<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
Commission File Number: 0-25074
STONEHAVEN REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland 39-6594066
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
2550 University West, Suite 240, St. Paul, Minnesota 55114
(Address of principal executive offices) (zip code)
Issuer's telephone number: 651-917-5536 Fax number: 651-645-0615
Securities registered under Section 12(b) of the Act: None
Securities registered under to Section 12(g) of the Act: Common
Shares, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes X No _____
As of May 5, 2000, 4,932,631 shares of the issuer's common shares were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
(Added by Exch Act Rel No. 31905, eff 4/26/93.) ----- -----
This report contains 17 pages. There is one exhibit.
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
FORM 10QSB
INDEX
<TABLE>
<S> <C>
PART I. Financial Information
Consolidated Balance Sheet - March 31, 2000 Page 3
Consolidated Statements of Operations -
three months ended March 31, 2000 and March 31, 1999 Page 4
Consolidated Statements of Cash Flows -
three months ended March 31, 2000 and March 31, 1999 Page 5
Notes to Consolidated Financial Statements Page 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations Page 13
PART II. Other Information
Other Information Page 16
Exhibits and Reports on Form 8-K Page 16
Signatures Page 17
</TABLE>
2
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in real estate:
Land $ 7,923,938
Buildings and improvements 33,497,772
Appliances, furniture, fixtures and equipment 239,041
- ------------------------------------------------------------------------------------------------
41,660,751
Accumulated depreciation (1,211,054)
- ------------------------------------------------------------------------------------------------
40,449,697
Cash and cash equivalents 6,708,755
Accounts receivable, trade and other 765,290
Restricted cash 951,368
Investment in unconsolidated subsidiary 94,700
Deferred rents receivable 65,697
Goodwill, net 4,366,736
Deferred financing costs, net 296,485
Prepaid expenses and other assets 151,777
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 53,850,505
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans and notes payable $ 23,698,579
Line of credit 235,966
Related party note payable 750,000
Accounts payable and accrued expenses 1,305,370
Deferred revenue, rents received in advance and security deposits 236,069
Dividends/distributions payable 1,082,634
- ------------------------------------------------------------------------------------------------
Total liabilities 27,308,618
- ------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 929,982
- ------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred Shares - $0.01 par value, 10,000,000 authorized: 707,834 Class A
cumulative convertible shares issued and outstanding, $10.00 per share
liquidation preference; 7,078
95,000 Class B junior cumulative convertible shares issued and outstanding,
$10.00 per share liquidation preference 950
Common Shares - $0.01 par value, 100,000,000 authorized; 4,858,802 shares
issued and outstanding 48,588
Additional paid-in capital 32,644,889
Accumulated deficit (7,089,600)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 25,611,905
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 53,850,505
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
(AS RESTATED)
------------------------------------
<S> <C> <C>
REVENUES
Rental revenue $ 787,151 $ 1,326,551
Tenant recoveries 388,877 331,667
Professional services and sales of hardware and software 461,163 --
Interest and other 106,397 14,437
- ---------------------------------------------------------------------------------------------
Total revenues 1,743,588 1,672,655
- ---------------------------------------------------------------------------------------------
EXPENSES
Costs related to sales of hardware, software and professional
services 314,684 --
Property, operating and maintenance 213,461 355,859
Advertising and promotion 1,800 16,456
Property taxes and insurance 219,942 316,865
Depreciation and amortization 334,437 323,577
Interest 428,828 644,988
General and administrative 471,180 193,141
Management fees 58,481 82,625
- ---------------------------------------------------------------------------------------------
Total expenses 2,042,813 1,933,511
- ---------------------------------------------------------------------------------------------
Loss from operations before equity in income of
unconsolidated subsidiary and loss allocated to minority
interest (299,225) (260,856)
Equity in income of unconsolidated subsidiary 1,856 915
Loss allocated to minority interest 160,377 193,466
- ---------------------------------------------------------------------------------------------
Loss from operations (136,992) (66,475)
Cumulative effect of change in accounting principle -- (35,565)
- ---------------------------------------------------------------------------------------------
Net Loss (136,992) (102,040)
Preferred Share Dividends (328,495) --
- ---------------------------------------------------------------------------------------------
Net loss available to Common Shareholders $ (465,487) $ (102,040)
- ---------------------------------------------------------------------------------------------
Net loss available to Common Shareholders before cumulative
effect of change in accounting principle per Common Share:
Basic and Diluted $ (0.16) $ (0.05)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Net loss available to Common Shareholders per Common Share:
Basic and Diluted $ (0.16) $ (0.08)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Weighted average number of Common Shares outstanding 2,902,524 1,349,552
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
-------------- -------------------
(AS RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (136,992) $ (102,040)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 334,437 321,959
Loss allocated to minority interest (160,377) (193,466)
Cumulative effect of change in accounting principle -- 35,565
Equity in income of unconsolidated subsidiary (1,856) (915)
Deferred rent receivable (10,035) --
Net change in assets and liabilities:
Accounts receivable, trade and other (330,989) 1,432
Restricted cash (240,430) (62,040)
Prepaid and other assets (29,444) 72,980
Accounts payable and accrued liabilities 435,627 151,602
Related party payable (9,297) 65,228
Deferred revenue and rents received in advance 114,091 --
Tenant security deposits 20,125 (402)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (15,140) 289,903
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and additions to real estate properties (1,544,943) (51,645)
Cash proceeds received from acquisition of consolidated subsidiary 160,759 --
Redemption of marketable securities 5,187,855 --
Investment in unconsolidated subsidiary 7,425 (90,000)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,811,096 (141,645)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 167,500 --
Payments on mortgage loans and notes payable (42,368) (74,237)
Dividends/distributions paid (152,689) (100,996)
Gross proceeds from issuance of common shares 47,632 9,521
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 20,075 (165,712)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,816,031 (17,454)
Cash and cash equivalents
Beginning of period 2,892,724 153,901
- ----------------------------------------------------------------------------------------------------------
End of period $ 6,708,755 $ 136,447
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Stonehaven Realty Trust ("Company") is a real estate investment trust ("REIT")
organized in the state of Maryland. The Company was formed on March 15, 1994 to
acquire, develop, own, and operate investment real estate. As of March 31, 2000,
the Company owned one residential and six commercial properties that contain a
total of 72 apartment units and approximately 326,000 commercial rentable square
feet. The Company's interest in the commercial properties is held through
Wellington Properties Investments, LP (the "Operating Partnership"), a Delaware
limited partnership formed in 1998. The Company is the sole general partner of,
and as of March 31, 2000, owns an approximately 91.8% interest in the Operating
Partnership. On February 24, 2000, the Company acquired by merger Netlink
International, Inc., a privately held Minnesota corporation which is an Internet
consulting and web development company.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the included disclosures are
adequate to make the information presented not misleading. In the opinion of the
Company, all adjustments (consisting solely of normal recurring items) necessary
for a fair statement of the financial position of the Company as of March 31,
2000, the results of its operations for the three month periods ended March 31,
2000 and 1999, and its cash flows for the three month periods ended March 31,
2000 and 1999 have been included. The results of operations for such interim
periods are not necessarily indicative of the results for a full year. For
further information, refer to the Company's consolidated financial statements
and footnotes included in the Annual Report of Form 10-KSB for the year ended
December 31, 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
In order to conform with generally accepted accounting principles, management,
in preparation of the Company's financial statements, is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of March 31,
2000, and the reported amounts of revenues and expenses for the three months
ended March 31, 2000 and 1999. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue generated from professional services and sales of hardware and software
is recognized as services and goods are provided. Services billed in advance are
recorded as deferred revenue and recognized when revenue is earned.
GOODWILL
Goodwill incurred in connection with the acquisition of Netlink is amortized on
a straight-line basis over an estimated useful life of three years.
6
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - ACQUISITION OF PROPERTIES AND CONSOLIDATED SUBSIDIARY
On February 29, 2000, the Company through the Operating Partnership, acquired
three commercial real estate properties leased for office purposes located in
suburban Minneapolis, Minnesota (the "Plymouth Properties"). The properties were
purchased from Plymouth Partners II, LLC of which a Trustee of the Company, is
the Chief Manager and co-owner. The purchase price of approximately $6,746,000,
was funded through the issuance of an aggregate of 181,629 limited partnership
units ("Units") in Operating Partnership (valued at $4.375 per Unit, or an
aggregate value of approximately $795,000), the assumption of certain
third-party debt totaling approximately $4,450,000, secured by such properties,
and the balance paid in cash. The acquisition was accounted for using the
purchase method of accounting.
On February 24, 2000, the Company acquired by merger Netlink International, Inc.
("Netlink"), a privately held Minnesota corporation which is an Internet
consulting and web development company. The acquisition was accounted for using
the purchase method of accounting and was accomplished by exchanging 914,286 of
the Company's common shares for all of the issued and outstanding stock of
Netlink valued at $4.375 per share, or an aggregate of approximately $4.0
million. Assets acquired of cash ($161,000), accounts receivable ($431,000),
fixed assets and other ($149,000), net of liabilities assumed ($1,241,000),
resulted in goodwill recorded at approximately $4,500,000.
The following pro forma condensed consolidated financial information presented
below is as if the acquisitions of the Plymouth Properties and Netlink and the
disposition of Maple Grove had occurred on January 1, 1999. The pro forma
financial information is unaudited and is not necessarily indicative of the
results which actually would have occurred if the acquisitions or disposition
had been consummated on January 1, 1999, nor does the pro forma information
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31
2000 1999
------------- ---------------
<S> <C> <C>
Pro forma total revenues $ 2,515,650 $ 2,623,849
Pro forma loss available to
Common Shareholders $ (640,641) $ (259,094)
Pro forma loss per Common Share
Basic $ (0.19) $ (0.11)
Diluted $ (0.19) $ (0.11)
</TABLE>
NOTE 4 - MORTGAGE LOANS AND NOTES PAYABLE
In connection with the acquisition of the Plymouth Properties, the Company
assumed mortgage notes payable to Century Bank NA which total $4,442,491 as of
March 31, 2000. The notes require aggregate monthly payments of $34,186
including interest at fixed rate of 7.625% per annum. The mortgage notes are due
May 31, 2002 and are collateralized by the Plymouth Properties and an assignment
of rents. A Trustee of the Company has guaranteed these mortgage loans payable.
In connection with the acquisition of Netlink, the Company assumed two notes
payable. The first is a line of credit with Excel Bank which totals $235,966 as
of March 31, 2000. The line of credit is guaranteed by the Company and provides
for advances up to an aggregate amount of the lesser of $450,000 or the
borrowing base (a percentage of eligible receivables as defined in the
agreement). Monthly payments of interest are required at a variable rate equal
to the Excel Bank Base Rate, which
7
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
as of March 31, 2000 was 8.75% per annum. The second is a note payable to the
Chief Executive Officer of Netlink and President of the Company. The note totals
$750,000 as of March 31, 2000 and is payable in two installments of $415,000 and
$335,000, due May 1, 2000 and January 2, 2001, respectively. The second
installment may be paid in cash or common shares of the Company, at the option
of the Company.
NOTE 5 - EQUITY
On February 18, 2000, the Board of Trustees approved the conversion of 1,657,437
Units of the Operating Partnership into 1,468,484 Common Shares and further
approved the conversion of the 254,800 Class B Preferred Shares held by AREE
into 808,482 Common Shares.
In connection with the acquisition of Netlink, the Company issued 914,286 Common
Shares (valued at $4.375 per share or an aggregate of $4.0 million) and set
aside a pool of options as to 200,000 Common Shares for future award to
employees of Netlink. Further, the Chief Executive Officer of Netlink, Odeh A.
Muhawesh, was appointed President of the Company and will become a member of the
Board of Trustees of the Company upon the earlier of the Company's next Annual
Meeting of Shareholders or should a vacancy arise among the current Board of
Trustees of the Company; the Chief Financial Officer, Ann K. Wessels of Netlink,
was appointed Chief Financial Officer of the Company; and the current employment
contract of the Company's Chief Executive Officer, Duane H. Lund, was required
to be extended to be co-terminous with that of the President.
On February 24, 2000, the Company issued to the President options as to 1.0
million Common Shares at a price of $5.375 per share. The options are
exercisable as to 500,000 shares immediately, with options as to 62,500 shares
exercisable quarterly, commencing May 24, 2000. In addition, the Company issued
to the Chief Executive Officer options as to 666,667 Common Shares at a price of
$6.375 per share. The options are exercisable as to 333,333 shares immediately,
with options as to 41,666.75 shares exercisable quarterly, commencing May 24,
2000.
During the three months ended March 31, 2000, 76,203 Class A Preferred Shares
were converted into 262,750 Common Shares.
NOTE 6 - DISTRIBUTIONS
On March 29, 2000 the Board of Trustees declared a dividend of $0.475 per
share with respect to the Class A Preferred Shares and the Class B Preferred
Shares. The dividend with respect to the Class A Preferred Shares is payable
on May 5, 2000 to shareholders of record on April 21, 2000. For the three
months ended March 31, 2000, no dividends had been declared on the Common
Shares.
On March 16, 1999, the Board of Trustees declared a split of 4.75 Common Shares
for each 3.00 Common Shares effective on March 24, 1999 to shareholders of
record as of March 22, 1999 ("Stock Split"). The Operating Partnership
simultaneously declared a split of 4.75 Units for each 3.00 Units effective on
March 24, 1999 to unitholders of record as of March 22, 1999. All amounts herein
have been adjusted to give effect to the Stock Split.
NOTE 7 - LOSS PER SHARE
The Company has adopted the Statement of Financial Accounting Standards No. 128,
"Earnings Per
8
<PAGE>
STONEHAVEN REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Share" ("EPS") for all periods presented herein. Net loss per weighted average
Common Share outstanding - basic and net loss per weighted average Common Share
outstanding - diluted is computed based on the weighted average number of Common
Shares outstanding for the period. The weighted average number of Common Shares
outstanding as of March 31, 2000 and March 31, 1999 were 2,902,524 and
1,349,552, respectively. Common share equivalents include outstanding
convertible preferred shares, warrants and stock options, and are not included
in net loss per weighted average Common Share outstanding - diluted as they
would be anti-dilutive.
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
2000 1999
(as restated)
------------------------------------
<S> <C> <C>
NUMERATOR
Loss from operations $ (136,992) $ (66,475)
Cumulative effect of change in accounting principle -- (35,565)
- --------------------------------------------------------------------------------------------------
Net loss (136,992) (102,040)
Preferred Share Dividends (328,495) --
- --------------------------------------------------------------------------------------------------
Net loss available to Common Shareholders $ (465,487) $ (102,040)
DENOMINATOR
Weighted average Common Shares Outstanding at March 31, 2000
and 1999, respectively: Basic and Diluted 2,902,524 1,349,552
BASIC AND DILUTED EPS
Net loss available to Common Shareholders from operations $ (0.16) $ (0.05)
Cumulative effect of change in accounting principle -- (0.03)
- --------------------------------------------------------------------------------------------------
Net loss available to Common Shareholders $ (0.16) $ (0.08)
- --------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
MANAGEMENT FEES
The Company has entered into Property Management Agreements with WMC Realty,
Inc. ("WRI"), a wholly-owned subsidiary of WMC, an affiliate of the Company in
which Arnold Leas (Chairman of the Board of Trustees) is President and Chief
Executive Officer, and Hoyt Properties Inc. ("Hoyt"), an entity controlled by
Steve Hoyt (a trustee of the Company) to serve as Property Managers of
properties owned by the Company. The Property Managers manage the day-to-day
operations of properties owned by the Company and receive a management fee for
this service. Management fees for the period January 1, 2000 through March 31,
2000 totaled $51,635 to Hoyt and $6,846 to WRI. Management fees for the period
January 1, 1999 through March 31, 1999 totaled $45,537 to Hoyt and $37,088 to
WRI.
RENTAL INCOME
During the three months ended March 31, 2000 and March 31, 1999, the Company
recognized revenue of $10,494 and $10,334, respectively, on office space leased
to Hoyt.
9
<PAGE>
INSURANCE
From time to time, the Company has purchased insurance through another affiliate
of WMC, Wellington Insurance Services, Inc., which received a commission of
those sales equal to 15% of scheduled premiums. These commissions totaled $2,500
and $2,500 for the three months ended March 31, 2000 and 1999, respectively.
NOTE 9 - SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
(as restated)
------------------------------------
<S> <C> <C>
Interest paid $ 308,602 $ 527,229
- ---------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
The following assets and liabilities were assumed in connection with the
acquisition of Netlink:
Furniture and equipment $ (74,672) $ --
Accounts receivable (430,888) --
Goodwill (4,499,777) --
Other assets (74,604) --
Line of credit 68,466 --
Related party note payable 750,000 --
Other liabilities 422,233 --
Common Shares 9,143 --
Additional paid in capital 3,990,858 --
- ---------------------------------------------------------------------------------------------------------------
Cash proceeds received from acquisition of consolidated subsidiary $ 160,759 $ --
- ---------------------------------------------------------------------------------------------------------------
The following assets and liabilities were assumed in connection with the
acquisition of the Plymouth Properties and additions to other properties:
Purchase of real estate $(6,746,078) $ --
Additions to real estate (38,951) (51,645)
Mortgage notes payable 4,445,459 --
Minority interests 794,627 --
- ---------------------------------------------------------------------------------------------------------------
Acquisition of and additions to real estate properties $(1,544,943) $ (51,645)
- ---------------------------------------------------------------------------------------------------------------
Dividends/distributions payable $ 1,082,634 $ 727,286
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 - INFORMATION BY BUSINESS SEGMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information". This
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Management views the operations of its real estate
properties and the operations of Netlink as a two segments.
10
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE
PROPERTIES NETLINK TOTAL
<S> <C> <C> <C>
Three months ended March 31, 2000
Revenues $ 1,282,210 $ 461,378 $ 1,743,588
Operating expenses 493,683 314,685 808,368
----------- ----------- -----------
Income from operations $ 788,527 $ 146,693 $ 935,220
----------- ----------- -----------
Segment assets at March 31, 2000 $48,550,157 $ 5,300,348 $53,850,505
----------- ----------- -----------
----------- ----------- -----------
Three months ended March 31, 1999
Revenues $ 1,672,655 $ -- $ 1,672,655
Operating expenses 771,805 -- 771,805
----------- ----------- -----------
Income from operations $ 900,850 $ -- $ 900,850
----------- ----------- -----------
Segment assets at March 31, 1999 $53,282,230 $ -- $53,282,230
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following table reconciles income from operations for reportable segments to
loss from operations as reported in the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ -------------
<S> <C> <C>
Income from operations for reportable
segments $ 935,220 $ 900,850
Add:
Equity in (loss) income of
unconsolidated entities 1,856 915
Minority interests 160,377 193,466
Less:
General and administrative (471,180) (193,141)
Interest (428,828) (644,988)
Amortization of deferred financing
costs and goodwill (136,971) (28,914)
Depreciation (197,466) (294,663)
--------- ---------
Loss from operations $(136,992) $ (66,475)
--------- ---------
--------- ---------
</TABLE>
11
<PAGE>
NOTE 11 - RESTATEMENT OF STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1999
The statement of operations for the three months ended March 31, 1999 has been
restated as follows:
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
-----------------------------------------
As reported Adjustments Restated
----------- ----------- --------
<S> <C> <C> <C>
Total revenues $ 1,672,655 $ -- $ 1,672,655
----------- ----------- -----------
----------- ----------- -----------
Equity in income of
unconsolidated subsidiary -- 915(a) 915
Loss allocated to minority
interest 173,075 20,391(b) 193,466
----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (89,399) 22,924 (66,475)
Cumulative effect of change in
accounting principle -- (35,565)(c) (35,565)
----------- ----------- -----------
Net loss available to Common
Shareholders $ (89,399) $ (12,641) $ (102,040)
----------- ----------- -----------
----------- ----------- -----------
Net loss available to Common
Shareholders before cumulative
effect of change in accounting
principle per Common Share:
Basic and Diluted $ (0.07) $ (0.05)
----------- ----------- -----------
----------- ----------- -----------
Net loss available to Common
Shareholders per Common
Share:
Basic and Diluted $ (0.07) $ (0.08)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(a) Reflects the effect of equity in income related to the Company's 8%
interest in Highlander.
(b) Reflects the loss allocated to minority interest as a result of the
adjustments.
(c) Reflects the write-off of the unamortized balance of organizational
costs on the Company's balance sheet.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements appearing elsewhere herein. This Form 10-QSB contains forward-looking
statements for purposes of the Securities Act of 1933 and the Securities
Exchange Act of 1934 and as such may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, there can
be no assurance that these expectations will be realized. Factors that could
cause actual results to differ materially from current expectations include, but
are not limited to, changes in general economic conditions, changes in interest
rates, legislative and regulatory changes, changes in monetary and fiscal
policies of the U.S. government, including policies of the U.S. Treasury and the
Federal Reserve Board, changes in local real estate conditions (including rental
rates and competing properties), changes in industries in which the Company's
principal tenants compete, the failure to timely lease unoccupied space, the
failure to timely re-lease occupied spaced upon expiration of leases, the
inability to generate sufficient revenues to meet debt service payments and
operating expenses, the unavailability of equity and debt financing,
unanticipated costs associated with the Company's acquisitions, potential
liability under environmental or other laws and regulations, the failure of the
Company to manage its growth effectively and the other risks identified in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
OVERVIEW
Stonehaven Realty Trust is a real estate investment trust. As of March 31,
2000, the Company owned a portfolio of one residential and six commercial
properties. The residential properties are located in Wisconsin and contain an
aggregate of 72 units. The commercial properties are located in Minnesota and
contain an aggregate of approximately 326,000 square feet. The Company's
interest in the commercial properties is held through Wellington Properties
Investments, LP (the "Operating Partnership"). The Company is the sole general
partner of the Operating Partnership and, as of March 31, 2000, the Company held
a 91.8% interest in the Operating Partnership.
On February 29, 2000, the Company through the Operating Partnership, acquired
three commercial real estate properties leased for office purposes located in
suburban Minneapolis, Minnesota (the "Plymouth Properties"). The properties were
purchased from a related party for an aggregate price of approximately
$6,746,000. The purchase price was funded through the issuance of an aggregate
of 181,629 limited partnership units ("Units") in Operating Partnership (valued
at $4.375 per Unit, or an aggregate value of approximately $795,000), the
assumption of certain third-party debt totaling approximately $4,450,000,
secured by such properties, and the balance paid in cash. The acquisition was
accounted for using the purchase method of accounting.
On February 24, 2000, the Company acquired by merger Netlink International, Inc.
("Netlink"), a privately held Minnesota corporation which is an Internet
consulting and web development company. The acquisition was accounted for using
the purchase method of accounting and was accomplished by exchanging 914,286 of
the Company's common shares for all of the issued and outstanding stock of
Netlink valued at $4.375 per share, or an aggregate of approximately $4.0
million.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 2000 AND 1999: Rental
revenue decreased by approximately $539,000 or 40.7% for the three month period
ended March 31, 2000 compared to
13
<PAGE>
the three month period ended March 31, 1999. The decreased revenue was primarily
a result of the Company's disposition of Maple Grove Apartments on November 16,
1999, offset, in part, by the acquisition of the Plymouth Properties on February
29, 2000. Tenant recoveries increased approximately $57,000 or 17.2% for the
three month period ended March 31, 2000 compared to the three month period ended
March 31, 2000. The increased revenue was primarily a result of the Company's
acquisition of the Plymouth Properties. Professional services and sales of
hardware and software of approximately $461,000 for the three month period ended
March 31, 2000 is the result of the Company's February 24, 2000 acquisition of
Netlink. Interest and other income increased by $92,000 during these same
periods primarily due to interest earned on invested funds as a result of the
Company's public offering consummated on October 28, 1999.
Total expenses increased from approximately $1,933,000 for the three month
period ended March 31, 1999 to $2,043,000 for the three month period ended March
31, 2000, a net increase of $109,000. Increased costs of approximately $315,000
related to sales of hardware, software and professional services was a result of
the acquisition of Netlink. Decreased property expenses of $254,000, decreased
management fees of $24,000, and decreased interest expense of $216,000 were
primarily a result of the disposition of the Maple Grove Apartments on November
16, 1999, offset, in part, by the acquisition of the Plymouth Properties on
February 29, 2000. Increased general and administrative expenses of $278,000,
were primarily a result of additional general and administrative costs
associated with Netlink.
Depreciation and amortization increased from approximately $324,000 for the
three month period ended March 31, 1999 to approximately $334,000 for the
comparable period in 2000, an increase of 3.3%, primarily as a result of the
Company's amortization of goodwill aggregating $4,499,000 in connection with the
acquisition of Netlink over a three year period coupled with additional
depreciation of the recently acquired Plymouth Properties offset, in part, by
reduced depreciation as a result of the disposition of the Maple Grove
Apartments.
Interest expense decreased from approximately $645,000 for the three month
period ended March 31, 1999 to approximately $429,000 for the comparable period
in 2000, a decrease of 33.5%, primarily as a result of the Company's payoff of
the mortgage loan associated with the Maple Grove Apartments, offset, in part,
by the Company's assumption of mortgage loans associated with the Plymouth
Properties.
The equity in income of unconsolidated subsidiary of approximately $1,856 for
the three month period ended March 31, 2000 as compared to $915 for the three
month period ended March 31, 1999 is the result of the Company's March 4, 1999
acquisition of an 8.00% interest in Highlander Acquisition Company, LLC
("Highlander") which owns a 154 unit residential property.
As a result of the above factors, loss from operations before equity in income
of unconsolidated subsidiary and loss allocated to minority interests increased
from approximately ($261,000) for the three month period ended March 31, 1999 to
a loss of approximately ($299,000) for the three month period ended March 31,
2000 and net loss available to Common Shareholders increased from approximately
($102,000) for the three month period ended March 31, 1999 to ($465,000) for the
three month period ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
SHORT TERM AND LONG TERM LIQUIDITY -
Cash provided by operations, borrowings from affiliates and lending institutions
and equity issuances have generally provided the primary sources of liquidity to
the Company. Historically, the Company has used these sources to fund operating
expenses, satisfy its debt service obligations and fund distributions to
shareholders.
14
<PAGE>
On March 29, 2000 the Board of Trustees declared a dividend of $0.475 per
share with respect to the Class A Preferred Shares and the Class B Preferred
Shares. The dividend with respect to the Class A Preferred Shares is payable
on May 5, 2000 to shareholders of record on April 21, 2000. For the three
months ended March 31, 2000, no dividends had been declared on the Common
Shares.
The Company has no other contractual obligations for property acquisition or
material capital costs, other than tenant improvements in the ordinary course
of business. The Company expects to meet its long-term capital needs through
a combination of cash from operations, net cash proceeds from sales,
additional borrowings and additional equity issuances of Common or Preferred
Shares.
CASH FLOWS
During the three month period ended March 31, 2000, the Company generated (i)
approximately $5,188,000 from the redemption of marketable securities; (ii)
approximately $161,000 from cash and approximately $167,000 from line of credit
proceeds in connection with the acquisition of Netlink; (iii) approximately
$7,000 from distributions from investment in unconsolidated subsidiary; and (iv)
approximately $48,000 from the issuance of Common Shares. These cash flows were
used primarily for (i) acquisition of and additions to real estate properties of
approximately $1,545,000; (ii) payment of cash dividends, net of the Company's
dividend reinvestment plan of approximately $153,000; (iii) repayments of debt
obligations aggregating approximately $42,000; and (iv) cash used in operating
activities of approximately $15,000. As a result, the Company's cash balances
increased by approximately $3,816,000 to approximately $6,709,000 at March 31,
2000 from $2,893,000 at December 31, 1999.
YEAR 2000 COMPLIANCE
The Year 2000 problem resulted from the use of a two digit year date instead of
a four digit date in the programs that operate computers (information technology
or "IT" systems) and other devices (i.e. "non-IT" systems such as elevators,
utility monitoring systems and time clocks that use computer chips). Systems
with a Year 2000 problem had programs that were written to assume that the first
two digits for any date used in the program would always be "19". Unless
corrected, this assumption could have resulted in problems when the century date
occurred. On that date, these computer programs could have misinterpreted the
date January 1, 2000 as January 1, 1900. This could have caused systems to
incorrectly process critical financial and operational information, generate
erroneous information or fail altogether. The Year 2000 issue was expected to
affect almost all companies and organizations.
As of the date of this filing, the Company's IT systems and non-IT systems have
not encountered any significant Year 2000 operating problems. In addition, there
were no significant third-party Year 2000 operating problems that had any impact
on the Company's operations. Therefore, the Company does not expect to incur any
significant additional costs relating to the Year 2000 issue.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
a. None
b. None
c. On February 18, 2000, 1,657,437 Units of the Operating Partnership and
254,800 Class B Preferred Shares were converted into 1,468,484 Common
Shares and 808,482 Common Shares, respectively.
On February 24, 2000, the Operating Partnership issued 181,629 limited
partnership Units in connection with the acquisition of the Plymouth
Properties. The issuance of these Units is exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended. These
Units are exchangeable into Common Shares of the Company, subject to
certain restrictions.
During the three months ended March 31, 2000, 76,203 Class A Preferred
Shares were converted into 262,750 Common Shares of the Company.
d. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
Financial Data Schedule EX-27
REPORTS ON FORM 8-K
During the three months ended March 31, 2000 and through May 12, 2000, the
Company filed the following Current Reports on Form 8-K:
Item 4 in connection with the Company's change of independent public accountant
from Grant Thornton LLP to PricewaterhouseCoopers LLP filed January 14, 2000.
16
<PAGE>
Item 2 in connection with the acquisitions of Netlink International, Inc. and
three commercial real estate properties located in suburban Minneapolis,
Minnesota filed March 17, 2000 and amended May 10, 2000 to include financial
information.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Stonehaven Realty Trust
By: \S\ Duane H. Lund .
-----------------------
Duane H. Lund
Chief Executive Officer
Date: May 12, 2000
17
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