SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 31, 2002
CEDAR INCOME FUND, LTD.
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(Exact name of registrant as specified in charter)
Maryland 0-14510 42-1241468
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(State or other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
44 South Bayles Avenue, Port Washington, New York 11050
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 767-6492
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(Former name or former address, if changed since last report)
Cedar Income Fund, Ltd.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002
(unaudited) and December 31, 2001
Consolidated Statements of Shareholders' Equity -
March 31, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Operations - Three
Months Ended March 31, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001
(unaudited)
Notes to Consolidated Financial Statements -
March 31, 2001 (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market
Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K and 8-K/A
Signatures
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
March 31, December 31,
2002 2001
------------ ------------
(unaudited)
Assets
Real estate
Land $ 10,108,717 $ 10,108,717
Buildings and improvements 47,930,622 47,513,267
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58,039,339 57,621,984
Less accumulated depreciation (976,333) (674,256)
------------ ------------
Real estate 57,063,006 56,947,728
Real estate held for sale 4,401,800 4,401,800
Property deposits 150,000 --
Cash and cash equivalents 2,290,404 2,872,289
Restricted cash 889,757 1,402,654
Rents and other receivables 423,432 217,104
Deferred financing costs, net 1,372,477 1,195,047
Deferred legal, net 178,936 98,749
Prepaid expenses, net 519,647 130,557
Deferred lease commissions 606,565 392,823
Deferred rental income 128,173 47,924
Taxes held in escrow 241,959 641,715
------------ ------------
Total Assets $ 68,266,155 $ 68,348,390
============ ============
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 46,042,006 $ 46,129,760
Loan payable 5,960,000 5,980,000
Accounts payable and accrued expenses 1,111,597 876,456
Security deposits 227,059 243,089
Advance rents 162,730 252,294
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Total Liabilities 53,503,392 53,481,599
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Minority Interest 2,301,845 2,235,239
Limited partner's interest in consolidated
Operating Partnership 8,846,604 8,964,366
Shareholders' Equity
Common stock ($.01 par value
50,000,000 shares authorized, 692,111
shares outstanding) 6,921 6,921
Additional paid-in-capital 3,607,393 3,660,265
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Total Shareholders' Equity 3,614,314 3,667,186
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Total Liabilities and Shareholders' Equity $ 68,266,155 $ 68,348,390
============ ============
Total Shareholders' Equity in the Company
and limited partner's (equity) interest in
Operating Partnership and minority interest $ 14,762,763 $ 14,866,791
============ ============
See the accompanying notes to consolidated financial statements.
Cedar Income Fund, Ltd.
Consolidated Statements of Shareholders' Equity
(unaudited)
Additional Total
Common Paid-In Undistributed Shareholders'
Stock Capital Net Earnings Equity
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 6,921 $3,660,265 $ - $3,667,186
-
Net loss - (52,872) - (52,872)
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Balance at March 31, 2002 $ 6,921 $3,607,393 $ - $3,614,314
======================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
2002 2001
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REVENUE
Rents $ 1,877,353 $ 712,208
Expense recoveries 622,639 163,427
Interest 10,325 107,644
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Total Revenue 2,510,317 983,279
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EXPENSES
Property expenses:
Payroll 22,403 14,010
Real estate taxes 288,674 91,988
Repairs and maintenance 227,336 87,405
Utilities 97,489 67,117
Management fee 96,990 31,918
Insurance 34,748 10,358
Leasing commisions 25,704 21,202
Other 99,730 26,432
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Property expenses, excluding depreciation 893,074 350,430
and amortization
Depreciation 302,077 130,985
Amortization 250,178 41,571
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Total property expenses 1,445,329 522,986
Interest 920,552 377,479
Directors' fees, directors' and officers'
insurance and expenses 30,762 18,086
Administrative and advisory fees 90,000 24,468
Legal and accounting 111,491 32,220
Other administrative 16,211 20,605
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Total Expenses 2,614,345 995,844
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Net loss before minority interest and limited
partner's interest in Operating Partnership (104,028) (12,565)
Minority interest (66,606) 22,888
Limited partner's interest 117,762 (12,940)
----------- -----------
Net loss before cumulative effect adjustment (52,872) (2,617)
Cumulative effect of change in accounting principles
(net of limited partnership share of ($14,732)) -- (6,014)
----------- -----------
Net loss $ (52,872) $ (8,631)
Net loss before extraordinary item per share (0.08) (0.01)
Cumulative effect of change in accounting principle -- (0.01)
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Net loss per share $ (0.08) $ (0.02)
=========== ===========
Average number of shares outstanding 692,111 692,111
=========== ===========
See the accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
---------------------------------
Net loss $ (52,872) $ (8,631)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 6,014
Minority interest 66,606 (22,888)
Limited partner's interest in Operating Partnership (117,762) 12,940
Depreciation and amortization 552,255 173,479
(Increase) decrease in deferred rental receivable (80,249) 18,288
Changes in operating assets and liabilites:
(Increase) decrease in rent and other receivable (206,328) 16,382
(Increase) decrease in prepaid expenses (389,090) 6,049
(Increase) decrease in deferred lease commissions (213,742) 8,773
Decrease in tax held in escrow 399,756 11,539
Increase in accounts payable 235,141 82,096
Security deposits collected, net (16,030) 5,793
Decrease in advance rents (89,564) (35,605)
--------------------------------
Net cash provided by operating activities 88,121 274,229
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Cash Flow From Investing Activities
Capital expenditures (417,355) (1,053,735)
Decrease in restricted cash 512,897 1,354,306
Deferred legal (80,187) --
Property deposits (150,000) --
Decrease in construction payable -- (343,030)
--------------------------------
Net cash used in investing activities (134,645) (42,459)
--------------------------------
Cash Flow from Financing Activities
Principal portion of scheduled mortgage payments (107,754) --
Financing costs (427,608) --
--------------------------------
Net cash used in financing activities (535,362) --
--------------------------------
Net (decrease) increase in cash and cash equivalents (581,886) 231,770
Cash and cash equivalents at beginning of the period 2,872,290 841,111
Cash and cash equivalents at end of the period $ 2,290,404 $ 1,072,881
================================
Supplemental Disclosure of Cash Activities
Interest paid $ 839,341 $ 363,603
================================
See the accompanying notes to consolidated financial statements.
Cedar Income Fund, Ltd.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 1. Background, Organization and Reorganization of the Company
Cedar Income Fund, Ltd. (the "Company") was originally incorporated in
Iowa on December 10, 1984, and qualified to operate as a real estate investment
trust ("REIT"). Shortly thereafter, the Company's Common Stock was listed on the
NASDAQ securities market. In June 1998, the Company was reorganized and included
in an umbrella partnership REIT structure through the contribution of
substantially all of its assets to a limited partnership (the "Operating
Partnership") in exchange for the sole general partnership interest and all
2,245,411 limited partnership interests ("Units") of the Operating Partnership.
Immediately thereafter, Cedar Bay Company, ("CBC") a New York general
partnership, which, as a result of a tender offer completed in April 1998,
became the largest stockholder of the Company, exchanged 1,703,300 shares of
Common Stock for 1,703,300 Units owned by the Company. Following these
transactions, substantially all of the Company's assets consisted of the
controlling general partnership interest of the Operating Partnership and
approximately 24% of the Units; substantially all of CBC's assets consisted of
189,737 shares of Common Stock (approximately 35% of the then-issued and
outstanding shares of Common Stock) and approximately 76% of the Units.
The Company's shares are traded on the NASDAQ (Small Cap) Market under
the symbol "CEDR".
Currently, a Unit in the Operating Partnership and a share of Common
Stock of the Company have essentially the same economic characteristics, as they
effectively share equally in net income or loss and distributions of the
Operating Partnership.
The Company continues to operate as a REIT. To qualify as a REIT under
applicable provisions of the Internal Revenue Code of 1986, as amended, and
Regulations thereto, the Company must have a significant percentage of its
assets invested in, and income derived from, real estate and related sources.
The Company's objectives are to provide to its shareholders a professionally
managed, diversified portfolio of commercial (primarily shopping center) real
estate investments which will provide the best available cash flow and present
an opportunity for capital appreciation.
The Company, through its Operating Partnership, owns and operates one
office property of approximately 79,000 sq. ft., located in Jacksonville,
Florida, a shopping center property of approximately 260,000 sq. ft. located in
Harrisburg, Pennsylvania through a 50% sole general partnership interest, and
three shopping center properties aggregating approximately 470,000 sq. ft., two
of which are located in Philadelphia, Pennsylvania and the third of which is
located in Sewell, New Jersey.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 1. Background, Organization and Reorganization of the Company (continued)
Cedar Bay Realty Advisors, Inc., a New York corporation ("CBRA"),
serves as investment advisor to the Company pursuant to an Administrative and
Advisory Agreement with the Company. Brentway Management LLC ("Brentway") a New
York limited liability company, provides property management services for the
Company's properties pursuant to a Management Agreement with the Company on
terms standard in the industry. SKR Management Corp., a New York corporation
("SKR"), provides certain legal services to the Company through its in-house
counsel and Secretary of the Company, Stuart H. Widowski. CBRA and SKR are
wholly-owned by Leo S. Ullman. Brentway is owned by Leo Ullman and Brenda
Walker. Leo S. Ullman is President and Chairman of the Board of the Company and
of the corporate partners of CBC. Brenda Walker is Vice President and a Director
of the Company and Vice President of the corporate partners of CBC. The terms of
the Administrative and Advisory Agreement and Management Agreement are further
discussed in Note 7 to the Consolidated Financial Statements.
The Company believes that its liquidity and expected sources of future
cash including (i) net proceeds from the currently-pending sale of Southpoint as
further discussed below, (ii) $2.3 million of cash and cash equivalents, (iii)
drawdowns on a $1 million line of credit (iv) net proceeds of sales of partial
interests in one or more of the Company's other properties, and (v) net proceeds
of the pending refinancing of The Point's mortgage loan, are sufficient to meet
current and near-term obligations, which include capital expenditures, property
acquisition commitments, SWH amortization payments and repayment of The Point's
existing mortgage loan. (See Notes 4 and 6).
Note 2. Description of Significant Accounting Policies
Consolidation Policy and Related Matters
The accompanying consolidated financial statements include the
consolidated financial position of the Company and the Operating Partnership as
of March 31, 2002 and December 31, 2001, and the results of their operations and
their cash flows for the three months ended March 31, 2002 and 2001,
respectively. All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying interim unaudited financial statements have been
prepared by the Company's management pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 2. Description of Significant Accounting Policies (continued)
Consolidation Policy and Related Matters (continued)
States ("GAAP") may have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. The unaudited financial
statements as of March 31, 2002 and for the three month periods ended March 31,
2002 and 2001 include, in the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the financial
information set forth herein. The results of operations for the interim periods
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto included in the Company's Form 10-K for the year ended December 31,
2001.
The Company owns an approximate 29% partnership interest as sole
general partner in the Operating Partnership, which provides the Company with
control over all significant activities of the Operating Partnership. The terms
of the Agreement of Limited Partnership of Cedar Income Fund Partnership, L.P.
dated June 1998, provide that the general partner has exclusive control over the
business affairs of the Operating Partnership, including, without limitation,
the following: (1) the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of or any other contracting of indebtedness
and other liabilities; (2) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental agencies; (3) the
acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or
exchange of any assets; (4) the negotiation, execution and performance of any
contracts, leases, conveyances or other instruments; (5) the appointment of a
manager or advisor to manage the business of the Operating Partnership; (6) the
maintenance of insurance; (7) the formation of, or acquisition of an interest
in, and the contribution of property to, any further limited or general
partnerships, joint ventures or other relationships that it deems desirable; (8)
the control of all matters affecting the rights and obligations of the Operating
Partnership; and (9) the general partner may not be removed by the limited
partners with or without cause, except with the consent of the general partner.
Based on the above nine items noted from the Limited Partnership
Agreement and the fact that the limited partners have no significant rights, the
Company has control over the Operating Partnership based on its general
partnership interest, and, accordingly, the Operating Partnership is
consolidated with the Company in the accompanying financial statements as of
March 31, 2002.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 2. Description of Significant Accounting Policies (continued)
The limited partner's interest as of March 31, 2002 (currently owned
entirely by CBC) represents approximately a 71% limited partnership interest in
the equity of the Operating Partnership.
The minority interest represents the limited partner's 50% interest in
The Point Associates, L.P. ("The Point Associates"). The Operating Partnership
has a 50% general partnership interest in such partnership, which is
consolidated in the accompanying financial statements for similar reasons as set
forth for the Operating Partnership. The limited partner in The Point Associates
is an affiliate of CBC.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Rental income is recognized on a straight-line basis over the term of
the lease. The excess of rents recognized over amounts contractually due is
included in deferred rents receivable on the accompanying balance sheets.
Contractually due but unpaid rents are included in tenant receivables on the
accompanying balance sheets. Certain lease agreements provide for reimbursement
of real estate taxes, insurance, common area maintenance costs and certain other
costs which are recorded on an accrual basis.
Gain on sales of real estate is recorded when title is conveyed to the
buyer, subject to the buyer's financial commitment being sufficient to provide
economic substance to the sale.
Real Estate
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of ten to forty years for buildings and improvements.
Tenant improvements, which are included in buildings and improvements, are
amortized on a straight-line basis over the term of the related lease.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 2. Description of Significant Accounting Policies (continued)
Cash Equivalents
The Company considers highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
Deferred Costs
Leasing fees and loan costs are capitalized and amortized over the life
of the related lease or loan.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, the
alternative fair value accounting provided for by the Financial Accounting
Standard Board ("FASB") under Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options.
The Company established a stock option plan (the "Plan") for the
purpose of attracting and retaining executive officers, directors and other key
employees. 500,000 of the Company's authorized shares of Common Stock have been
reserved for issuance under the Plan. The Plan is administered by a committee of
the Board of Directors, which committee will, among other things, select the
number of shares subject to each grant, the vesting period for each grant and
the exercise price (subject to applicable regulations with respect to incentive
stock options) for the options.
Effective July 10, 2001, the Board of Directors authorized the issuance
of options to purchase 10,000 shares at $3.50 per share, the stock price as of
that date, to each of the five Directors then in office and valid for ten years
thereafter.
Earnings Per Share
FASB Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", was issued and adopted by the Company during 1997. SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Since the Company's financial
statements reflect a net loss for the period, dilutive securities are not
considered in the computation of basic and diluted net loss per share in
accordance with SFAS 128. Accordingly, basic and diluted net income (loss) per
share is computed using the weighted average number of shares outstanding during
the periods (692,111 in both 2001 and 2002).
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 2. Description of Significant Accounting Policies (continued)
Income Taxes
The Company generally will not be subject to federal income taxes as
long as it qualifies as a REIT under Sections 856-869 of The Internal Revenue
Code of 1986, as amended (the "Code"). A REIT will generally not be subject to
federal income taxation on that portion of income that qualifies as REIT taxable
income and to the extent that it distributes such taxable income to its
stockholders and complies with certain requirements of the Code relating to
income and assets. As a REIT, the Company is allowed to reduce taxable income by
all or a portion of distributions to stockholders and must distribute at least
90% of its taxable income to qualify as a REIT.
Impairment of Long-Lived Assets
The Company's real estate assets are reviewed for impairment whenever
events or changes in circumstances indicate that the net carrying amount may not
be recoverable. When such events occur, the Company measures impairment by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. If the sum of the expected undiscounted future cash
flows is less than the carrying amount of the assets, the Company would
recognize an impairment loss based upon an estimate of value of the respective
property.
Recent Pronouncements
In June 2001, the FASB approved Statement of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations", and Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. The provisions of SFAS 142 are effective for fiscal
years beginning
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 2. Description of Significant Accounting Policies (continued)
after December 15, 2001. The Company has adopted SFAS 142 as of January 1, 2002.
The Company believes that the adoption of this standard will have no impact on
the Company's financial position or results of operations.
In August 2001, the FASB approved Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 supersedes SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of business. SFAS 144 retains the
requirements of SFAS 121 for recognition and measurement of an impairment loss
on long-lived assets, and establishes a single accounting model for all
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. The provisions of SFAS 144 are effective for fiscal years
beginning after December 15, 2001. The Company has adopted SFAS 144 as of
January 1, 2002. The Company believes that the adoption of this Standard will
have no impact on the Company's financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Derivative Financial Instruments
On January 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments. Specifically,
SFAS 133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. In the normal course of business, the Company is
exposed to the effect of interest rate changes. The Company limits these risks
by following established risk management policies and procedures including those
for the use of derivatives. The only hedging transaction entered into by the
Company was the purchase of an interest rate cap during 2000. The Company does
not use derivatives for trading or speculative purposes. Further, the Company
has a policy of only entering into contracts with major financial institutions
based upon their credit ratings and other factors.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 3. Real Estate and Accumulated Depreciation
The Company's properties are leased to various tenants, whereby the
Company incurs normal real estate operating expenses associated with ownership.
The Company incurred capital expenditures of $417,354 and $1,053,735 for the
quarters ended March 31, 2002 and 2001, respectively.
Note 4. Real Estate Held for Sale and Sales of Real Estate
As a result of the SWH financing and the related mandatory payments
(see Note 6), the Company's Southpoint property in Jacksonville, Florida has
been actively marketed for sale and was classified as "real estate held for
sale" effective October 9, 2001 (see Note 1). A contract of sale for Southpoint
with an unrelated purchaser in the amount of $4.7 million, entered into as of
February 1, 2002, is presently pending. The deposit on the contract became
non-refundable as of March 20, 2002. The closing is scheduled for the second
quarter of 2002. Net proceeds of the sale are expected to be approximately
$4,400,000, after credits to purchaser for certain tenant and capital
improvements in the aggregate amount of approximately $25,000, and after
deduction of sales costs of $273,000, including estimated commissions of
$169,000, title and deed costs of $47,000, legal fees of $10,000 and a
disposition fee payable to CBRA in the amount of $47,000. The Company, during
the quarter ended December 31, 2001, recognized an impairment loss of $1,341,759
related to the Southpoint property. That impairment loss reflects the difference
between the book value of the Southpoint property, as of December 31, 2001, and
the present market value of the property less estimated sales costs.
Note 5. Commitments and Contingencies
The Operating Partnership has entered into agreements to purchase (i)
an approximate 7 acre parcel of land in Fort Washington, Pennsylvania, on which
it has agreed to build a 41,000 sq. ft. health club facility, net-leased
pursuant to an executed lease agreement to L.A. Fitness International, L.L.C.,
subject to certain governmental approvals; (ii) subject to mortgagee approval of
the assumption of existing first mortgage financing, a 293,000 sq. ft.
supermarket-anchored shopping center in north central Pennsylvania; and (iii)
subject to a fairness opinion, a 20% sole general partnership interest in a
partnership owning a 220,000 sq. ft. shopping center in Philadelphia,
Pennsylvania presently owned by an affiliate of CBC.
The Fort Washington development is expected to be financed with a
third-party construction loan, which, upon completion, will become a permanent
loan of $5 million (the aggregate term of the loan including the construction
period will be five years), third-party participating equity of $1 million,
approximately $1.7 million from the tenant and approximately
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 5. Commitments and Contingencies (continued)
$300,000 in equity contributions from the Company out of currently-available
cash. The supermarket-anchored center is expected to be acquired by assumption
of existing third-party financing of approximately $13.9 million, $4 million
from a third-party participating equity co-venturer and $1.4 million from the
Company's currently-available cash. The 20% sole general partnership interest
will be purchased in four equal annual installments of approximately
$300,000-$400,000 each, again from currently-available cash. A third party
entity will purchase a 69% interest in the partnership at the time of the
aforementioned acquisition, and outstanding financing of $16.8 million will be
assumed.
See Notes 1, 6 and 7 for additional commitments and contingencies.
Note 6. Mortgage Loans, Other Loan Payable, and Line of Credit
Properties owned by the Company are subject to the following
property-specific mortgage loans payable:
o Academy Plaza, Philadelphia, Pennsylvania, has a first mortgage with a
principal balance of approximately $10,651,000 as of March 31, 2002, at
7.275% due March 10, 2013, with a 30-year amortization schedule.
o Port Richmond Village, Philadelphia, Pennsylvania, has a first mortgage
with a principal balance of approximately $11,541,000 as of March 31, 2002,
at 7.174% due April 10, 2007, with a 30-year amortization schedule.
o Washington Center Shoppes, Sewell, New Jersey, has a first mortgage with a
principal balance of approximately $5,950,000 as of March 31, 2002, at
7.53% with an anticipated payment date of November 11, 2007, with a 30-year
amortization schedule with a contractual maturity date of November 11,
2027.
o The Point Shopping Center, Harrisburg, Pennsylvania, in which the Company
has a 50% general partnership interest, has a first mortgage in the amount
of $17,900,000 as of March 31, 2002, at LIBOR plus 2.25%, due June 1, 2002.
The pending refinancing is scheduled to close prior to such date.
o Southpoint Parkway Center, Jacksonville, Florida, became encumbered on
October 9, 2001, by a first mortgage in the amount of $6 million in
connection with financing in such amount, by SWH Funding Corp. of
Hackensack, New Jersey. The Southpoint property was
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 6. Mortgage Loans, Other Loan Payable, and Line of Credit (continued)
unencumbered immediately prior to such financing. Net proceeds of such $6
million loan were applied to the acquisition of the three
supermarket-anchored shopping centers in Pennsylvania and southern New
Jersey as further described in the Company's Form 10-K for the year ended
December 31, 2001.
A wholly-owned subsidiary of SWH and the Operating Partnership have
together formed Cedar Center Holdings L.L.C. 3, which, in turn, is the sole
member of each of the four limited liability companies which own, indirectly
through other limited liability companies, the three shopping center properties
and development parcel acquired by the Operating Partnership in October 2001.
SWH has no interest in profits or assets of Cedar Center Holdings L.L.C. 3;
however, SWH has the right to acquire operating control of the above mentioned
three shopping center properties in the event of a default by the Operating
Partnership or its affiliates of certain terms of the SWH financing.
As additional security for the SWH loan, the Operating Partnership has
pledged to SWH Funding Corp., its rights to distributions from the entity which
controls the limited liability companies which own each of the three shopping
center properties. Under the pledge, SWH has no rights to such distributions
unless and until an event of default occurs.
The SWH financing arrangements involve a term of three years, maturing
November 1, 2004, with a right to extend for two additional eighteen month
periods upon payment of certain fees, and subject to certain additional minimum
monthly and annual or "back-end" payments, and to certain additional
participations in gain in value payable at the earliest of the repayment date,
maturity or the date of sale of the three shopping center properties described
above.
Payments to SWH pursuant to the financing arrangements shall be at a
rate of 12.5% per annum on the outstanding balance. In addition, an "equity fee"
in an amount equal to the greater of $350,000 or 10% of the gain in value of the
properties as determined by appraisal is payable at maturity. Further, SWH shall
be entitled to "exit fees" of $120,000 if the entire principal is paid prior to
October 2002, thereafter additional amounts accrue at 1/3% per month during the
period October 2002 - November 2004; 1/2% per month during the extension period
from November 2004 - November 2005; and 2/3% per month during the extension
periods from November 2005 - November 2007. A loan fee of $225,000 was paid to
SWH at closing.
Commencing as of December 1, 2001, amortization payments of $10,000 are
required during each of the first three months, $20,000 for each of the 4th
through 6th months, $35,000 for each of the 7th through the 12th months,
$45,833.33 for the 13th through the 24th months, and
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 6. Mortgage Loans, Other Loan Payable, and Line of Credit (continued)
$41,666.67 for the 25th through the 36th months. In addition there is a
mandatory payment of $4.5 million on or prior to the 12th month (November 2002)
and an additional mandatory payment of $300,000 on or prior to the 18th month.
The obligations of the Operating Partnership under the SWH financing
agreement are guaranteed by the Company.
The combined aggregate future principal payments of mortgage loans and other
loan(s) at March 31, 2002, are as follows:
Year Mortgage loans payable Other loan payable
- -------------- -------------------------------------------------
2002 $ 18,154,557 (1) $ 4,851,667 (2)
2003 368,197 841,667
2004 391,499 266,666
2005 425,651 -
2006 457,842 -
Thereafter 26,244,260 -
------------------- --------------
$ 46,042,006 $ 5,960,000
=================== ==============
(1) The Point's $17.9 million loan has two six-month extensions through June 1,
2003. The Company expects to refinance the property in an amount equal to
or greater than $17.9 million on or before June 1, 2002.
(2) Substantially all of amount due is expected to be paid from the proceeds of
the sale of Southpoint (see Note 4).
The Operating Partnership obtained a line of credit, effective March 4,
2002, in the amount of $1,000,000 from North Fork Bank, Melville, New York. The
term of the line of credit is for one (1) year with a maturity date of March 4,
2003. The line, at the sole discretion of the bank, may be used for (i) real
estate investment, (ii) real estate management, (iii) working capital and (iv)
other purposes as applicable and as approved by the bank. The interest rate on
any drawdown will be the greater of 6% or the bank's prime rate plus 1%.
Interest on the outstanding loan balance is to be paid to the bank monthly in
arrears. The line of credit's availability is subject to certain conditions as
defined.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
December 31, 2001
(unaudited)
Note 7. Related Party Transactions
Tender Offer
In June 1998, CBC, following a tender offer completed in April 1998 for
the purchase of the Company's shares, became the Company's largest shareholder.
CBC is a New York general Partnership. CBC is owned 55% by Duncomb
Corp., 40% by Lindsay Management Corp. and 5% by Hicks Corp. Mr. Ullman,
President and Chairman of the Board of Directors of the Company, is an executive
officer and a Director of each of those corporations.
CBC is also an affiliate of the limited partner in The Point
Associates, L.P. in which the Operating Partnership acquired a 50% general
partnership interest in July 2000 for $2.1 million plus closing costs of
approximately $385,000.
The 50% interest in The Point Associates, was purchased from Selbridge
Corp., then the sole general partner of The Point Associates, L.P. by assignment
of its 42% general partnership interest and from Mr. Ullman, then the sole
limited partner, by assignment of his entire 8% limited partnership interest.
Simultaneously with the assignment of partnership interests, Selbridge Corp.
became a 50% limited partner and the Company became a 50% general partner.
The proceeds of Mr. Ullman's 8% limited partnership interest were used
to repay a loan from Selbridge Corp. to Mr. Ullman to buy such partnership
interest. Selbridge Corp. paid a disposition fee to SKR in the amount of
$67,500.
The Operating Partnership has the right to acquire an additional 39%
partnership interest from Selbridge Corp. at any time at a price equal to the
fractional interest to be acquired, multiplied by ten times net operating
income, less the outstanding first mortgage debt. Selbridge Corp. is prohibited
from selling its remaining interest in The Point Associates, without first
offering to sell such interest to the Operating Partnership based upon the
aforementioned formula.
Advisory Services
The Company does not have any employees and has contracted with CBRA to
provide administrative, advisory, acquisition and divestiture services to the
Company pursuant to an Administrative and Advisory Agreement (the "Advisory
Agreement") entered into in April 1998, and amended as of August 21, 2000 and
January 1, 2002. CBRA is wholly-owned by Leo S.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 7. Related Party Transactions (continued)
Ullman. Mr. Ullman is President and a director of, and Brenda J. Walker is Vice
President of, CBRA. The term of the amended Advisory Agreement commenced as of
August 21, 2000, and is for five years and is automatically renewed annually
thereafter for additional one-year periods, subject to the right of a majority
of independent directors to cancel the Advisory Agreement upon sixty days'
written notice. While Mr. Ullman and Ms. Walker are not employed by the Company,
they do receive remuneration from CBRA, Brentway, and SKR each of which receives
fees from the Company.
Under the Advisory Agreement, CBRA is obligated to: (a) provide office
space and equipment, personnel and general office services necessary to conduct
the day-to-day operations of the Company; (b) select and conduct relations with
accountants, (subject to audit committee approval), attorneys, brokers, banks
and other lenders, and such other parties as may be considered necessary in
connection with the Company's business and investment activities, including, but
not limited to, obtaining services required in the acquisition, management and
disposition of investments, collection and disbursement of funds, payment of
debts and fulfillment of obligations of the Company, and prosecuting, handling
and settling any claims of the Company; (c) provide property acquisition and
disposition services, research, economic and statistical data, and investment
and financial advice to the Company; and (d) maintain appropriate legal,
financial, tax, accounting and general business records of activities of the
Company and render appropriate periodic reports to the Directors and
stockholders of the Company and to regulatory agencies, including the Internal
Revenue Service, the Securities and Exchange Commission, and similar state
agencies.
The Advisory Agreement may be terminated (i) for cause upon not less
than sixty days' written notice and (ii) by vote of at least 75% of the
independent directors at the end of the third or fourth year of such five year
term in the event gross assets fail to increase by 15% per annum.
Pursuant to the Advisory Agreement as in effect through December 31,
2001, CBRA was generally entitled to receive acquisition and disposition fees of
5% of the gross purchase price and 3% of the gross sales price, respectively.
CBRA had agreed to defer certain acquisition fees to which it may
otherwise be entitled with respect to the possible acquisition by the Company or
the Operating Partnership of certain properties owned by CBC and/or its
affiliates. Further, CBRA had agreed to defer certain fees otherwise payable
with respect to the sales in 2001 of the Operating Partnership's Corporate
Center and Broadbent properties.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 7. Related Party Transactions (continued)
With respect to the sales of these two properties, the Operating
Partnership paid to CBRA aggregate disposition fees of $61,600, representing 1%
of the sales prices. CBRA agreed with the Board of Directors and management to
defer an additional 2% (aggregate $143,200) to which it would otherwise be
entitled pursuant to the terms of the agreement, which provided generally that
the deferred amounts would be reduced and eventually eliminated if CBRA remained
investment advisor to the Company beyond December 31, 2009.
On December 18, 2001, the Board of Directors approved an Amendment to
the Administrative and Advisory Agreement, reflecting a reduction in acquisition
and disposition fees payable to CBRA by the Company. Effective as of January 1,
2002, CBRA will earn a disposition or acquisition fee, as applicable, equal to
1% of the sale/purchase price; no other fees will be payable in connection with
such transactions.
Pursuant to the Advisory Agreement, CBRA was originally entitled to
receive an acquisition fee in the maximum amount of $1,737,500 (5%) with respect
to the acquisition of the three supermarket-anchored shopping centers and land
parcel acquired on October 9, 2001. Initially, CBRA agreed to accept a cash fee
in the amount of $173,750 (one-half of 1%). As for the balance of the fee, CBRA
had agreed to (1) waive a portion in the amount of $868,750 (2.5%) and (2) defer
a portion in the amount of $696,000 (2%). Subsequently, with agreement of the
Board of Directors, the cash fee portion paid to CBRA was increased to 1%
(aggregate $347,500), and the deferred portion was waived in its entirety by
CBRA.
As a result of the Amendment, it is expected that there will be no
further deferrals or waivers of fees payable by the Company to CBRA.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 7. Related Party Transactions (continued)
The following is a schedule of fees payable by the Company to CBRA
reflecting the impact of the amendment and the reduced fees related to the
shopping centers:
Property Deferred Paid Total
- -------- -------- ---- -----
1st Quarter 2002 Transaction $ 0 $ 0 $ 0
- ----------------------------
2001 Transactions
- -----------------
Broadbent Business Center 106,000 53,000 159,000
Corporate Center 37,200 18,600 55,800
The three supermarket-anchored
shopping centers (2) - 347,500 347,500
2000 Transaction
- ----------------
Germantown 52,500 22,500 75,000
---------------------------------------------------
Total fees $ 195,700 (1) $ 441,600 $ 637,300
===================================================
(1) Amount owed if the Administrative and Advisory Agreement with CBRA is not
continued beyond December 31, 2004.
(2) The three supermarket-anchored shopping centers consist of Academy Plaza,
Port Richmond Village and Washington Center (including development parcel
adjacent to Washington Center).
As indicated above, deferred disposition and acquisition fees will be
reduced by 50% if CBRA remains investment advisor to the Company for the period
after December 31, 2004, but prior to December 31, 2005. In the event of
termination or expiration of the Agreement after December 31, 2005, such fees
payable to Advisor shall be reduced by 10 percentage points for each subsequent
calendar year the Agreement remains in effect, until reduced to zero in any
event after December 31, 2009. Any deferred disposition and acquisition fees
payable to CBRA will also be waived as of the effective date of termination of
services by CBRA if the services of CBRA are terminated voluntarily by CBRA.
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 7. Related Party Transactions (continued)
Based on the above, it is probable that a liability has been incurred.
However, the liability at this point can only be estimated to be in the range of
zero and the full fee. There is no best estimate within the range. This reflects
the fact that depending on how long CBRA's services are being used, the ultimate
fee amount payable may well be zero. Accordingly, none of the deferred fees have
been reflected in the accompanying financial statements.
In addition to acquisition and disposition fees payable to CBRA, CBRA
also receives a monthly administrative and advisory fee equal to 1/12 of 3/4 of
1% of the estimated current value of real estate assets of the Company, plus
1/12 of 1/4 of 1% of the estimated current value of all other assets of the
Company.
Property Management Services
Brentway provides property management, leasing, construction management
and loan placement services to the Company's real properties pursuant to a
Management Agreement entered into in April 1998 (the "Management Agreement").
Brentway is owned by Mr. Ullman and Ms. Walker, who are also Chairman and
President of Brentway, respectively. Mr. Ullman is President and Chairman of the
Company and Ms. Walker is Vice President and Director of the Company. The term
of the Management Agreement is for one year and is automatically renewed
annually for additional one-year periods subject to the right of either party to
cancel the Management Agreement upon sixty days' written notice. Under the
Management Agreement, Brentway is obligated to provide property management
services, which include leasing and collection of rent, maintenance of books and
records, establishment of bank accounts and payment of expenses, maintenance and
operation of property, reporting and accounting for the Company regarding
property operations, and maintenance of insurance. All of the duties of Brentway
are to be fulfilled at the Company's expense, provided, however, that the
Company is not required to reimburse Brentway for personnel expenses other than
for on-site personnel at the properties managed. Brentway receives fees for its
property management services as follows: a monthly management fee equal to 4% of
the gross income for the four supermarket-anchored shopping centers, and 5% of
the gross income for Southpoint (2.5% of which is paid to an unrelated party).
Brentway also receives leasing fees of up to 6% of the rent to be paid during
the term of the lease procured except in the case of the supermarket-anchored
shopping centers, where leasing fees are limited to 4.5%. Construction
management fees are 5% of the hard costs
CEDAR INCOME FUND, LTD.
Notes to Consolidated Financial Statements
March 31, 2002
(unaudited)
Note 7. Related Party Transactions (continued)
of construction. Loan placement fees are 1% of the amount financed, subject to
a maximum fee of $100,000 per transaction.
Leasing fees paid by the Company during this period were also paid to
third parties. Brentway has subcontracted with a local management company for
site management and leasing services for the Company's office property in
Jacksonville, Florida.
Schedule of Administrative and Advisory, Property Management, Leasing and Other
Fees Paid or Accrued to Related Parties:
January 1 - January 1 -
March 31, 2002 March 31, 2001
-------------------------------------------
Administrative and Advisory Fees
Cedar Bay Realty Advisors, Inc. $ 90,000 $ 24,468
-------------------------------------------
Property Management Fees
Brentway $ 101, 522 $ 21,218
-------------------------------------------
Construction Management Fees
Brentway $ 20,000 $ -
-------------------------------------------
Leasing Fees
Brentway $ 259,829 $ -
-------------------------------------------
Legal Fees
Stuart H. Widowski / SKR Management Corp. (1) $ 28,902 $ 2,138
-------------------------------------------
(1) Fees of $28,902 were paid to Stuart H. Widowski, Esq., SKR's in-house
counsel and Secretary of the Company, through SKR Management Corp., an
affiliate of CBRA, Brentway, CBC and Leo S. Ullman, for legal services
provided.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
historical financial statements of the Company and related notes.
The Company considers certain statements set forth herein to be
"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, with respect to the Company's expectations for future periods.
Certain forward-looking statements, including, without limitation, statements
related to the timing and success of acquisitions and the completion of
development or redevelopment of properties, the financing of the Company's
operations, the ability to lease vacant space and the ability to renew or relet
space under expiring leases, involve certain risks and uncertainties. Although
the Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, the actual results may differ
materially from those set forth in the forward-looking statements and the
Company can give no assurance that its expectations will be achieved. Certain
factors that might cause the results of the Company to differ materially from
those indicated by such forward looking statements include, among other factors,
general economic conditions, general real estate industry risks, tenant default
and bankruptcies, loss of major tenants, the impact of competition and
acquisition, redevelopment and development risks including delays in completion
and cost overruns, the ability to finance business opportunities, increase in
interest rates and local real estate markets. Consequently, such forward-looking
statements should be regarded solely as reflections of the Company's current
operating and development plans and estimates. These plans and estimates are
subject to revisions from time to time as additional information becomes
available, and actual results may differ from those indicated in the referenced
statement.
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 Company's consolidated financial statements and related notes. In
preparing these financial statements, management has utilized information
available including its past history, industry standards and the current
economic environment among other factors in forming its estimates and judgments
of certain amounts included in the consolidated financial statements, giving due
consideration to materiality. It is possible that the ultimate outcome as
anticipated by management in formulating its estimates inherent in these
financial statements might not materialize. However, application of the critical
accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Company's results of operations
to those of similar businesses.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Consolidation Policy
The accompanying consolidated financial statements include the
(unaudited) consolidated financial position of the Company and the Operating
Partnership as of March 31, 2002 and December 31, 2001, and the results of their
opreations and their cash flows for the three months ended March 31, 2002 and
2001, respectively. All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company owns an approximate 29% partnership interest as sole
general partner in the Operating Partnership, which provides the Company with
control over all significant activities of the Operating Partnership. As per the
Agreement of Limited Partnership of Cedar Income Fund Partnership, L.P. dated
June 1998, the general partner has exclusive control over the business affairs
of the Operating Partnership, including, without limitation, the following: (1)
the making of any expenditures, the lending or borrowing of money, the
assumption or guarantee of or any other contracting of indebtedness and other
liabilities; (2) the making of tax, regulatory and other filings, or rendering
of periodic or other reports to governmental agencies; (3) the acquisition,
disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any
assets; (4) the negotiation, execution and performance of any contracts, leases,
conveyances or other instruments; (5) the appointment of a manager or advisor to
manage the business of the Operating Partnership; (6) the maintenance of
insurance; (7) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general partnerships, joint
ventures or other relationships that it deems desirable; (8) the control of all
matters affecting the rights and obligations of the Operating Partnership; and
(9) the general partner may not be removed by the limited partners, with or
without cause, except with the consent of the general partner.
Based on the above nine items noted from the Limited Partnership
Agreement and the fact that the limited partners have no significant rights, the
Company has control over the Operating Partnership based on its general
partnership interest, and, accordingly, the Operating Partnership is
consolidated with the Company in the accompanying financial statements as of
December 31, 2001. The Operating Partnership in turn owns a 50% general
partnership interest in The Point Associates, L.P. which entity is also included
in the consolidated financial statements of the Company.
Revenue Recognition and Accounts Receivable
Rental revenue is recognized on a straight-line basis, which averages
minimum rents over the terms of the leases. The excess of rents recognized over
amounts contractually due are included in deferred rents receivable on the
Company's balance sheets. The leases also typically provide for tenant
reimbursements of common area maintenance and other operating expenses and real
estate taxes. Ancillary and other property related income is recognized in the
period earned.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Revenue Recognition and Accounts Receivable (continued)
The Company makes estimates of the collectibility of its accounts
receivable related to base rent, tenant escalations and reimbursements and other
revenue or income. The Company specifically analyzes tenant receivables and
analyzes historical bad debts, customer credit-worthiness, current economic
trends and changes in customer payment terms when evaluating the adequacy of its
allowance for doubtful accounts. In addition, when tenants are in bankruptcy,
the Company makes estimates of the expected recovery of pre-petition
administrative and damage claims. In some cases, the ultimate resolution of
those claims may extend beyond a year. Such estimates may have a direct impact
on the Company's net income, as a greater bad debt reserve will result in less
net income.
Gain on sales of real estate are recorded when title is conveyed to the
buyer, subject to the buyer's financial commitment being sufficient to provide
economic substance to the sale.
Real Estate
Land, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for maintenance and repairs
are charged to operations as incurred. Renovations and/or replacements, which
improve or extend the life of the asset are capitalized and depreciated over
their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the
estimated useful life of ten to forty years for buildings and improvements, and
five to ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.
The Company is required to make subjective assessments as to the useful
lives of its properties for purpose of determining the amounts of depreciation
to be reflected on an annual basis with respect to those properties. These
assessments have a direct impact on the Company's net income. Should the Company
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
Assessments by the Company of certain other lease-related costs as well
as any recorded straight-line rent receivable must be made when the Company has
a reason to believe that the tenant will not be able to perform under the terms
of the lease as originally expected.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Impairment of Long-Lived Assets
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows (undiscounted and without interest charges) to be generated by
the property are less than the carrying value of the property. Such cash flows
consider factors such as expected future operating income, trends and prospects,
as well as the effects of demand, competition and other factors. To the extent
impairment has occurred, the loss will be measured as the excess of the carrying
amount of the property over the fair value of the property.
The Company is required to make subjective assessments as to whether
there are impairments in the value of its real estate properties and other
investments. Any assessment resulting in a determination of impairment will have
a direct negative impact on the Company's net income.
Overview and Background
The Company is an advised REIT specializing in the acquisition,
leasing, financing, management and development of retail properties. The
Company's growth strategy is focused on the real estate markets in Pennsylvania
and southern New Jersey.
The Company owns all of its interests in real property, directly or
indirectly, through the Operating Partnership. As of March 31, 2002, the Company
owns and operates four retail properties (three located in Pennsylvania and one,
with an adjacent separate development parcel, in southern New Jersey) and one
office property located in Jacksonville, Florida. As of March 31, 2002, the
lease occupancy of the Company's one office property was approximately 86%. The
four retail properties have combined lease occupancy of approximately 87% as of
March 31, 2002.
On June 28, 2001, the Company sold its interest in Corporate Center for
$1.86 million. The Company incurred closing expenses of approximately $86,000,
including a broker's commission of $55,800.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Overview and Background (continued)
In October 2001, the Company purchased three shopping center properties
and a certain parcel of land for an aggregate purchase price of approximately
$35 million, plus closing costs, adjustments and reserves of approximately $2.8
million. The properties are: (i) Academy Plaza - a 155,000 sq. ft. community
shopping center anchored by a 50,000 sq. ft. Acme supermarket, (ii) Port
Richmond Village - a 156,000 sq. ft. community shopping center anchored by a
40,000 sq. ft. Thriftway supermarket, (iii) Washington Center Shoppes - a
157,000 sq. ft. community shopping center anchored by a 66,000 sq. ft. Acme
supermarket, and (iv) a development parcel of approximately 34,500 sq. ft.
adjacent to Washington Center Shoppes.
Results of Operations
Property operating revenue for the three months ended March 31, 2002
was $2,499,992 compared to $875,635 for the corresponding period in 2001, an
increase of approximately $1.6 million. This increase is attributable to the
acquisition of the three supermarket-anchored shopping center properties in
October 2001, and the increase in rental revenue at The Point as a result of the
opening of the Giant supermarket in July 2001. This increase is offset, in part,
by the sales of Corporate Center East and Broadbent Business Center during the
second quarter of 2001.
Property operating expenses and real estate taxes ("Property Expenses")
were $1,445,329 for the three months ended March 31, 2002 compared to $522,986
for the corresponding period in 2001, an increase of approximately $900,000.
This increase is attributable to the acquisition of the three
supermarket-anchored shopping centers and the full years' operation of The Point
and is offset, in part, by the sales of Corporate Center East and the Broadbent
Business Center.
Interest expense was $920,552 for the three months ended March 31,
2002, compared to $377,479 for the corresponding period in 2001. This increase
is attributable to the acquisition of the aforementioned shopping centers with
the assumption of $28.3 million in mortgages and $6 million of financing from
SWH. As a result of the increase in estimated value of the Company's assets,
administrative fees increased by approximately $66,000 from March 31, 2001 to
March 31, 2002. Professional fees increased by approximately $79,000 over the
same period due to an increase in accounting fees attributable to audits for the
three acquisition properties, as well as an increase in the Company's audit fees
as a result of the growth of the real estate portfolio.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Summary of Cash Flows
The Company's rental revenues for the three months ended March 31, 2002
were $2,499,992 compared to $875,635 for the three months ended March 31, 2001.
Vacancy at the end of 2002 is expected to increase from 58,439 sq. ft. to
approximately 63,800 sq. ft. The leasing time-table, between getting a lease
signed, building-out the space and the tenant taking possession, varies
depending on the market in the geographic location of the property as well as
the nature of the tenant's business. Management estimates that the Company will
incur approximately $890,000 in tenant improvement and leasing costs to lease-up
vacancies during 2002. Such amounts have been included in the respective
properties' 2002 operating budgets.
The operating expenses of the five properties owned by the Company
through its Operating Partnership are paid from the respective properties'
rental revenues. Management has prepared operating budgets for each of the five
properties and the aggregate revenues more than cover the operating expenses,
first mortgage debt service, tenant improvements and commissions.
Net cash provided by operating activities totaled $88,121 for the three
months ended March 31, 2002 and $274,229 for the corresponding period in 2001.
The decrease from year-to-year is predominantly due to the sales of two
properties in 2001, and the acquisition of four new properties over the past two
years.
Net cash used in investing activities totaled $134,644 for the three
months ended March 31, 2002 and $42,459 for the corresponding period in 2001.
Net cash used in financing activities totaled $535,362 for the three
months ended March 31, 2002 and $0 for the corresponding period in 2001.
Financing costs incurred during the first quarter of 2002 relate to currently
pending acquisitions.
Liquidity and Capital Resources
Real estate before deduction for accumulated depreciation equals $24.30
per share/OP Unit based on shares/OP Units outstanding as of March 31, 2002.
Real Estate at cost, less accumulated deductions for depreciation equals $23.82
per share/OP Unit on shares/OP Units outstanding as of March 31, 2002.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
Historically, rental revenue has been the principal source of funds to
pay operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the Company.
The Operating Partnership has entered into agreements to purchase (i)
an approximate 7 acre parcel of land in Fort Washington, Pennsylvania, on which
it has agreed to build a 41,000 sq. ft. health club facility, net-leased
pursuant to an executed lease agreement to L.A. Fitness International, L.L.C.,
subject to certain governmental approvals; (ii) subject to mortgage approval of
the assumption of existing first mortgage financing a 293,000 sq. ft.
supermarket-anchored shopping center in north central, Pennsylvania; and (iii)
subject to a fairness opinion, a 20% sole general partnership interest in a
partnership owning a 220,000 sq. ft. shopping center in Philadelphia,
Pennsylvania presently owned by an affiliate of CBC.
The Fort Washington development is expected to be financed with a
third-party construction loan, which, upon completion of construction, will
become a permanent loan of $5 million (the aggregate term of the loan including
the construction period will be five years), third-party participating equity of
$1 million, approximately $1.7 million from the tenant and approximately
$300,000 in equity contributions from the Company out of currently-available
cash. The supermarket-anchored center is expected to be acquired by assumption
of existing third-party financing of approximately $13.9 million, $4 million
from a third-party participating equity co-venturer, and $1.4 million from the
Company's currently-available cash. The 20% sole general partnership interest
will be purchased in four equal annual installments of $300,000-$400,000 each,
again from currently-available cash.
The Company's indebtedness at March 31, 2002 was approximately $52
million, including $6 million in financing payable to SWH. The SWH financing
requires a $4.5 million payment to be made as of November 2002, among other
required payments
The Company expects to fund the two mandatory payments due with respect
to the SWH financing ($4,500,000 and $300,000 due by November 2002 and May 2003,
respectively) from a combination of (i) net proceeds of the currently-pending
sale of the Southpoint property, (ii) $2.3 million in cash and cash equivalents,
(iii) drawdowns on a $1 million line of credit (iv) net proceeds of sales of
partial interests in one or more of the Company's other properties and (v) net
proceeds of the pending refinancing of The Point's mortgage loan.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
The Operating Partnership obtained a line of credit, effective March 4,
2002, in the amount of $1,000,000 from North Fork Bank, Melville, New York. The
term of the loan is for one (1) year with a maturity date of March 4, 2003. The
loan, at the sole discretion of the bank, may be used for (i) real estate
investment, (ii) real estate management, (iii) working capital and (iv) other
purposes as applicable and as approved by the bank. The interest rate is the
greater of 6% or the bank's prime rate plus 1%. Interest on the outstanding loan
balance is to be paid to the bank monthly in arrears. The line of credit's
availability is subject to certain conditions, including, but not limited to,
quarterly submission of 10-Q filings, annual submission of 10-K filings and a
30-day annual "clean up" (i.e. the outstanding balance of drawdowns under the
line of credit must be reduced to zero for 30 days). The line of credit does not
require any fees to be paid by the Company or the Operating Partnership. The
Company views the availability of this line of credit to be sound business
practice and an augment to its liquidity.
The Company expects that capital markets in the United States will
continue to be active and will provide funds for the refinancing of its four
(retail) properties' first mortgages as such mortgages mature over the next five
months to eleven years. With the exception of the Point's mortgage, all such
mortgages are amortizing loans. The balances due at maturity, and the annual
amortization payments due are summarized below.
The Company believes that its liquidity and expected sources of future
cash including the (i) net proceeds from the currently-pending sale of
Southpoint as further discussed below, (ii) $2.3 million of cash and cash
equivalents, (iii) drawdowns on a $1 million line of credit, (iv) net proceed of
sales of partial interests in one or more of the Company's other properties, and
(v) net proceeds of the pending refinancing of The Point's mortgage loan are
sufficient to meet current and near-term obligations, which include capital
expenditures, property acquisition commitments, SWH amortization payments and
repayment of The Point's existing mortgage loan.
The tragedy of September 11, 2001 had a significant effect on the real
estate industry. The real estate industry has been experiencing a significant
change in the property insurance markets that has resulted in significantly
higher premiums for landlords whose policies are subject to renewal in 2002,
primarily in the area of terrorism insurance coverage. The Company does not know
if sufficient insurance coverage will be available when the current policy
expires, or the costs for obtaining a policy containing terms similar to our
current policy. This may have an impact on the availability and cost of secured
financing in the future. Also, as a result of investigations of Enron and other
reported investigations of financial reporting, that insurance coverage and
premium costs for officers and directors insurance has been adversely affected.
The Company's annual premium for such insurance increased by approximately 29%.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
The following table sets forth the Company's significant debt
obligations at March 31, 2002, by scheduled principal cash flow payments and
maturity date:
The combined aggregate future principal payments of mortgage loans and other
loan(s) at March 31, 2002, are as follows:
Year Mortgage loans payable Other loan payable
- -------------- ------------------------------------------------------
2002 $ 18,154,557 (1) $ 4,851,667 (2)
2003 368,197 841,667
2004 391,499 266,666
2005 425,651 -
2006 457,842 -
Thereafter 26,244,260 -
---------------------- -----------------
$ 46,042,006 $ 5,960,000
====================== =================
(1) The Point's $17.9 million loan has two six-month extensions through June 1,
2003. The Company expects to refinance the property in an amount equal to
or greater than $17.9 million on or before June 1, 2002.
(2) Substantially all of amount due is expected to be paid from the proceeds of
the sale of Southpoint (see Note 4).
In order to qualify as a REIT for federal income tax purposes, the
Company is required to make distributions to its stockholders of at least 90% of
REIT taxable income. The Company expects to use its cash on hand and cash flow
from operating activities for this purpose if distributions to partners and
stockholders are required in order to continue to qualify as a REIT.
Inflation
Low-to-moderate levels of inflation during the past several years have
favorably impacted the Company's operations by stabilizing operating expenses.
At the same time, low inflation had the indirect effect of reducing the
Company's ability to increase tenant rents. The Company's properties have
tenants whose leases include expense reimbursements and other provisions to
minimize the effect of inflation. These factors, in the long run, are expected
to result in the more attractive returns from the Company's real estate
portfolio as compared to short-term investment vehicles.
Cedar Income Fund, Ltd.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Funds from Operations
Management believes that funds from operations ("FFO") are an
appropriate measurement of performance of the REIT. FFO is defined by the
National Association of Real Estate Investment Trusts ("NAREIT") as net income
or loss, excluding gains or losses from debt restructuring and sale of
properties plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
indicative of cash available to fund cash needs. FFO should not be considered an
alternative to cash flow as a measure of liquidity.
Since all companies and analysts do not calculate FFO in a similar
fashion, the Company's calculation of FFO presented herein may not be comparable
to similarly titled measures reported by other companies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates primarily from its
floating debt arrangements. The Company's primary strategy is to protect against
this risk by using a derivative transaction to limit the adverse impact that
floating LIBOR rate interest fluctuations could have on cash flow. In November
2000, the Company, through a partnership it controls, entered into an interest
rate cap agreement effective December 1, 2000 with a financial institution for a
notional amount of $17,900,000, capping the interest rate of its secured
mortgage loan facility which provides for interest at LIBOR plus 3.25% (interest
rate at March 31, 2002 was 5.12%). The cap limits the base LIBOR interest rate
to 7.5% and expires on June 1, 2002. The intention is for the cap agreement to
be held to maturity. The Company does not use derivative financial instruments
for trading purposes. As of March 31, 2002, the hedge effectively had no value
and has been adjusted in accordance with SFAS 133 (See Note 2, "Recent
Pronouncements" to the consolidated financial statements). Due to the Company's
minimal use of derivatives, management's adoption of SFAS 137 (See Note 2,
"Recent Pronouncements" to the consolidated financial statements) did not have a
significant effect on earnings or on the financial position of the Company. If
the base interest rates would increase by 1%, there would be an approximate
$26,000 decrease in net income after minority interest and limited partner's
interest.
In addition, the Company has an aggregate of $34,102,006 of mortgage
loans and one other loan payable at fixed interest rates. A substantial increase
in general interest rates would potentially prevent the Company from refinancing
the mortgage loans and the other loan at rates favorable to the Company.
Cedar Income Fund, Ltd.
Part II Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Cedar Income Fund, Ltd.
March 31, 2002
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.
CEDAR INCOME FUND, LTD.
/s/ Leo S. Ullman /s/ Brenda J. Walker
- ----------------------------------- --------------------------------
Leo S. Ullman Brenda J. Walker
Chairman of the Board and President Vice President and Director
(principal executive officer) (principal financial officer)
/s/ Ann Maneri
--------------------------------
Ann Maneri
Controller
(principal accounting officer)
May 15, 2002