on December 20, 2002, the Corporation closed the sale of Sutton Square Shopping Center in Raleigh, North Carolina for a gross sales price of $16,750,000. After all adjustments and paying the release amount plus fees to the lender, the Corporation received net cash proceeds of approximately, $10,393,025. On January 31, 2003, Tri-Columbus Associates, a joint venture in which the Corporation owns a 20.66% interest, completed a sale of 4251 Leap Road in Hilliard, Ohio. After all adjustments and paying the release amount plus fees to the lender the joint venture received approximately $2,063,553 in net proceeds of which the Corporation is entitled to receive approximately $426,330. On February 25, 2003, the Operating Partnership entered into an agreement to sell its property located in San Diego, California for a purchase price of $29,750,000. The sale is subject to the buyer completing its due diligence review. If the property is sold pursuant to the terms of the current Loan encumbering the property, $20,000,000 of the proceeds from the sale will be required to be paid to the Lender. The sale is expected to be consummated, if at all, during the second quarter of 2003.
The Corporation had $10,898,495 in cash and cash equivalents at December 31, 2002. Cash and cash equivalents are temporarily invested in short-term instruments. The Corporation's level of liquidity based upon cash and cash equivalents decreased by $6,174,966 for the year ended December 31, 2002 from $17,073,461 for the year ended December 31, 2001. As discussed further below, the decrease resulted from $28,712,914 of cash used in financing activities which was offset by $7,068,856 of net cash provided by operating activities of which included $6,978,371 in distributions made in excess of income from joint ventures and by $15,469,092 provided by investment activities. The sources of cash provided by investment activities consists of $16,456,646 in proceeds from the sale of Sutton Square Shopping Center prior to the pay down of the Credit Facility which were offset slightly by $528,970 in improvements to real estate and $458,584 used in discontinued operations.
In addition to cash and cash equivalents reported at December 31,2002, the Corporation's joint ventures held cash at December 31, 2002 of which the Corporation's allocable share was approximately $4,097,339.
Cash used in financing activities consisted of $17,866,603 paid to PCIC in connection with the Transaction, $22,034,250 paid to retire the note that was issued to Shelbourne Management in connection with the Transaction, cash dividends of $12,591,404 and $6,000,000 of principal payments on the Credit Facility as a result of the sale of Sutton Square Shopping Center. These decreases were partially offset by proceeds from the initial borrowing under the Credit Facility of $29,779,343.
Currently, the Corporation's primary source of funds is cash flow from the operation of its wholly owned properties, principally rents collected from tenants as well as distributions from joint venture investments and proceeds from property sales. Rents collected from tenants for the year ended December 31, 2002 amounted to $4,474,295 as compared to $5,270,927 for the year ended December 31, 2001. The decrease in rents collected from tenants is due to the sale of Commonwealth Industrial Park on December 6, 2001.
For the year ended December 31, 2002, the Corporation made $528,970 in capital expenditures and $82,012 in capitalized tenant procurement costs that were funded from cash flow and the Corporation's working capital reserves. The Corporation's capital expenditures were $241,433 of tenant improvements at wholly owned properties along with a heating ventilation air conditioning unit replacement of $159,795 and repaving of the parking lot of $99,104 at Commerce Plaza. Tenant procurement costs consisted of leasing commissions and legal costs. Additionally, Melrose Crossing's capital expenditures of $92,400 and tenant procurement costs of $107,191 are included in cash used in discontinued operations.
CAPITAL IMPROVEMENTS AND CAPITALIZED TENANT PROCUREMENT COSTS
The following table sets forth, for each of the last three fiscal years, the Corporation's and the Predecessor Partnership's expenditures at each of its wholly owned properties for capital improvements and capitalized tenant procurement costs:
(1) Commonwealth Industrial Park was sold on December 6, 2001.
(2) Sutton Square Shopping Center was sold on December 20, 2002.
(3) Melrose Crossing and the Melrose Out Parcel were sold on February 28, 2003.
The capital expenditures for 2002 were mostly in the ordinary course of business. Major capital expenditures budgeted for 2003 consist primarily of approximately $1,200,000 at Matthews Festival in order to renovate the movie theater that has been vacant since August 2000 in order to lease to in-line tenants. The project involves leveling the floor from stadium seating to create more leasing opportunities.
Certain properties require periodic investments of capital for tenant costs related to new and renewal leasing. The most significant tenant procurement costs budgeted for 2003 is $592,679 at Commerce Plaza. These costs are primarily related to the expansion of Radio One into suite 300 which consists of 12,633 square feet and 4 currently vacant spaces that are projected to be released in 2003. Radio One expansion is projected to have an approximate cost of $241,684, or 41%, of the tenant procurement costs. All other projects are scheduled to run between $50,000 and $100,000 depending on the square footage of the space involved.
RESULTS OF OPERATIONS
After April 30, 2002, as a result of the Operating Partnership's incurring debt in connection with entering into the Credit Facility, the Corporation is no longer allowed to account for its investments in joint ventures on a pro-rata consolidation basis in accordance with its percentage of ownership but must instead utilize the equity method of accounting. Further, as a result of the adoption of the Plan of Liquidation, the Corporation adopted liquidation accounting effective October 30, 2002. In order to provide a more meaningful comparison of the results of operations for the years ended December 31, 2002 and 2001, the following comparison compares the results of operations for such periods assuming that the Corporation used the equity method of accounting for the entirety of both periods.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31, 2001(ON A PRO-FORMA BASIS)
Net Income
The Corporation's net income decreased by $23,487,499 to a net loss of $16,637,348 for the year ended December 31, 2002 from a net income of $6,850,151 for the year ended December 31, 2001. This decrease is primarily attributable to expenses incurred in connection with the Transaction, including the purchase of the Advisory Agreement, legal fees and consulting fees to Lazard Freres & Co. LLC for its advisory and valuation services for the Corporation. In addition, further contributing to the decrease in net income were the legal fees incurred by the Corporation associated with defending lawsuits brought in connection with the Transaction and a decrease in rental revenue of $393,817. Partially offsetting the increase in costs and expenses was an increase in equity income from the investment in joint ventures of $177,758. Further mitigating the effect of increased expenses was the gain on sale of Sutton Square in 2002 which was $3,552,310 greater than the gain on sale recognized by the sale of Commonwealth Industrial Park in 2001.
Rental Revenues
Rental revenues decreased $393,817, or approximately 8%, to $4,372,261 for the year ended December 31, 2002 from $4,766,078 for the year ended December 31, 2001. The decrease in rental revenue was due to the loss of $934,001 of rental income attributable to Commonwealth Industrial Park which was sold in December 2001. The decrease was offset in part by the aggregate increase in rental revenues of the remaining wholly owned properties of $540,184.
Costs and Expenses
Costs and expenses for the year ended December 31, 2002 amounted to $30,632,657, representing an increase of $25,594,387 from the year ended December 31, 2001. This increase consists of a one-time expense of $23,049,398 for the purchase of the Advisory Agreements. The remaining costs and expenses amounted to $7,583,259 representing an increase of $2,544,989 from $5,038,270 incurred during the year ended December 31, 2001. The increase is primarily due to an increase in administrative expenses incurred in connection with the Transaction, legal, professional and consulting fees.
Operating expenses decreased slightly despite increased insurance costs. The Corporation experienced an increase in depreciation and amortization expense due to real estate improvements and tenant procurement costs of $76,270. Excluding the 2001 depreciation and amortization expense associated with Commonwealth Industrial Park of $170,940, the increase of depreciation and amortization amounted to $247,211. Pursuant to the vote of the stockholders to liquidate the portfolio and resultant conversion to the liquidation basis of accounting on October 29, 2002, the Corporation will not incur any further depreciation and amortization costs. Property management fees decreased $24,169. However if the 2001 fees attributable to Commonwealth Industrial Park of $30,584 are deducted, property management fees increased by $6,416 due to increased rental collections from the wholly owned properties in 2002.
Asset management fee decreased by $926,170 for the year ended December 31, 2002 from $1,342,002 for the year ended December 31, 2001. This decrease was due to the reduction of the fee in connection with the Transaction from a fee based on 1.25% of gross asset value of the Corporation to set a fee of $27,778 per month
through September 30, 2002, which was then further reduced to $16,667 per month for the balance of 2002. Shelbourne Management was paid $157,582 in partnership asset management fees prior to February 14, 2002, $208,250 was paid to PCIC for transition fees from February 15, 2002 through September 30, 2002 and Kestrel Management was paid $50,000 for its services from October 1, 2002 through December 31, 2002.
Non-Operating Income and Expenses
Income from the investment in joint ventures increased by $177,758 to $4,110,603 for the year ended December 31, 2002 from $3,932,845 for the same time period in 2001. The increase is due to the increased equity income from 568 Broadway of $354,946 that was offset by an aggregate decrease of equity income from Century Park, Seattle Landmark and Tri-Columbus Associates of $177,188.
Interest expense of $215,768 was paid on the note issued to Shelbourne Management in the Transaction. An additional $829,073 was incurred on the Credit Facility dated May 1, 2002. No interest expense was incurred during 2001 as the Company had no outstanding debt obligations.
Interest income decreased by $133,387, or 45% to $165,102 for the year ended December 31, 2002 as compared to $298,489 for the year ended December 31, 2001 due to significantly lower cash balances invested as well as lower yields on investments.
Other income decreased for the year ended December 31, 2002 as compared to the year ended December 31, 2001 by $20,516 or 97% to $549 from $21,065 due to the absence, as a result of the conversion of the Predecessor Partnership into a REIT, of transfer fees that were previously generated by the transfer of partnership interests.
Loss from discontinued operations (Melrose Crossing I) ceased in 2002 on October 29, 2002 due to the stockholders vote to liquidate the portfolio. Under liquidation accounting, all property is considered real estate held for sale and discontinued income is no longer applicable.
Inflation
Inflation is not expected to have a material impact on the operations of financial position of the Corporation.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 (AS REPORTED) TO THE YEAR ENDED DECEMBER 31, 2000 (AS REPORTED)
Net Income
The Corporation experienced an increase in net income of $2,746,875, or approximately 67%, for the year ended December 31, 2001 to $6,850,151 compared to 2000 net income of $4,103,276 due to a gain on the sale of Commonwealth Industrial Park. The property was sold for $8,200,000, and the Corporation received $7,879,568 in net proceeds after all expenses, prorations, adjustments and settlement charges. The Corporation realized a gain of $3,207,975 on the sale. This gain was partially offset by a decrease in interest income and increased costs and expenses.
Interest and Other Income
Interest income decreased by $105,505, or approximately 13%, from $815,468 in 2000 to $709,913 in 2001 due to lower interest rates provided by short-term investment instruments. Other income increased from $54,881 in 2000 to $80,400 in 2001 due to real estate tax abatements from previous years on Melrose Crossing, Matthews Festival and 4251 Leap Road (part of Tri-Columbus), which was partially offset by the decrease in transfer fee income from transfers of partnership units.
Rental Revenues
Rental revenues increased by approximately 1% during the year ended December 31, 2001 to $11,918,573 from $11,805,236 for the same period in 2000 due to normal course increases in rents in new and renewal leases, which offset the vacancies at Matthews Festival and Commerce Plaza.
Costs and Expenses
Costs and expenses increased by $494,401, or approximately 6%, during the year ended December 31, 2001 to $9,066,710 compared to $8,572,309 in 2000, due to increases in asset management fees, operating expenses, property management fees and depreciation and amortization expense. Asset management fees increased by $170,750, or approximately 15%, in 2001 due to an increase in the gross asset value of the Corporation. Operating expenses increased by $251,451, or approximately 7% to $4,055,975 in 2001 as compared to $3,804,524 in 2000 due to an increase in utilities, taxes and cleaning costs, which was offset primarily by a decrease in repair and maintenance costs and a minor decrease in personnel expenses. For the year ended December 31, 2001, the property management fee increased slightly and administrative expenses remained relatively constant.
RECENT DEVELOPMENTS
On January 13, 2003, the Board of Directors declared a dividend of $12,974,484 ($14.50 per share). The dividend was paid on January 31, 2003 to stockholders of record at the close of business on January 23, 2003.
On January 15, 2003, a joint venture owned by the operating partnership and the operating partnerships of Shelbourne Properties I, Inc. and Shelbourne Properties III, Inc. acquired from Realty Holdings of America, LLC, an unaffiliated third party, a 100% interest in an entity that owns 20 motel properties triple net leased to an affiliate of Accor S.A. The cash purchase price, which was provided by working capital, was approximately $2,700,000, of which approximately $878,000, $1,096,000 and $726,000 was paid by Shelbourne Properties I, Inc., the Corporation and Shelbourne Properties III, Inc., respectively. The properties are also subject to existing mortgage indebtedness in the current principal amount of approximately $74,220,000.
The Companies formed the joint venture and acquired the interest in the new properties in order to facilitate the disposition of the other properties of the Companies and the distribution to stockholders of the sales proceeds in accordance with the Plan of Liquidation. Prior to the acquisition of the Accor S.A. properties, the holder of the Class A Preferred Units of the Operating Partnership had the right to cause the operating partnerships to purchase the Class A Preferred Units at a substantial premium to their liquidation value (at the time of the acquisition, a premium of approximately $6,605,000 in the case of the Operating Partnership and approximately $16,265,000 for all three operating partnerships) unless the operating partnerships maintained at least approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the case of the Operating Partnership) guaranteed by the holder of the Class A Preferred Units and secured by assets having an aggregate market value of at least approximately $74,800,000 ($30,400,000 in the case of the Operating Partnership). These requirements significantly impaired the ability of the Corporation to sell its properties and make distributions in accordance with the Plan of Liquidation. In lieu of these requirements, the operating partnerships agreed to acquire the Accor S.A. properties for the benefit of the holder of the Class A Preferred Units. The holder of the Class A Preferred Units does, however, continue to have the right, under certain limited circumstances which the Companies do not anticipate will occur, to cause the operating partnerships to purchase the Class A Preferred Units at the premium described above. The terms of the Class A Preferred Units were also modified to eliminate the $2,500,000 aggregate liquidation preference to which the holder of the Class A Preferred Units was previously entitled ($1,015,148 in the case of the Operating Partnership).
The holder of the Class A Preferred Units has the right to require the operating partnerships to acquire other properties for its benefit at an aggregate cash cost to the operating partnerships of $2,500,000 (approximately $1,000,000 of which would be paid by the Operating Partnership). In that event the Accor S.A. properties would not be held for the benefit of the holder of the Class A Preferred Units and would be disposed of as part of the liquidation of the Companies.
On January 31, 2003, the Hilliard, Ohio property was sold to an unaffiliated third party for a gross sale price of $4,600,000. After satisfying the debt encumbering the property, closing adjustments and other closing costs, net proceeds were approximately $2,063,500, $426,330 of which is attributable to the Company's interest.
On February 20, 2003, direct and indirect subsidiaries of each of the Companies entered into a Loan Agreement with Fleet National Bank, as agent for itself and other lenders pursuant to which the Borrowers obtained a $55,000,000 loan. The proceeds from this loan allocable to the Company were used to satisfy the Company's existing loan payable and the balance was paid as a dividend by the Corporation in March 2003.
On February 25, 2003, the Operating Partnership entered into an agreement to sell its property located in San Diego, California for a purchase price of $29,750,000. The sale is subject to the buyer completing its due diligence review. If the property is sold pursuant to the terms of the current Loan encumbering the property, $20,000,000 of the proceeds from the sale will be required to be paid to the Lender. The sale is expected to be consummated, if at all, during the second quarter of 2003.
On February 28, 2003, the joint venture property located in New York, New York was sold for a gross purchase price of $87,500,000, which consisted of the assumption of a $10,000,000 loan encumbering the property and the balance in cash. Net proceeds after closing costs and adjustments from the sale were approximately $73,000,000 of which $28,415,250 is attributable to the Corporation's interest in the property.
On February 28, 2003, the Corporation declared a dividend of $30.00 per share from the net proceeds of the Fleet Loan and the sale of the New York, New York property. The dividend was paid on March 18, 2003 to stockholders of record at the close of business on March 10, 2003.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk the Corporation faces is interest rate sensitivity. The Corporation's long-term debt bears interest at a floating rate and therefore is exposed to the risk of interest rate changes. At March 24, 2003, borrowings totaled $22,081,542 and bore interest at a rate of LIBOR plus 2.75%. Based on the balance outstanding on the Loan at March 24, 2003 and the interest rate at that date, a 10% increase in LIBOR would increase the interest expense in 2003 by approximately $29,589. Conversely, a 10% decrease in LIBOR would decrease interest expense in 2003 by the same amount. The gain or loss the Corporation ultimately realizes with respect to interest rate fluctuations will depend on the actual interest rates during that period. The Corporation does not believe that it has any risk related to derivative financial instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated balance sheets as of December 31, 2002 and 2001, and the related consolidated statements of operations, equity and cash flows for the years ended December 31, 2002, 2001 and 2000, and the notes thereto, and the independent auditors' report thereon and the financial statement schedule are set forth on pages through.
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 OF THE REGISTRANT.
Information called for by Item 10 of Form 10-K is set forth under the heading "Election of Directors" in the Company's Proxy Statement for its annual meeting of Stockholders relating to year ended December 31, 2002 (the "Proxy Statement"), which is incorporated herein by reference, and under the heading "Executive Officers of the Company" in the Business section included herein.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 of Form 10-K is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 of Form 10-K is set forth under the heading "Certain Relationships and Related Transactions" in the Proxy Statement, which is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer have, within 90 days of the filing date of this annual report, evaluated the effectiveness of the Corporation's disclosure controls and procedures [as defined in Exchange Act Rules 13a - 14(c)] and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect such internal controls since the date of evaluation. Accordingly, no corrective actions have been taken with regard to significant deficiencies or material weaknesses.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements
Independent Auditors' Report
Consolidated Statement of Net Assets of December 31, 2002 and Consolidated Balance Sheet as of December 31, 2001
Consolidated Statements of Operations and Changes in Net Assets for the Period October 30, 2002 to December 31, 2002, and Consolidated Statement of Operations for the Period January 1, 2002 to October 29, 2002 and for the years ended December 31, 2001 and 2000
Consolidated Statements of Equity for the Period January 1, 2002 to October 29, 2002 and the Years Ended December 31, 2001 and 2000
Consolidated Statements of Cash Flows for the Periods October 30, 2002 to December 31, 2002 and January 1, 2002 to October 29, 2002 and for the Years Ended December 31, 2001 and 2000
(2) Notes to Consolidated Financial Statements
All schedules are omitted because they are not applicable or not required.
(b) REPORTS ON FORM 8-K
Date Filed: December 23, 2002 Item Reported: 2 (Acquisition or Disposition of Assets)
(c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
2.1 Stock Purchase Agreement among HX Investors, Exeter Capital Corporation and the Company(4) 2.2 Amendment No. 1 to Stock Purchase Agreement(6) 2.3 Plan of Liquidation (7) 3.1 Amended and Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated Bylaws of the Company(1) 4.1 Limited Partnership of the operating partnership (1) 4.2 Stockholder Rights Agreement (1) 4.3 Amendment to Stockholder Rights Agreement (2) 4.4 Restated Partnership Unit Designation for 5% Class A Preferred Partnership Units (incorporated by reference to Exhibit E-1 of Exhibit 10.4) (9) 4.5 Stockholder Agreement, among the Companies and HX Investors, LP and Exeter Capital Corporation, dated as of April 30, 2002 (3) 4.6 Amendment No. 2 to Stockholder Rights Agreement (5) 4.7 Partnership Unit Designation of the Class B Partnership Units of the Operating Partnership(8) 10.1 Settlement Agreement and Mutual Release between HX Investors, the Companies and Shelbourne Management (4) 10.2 Amendment No. 1 to Settlement Agreement(6) 10.3 Purchase Agreement, dated as of January 15, 2003, between the Shelbourne JV LLC and Realty Holdings of America, LLC (9) 10.4 Agreement, dated as of January 15, 2003, among Presidio Capital Investment Company, LLC (and certain of its subsidiaries), Shelbourne Management, NorthStar Capital Investment Corp., each of the Shelbourne REITs and its operating partnership and HX Investors, L.P. (9)
10.5 Loan Agreement, dated as of February 19, 2003, among Shelbourne Properties I L.P., Shelbourne Properties II L.P., Shelbourne Properties III L.P., Shelbourne Richmond Company LLC, Shelbourne Matthews Company LLC, Shelbourne Las Vegas Company LLC, Century Park I Joint Venture, Seattle Landmark Joint Venture, Tri-Columbus Associates and Fleet National Bank and the other lending institutions which may become party thereto and Fleet National Bank, as agent (10) 10.6 Form of Guaranty, dated as of February 19, 2003, from Shelbourne Properties II, Inc. and Shelbourne Properties II L.P. (10) 10.7 Form of Indemnity, Contribution and Subrogation Agreement, dated as of February 19, 2003, among the REITs and the operating partnerships (10) 10.8 Form of Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing with respect to the Collateral Properties dated as of February 19, 2003 in favor of Fleet National Bank (10) 10.9 Cash Management Agreement, dated February 19, 2003, among Shelbourne Properties I L.P., Shelbourne Properties II L.P., Shelbourne Properties III L.P., Fleet National Bank, as agent for itself and the Lenders, and various subsidiaries of the Shelbourne OP's listed on Exhibit A thereto (10) 99.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- ------------------ (1) incorporated by reference to the Registration Statement of the Company on Form S-4 filed on February 11, 2000, as amended (2) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 14, 2002 (3) incorporated by reference to the Current Report of the Company on Form 8-K filed on May 14, 2002. (4) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 2, 2002. (5) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 8, 2002 (6) incorporated by reference to the Current Report of the Company on Form 8-K filed on August 5, 2002 (7) incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on September 27, 2002 (8) incorporated by reference to the Quarterly Report on Form 10-Q of the Company filed on November 14, 2002. (9) incorporated by reference to the Current Report of the Company on Form 8-K filed on January 15, 2003. (10) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 24, 2003.
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.
Dated: March 28, 2003 By: /s/ Michael L. Ashner ------------------------------ Michael L. Ashner Chief Executive Officer
Dated: March 28, 2003 By: /s/ Carolyn B. Tiffany ------------------------------ Carolyn B. Tiffany Chief Financial Officer
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.
SHELBOURNE PROPERTIES II, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
CERTIFICATIONS
I, Michael L. Ashner, certify that:
1. I have reviewed this annual report on Form 10-K of Shelbourne Properties II, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Michael L. Ashner ----------------------- Michael L. Ashner Chief Executive Officer
SHELBOURNE PROPERTIES II, INC. FORM 10-K DECEMBER 31, 2002
CERTIFICATIONS
I, Carolyn B. Tiffany, certify that:
1. I have reviewed this annual report on Form 10-K of Shelbourne Properties II, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Carolyn B. Tiffany ----------------------- Carolyn B. Tiffany Chief Financial Officer
SHELBOURNE PROPERTIES II, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
EXHIBIT INDEX
- ------------------ (1) incorporated by reference to the Registration Statement of the Company on Form S-4 filed on February 11, 2000, as amended (2) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 14, 2002 (3) incorporated by reference to the Current Report of the Company on Form 8-K filed on May 14, 2002. (4) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 2, 2002. (5) incorporated by reference to the Current Report of the Company on Form 8-K filed on July 8, 2002 (6) incorporated by reference to the Current Report of the Company on Form 8-K filed on August 5, 2002
(7) incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on September 27, 2002 (8) incorporated by reference to the Quarterly Report on Form 10-Q of the Company filed on November 14, 2002. (9) incorporated by reference to the Current Report of the Company on Form 8-K filed on January 15, 2003. (10) incorporated by reference to the Current Report of the Company on Form 8-K filed on February 24, 2003.
Exhibit 99.1
SHELBOURNE PROPERTIES II, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Shelbourne Properties II, Inc., (the "Company"), on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 28, 2003 /s/ Michael L. Ashner ----------------------------- Michael L. Ashner Chief Executive Officer
Date: March 28, 2003 /s/ Carolyn B. Tiffany ----------------------------- Carolyn B. Tiffany Chief Financial Officer
ANNUAL REPORT ON FORM 10-K: ITEM 8 AND 14(a)(2)
SHELBOURNE PROPERTIES II, INC.
A DELAWARE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
I N D E X
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Shelbourne Properties II, Inc.
We have audited the accompanying consolidated statement of net assets (liquidation basis) as of December 31, 2002, and the related consolidated statement of changes in net assets (liquidation basis) for the period October 30, 2002 to December 31, 2002. In addition, we have audited the accompanying consolidated balance sheet of Shelbourne Properties II, Inc. (the "Corporation"), as of December 31, 2001, and the related consolidated statements of operations, equity, and cash flows for each of the two years in the period ended December 31, 2001, and for the period January 1, 2002 to October 29, 2002. These financial statements are the responsibility of the Corporation'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.
As discussed in Note 1 to the financial statements, the stockholders of the Corporation approved a plan of liquidation on October 29, 2002. As a result the Corporation has changed its basis of accounting from the going concern basis to the liquidation basis effective October 30, 2002.
In our opinion, such consolidated financial statements present fairly, in all material respects (1) the net assets (liquidation basis) of the Corporation and its subsidiaries as of December 31, 2002, (2) the change in their net assets (liquidation basis) and their cash flows (liquidation basis) for the period October 30, 2002 to December 31, 2002, (3) their financial position at December 31, 2001, (4) the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 and for the period January 1, 2002 to October 29, 2002, and (5) the results of their operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidation financial statements, because of the inherent uncertainty of valuation when a company is in liquidation, the amounts realizable from the disposition of the remaining assets and the amounts creditors agree to accept in settlement of the obligations due them may differ materially from the amount shown in the accompanying consolidated statement of net assets as of December 31, 2002.
DELOITTE & TOUCHE LLP
Boston, Massachusetts March 25, 2003
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED STATEMENT OF NET ASSETS AS OF DECEMBER 31, 2002 (LIQUIDATION BASIS) AND CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 (GOING CONCERN BASIS) (SEE NOTE 2 - BASIS OF PRESENTATION)
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE PERIOD OCTOBER 30, 2002 TO DECEMBER 31, 2002 (LIQUIDATION BASIS) AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 2002 TO OCTOBER 29, 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (GOING CONCERN BASIS) (SEE NOTE 2 - BASIS OF PRESENTATION)
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE PERIOD OCTOBER 30, 2002 TO DECEMBER 31, 2002 (LIQUIDATION BASIS) AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 2002 TO OCTOBER 29, 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 CONCERN BASIS) (CONTINUED)
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED STATEMENTS OF EQUITY FOR THE PERIOD JANUARY 1, 2002 TO OCTOBER 29, 2002 AND THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (GOING CONCERN BASIS)
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS OCTOBER 30, 2002 TO DECEMBER 31, 2002 (LIQUIDATION BASIS) AND JANUARY 1, 2002 TO OCTOBER 29, 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (GOING CONCERN BASIS)
See notes to consolidated financial statements.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Shelbourne Properties II, Inc., a Delaware corporation (the "Corporation") was formed on April 17, 2001. The Corporation's wholly-owned operating partnership, Shelbourne Properties II L.P., a Delaware limited partnership (the "Operating Partnership", and together with the Corporation, the "Company"), holds directly and indirectly all of the Company's properties. Pursuant to a merger that was consummated on April 17, 2001, the Operating Partnership became the successor by merger High Equity Partners, Series 86 (the "Predecessor Partnership").
In August 2002, the Board of Directors adopted a Plan of Liquidation (the "Plan of Liquidation") and directed that the Plan of Liquidation be submitted to the Corporation's stockholders for approval. The stockholders of the Corporation approved the Plan of Liquidation at a Special Meeting of Stockholders held on October 29, 2002. The Plan of Liquidation contemplates the orderly sale of all of the Corporation's assets for cash or such other form of consideration as may be conveniently distributed to the Corporation's stockholders and the payment of (or provision for) the Corporation's liabilities and expenses, as well as the establishment of a reserve to fund the Corporation's contingent liabilities. The Plan of Liquidation gives the Corporation's Board of Directors the power to sell any and all of the assets of the Corporation without further approval by the stockholders.
The Corporation currently expects that the liquidation will be substantially completed not later than October 29, 2004, although there can be no assurance in this regard. As a result, it is currently anticipated that not later than October 29, 2004 any then remaining assets and liabilities will be transferred to a liquidating trust. With the transfer to a liquidating trust, the liquidation will be completed for federal and state income tax purposes, although one or more distributions of the remaining cash and net proceeds from future asset sales may occur subsequent to the establishment of a liquidating trust.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As a result of the adoption of the Plan of Liquidation and its approval by the Corporation's stockholders, the Corporation adopted the liquidation basis of accounting for the period subsequent to October 29, 2002. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value. Liabilities including the reserves for estimated costs during the period of liquidation are stated at their anticipated settlement amounts. The valuation of investments in joint ventures and real estate held for sale is based upon current contracts, estimates as determined by independent appraisals or other indications of sales values. The valuations for other assets and liabilities under the liquidation basis of accounting are based on management's estimates as of December 31, 2002. The actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated.
The accompanying consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, the Operating Partnership and Shelbourne Properties II GP LLC, the general partner of the Operating Partnership and a wholly owned subsidiary of the Corporation. Intercompany accounts and transactions have been eliminated in consolidation.
As a result of the Operating Partnership incurring debt, the Corporation is no longer allowed to account for its investments in joint ventures on a pro-rata consolidation basis. The Corporation must instead utilize the equity method of accounting. As required, the Corporation's consolidated statements of operations reflect the equity method of accounting subsequent to January 1, 2002, and pro-rata consolidation prior to that date (see Investments in Joint Ventures below).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)
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 EQUIVALENTS
The Corporation considers all short-term investments that have original maturities of three months or less from the date of acquisition to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts Receivable are stated net of allowance for doubtful accounts of $92,693 and $105,200 as of December 31, 2002 and December 31, 2001, respectively.
REVENUE RECOGNITION
Prior to the adoption of the liquidation basis of accounting, base rents were recognized on a straight-line basis over the terms of the related leases. Subsequent to the adoption of the liquidation basis of accounting, the amount of the previously deferred straight-line rent was grouped with real estate for purposes of comparing such balances to their net realizable value and, if such amounts when aggregated with real estate exceeded the net realizable value, the amount of the excess was included in the write-off of other assets as part of the adjustment to the liquidation basis of accounting. At October 29, 2002 approximately $299,737 of deferred straight-line rent was included in other assets that was subsequently grouped with real estate with no write-off required.
Percentage rents charged to retail tenants based on sales volume are recognized when earned. Pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," and the Emerging Issues Task Force's consensus on Issue 98-9, "Accounting for Contingent Rent in Interim Financial Periods," the Corporation defers recognition of contingent rental income (i.e., percentage/excess rent) in interim periods until the specified target (i.e., breakpoint) that triggers the contingent rental income is achieved. Recoveries from tenants for taxes, insurance and other operating expenses are recognized as revenue in the period the applicable costs are incurred.
INVESTMENTS IN JOINT VENTURES
Certain properties are owned in joint ventures with Shelbourne Properties I L.P. and/or Shelbourne Properties III L.P. Prior to April 30, 2002, the Corporation owned an undivided interest in the assets owned by these joint ventures and was severally liable for indebtedness it incurred in connection with its ownership interest in those properties. Therefore, for periods prior to April 30, 2002, the Corporation's consolidated financial statements had presented the assets, liabilities, revenues and expenses of the joint ventures on a pro rata basis in accordance with the Corporation's percentage of ownership.
After April 30, 2002, as a result of the Operating Partnership's incurring debt in connection with entering into the Credit Facility discussed in Note 6, the Corporation was no longer allowed to account for its investments in joint ventures on a pro-rata consolidation basis in accordance with its percentage of ownership but must instead utilize the equity method of accounting. Accordingly, the Corporation's consolidated balance sheet at December 31, 2002 and the Corporation's consolidated statements of operations commencing January 1, 2002 reflect the equity method of accounting.
If the change to equity accounting had been reflected upon the December 31, 2001 consolidated balance sheet, the changes would have been to reduce real estate by $16.3 million, cash and cash equivalents by
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)
$8.9 million, receivables by $0.1 million, accounts payable and accrued expenses by $0.5 million and to increase other assets by $6.1 million and investment in joint ventures by $18.7 million.
REAL ESTATE
Subsequent to the adoption of the liquidation basis of accounting, real estate assets were adjusted to their net realizable value and classified as real estate held for sale. Additionally, the Corporation suspended recording any further depreciation expense.
Prior to the adoption of the liquidation basis of accounting, real estate was carried at cost, net of adjustments for impairment. The Corporation evaluated the recoverability of the net carrying value of its real estate and related assets at least annually, and more often if circumstances dictated. If there was an indication that the carrying amount of a property might not be recoverable, the Corporation prepared 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. Impairment write-downs recorded by the Predecessor Partnership did not affect the tax basis of the assets and were not included in the determination of taxable income or loss.
Repairs and maintenance are charged to expense as incurred. Replacements and betterments are capitalized.
REAL ESTATE HELD FOR SALE AND ADJUSTMENTS TO LIQUIDATION BASIS OF ACCOUNTING
On October 30, 2002, in accordance with the liquidation basis of accounting, assets were adjusted to estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of investments in joint ventures and real estate held for sale is based on current contracts, estimates as determined by independent appraisals or other indications of sales value, net of estimated selling costs and capital expenditures of approximately $4,257,000 anticipated during the liquidation period. The valuations of other assets and liabilities are based on management's estimates as of December 31, 2002. The actual values realized for assets and settlement of liabilities may differ materially from amounts estimated. The net adjustment at October 30, 2002 required to convert from the going concern (historical cost) basis to the liquidation basis of accounting totaled $2,743,237, which is included in the consolidated statement of changes in net assets (liquidation basis) for the period October 30, 2002 to December 31, 2002. Significant increases (decreases) in the carrying value of net assets are summarized as follows:
Adjusting assets to estimated net realizable value resulted in the adjustment in value of certain real estate properties. The anticipated gains associated with the adjustment in value of these real estate properties have been deferred until such time as a sale occurs. The write-down of other assets included amounts for unamortized lease commissions and straight-line rent which resulted in a write-off of $250,638.
On December 20, 2002, the Operating Partnership sold the Sutton Square Shopping Center for $16,750,000, recognizing $6,760,285 of deferred gain.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
Treasury stock was stated at cost.
DEPRECIATION AND AMORTIZATION
Upon the adoption of the liquidation basis of accounting, deferred loan fees of $892,599 were written off to reflect the balances at their net realizable value. Direct lease costs associated with the real estate were grouped with real estate for purposes of comparing carrying amounts to their net realizable value, and if such amounts when aggregated with real estate exceeded the net realizable value, these costs were written off.
Prior to the Corporation adopting the liquidation basis of accounting, depreciation was computed using the straight-line method over the useful life of the property, which is estimated to be 40 years. The cost of properties represented the initial cost of the properties to the Company plus acquisition and closing costs less impairment adjustments. Tenant improvements, leasing costs and deferred loan fees were amortized over the applicable lease term.
FINANCIAL INSTRUMENTS
The carrying values reflected in the consolidated statements of net assets at December 31, 2002 reasonably approximate the fair values for cash and cash equivalents, other assets, receivables, accounts payable, accrued expenses and note payable. Additionally, as the Corporation currently expects that the liquidation will be substantially completed not later than October 2004, the net realizable value of notes payable approximates the fair value. In making such assessment, the Corporation has utilized discounted cash flow analyses, estimates, and quoted market prices as deemed appropriate.
RESERVE FOR ESTIMATED COSTS DURING THE PERIOD OF LIQUIDATION
Under liquidation accounting, the Corporation is required to estimate and accrue the costs associated with executing the Plan of Liquidation. These amounts can vary significantly due to, among other things, the timing and realized proceeds from property sales, the costs of retaining agents and trustees to oversee the liquidation, the costs of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of the Company's operations. These costs are estimates and are expected to be paid out over the liquidation period. Such costs do not include costs incurred in connection with ordinary operations.
INCOME TAXES
The Corporation is operating with the intention of qualifying as a real estate investment trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which pays at least 90% of its ordinary taxable income as a dividend to its stockholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its stockholders.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)
The Corporation paid to stockholders an amount greater than its taxable income; therefore, no provision for federal income taxes is required. For federal income tax purposes, the cash dividends distributed to stockholders are characterized as follows:
2002 2001 ---- ---- Liquidating Distribution 100% - Ordinary Income - 54% Return of Capital - 46% ---- ---- Total 100% 100%
Prior to the conversion to a REIT, no provision had been made for federal, state and local income taxes since they were the personal responsibility of the partners. A final tax return and K-1's were issued for the short tax year ended 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, impairment of long-lived assets and the initial write off of organization costs for book purposes, the tax basis of the Corporation's net assets exceeds its book value by $61,206,115 and $38,594,489 at December 31, 2002 and 2001, respectively.
AMOUNTS PER SHARE
Basic earnings (loss) per share is computed based on weighted average common shares outstanding during the period. The number of limited partnership units outstanding prior to the conversion was restated to reflect the effects of the conversion.
DISTRIBUTIONS PER SHARE
On November 5, 2002, the Board of Directors declared a dividend of $14.00 per share. The dividend was subsequently paid on November 21, 2002 to all stockholders of record as of November 15, 2002.
On December 7, 2001 the Board of Directors declared a dividend of $2.11 per share. The dividend was subsequently paid on December 21, 2001 to all stockholders of record as of December 17, 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 did not have a material affect on the financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," which updates, clarifies and simplifies existing accounting pronouncements will be effective for fiscal years beginning after May 15, 2002. This statement will not have a material effect on the Corporation's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)
are effective for the Corporation's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This Interpretation had no effect on the Corporation's financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interest in variable interest entities created after January 31, 2003, and the Corporation will need to apply its provisions to any existing variable interest in variable interest entities by no later than December 21, 2004. The Corporation does not expect that this will have an impact on the Corporation's consolidated financial statements.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 2000, 2001 and 2002, as in prior years, property management services (the "Property Management Services") and asset management services, investor relation services and accounting services (the "Asset Management Services") have been provided to (i) the Predecessor Partnership by affiliates of the general partners of the Predecessor Partnership's (the "Predecessor General Partners") and (ii) the Company by affiliates of the Company.
ASSET MANAGEMENT SERVICES
Pursuant to the terms of the Predecessor Partnership's partnership agreement and, after April 17, 2001, the terms of the Advisory Agreement (the "Advisory Agreement") between the Corporation, the Operating Partnership and Shelbourne Management LLC ("Shelbourne Management"), a wholly-owned subsidiary of Presidio Capital Investment Company, LLC ("PCIC"), the Corporation was obligated to pay for Asset Management Services an annual asset management fee, payable quarterly, equal to 1.25% of the gross asset value of the Corporation as of the last day of each year. In addition, the Corporation was obligated to (i) pay $200,000 for non-accountable expenses and (ii) reimburse the Predecessor General Partners or the Shelbourne Management, as the case may be, for expenses incurred in connection with the performance of its services. Effective February 14, 2002, in connection with the Transaction (as described below), the fee for providing Asset Management Services was reduced to $333,333 per annum. Effective October 1, 2002, as provided for in the Plan of Liquidation, the fee for providing Asset Management Services was further reduced to $200,000 per annum.
Asset Management Services were provided to the Corporation during the years ended December 31, 2000, 2001 and 2002 as follows:
o During the year ended December 31, 2000 and from January 1, 2001 to April 17, 2001, by Resources Supervisory Management Corp. ("Resources Supervisory"), an affiliate of the Predecessor General Partners.
o Effective April 17, 2001 through February 13, 2002, pursuant to the terms of the Advisory Agreement, by Shelbourne Management.
o Effective February 14, 2002 through September 30, 2002, by PCIC.
o Effective October 1, 2002, as contemplated by the Plan of Liquidation, by Kestrel.
In each case, at the time that Resources Supervisory, Shelbourne Management, PCIC and Kestrel provided the Asset Management Services, such entities were affiliates of the Corporation.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
PROPERTY MANAGEMENT SERVICES
As with the Asset Management Services, the Predecessor Partnership and the Operating Partnership have contracted with affiliates to provide Property Management Services pursuant to agreements that provide for a fee of up to 6% of property revenue. For the period from January 1, 2000 through September 30, 2000, Resources Supervisory provided the Property Management Services. Effective October 1, 2000, Kestrel began providing Property Management Services.
The following table summarizes the amounts paid to affiliates for Asset Management Fees, Property Management Fees and expense reimbursements for the twelve-month periods ended December 31, 2002, 2001 and 2000.
YEAR ENDED DECEMBER 31, 2000
ALLOCATION OF NET INCOME OF PREDECESSOR PARTNERSHIP/DIVIDENDS BY THE CORPORATION
Prior to April 17, 2001, the Predecessor General Partners were allocated 5% of the net income of the Predecessor Partnership that amounted to $205,164 in 2000.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED (CONTINUED)
Dividends payable to affiliates for the years ended December 31, 2001 and 2002 on account of shares of common stock owned are as follows:
Year Ended December 31, ----------------------- 2002 2001 -------- -------
Presidio Capital Investment Company LLC $ - $ 723,992 HX Investors, L.P. 5,194,168 86,299
THE TRANSACTION
On February 14, 2002, the Corporation, Shelbourne Properties I, Inc. and Shelbourne Properties III, Inc. (the "Companies") consummated a transaction (the "Transaction") whereby the Corporation purchased the 343,124 shares of the Corporation's common stock held by subsidiaries of PCIC and the Advisory Agreement was contributed to the Operating Partnership. Pursuant to the Transaction, the Corporation paid PCIC $17,866,603 in cash and the Operating Partnership issued preferred partnership interests with an aggregate liquidation preference of $1,015,148 and a note in the amount of $22,034,250. This note was satisfied in April 2002 from the proceeds of the Credit Facility.
4. REAL ESTATE
The following table is a summary of the Corporation's real estate as of:
On December 6, 2001, Commonwealth Industrial Park was sold for $8,200,000. After all the expenses, prorations, adjustments, and settlement charges, the Partnership received $7,879,568 in net proceeds. The Corporation realized a gain on sale of $3,207,975. The REIT realized a tax loss on sale of $1,421,228.
On December 20, 2002, the Corporation sold Sutton Square Shopping Center for $16,750,000. The Corporation received $10,393,025 in net proceeds after the required pay down of the note payable described in Note 6 of $6,000,000, expenses, and settlement charges. The Corporation realized an accounting gain on sale of approximately $6,760,000 and a tax gain of approximately $7,373,000.
On February 28, 2003, Melrose Crossing I, was sold to an unaffiliated third party for a gross purchase price of $3,247,200. Net proceeds, after closing costs and adjustments, from the sale were approximately $2,900,000. Operations of Melrose Crossing I have been reclassified as discontinued operations on the statement of operations prior to October 29, 2002.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
The following is a summary of the Corporation's share of anticipated future receipts under noncancellable leases for real estate held for sale:
At December 31, 2002, all wholly owned properties were except for Melrose Crossing were pledged as collateral for the credit facility described in Note 6.
5. INVESTMENT IN JOINT VENTURES
The Corporation invests in four joint ventures, (568 Broadway, Century Park, Seattle Landmark and Tri-Columbus) which were historically accounted for on a pro-rata consolidation basis.
Effective January 1, 2002, as a result of the Corporation incurring debt during 2002, the Corporation was no longer permitted under generally accepted accounting principles to account for its investments in joint ventures on a pro-rata consolidation basis. The Corporation must instead utilize the equity method of accounting. Accordingly, the Corporation's consolidated balance sheet at December 31, 2002 and the Corporation's consolidated statement of operations commencing January 1, 2002 reflect the equity method of accounting.
On October 30, 2002, the Corporation adopted the liquidation basis of accounting. Subsequent to the adoption of the liquidation basis of accounting, the investments in joint ventures were adjusted to their net realizable value based on current contracts, estimates as determined by independent appraisals or other indications of sales value.
On October 31, 2002, 568 Broadway Joint Venture, a joint venture in which the Corporation indirectly held a 38.925% interest, entered into a contract to sell its property located at 568 Broadway, New York, New York for a gross price of $87,500,000. At December 31, 2002, a non-refundable deposit of $7,000,000 was being held by the joint venture until the sale of the property was completed. The property was sold on February 28, 2003. In connection with the sale, the buyer assumed a $10,000,000 loan obligation secured by the property and paid the balance of the remaining purchase price in cash.
At December 31, 2002, all the investments in joint ventures were pledged as collateral for the note payable described in Note 6.
6. CREDIT FACILITY
On May 1, 2002, the operating partnerships of the Companies and certain of the operating partnerships' subsidiaries entered into a $75,000,000 revolving credit facility with Bayerische Hypo-Und Vereinsbank AG, New York Branch, as agent for itself and other lenders (referred to as the "Credit Facility" or the "Note Payable"). The Credit Facility was satisfied on February 20, 2003. (See note 9 below.) The Credit Facility had a term of three years and was prepayable in whole or in part at any time without penalty or premium. The Companies initially borrowed $73,330,073 under the Credit Facility. The Company's share of the proceeds amounted to $29,779,343 of which $22,034,250 was used to repay the note issued in the Transaction, $215,768 to pay associated accrued interest and $840,624 to pay costs associated with the Credit Facility. The excess proceeds of approximately $6,688,701 were deposited into the Company's operating cash account. The Companies have the right, from time to time, to elect an annual interest rate equal to (i) LIBOR plus 1.5% for the portion of the Note Payable secured by mortgages on certain real properties (Conversion rate), (ii) LIBOR plus 2.5% for the portion of the Note Payable secured by a pledge
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT FACILITY (CONTINUED)
of partnership interests (LIBOR rate) or (iii) the greater of (a) agent's prime rate or (b) the federal funds rate plus 1.5% (Base rate). The Companies are required to pay the lenders, from time to time, a commitment fee equal to .25% of the unborrowed portion of the Credit Facility. Such fee paid during the term of the Credit Facility was $1,392. Interest was payable monthly in arrears. The average interest rate at December 31, 2002 was approximately 3.8%.
The Credit Facility was secured by (i) a pledge by the operating partnerships of their membership interest in their wholly-owned subsidiaries that hold their interests in joint ventures with the other Companies and (ii) mortgages on certain real properties owned directly or indirectly by the operating partnerships. All of the properties of the Company were security for the Credit Facility, except for its two real properties located in Illinois.
Under the terms of the Credit Facility, the Companies could sell the pledged property only if certain conditions were met. If properties were sold, the Companies were required to pay a fixed release price to the lender except in the case of core properties, which included, with respect to properties in which the Company held an interest, as 568 Broadway, Century Park and Seattle Tower, in which case the Companies were required to pay the lender the greater of the net proceeds or the release amount. On December 20, 2002, in connection with the Company selling Sutton Square, the Credit Facility was paid down $6,000,000 out of sales proceeds. In addition, the Companies were required to maintain certain debt yield maintenance ratios and comply with restrictions relating to engaging in certain equity financings, business combinations and other transactions that might result in a change of control (as defined under the Credit Facility).
The Companies were jointly and severally liable under the Credit Facility but had entered into a Contribution and Cross-Indemnification Agreement.
7. CLASS B PARTNERSHIP INTERESTS
Under the Plan of Liquidation which has been approved by the Corporation's Board of Directors and stockholders, HX Investors is entitled to receive an incentive payment of 15% of (i) the cash and other proceeds generated from operating the assets and properties of the Company, plus the aggregate fair value of all consideration received from the disposal of the assets and properties of the Company less (ii) the sum of all direct costs incurred in connection with such disposal (the "Incentive Fee"), after the payment of a priority return of approximately $66.25 per share to stockholders of the Corporation plus interest thereon compounded quarterly at 6% per annum (the "Priority Return"). On August 19, 2002, the Board of Directors of the Corporation authorized the issuance by the Operating Partnership of, and the Operating Partnership issued, Class B Units to HX Investors which Class B Units provide distribution rights to HX Investors consistent with the intent and financial terms of the Incentive Fee. The Class B Units entitle the holder thereof to receive distributions equal to 15% of gross proceeds after the Priority Return. After giving effect to dividends paid from August 19, 2002 to March 24, 2003, the remaining unpaid per share Priority Return is $9.66.
8. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS
In connection with the Transaction, the Operating Partnership issued to Shelbourne Management 1,015.148 Class A 5% Preferred Partnership Units (the "Class A Units"). The Class A Units entitled the holder to a quarterly distribution equal to 1.25% of the aggregate liquidation preference of the Class A Units ($1,015,148). In addition, upon the liquidation of the Operating Partnership, each Class A Unit was entitled to a liquidation preference of $1,000 per unit. The Class A Units are not convertible into common units of the Operating Partnership or shares in the Corporation and the holders of the Class A Units do not have voting rights except in limited circumstances. Although the holders of the Class A Units do not have redemption rights, pursuant to the terms of the Purchase and Contribution Agreement entered into in connection with the Transaction, Shelbourne Management had the right to cause the Operating Partnership to reacquire the Class A Units upon the occurrence of certain events including, without limitation, if the
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CLASS A 5% PREFERRED PARTNERSHIP INTERESTS (CONTINUED)
aggregate assets of the Companies is below approximately $75 million or the outstanding debt under which the Companies are obligated is less than $55 million, for a purchase price equal to the liquidation preference plus an amount (the "Put Premium") which was equal to approximately $6,605,000 at December 31, 2002 and declines each February 13, May 13, August 13 and November 13 until it reaches zero on May 13, 2007. Subsequent to year end, the terms of the Class A Units were modified to eliminate the liquidation preference and limit the circumstances under which the holders of the Class A Units could cause the Operating Partnership to purchase the Class A Units at a premium.
In connection with the settlement of the lawsuit brought by HX Investors, Shelbourne Management agreed to pay to HX Investors 42% of the amounts paid to Shelbourne Management with respect to the Class A units.
9. CHANGE IN CONTROL
On July 1, 2002, the Companies entered into a settlement agreement with respect to certain outstanding litigation involving the Companies. In connection with the settlement, the Corporation entered into a stock purchase agreement (the "Stock Purchase Agreement") with HX Investors and Exeter Capital Corporation ("Exeter"), the general partner of HX Investors, pursuant to which HX Investors, the owner of approximately 12% of the outstanding common stock of the Corporation, agreed to conduct a tender offer for up to an additional 30% of the Corporation's outstanding stock at a price per share of $62.00 (the "HX Investors Offer"). The tender offer commenced on July 5, 2002 following the filing of the required tender offer documents with the Securities and Exchange Commission by HX Investors.
Pursuant to the Stock Purchase Agreement, the Board of Directors of the Corporation approved a plan of liquidation for the Corporation (the "Plan of Liquidation") and agreed to submit the Plan of Liquidation to its stockholders for approval. HX Investors agreed to vote all of its shares in favor of the Plan of Liquidation. Under the Plan of Liquidation, HX Investors was to receive an incentive payment of 25% of gross proceeds after the payment of a priority return of approximately $66.25 per share was made to the stockholders of the Corporation.
Subsequently, on July 29, 2002, Longacre Corp. ("Longacre") commenced a lawsuit individually and derivatively against the Corporation, Shelbourne Properties I, Inc., Shelbourne Properties III, Inc., their boards, HX Investors, and Exeter seeking preliminary and permanent injunctive relief and monetary damages based on purported violations of the securities laws and mismanagement related to the tender offer by HX Investors, the Stock Purchase Agreement, and the Plan of Liquidation. The suit was filed in federal court in New York, New York. On August 1, 2002, the court denied Longacre's motion for a preliminary injunction, and, on September 30, 2002, the court dismissed the lawsuit at the request of Longacre.
Contemporaneous with filing its July 29, 2002 lawsuit, Longacre publicly announced that its related companies, together with outside investors, were prepared to initiate a competing tender offer for the same number of shares of common stock of the Corporation as were tendered for under the HX Investors Offer, at a price per share of $68.20. Over the course of the next several days, Longacre and HX Investors submitted competing proposals to the board of directors of the Corporation and made those proposals public. On August 4, 2002, Longacre notified the Corporation that it was no longer interested in proceeding with its proposed offer.
On August 5, 2002, the Corporation entered into an amendment to the Stock Purchase Agreement. Pursuant to the terms of the amendment, the purchase price per share offered under the HX Investors Offer was increased from $62.00 to $73.85. The amendment also reduced the incentive payment payable to HX Investors under the Plan of Liquidation from 25% to 15% of gross proceeds after payment of the approximately $66.25 per share priority return to stockholders of the Corporation (the "Incentive Fee"), and included certain corporate governance provisions.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CHANGE IN CONTROL (CONTINUED)
On August 16, 2002, the HX Investors offer expired and HX Investors acquired 268,444 shares representing 30% of the outstanding shares.
On August 19, 2002, as contemplated by the Stock Purchase Agreement, the existing Board of Directors and executive officer of the Corporation resigned and the Board was reconstituted to consist of six members, four of whom are independent directors. In addition, new executive officers were appointed.
Also on August 19, 2002, the Board of Directors of the Corporation authorized the issuance by the Operating Partnership of the Corporation of Class B Units to HX Investors which Class B Units provide distribution rights consistent with the intent and financial terms of the incentive payment provided for in the Stock Purchase Agreement described above and which distributions are payable only in the event that the Plan of Liquidation was adopted. On August 19, 2002, the Operating Partnership issued the Class B Units to HX Investors in full satisfaction of the Incentive Fee payment otherwise required under the Plan of Liquidation.
10. SUBSEQUENT EVENTS
On January 13, 2003, the Board of Directors declared a dividend of $12,974,484 ($14.50 per share). The dividend was paid on January 31, 2003 to stockholders of record at the close of business on January 23, 2003.
On January 15, 2003, a joint venture owned by the Operating Partnership and the operating partnerships of Shelbourne Properties I, Inc. and Shelbourne Properties III, Inc. acquired from Realty Holdings of America, LLC, an unaffiliated third party, a 100% interest in an entity that owns 20 motel properties triple net leased to an affiliate of Accor SA. The cash purchase price, which was provided from working capital, was approximately $2,700,000, of which approximately $878,000, $1,096,000 and $726,000 was paid by Shelbourne Properties I, Inc., the Corporation and Shelbourne Properties III, Inc., respectively. The properties are also subject to existing mortgage indebtedness in the current principal amount of approximately $74,220,000.
The Companies formed the joint venture and acquired the interest in the new properties in order to facilitate the disposition of the other properties of the Companies and the distribution to stockholders of the sales proceeds in accordance with the Plan of Liquidation. Prior to the acquisition of the Accor S.A. properties, he holder of the Class A Units had the right to cause the Operating Partnerships to purchase the Class A Units at a substantial premium to their liquidation value (at the time of the acquisition, a premium of approximately $6,605,000 in the case of the Operating Partnership and approximately $16,265,000 for all three operating partnerships) unless the operating partnerships maintained at least approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the case of the Operating Partnership) guaranteed by the holder of the Class A Units and secured by assets having an aggregate market value of at least approximately $74,800,000 ($30,400,000 in the case of the Operating Partnership). These requirements significantly impaired the ability of the Corporation to sell its properties and make distributions in accordance with the Plan of Liquidation. In lieu of these requirements, the operating partnerships agreed to acquire the Accor S.A. properties for the benefit of the holder of the Class A Units. The holder of the Class A Units does, however, continue to have the right, under certain limited circumstances which the Companies do not anticipate will occur, to cause the operating partnerships to purchase the Class A Units at the premium described above. The terms of the Class A Units were also modified to eliminate the $2,500,000 aggregate liquidation preferences to which the holder of the Class A Units was previously entitled ($1,015,148 in the case of the Operating Partnership).
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENTS (CONTINUED)
The holder of the Class A Units has the right to require the operating partnerships to acquire other properties for its benefit at an aggregate cash cost to the operating partnerships of $2,500,00 (approximately $1,015,000 of which would be paid by the Operating Partnership). In that event the Accor S.A. properties would not be held for the benefit of the holder of the Class A Preferred Units and would be disposed of as part of the liquidation of the Companies.
On January 31, 2003, the Hilliard, Ohio property was sold to an unaffiliated third party for a gross sale price of $4,600,000. After satisfying the debt encumbering the property, closing adjustments and other closing costs, net proceeds were approximately $2,063,500, $426,330 of which is attributable to the Company's interest.
On February 20, 2003, in a transaction further designed to provide flexibility to the Companies in implementing their respective plans of liquidation and enable them to distribute 100% of the net proceeds from the sale of the New York, New York property, direct and indirect subsidiaries (the "Borrowers") of each of the Companies entered into a Loan Agreement with Fleet National Bank, as agent for itself and other lenders ("Fleet") pursuant to which the Borrowers obtained a $55,000,000 loan (the "Loan"). The Companies believed that by entering into a single loan transaction instead of three separate loan transactions they were able to obtain a larger loan at a more favorable interest rate. The Loan bears interest at the election of the Borrowers at a rate of either LIBOR plus 2.75% or Fleet's prime rate (but not less than 5%) plus 100 basis points. At present the Borrowers have elected that the Loan bear interest at LIBOR plus 2.75%. The Loan matures on February 19, 2006, subject to two one year extensions. The Loan is prepayable in whole or in part at anytime without penalty or premium.
The Loan is secured by mortgages on certain real properties owned directly and indirectly by the operating partnerships. The Borrowers are jointly and severally liable for the repayment of the amounts due under the Loan and the Operating Partnership and the Corporation (as well as the other Operating Partnerships and Companies) have guaranteed the repayment of the Loan. A portion of the proceeds of the Loan proceeds, as well as the balance of a note in the amount of $10,000,000 secured by the 568 Broadway property, were used to satisfy the Credit Facility that had a balance due of $37,417,249.
On February 28, 2003, 568 Broadway Joint Venture, a partnership in which the Operating Partnership indirectly holds a 38.925% interest, sold its property located in New York, New York for a gross purchase price of $87,500,000. The property was sold to 568 Broadway Holding LLC. After assumption of the debt encumbering the property ($10,000,000), closing adjustments and other closing costs, net proceeds were approximately $73,000,000 approximately $28,415,250 of which was allocated to the Operating Partnership.
Also on February 28, 2003, the Operating Partnership sold its properties located in Melrose Park, Illinois for a gross purchase price of $3,247,200. The property was sold to Antonio Francesco Ingraffia, as trustee of the Antonio Francesco Ingraffia Living Trust, under Trust Agreement dated April 29, 1993, as to an undivided 1/2 interest and Domenico Gambino, as trustee of the Domenico Gambino Living Trust, under Trust Agreement dated April 28, 1993, as to an undivided 1/2 interest. After closing adjustments and other closing costs, net proceeds were approximately $2,900,000.
On February 28, 2003, the Board of Directors declared a dividend of $30.00 per share payable on March 18, 2003 to holders of record on March 10, 2003. The dividend was made from proceeds from the Fleet Loan and sales of the New York, New York property and the Melrose Park, Illinois property, as well as cash reserves.
SHELBOURNE PROPERTIES II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY DATA
The following table presents unaudited financial data by quarter for the years ended December 31, 2002 and 2001. Periods prior to October 30, 2002 were on a going concern basis, liquidation basis was used thereafter.