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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Commission file number 0-16341
SHELBOURNE PROPERTIES II, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3502382
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
P.O. Box 9507, 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114
-----------------------------------------------------------------------
(Address of principal executive offices)
(617) 570-4600
(Registrant's telephone number, including area code)
5 Cambridge Center, Cambridge, MA 02142
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 13, 2001, there were 1,237,916 shares of common stock
outstanding.
--------------------------------------------------------------------------------
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
The financial information contained in this Form 10-Q for the periods prior to
April 17, 2001 are those of Shelbourne Properties II, Inc.'s predecessor in
interest, High Equity Partners L.P. - Series 86 (the "Partnership"). On April
17, 2001, the Partnership was merged with and into Shelbourne Properties II, LP,
a limited partnership wholly owned, directly and indirectly, by Shelbourne
Properties II, Inc.
INDEX
Page
----
Part I. Financial Information
Item I. Financial Statements
Balance Sheets - June 30, 2001 and December 31, 2000 ...................................... 3
Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000............... 4
Statement of Partners' Equity - Six Months Ended June 30, 2001............................. 5
Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000......................... 6
Notes to Financial Statements.............................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 17
Part II. Other Information:
Item 4. Submission of Matters to Vote of Securityholders........................................... 18
Item 6. Exhibits and Reports on Form 8-K........................................................... 18
Signatures.......................................................................................... 19
2
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
[UNAUDITED]
ASSETS
Real estate - net $ 45,681,775 $ 45,939,430
Cash and cash equivalents 18,840,062 17,607,533
Other assets 3,732,806 3,461,815
Receivables - net 178,729 132,805
------------ ------------
$ 68,433,372 $ 67,141,583
============ ============
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $1,332,798 $1,353,556
Due to affiliates - 512,473
------------ ------------
1,332,798 1,866,029
------------ ------------
Equity:
Common Stock:
$.01 Par Value per share; Authorized 2,500,000 shares; issued
and outstanding 1,237,916 shares 12,379 -
Additional Capital 66,329,959 -
Retained Earnings 758,236 -
Limited partners' equity (588,010 units
issued and outstanding) - 62,010,830
General partners' equity - 3,264,724
------------ ------------
67,100,574 65,275,554
------------ ------------
$ 68,433,372 $ 67,141,583
============ ============
See notes to financial statements.
3
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
STATEMENTS OF OPERATIONS
[UNAUDITED]
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------ ----------------- ----------------- ----------------
2001 2000 2001 2000
---- ----- ---- ----
Rental Revenue $3,042,154 $ 2,844,905 $ 6,096,413 $ 5,761,070
---------- ----------- ----------- -----------
Costs and Expenses:
Operating expenses 976,043 872,404 1,909,824 1,901,258
Depreciation and amortization 547,963 479,570 1,107,374 1,030,995
Asset management fee 334,378 216,077 666,026 432,154
Administrative expenses 350,881 331,784 844,271 646,090
Property management fee 91,576 70,579 182,302 172,710
---------- ----------- ----------- -----------
2,300,841 1,970,414 4,709,797 4,183,207
---------- ----------- ----------- -----------
Income before interest and other income 741,313 874,491 1,386,616 1,577,863
Interest income 182,429 183,116 416,002 332,893
Other income 8,602 10,050 22,402 10,050
---------- ----------- ----------- -----------
Net income $ 932,344 $ 1,067,657 $ 1,825,020 $ 1,920,806
=========== =========== =========== ===========
Earnings Per Share - Basic and Diluted
Net income per share of common stock $ .75 $ .86 $ 1.47 $ 1.55
========= ========= ========= =========
Weighted average common shares 1,237,916 1,237,916 1,237,916 1,237,916
========= ========= ========= =========
See notes to financial statements.
4
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
STATEMENT OF EQUITY
[UNAUDITED]
PARTNERS' EQUITY SHAREHOLDERS' EQUITY
--------------------------------- -------------------------------------
GENERAL LIMITED COMMON ADDITIONAL RETAINED
PARTNERS PARTNERS STOCK CAPITAL EARNINGS TOTAL
---------------- --------------- -------------------------------------- --------------
Balance, January 1, 2001 $ 3,264,724 $ 62,010,830 $ - $ - $ - $ 65,275,554
Net income through
April 17, 2001 51,439 1,015,345 $ - $ - $ - 1,066,784
Conversion of partnership
into REIT (3,316,163) (63,026,175) 12,379 66,329,959 - -
Net income subsequent to
conversion - 758,236 758,236
--------------- -------------- -------- ------------ --------- --------------
- - -
Balance, June 30, 2001 $ - $ - $ 12,379 $ 66,329,959 $ 758,236 $ 67,100,574
=============== ============== ======== ============ ========= ==============
See notes to financial statements.
5
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
STATEMENTS OF CASH FLOWS
[UNAUDITED]
FOR THE SIX MONTHS ENDED
JUNE 30,
2001 2000
---- ----
Cash Flows From Operating Activities:
Net income $1,825,020 $ 1,920,806
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 1,107,374 1,030,995
Straight line adjustment for stepped
lease rentals 37,531 15,861
Changes in asset and liabilities:
Other assets (499,292) (289,705)
Receivables (45,924) (97,766)
Accounts payable and accrued expenses (20,758) (116,968)
Due to affiliates (512,473) (203,630)
------------ ------------
Net cash provided by operating activities 1,891,478 2,259,593
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate (658,949) (306,018)
------------ ------------
Increase in Cash and Cash Equivalents 1,232,529 1,953,575
Cash and Cash Equivalents, Beginning of Year 17,607,533 12,675,936
------------ ------------
Cash and Cash Equivalents, End of Quarter $ 18,840,062 $ 14,629,511
============ ============
See notes to financial statements.
6
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
1. GENERAL
The accompanying financial statements, notes and discussions should be read
in conjunction with the financial statements, related notes and discussions
contained in the Annual Report on Form l0-K of High Equity Partners, L.P. -
Series 86 (the "Partnership") for the year ended December 31, 2000.
Effective April 17, 2001, the Partnership was merged with and into
Shelbourne Properties II, LP (the "Operating Partnership"), a limited
partnership wholly owned, directly and indirectly, by Shelbourne Properties
II, Inc. (together with the Operating Partnership, the "Company"). See
Note 7.
The financial information contained herein is unaudited; however, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such financial
information have been included. Results of operations for the three and six
months ended June 30, 2001 are not necessarily indicative of the results to
be expected for the entire year.
2. SIGNIFICANT ACCOUNTING POLICIES
Investment in Joint Ventures
Certain properties are owned in joint ventures with Shelbourne Properties I
and/or Shelbourne Properties III, LP, affiliated partnerships that are
under common control with the Company. The Company owns, and the
Partnership owned, an undivided interest in the assets owned by these joint
ventures and is and was severally liable for indebtedness it incurred in
connection with its ownership interest in those properties. Therefore, the
Company's financial statements present the assets, liabilities, revenues
and expenses of the joint ventures on a pro rata basis in accordance with
the Company's percentage of ownership.
Real Estate
Real Estate is carried at cost, net of adjustments for impairment. Repairs
and maintenance are charged to expense as incurred. Replacement and
betterments are capitalized. The Partnership evaluated, and the Company
will evaluate the recoverability of the net carrying value of its real
estate and related assets at least annually, and more often if
circumstances dictated. If this review indicates that the carrying value of
a property might not be recoverable, the Partnership prepared, and the
Company will prepare estimates of the future undiscounted cash flows
expected to result from the use of the property and its eventual
disposition, generally over a five-year holding period. In performing this
review, management takes into account, among other things, the existing
occupancy, the expected leasing prospects of the property and the economic
situation in the region where the property was located.
7
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate (continued)
If the sum of the expected future cash flows, undiscounted, was less than
the carrying amount of the property, the Partnership recognized, and the
Company will recognize, an impairment loss, and reduced the carrying amount
of the property to its estimated fair value. Fair value is the amount at
which the property could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation sale.
Management estimated and will continue to estimate fair value using
discounted cash flows or market comparables, as most appropriate for each
property. Independent certified appraisers were utilized to assist
management, when warranted.
Impairment write-downs recorded by the Partnership prior to April 17, 2001
did not affect the tax basis of the assets and were not included in the
determination of taxable income or loss. No write-downs have been recorded
since the effective date of the merger.
Because the expected cash flows used to evaluate the recoverability of the
property and their fair values were based upon projections of future
economic events, such as property occupancy rates, rental rates, operating
cost inflation and market capitalization rates, the amounts ultimately
realized at disposition may differ materially from the net carrying values
at the balance sheet dates. The cash flows and market comparables used in
this process were based on good faith estimates and assumptions developed
by management. Unanticipated events and circumstances may occur and some
assumptions may not materialize; therefore, actual results may vary
materially from the estimates. The Company may in the future provide
additional write-downs, which could be material, if real estate markets or
local economic conditions change.
Recently Issued Accounting Pronouncements
Effective January 1, 2001, the Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was adopted by the Partnership. Because the Partnership did not
utilize derivatives or engage in hedging activities, this standard did not
have a material effect on the Partnership's financial statements and is not
expected to have a material effect on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards "SFAS" No. 141 "Business
Combinations". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method of accounting. SFAS No. 141 also
changes the criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. This statement will
not affect the Company's financial statements.
8
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (continued)
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS no. 142 addresses accounting and reporting for intangible
assets acquired, except for those acquired in a business combination. SFAS
No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles will
not be amortized but rather will be tested at least annually for
impairment. SFAS No. 142 also addresses accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
This statement will not have a material effect on the Company's financial
statements.
3. RELATED PARTY TRANSACTION
Until April 17, 2001, the general partners of the Partnership were entitled
to receive certain fees and reimbursement for expenses as permitted under
the terms of the Partnership's partnership agreement. Effective April 17,
2001, the Company entered into a contract with Shelbourne Management, LLC
("Shelbourne Management"), which contract has a term of 10 years, pursuant
to which Shelbourne Management is to provide the Company with all
management, advisory and property management services. Shelbourne
Management is owned by Presidio Capital Investment Company, LLC ("PCIC"),
an entity controlled and principally owned by affiliates of the senior
management of the Company. For providing these services, Shelbourne
Management will receive (1) an annual asset management fee, payable
quarterly, equal to 1.25% of the gross asset value of Shelbourne as of the
last day of each year, (2) property management fees of up to 6% of property
revenues, (3) $150,000 for non-accountable expenses and (4) reimbursement
of expenses incurred in connection with the performance of its services.
The fees payable to the general partners to April 17, 2001 and to
Shelbourne Management from and after April 17, 2001 consist of (i) a
maximum non-accountable expense reimbursement of $150,000 per year, (ii) an
annual management fee of 1.25% of the Gross Asset Value of the
Partnership/Company (as defined), (iii) property management fees of up to
6% of property revenues, and (iv) reimbursement of expenses incurred in
connection with the performance of its services. Gross asset value is the
gross asset value of all assets owned by the Operating Partnership based on
the latest appraisal of real estate assets by an independent appraiser of
national reputation selected by the advisor and the amount of other assets
as reflected on the balance sheet. Since the asset management fee is based
on gross assets, the amount payable to Shelbourne Management will increase
to the extent the Company acquires new investments, whether for cash, by
causing the Company to incur indebtedness or otherwise.
9
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
3. RELATED PARTY TRANSACTION (CONTINUED)
The following table indicates the amounts paid to general partners and
Shelbourne Management on account of such fees for the six month periods
ended June 30, 2001 and June 30, 2000.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
[unaudited] [unaudited]
General Partners Shelbourne Management General Partners
---------------- --------------------- ----------------
Expense Reimbursement $ 59,444 $ 40,556 $100,000
Asset Management Fee $394,808 $271,218 $432,154
Prior to October 2000, the Partnership had a property management services
agreement with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the general partners, to perform certain
functions relating to the management of the properties of the Partnership.
A portion of the property management fees were paid to unaffiliated
management companies which were engaged for the purpose of performing
certain of the management functions for certain properties.
For the quarter ended June 30, 2000, Resources Supervisory was entitled to
receive $70,579. Due to flat fee agreements with certain properties and
collection of outstanding receivables $70,579 was paid to unaffiliated
management companies for property management services for the quarter ended
June 30, 2000. For the six months ended June 30, 2000, Resources
Supervisory was entitled to receive $172,710. Due to flat fee agreements
with certain properties and collection of outstanding receivables, $165,684
was paid to unaffiliated management companies for property management
services with the balance being retained by Resources Supervisory.
Effective October 2000, Kestrel Management L.P. ("Kestrel"), an affiliate
of the agent, began performing all property management services directly
for the Partnership and, effective April 17, 2001, the Company. For the
quarter ended June 30, 2001, Kestrel earned $91,576. For the six months
ended June 30, 2001, Kestrel earned $182,302.
In connection with the merger, the units of limited partnership interest
held by affiliates of the general partners, including those acquired in
tender offers made in connection with the settlement of a class action
lawsuit were converted into shares of common stock of the Company. In this
regard, affiliates of PCIC received 281,232 shares of common stock of the
Company representing 22.7% of the total outstanding shares. In addition,
pursuant to the terms of the merger, the general partners received an
aggregate of 61,896 shares. See Note 7.
10
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
4. REAL ESTATE
The following table is a summary of the Company's real estate as of:
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
[unaudited]
Land $ 11,669,652 $ 11,669,652
Buildings and improvements 60,658,184 59,999,235
------------ -----------
72,327,836 71,668,887
Less: Accumulated depreciation (26,646,061) (25,729,457)
------------ -----------
$ 45,681,775 $ 45,939,430
============ ============
5. DUE TO AFFILIATES
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
[unaudited]
Partnership asset management fee $ - $ 462,473
Non-accountable expense reimbursement - 50,000
------------ -----------
Total $ - $ 512,473
============ ============
The amounts payable at December 31, 2000 were paid in the subsequent
quarters.
6. FEDERAL INCOME TAX CONSIDERATIONS
As of April 17, 2001, the Partnership was converted into a corporation that
will elect to be taxed as a real estate investment trust (REIT) under the
provisions of the Internal Revenue Code. See Note 7. As a result, the
shareholders of the REIT will be required to include their proportionate
share of any distribution of taxable income on their returns. REITs are
required to distribute at least 90% of their ordinary taxable income to
shareholders and meet certain income, asset and shareholder ownership
requirements.
11
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
7. SETTLEMENT OF LAWSUIT
In April 1999, the California Superior Court approved the terms of the
settlement of a class action and derivative litigation involving the
Partnership. Under the terms of the settlement, the general partners agreed
to take the actions described below subject to first obtaining the consent
of limited partners to amendments to the Agreement of Limited Partnership
of the Partnership summarized below. The settlement became effective in
August 1999 following approval of the amendments.
As amended, the Partnership Agreement (a) provided for a Partnership Asset
Management Fee equal to 1.25% of the Gross Asset Value of the Partnership
(as defined) and (b) fixed the amount that the General Partners would be
liable to pay to limited partners upon liquidation of the Partnership as
repayment of fees previously received (the "Fee Give-Back Amount"). As of
March 31, 2001, the Fee Give-Back Amount was $3.77 per Unit, subject to
reduction by approximately $.49 per Unit for each full calendar year after
2000 in which liquidation did not occur. As amended, the Partnership
Agreement provided that, upon a reorganization of the Partnership into a
REIT or other public entity, the general partners would have no further
liability to pay the Fee Give-Back Amount. As a result of the conversion of
the Partnership into a REIT on April 17, 2001, as described below, the
general partners liability to pay the Fee Give-Back Amount was
extinguished.
As required by the settlement, an affiliate of the general partners,
Millennium Funding III, LLC, made a tender offer to limited partners to
acquire up to 39,596 Units (representing approximately 6.7% of the
outstanding Units) at a price of $103.05 per Unit. The offer closed in
January 2000 and all 39,596 Units were acquired in the offer.
The final requirement of the settlement obligated the general partners to
use their best efforts to reorganize the Partnership into a REIT or other
entity whose shares were listed on a national securities exchange or on the
NASDAQ National Market System. A Registration Statement was filed with the
Securities and Exchange Commission on February 11, 2000 with respect to the
restructuring of the Partnership into a publicly traded REIT. On or about
February 15, 2001 a prospectus/consent solicitation statement was mailed to
the limited partners of the Partnership seeking consent to the
reorganization of the Partnership into a REIT.
The consent of limited partners was sought to approve the conversion of the
Partnership into the Company. The consent solicitation expired April 16,
2001 and holders of a majority of the units approved the conversion.
On April 17, 2001 the conversion was accomplished by merging the
Partnership into the Operating Partnership. Pursuant to the merger, each
limited partner of the Partnership received two shares of stock of the
Company for each unit they owned, and the general partners received an
aggregate of 61,896 shares of stock of the Company in exchange for their
general partner interests in the Partnership. The common stock of the
Company listed on the American Stock Exchange under the symbol HXE.
12
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Statements contained herein may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
section 21E of the Securities Exchange Act of 1934, as amended. Any statements
contained herein which are not statements of historical facts and that address
activities, events or developments that Shelbourne Properties II, Inc. expects,
believes or anticipates will or may occur in the future shall be deemed to be
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events, actual results and
performance financial and otherwise, could differ materially from those set
forth in or contemplated by the forward-looking statements herein. Factors that
could cause actual results to differ materially from those in forward-looking
statements include the terms of future property sales, investments and
financings, general economic and business conditions and various other risk
factors listed in the registration statement of Shelbourne Properties II, Inc.
filed with the Securities and Exchange Commission.
This item should be read in conjunction with the financial statements and other
items contained elsewhere in the report.
On April 17, 2001 Integrated Resources High Equity Partners, Series 86, a
California Limited Partnership (the "Partnership") was merged with and into
Shelbourne Properties II, LP, a limited partnership wholly owned, directly and
indirectly, by Shelbourne Properties II, Inc. Shelbourne Properties II, LP and
Shelbourne Properties II, Inc. are collectively referred to as the "Company".
Set below is a discussion and analysis of the financial condition of the Company
and the historical operations of the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its working capital reserves and any cash from operations as
its primary source of liquidity. In addition to cash, unlike the Partnership
which could not incur indebtedness or issue additional equity, the Company has
as potential sources of liquidity, capital raised by either borrowing money on a
long-term or short-term basis, or issuing additional equity securities. Due to
the restrictions on debt incurrence in the Partnership and the resulting lack of
mortgage debt on the properties, it is anticipated that the Company will have
significantly enhanced capital resources as compared to the Partnership. The
Company's use of these sources of capital may result in the encumbrance of its
current and future assets with substantial amounts of indebtedness. As a result,
the Company may have an increased risk of default on its obligations and thus a
decrease in its long-term liquidity.
The Company is currently marketing its Matthews Festival, Matthews, NC; Commerce
Plaza, Richmond, VA; and Commonwealth Industrial Park, Fullerton, CA properties
for sale. In the event that these properties are ultimately sold, the net
proceeds from such sale will be distributed, held in reserves or invested in
existing or new properties, or a combination thereof.
13
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
The Company had $18,840,062 in cash and cash equivalents at June 30, 2001. Cash
and cash equivalents are temporarily invested in short-term instruments. The
Company's level of liquidity, which is based upon cash and cash equivalents,
increased by $1,232,529 at June 30, 2001 as compared to December 31, 2000. The
increase in cash and cash equivalents at June 30, 2001 is due to $1,891,478 of
cash provided by operating activities that was partially offset by $658,949 of
improvements to real estate (investing activities). Currently, the Company's
primary source of funds is cash flow from the operation of its properties,
principally rents received from tenants that amounted to $6,096,413 for the six
months ended June 30, 2001. In addition, to the extent the Company acquires
additional assets, its cash flow from operations would be derived from a larger,
more diverse, and potentially riskier group of assets than currently owned.
Likewise, the Company's ability to pay dividends may be affected by the
leveraging of its assets and reinvestment of sale and financing proceeds for the
acquisition of additional assets.
For the three and six months ended June 30, 2001, the Company made $216,281 and
$658,949 respectively, in capital expenditures that were funded from cash flow
and the Company's working capital reserves. In addition to tenant improvements
at the properties, capital expenditures consisted of elevator repairs and water
piping at Seattle Tower and pylon signage and water line enhancements at
Matthews Township Festival Shopping Center. In February 2001, the Seattle area
was hit with an earthquake. The damage to Seattle Tower did not effect its
operations and it is expected that insurance will cover the costs associated
with the damage.
The budgeted expenditures for capital improvements and capitalized tenant
procurement cost in 2001 are an aggregate $4,063,000. These costs are expected
to be incurred in the normal course of business and funded from cash flow from
the operation of the properties and working capital reserves that are
temporarily invested in short-term money market instruments, as well as other
sources of capital including financing proceeds and the issuance of additional
equity. However, the actual amount of such expenditures depends upon the level
of leasing activity and other factors that cannot be predicted with certainty.
Because it is possible that the Company will have mortgage indebtedness and a
substantially larger pool of real estate assets, thereby increasing expenses,
the risk that it may be unable to fund the necessary capital and tenant
procurement costs at its properties will likely be increased.
Except as discussed herein, management is not aware of any other trends, events,
commitments or uncertainties that will have a significant impact on the
Company's liquidity. If, however, real estate market conditions deteriorate in
any areas where the properties are located, there is substantial risk that
future cash flow may be insufficient to fund the capital improvements and lease
procurement costs of the properties. In that event, the Company would utilize
its remaining working capital reserves, reduce distributions, raise additional
capital through financing or the issuance of equity, or sell one or more
properties.
14
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
RESULTS OF OPERATIONS
Six months ended June 30, 2001 vs. June 30, 2000
The Company's net income experienced a decrease of $95,786 (5%) for the six
months ended June 30, 2001 as compared to the same period in the prior year. The
decrease in net income for the comparable six month periods was due to an
increase in costs and expenses of $526,590 (12.6%) partially offset by increased
rental revenue of $335,343 (5.8%), interest income of $83,109 (25%) and other
income of $12,352 (123%).
Rental revenues increased during the six months ended June 30, 2001 compared to
2000 primarily due to increased income from the common area maintenance and real
estate tax recoveries along with leasing of vacant space at Commerce Plaza.
Interest income increased during the six months ended June 30, 2001 due to
higher cash balances during the six months of 2001 as compared to the comparable
period in 2000. This is due to the suspension by the Partnership of
distributions until the conditions of the settlement of the lawsuit were met. To
the extent that dividends are made in excess of net income, it is expected that
interest income will decline in subsequent quarters. Other income increased
during the six months ended June 30, 2001 as compared to the same period in 2000
as a result of the increase in the amount of investor servicing transfer fees.
Costs and expenses increased by $526,590 during the six months ended June 30,
2001 compared to the same period in 2000 due to increases in depreciation and
amortization, asset management fees, administrative expenses and property
management fees, while operating expenses remained relatively stable for the
comparable periods. Depreciation and amortization increased due to significant
real estate improvements completed in 2000 and the first six months of 2001 and
increased tenant procurement costs due to leasing of vacant spaces at Commerce
Plaza. Asset management fees increased for the six months ended June 30, 2001 as
compared to the six months ended June 30, 2000 as appraisals were conducted for
each property in the second quarter of 2000 that significantly increased the
Gross Asset Value of the portfolio owned by the Company. Administrative expenses
increased for the six months ended June 30, 2001 as compared to the same period
in 2000 primarily due to the costs associated with the conversion of the
Partnership into the Company. Property management fees increased due to
collections of past receivables, new leases at Commerce Plaza but was offset by
the increased vacancies at the Matthews Festival property.
Three months ended June 30, 2001 vs. June 30, 2000
The Company experienced a decrease in net income of $135,313 (12.7%) for the
three months ended June 30, 2001 as compared to the three months ended June 30,
2000. The decrease in net income for the comparable three month period was due
to an increase in costs and expenses of $330,427 (16.8%) partially offset by an
increase in rental revenue of $197,249 (6.9%).
Rental revenues increased during the three months ended June 30, 2001 compared
to 2000 primarily due to leasing of vacant spaces at Commerce Plaza.
15
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
Costs and expenses increased for the three months ended June 30, 2001 as
compared to the same period in 2000 primarily due to an increase in all expense
items. Operating expenses increased $103,639 for the comparable periods due
primarily to increased utility and repairs and maintenance expense. Partnership
asset management fees increased $118,301 due to new appraisals done on
individual properties during the second quarter of 2000 which increased the
Gross Asset Value. Depreciation and amortization increased $68,393 due to
increased tenant procurement fees and improvements in real estate and property
management fees increased $20,997 due to increase rental revenues. General and
administrative costs increased $19,097 due to the increased costs associated
with the operation of the Company as a real estate investment trust.
Inflation is not expected to have a material impact on the operations or
financial position of the Company.
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO") is helpful to investors
as a measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs.
FFO, which is a commonly used measurement of the performance of an equity REIT,
as defined by the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"), is net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructurings,
asset valuation provisions and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures.
The Company's FFO may not be comparable to FFO reported by other REITs that do
not define the term in accordance with the current NAREIT definition or that
interpret the NAREIT definition differently. FFO does not represent cash
generated from operating activities determined in accordance with accounting
principles generally accepted in the United States and should not be considered
as an alternative to net income (determined in accordance with accounting
principles generally accepted in the United States) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
16
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
FFO for the three and six month periods ended June 30, 2001 and 2000 are
summarized in the following table:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Net Income $ 932,344 $1,067,657 $1,825,020 $1,920,806
Plus: Depreciation and
Amortization related to real estate 547,963 479,570 1,107,374 1,030,995
---------- ---------- ---------- ----------
Funds From Operations $1,480,307 $1,547,227 $2,932,394 $2,951,801
========== ========== ========== ==========
OTHER MATTERS
Effective August 15, 2001, Messrs. W. Edward Scheetz and David T. Hamamoto,
directors of the Company, have been appointed as Co-Chief Executive Officers of
the Company and of its external adviser, Shelbourne Management LLC, in
replacement of Mr. Michael L. Ashner, who resigned effective as of such date.
Mr. Ashner is the Chief Executive Officer of Kestrel Management, L.P., the
entity that, together with its affiliates, will continue to perform
administrative and property management services for the Company. The resignation
of Mr. Ashner and the other officers of the Company who are employed by Kestrel
Management is not expected to have an impact on the operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any debt instruments. As such, the Company does not
have any market risk of interest rate volatility. However, to the extent that
interest rates are lowered, interest income on the Company's cash reserves will,
accordingly, decrease. The Company does not believe that it has any risk related
to derivative financial instruments.
17
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Securityholders
Commencing February 15, 2001, consents of the limited partners of the
Partnership were solicited to the conversion of the Partnership into a publicly
traded real estate investment trust. The consent solicitation period ended on
April 16, 2001. Holders of 334,504 units (56.89% of the outstanding units) voted
in favor of the conversion, holders of 36,568 units (6.22% of the outstanding
units) voted against the conversion and holders of 6,707 units (1.14% of the
outstanding units) abstained. The conversion was consummated on April 17, 2001
and each outstanding limited partnership unit in the Partnership was converted
into two shares of common stock of the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
99. Press Release dated August 14, 2001
(a) Reports on Form 8-K:
No report on Form 8-K was filed during this period.
18
SHELBOURNE PROPERTIES II, INC.
FORM 10-Q - JUNE 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Shelbourne Properties II, Inc.
Dated: August 14, 2001 By: /s/ Michael L.Ashner
----------------------
President and Director
(Principal Executive Officer)
Dated: August 14, 2001 By: /s/ Dallas E. Lucas
---------------------
Dallas E. Lucas
Treasurer
(Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
No. Exhibit Page No.
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99. Press Release dated August 14, 2001 21
20