================================================================================
Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation
incorporation or organization)
100 S.E. SECOND STREET, MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
Title of Each Class Which Registered
------------------- -------------------------
Common Stock, par value $.10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [ X ] Yes
[ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filed
(as defined in Exchange Act Rule 12b-2). [ X ] Yes [ ] No
The aggregate market value of the common stock held by non-affiliates
of Vector Group Ltd. as of June 30, 2004 was approximately $435 million.
At March 14, 2005, Vector Group Ltd. had 41,837,553 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement
for the 2005 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Registrant's
fiscal year covered by this report.
================================================================================
EXPLANATORY NOTE
This Annual Report on Form 10-K/A for the year ended December 31, 2004
is being filed to include in Part IV, Item 15, financial statements with respect
to Douglas Elliman Realty, LLC and Koa Investors, LLC. In accordance with Rule
3-09 of Regulation S-X, the separate financial statements of these entities (50%
or less owned persons) are being filed with the SEC no later than 90 days after
the end of our fiscal year covered by this report.
This Amendment No. 1 does not update any other disclosure to reflect
developments since the original date of filing.
The following item of the original filing is amended by this Amendment
No. 1:
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Unaffected items have not been repeated in this Amendment No. 1.
(a)(2) List of Financial Statement Schedules
The following financial statements are filed as part of this
report pursuant to Item 15(c) of Form 10-K:
Douglas Elliman Realty, LLC financial statements as
of December 31, 2004 and 2003 and for the three years
ended December 31, 2004.
Koa Investors, LLC financial statements as of
December 31, 2004 and 2003 and for the three years
ended December 31, 2004.
(a)(3) Exhibits
EXHIBIT
NO. DESCRIPTION
------- ---------------------------------------------------
23.1 Consent of Independent Registered Public Accounting
Firm
23.2 Consent of Independent Registered Public Accounting
Firm
31.1 Certification of Chief Executive Officer, Pursuant
to Exchange Act Rule 13a-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, Pursuant
to Exchange Act Rule 13a-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Financial Statement Schedules
The financial statements with regard to Douglas Elliman Realty, LLC and
Koa Investors, LLC are being filed in this report pursuant to Rule 3-09 of
Regulation S-X.
2
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
INDEX
DECEMBER 31, 2004
-----------------------------------------------------------------------------
PAGE(S)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................1
FINANCIAL STATEMENTS
Consolidated Statement of Financial Position.............................2
Consolidated Statement of Operations.....................................3
Consolidated Statement of Changes in Members' Equity.....................4
Consolidated Statement of Cash Flows.....................................5
Notes to Consolidated Financial Statements............................6-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Managers and the Members
of Douglas Elliman Realty, LLC:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Douglas Elliman Realty, LLC and Subsidiaries (the "Company") at December 31,
2004 and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Melville, New York
February 18, 2005
1
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 21,375
Commission receivables 1,814
Prepaid expenses and other current assets 2,912
--------
Total current assets 26,101
--------
Property and equipment, net 15,520
Goodwill 36,676
Trademarks 21,663
Other intangible assets, net 2,748
Deferred financing charges 370
Security deposits 650
Other assets 92
--------
Total assets $103,820
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Current portion of notes payable and other obligations $ 2,491
Current portion of notes payable to related parties 2,507
Accounts payable and accrued expenses 7,436
Accrued compensation 4,808
Commissions payable 5,520
Other current liabilities 500
--------
Total current liabilities 23,262
--------
Notes payable and other obligations, less current portion 2,063
Notes payable to related parties, less current portion 64,647
Other long-term liabilities 1,838
Accrued royalties 1,287
--------
Total liabilities 93,097
--------
Commitments and contingencies
Members' equity 10,723
--------
Total liabilities and members' equity $103,820
========
The accompanying notes are an integral part of these consolidated
financial statements.
2
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
REVENUES
Commission revenues $ 258,388
Property management fees 22,939
Other revenues 5,489
---------
Total 286,816
COSTS AND EXPENSES
Commissions and royalties 168,164
Sales administration 13,170
General and administration 45,191
Rent 12,137
Advertising and promotions 15,200
Depreciation 4,533
Amortization of intangible assets 968
---------
Total costs and expenses 259,363
Operating income 27,453
Other income (expenses)
Interest income 71
Interest expense (6,279)
---------
Net income before taxes 21,245
---------
Income tax expense 645
---------
Net income $ 20,600
=========
The accompanying notes are an integral part of these consolidated
financial statements.
3
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------
BALANCE, JANUARY 1, 2004 $ (288)
Net income 20,600
Distributions to members (9,589)
--------
BALANCE, DECEMBER 31, 2004 $ 10,723
========
The accompanying notes are an integral part of these consolidated
financial statements.
4
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,600
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 4,533
Amortization 968
Interest paid in kind 392
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable (182)
Prepaid expenses and other assets 1,003
Accounts payable and accrued expenses 4,579
Commissions payable 2,995
Other liabilities 3,125
--------
Net cash provided by operating activities 38,013
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,413)
Business acquisitions (3,293)
--------
Net cash used in investing activities (11,706)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable to related parties (5,594)
Payments on notes payable and other obligations (396)
Payments on notes receivable 1,585
Distribution to members (9,589)
--------
Net cash used in financing activities (13,994)
--------
Net increase in cash and cash equivalents 12,313
CASH AND CASH EQUIVALENTS
Beginning of period 9,062
--------
End of period $ 21,375
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 6,279
Income taxes paid $ 77
Non-cash investing and financing activities -- see Note 4.
The accompanying notes are an integral part of these consolidated
financial statements.
5
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Douglas
Elliman Realty, LLC, formerly Montauk Battery Realty, LLC, a New York
limited liability company, and its wholly-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
NATURE OF OPERATIONS
The Company is primarily engaged in the real estate brokerage business
through its principal subsidiaries, Douglas Elliman, LLC ("Douglas
Elliman"), a residential real estate brokerage company based in New
York, New York and its Long Island based operations, B&H Associates of
New York, LLC and B&H of the Hamptons, LLC, both of which conduct
business as Prudential Douglas Elliman Real Estate ("Prudential Douglas
Elliman"). The Company is also engaged in property management through
its subsidiary, Residential Management Group, LLC, which conducts
business as Douglas Elliman Property Management ("DEPM").
ORGANIZATION
On October 15, 2002, Montauk Battery Realty, LLC was formed to
consolidate the ownership of the then Company's operating entities, B&H
Associates of New York, LLC and B&H of the Hamptons, LLC, under one
company, which was completed on December 19, 2002. On March 14, 2003,
the Company acquired Douglas Elliman and DEPM and, on May 19, 2003,
Montauk Battery Realty, LLC changed its name to Douglas Elliman Realty,
LLC.
In October 2004, upon receipt of required regulatory approvals, the
Company purchased all of the interest in Burr Enterprises Ltd., which
conducts business as Preferred Empire Mortgage Company ("Preferred").
Preferred is a mortgage broker, and the seller is a former officer of
the Company. See Notes 3 and 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
financial instruments with an original maturity of less than three
months to be cash equivalents.
6
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT. Property, equipment and leasehold improvements
are stated at cost. Maintenance and repairs are charged to expense as
incurred; costs of major additions and betterments are capitalized.
When property and equipment are sold or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts
and any resulting gain or loss is reflected in other income.
Depreciation is provided on the straight line method over the estimated
useful lives of the related assets. The cost of leasehold improvements
is amortized over the lesser of the length of the related leases or the
estimated useful lives of the improvements.
GOODWILL AND TRADEMARKS. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), the Company does not amortize goodwill and
trademarks, which are deemed to have an indefinite useful life. The
Company assesses goodwill and trademarks for impairment using fair
value measurement techniques on an annual basis.
OTHER INTANGIBLE ASSETS. Other intangible assets consist primarily of
non-compete agreements and management contracts. Amortization of
non-compete agreements is being provided over the contractual term,
generally three years or less. Amortization of management contracts is
being provided over fifteen years.
DEFERRED FINANCING CHARGES. Deferred financing charges consist
primarily of professional fees related to the acquisition of new
financing and the restructuring of the Company's debt obligations in
March 2003. These are being amortized over the life of the related debt
obligations.
REVENUE RECOGNITION. Real estate commissions earned by the Company's
real estate brokerage business are recorded as revenue on a gross basis
upon the closing of a real estate transaction (i.e., the purchase or
sale of a home). Property management fees earned by DEPM are recorded
as revenue when the related services are performed.
ADVERTISING COSTS. Advertising costs are expensed as incurred
and are included in operating expenses.
INCOME TAXES. The Company is a limited liability company. The members
of a limited liability company are taxed on their proportionate share
of the Company's taxable income. Accordingly, no provision or liability
for federal income taxes is included in the financial statements. Taxes
for New York City operations are included in the financial statements
as New York City does not follow federal tax regulations for limited
liability companies.
7
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
3. ACQUISITION OF DOUGLAS ELLIMAN AND DEPM
On March 14, 2003, the Company acquired from Insignia Financial Group,
Inc. ("Insignia") the operations of Douglas Elliman and DEPM and
related trademarks for $67,250 cash, $175 in closing costs and the
assumption of up to $4,000 of liabilities. The results of their
operations are included in the consolidated financial statements from
the date of acquisition. The Company's acquisition objective was to
leverage and expand its position in the real estate brokerage business
in the New York metropolitan area.
Douglas Elliman was founded in 1911 and is one of Manhattan's leading
residential real estate brokers, specializing in the high-end of the
sales and rental marketplaces. Douglas Elliman has twelve New York City
offices with more than 1,100 real estate brokers. DEPM is a leading
manager of rental, co-op and condominium housing in the New York
metropolitan area. DEPM provides full service third-party fee
management for approximately 250 properties, representing approximately
50,000 units in New York City, Nassau County, Northern New Jersey and
Westchester County.
To fund the acquisition, the Company borrowed $71,500 from two of its
members, Prudential Real Estate Financial Services of America, Inc.
("PREFSA") and New Valley Corporation ("New Valley"). PREFSA lent the
Company $52,500 of senior secured debt and PREFSA and New Valley each
lent the Company $9,500 of subordinated debt. In connection with the
issuance of the subordinated debt, PREFSA and New Valley each acquired
additional membership interests representing a 15% fully diluted
interest in the Company. Based on an appraisal conducted by an
independent third party, the Company valued these additional membership
interests at $2,500 and recorded this amount as a reduction to the
principal amount of the subordinated debt. The Company is amortizing
the value of these membership interests over the term of the
subordinated debt.
The acquisition of Douglas Elliman and DEPM has been accounted for in
accordance with SFAS No. 141, "Business Combinations". The cost of
acquisition was allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values at the date
of acquisition. Fair values were determined by an independent
third-party appraisal.
8
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
The following table summarizes the final purchase price allocation of
Douglas Elliman's and DEPM's assets acquired and liabilities assumed at
the date of acquisition.
ASSETS
Cash $ 650
Receivables 2,860
Other assets 462
Property and equipment 10,864
Customer-based intangible assets 4,057
Management contract intangible assets 2,734
Trademarks 21,663
Goodwill 33,617
-------
Total $76,907
-------
LIABILITIES
Accounts payable and accrued expenses $ 6,407
Other obligations 4,000
Acquisition financing from related parties 66,500
-------
Total $76,907
-------
The Company assesses intangible assets for impairment using fair value
measurement techniques on an annual basis. In accordance with SFAS No.
142, the Company does not amortize goodwill and trademarks, which are
deemed to have an indefinite useful live. Douglas Elliman amortized the
entire amount of the acquired customer-based intangible assets of
$4,057 in the year ended December 31, 2003. DEPM is amortizing
management contracts over 15 years. This represents the expected period
of benefit from such assets. For U.S. income tax purposes, the Company
and Insignia elected to treat the acquisition of Douglas Elliman, DEPM
and the related trademarks as an asset acquisition. As a result, the
entire amount of intangible assets is amortizable over 15 years for
U.S. income tax purposes.
4. ACQUISITIONS IN 2004
The Company acquired the interest of Preferred for a purchase price of
$2,363, and the interest of several real estate offices in four
transactions for an aggregate purchase price of $1,230. The results of
their operations are included in the consolidated financial statements
from the dates of acquisition. The Company's acquisition objective was
to leverage its position in the real estate brokerage business in the
New York metropolitan area.
The acquisitions have been accounted for in accordance with SFAS No.
141, "Business Combinations". The cost of the acquisitions was
allocated to the assets acquired and liabilities assumed based on
estimates of their respective fair values at the date of acquisition,
which approximated their book values. The costs of the acquisitions
were allocated to goodwill for $2,357, to fixed assets for $330, and to
other assets for $906. The purchases were primarily funded from the
Company's operations, and the Company issued a note for $300 for one of
the real estate transactions. Goodwill acquired is amortizable over 15
years for U.S. income tax purposes.
9
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consist of the following:
Furniture, fixtures and office equipment $ 12,803
Internally developed software 6,030
Leasehold improvements 8,319
Automobiles 80
Construction in progress 415
--------
Total 27,647
--------
Less, accumulated depreciation and amortization (12,127)
--------
Total $ 15,520
========
The estimated useful life of furniture, fixtures and office equipment
at December 31, 2004 ranges from five to ten years. Internally
developed software has an estimated useful life of three to five years,
and automobiles have a life of six years. Leasehold improvements are
depreciated based on the lesser of the remaining life of the lease or
the useful life of the leasehold improvement. Depreciation expense for
the year ended December 31, 2004 was $4,533. Computer software had a
net book value of $3,818 at December 31, 2004, and the related
amortization expense included in depreciation expense was $1,091 for
the year then ended.
6. INTANGIBLE ASSETS
Intangible assets at December 31, 2004 consist of the following:
Goodwill $ 36,676
Trademarks 21,663
Deferred financing charges 506
Other intangible assets 3,764
--------
Total 62,609
Less, accumulated amortization (1,153)
--------
Total $ 61,456
========
In accordance with SFAS No. 142, the Company does not amortize goodwill
and trademarks, which have indefinite lives. Amortization expense for
the year ended December 31, 2004 was $968, which includes $78 of
amortization of customer-based intangible assets acquired and fully
amortized during the year. Amortization expense is estimated to be
$729, $405, $344, $293, and $251 for the five years ended December 31,
2005 through 2009, respectively.
10
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
The changes in the carrying amount of goodwill for the year ended
December 31, 2004 were as follows:
REAL ESTATE PROPERTY
BROKERAGE MANAGEMENT TOTAL
------- ---------- -------
Balance as of December 31, 2003 $34,316 $ 3 $34,319
Acquisitions 2,357 -- 2,357
------- ------- -------
Balance as of December 31, 2004 $36,673 $ 3 $36,676
======= ======= =======
7. DUE FROM RELATED PARTIES
A former officer of the Company used the proceeds he received from the
sale of Preferred to repay $1,585 due from that officer.
8. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable, capital leases and other obligations at December 31,
2004 consist of:
2004
-------
Notes payable and other obligations
Payment obligation - former owner $ 2,000
Term note payable - bank 1,605
Notes payable issued in connection with acquisitions 830
Capital leases payable 119
-------
Total notes payable, capital leases and
other obligations 4,554
Less, current maturities (2,491)
-------
Amount due after one year $ 2,063
=======
In connection with the acquisition of Douglas Elliman, the Company
assumed an obligation to make a payment to a former owner of Douglas
Elliman in an amount up to $4,000, due in 2003 and 2004. The obligation
is subject to certain claims and offsets the Company has against this
former owner. The 2003 payment of $2,000 was made. The remaining
balance of $2,000 was due in August 2004, but is the subject to final
negotiation.
TERM NOTE PAYABLE - BANK:
In December 2002, Prudential Douglas Elliman borrowed $1,940 from a
bank, bearing interest at 7% per annum, due in January 2006. Principal
is amortized in the amount of $15 per month during the term of the
loan. The loan is collateralized by the assets of Prudential Douglas
Elliman to the extent of the unpaid principal and interest.
11
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
NOTES PAYABLE ISSUED IN CONNECTION WITH ACQUISITIONS AND CAPITAL LEASES
PAYABLE:
Prudential Douglas Elliman has various other notes issued in connection
with acquisitions of real estate brokerage companies and capital leases
payable bearing interest at various rates up to 14.5%, which mature
through 2009. Assets under capital lease are primarily office equipment
and furniture, and have a net book value of $167 at December 31, 2004.
SCHEDULED MATURITIES:
Scheduled maturities of notes payable, capital leases and other
obligations are as follows:
Year ending December 31 2004
-----------
2005 $ 2,491
2006 1,658
2007 203
2008 103
2009 99
-----------
Total $ 4,554
===========
9. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at December 31, 2004 consist of:
2004
--------
Notes payable to related parties
Acquisition term note payable - PREFSA $ 45,530
Acquisition subordinated notes payable - PREFSA 8,621
Acquisition subordinated notes payable - New Valley 8,621
Franchise term notes payable - PREA 3,939
Note payable - officer 443
--------
Total notes payable to related parties 67,154
Less, current maturities (2,507)
--------
Amount due after one year $ 64,647
========
12
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
ACQUISITION TERM NOTE PAYABLE - PREFSA:
In connection with the acquisition of Douglas Elliman and DEPM, PREFSA
lent the Company $52,500 of Senior Secured Debt, maturing in 2011 (the
"Term Note"). The Term Note bears interest at prime rate plus 2% and is
collateralized by substantially all the assets of the Company. The Term
Note provides for monthly payments of 3% of gross revenues of Douglas
Elliman and Prudential Douglas Elliman prior to March 15, 2005 and 4.5%
thereafter so long as the Term Note is outstanding. The payments based
on gross revenues are applied first to interest and then to outstanding
principal. Additional principal payments are due on June 1 of each year
in the amount equal to 60% of the Company's Excess Cash Flow, which is
defined in the Term Note loan agreement as the prior year's net income
plus cash proceeds received from asset sales and depreciation and
amortization expense, less cash capital expenditures, principal
payments on notes payable and capital leases (excluding the revolving
note facility discussed below), and tax distributions made to the
Company's members. The Term Note includes covenants that, among other
things, require the Company to meet certain financial ratios, limit the
Company's ability to incur debt, and limit capital expenditures.
SUBORDINATED NOTES PAYABLE - PREFSA AND NEW VALLEY:
In connection with the acquisition of Douglas Elliman and DEPM, PREFSA
and New Valley each lent the Company $9,500 of subordinated debt, due
2013 (the "Subordinated Debt"). The Subordinated Debt is subordinate to
the Term Note and bears interest at 12% per annum, of which 10% is
payable in cash and 2% accrues and is added to the principal amount.
Interest added to the principal balance in 2004 was $392. In connection
with the issuance of the Subordinated Debt, PREFSA and New Valley each
acquired additional membership interests representing a 15%
fully-diluted interest in the Company. Based on an appraisal conducted
by an independent third party, the Company valued those membership
interests at $2,500 and recorded this amount as a reduction to the
principal amount of the Subordinated Debt. The Company is amortizing
the value of these membership interests over the term of the
Subordinated Debt. The amount amortized to interest expense for the
year ended December 31, 2004 was $172. Principal payments are due on
June 1 of each year in an amount equal to 20% of the Company's Excess
Cash Flow computed in the same manner as defined in the Term Note loan
agreement.
FRANCHISE TERM NOTES PAYABLE:
In December 2002, The Prudential Real Estate Affiliates, Inc. ("PREA"
or the "Franchiser"), an affiliate of PREFSA, lent Prudential Douglas
Elliman $3,300 bearing interest at 9% per annum and due in annual
installments of principal and interest of $514 through 2012.
In March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8%
per annum and due in annual installments of principal and interest of
$186 through 2013.
13
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
REVOLVING LOAN FACILITY:
In March 2003, the Company and PREFSA entered into a revolving loan
facility for $5,000, available until March 2006. Borrowings under the
facility bear interest at prime rate plus 1.5% and are collateralized
by substantially all the assets of the Company. As of December 31,
2004, $5,000 was available under the facility.
NOTE PAYABLE - OFFICER:
As of December 31, 2004, the Company was indebted to a member and
executive officer of Realty, in the amount of $443 with interest at
prime rate plus 1.5%. The principal amount is due on June 1 of each
year in the amount equal to approximately 8.29% of the Company's Excess
Cash Flow, which is computed in the same manner as defined in the Term
Loan agreements, provided New Valley receives an equal payment and
PREFSA receives a proportionate payment, each as a return of capital.
SCHEDULED MATURITIES:
Scheduled maturities of debt to related parties are presented below.
The table does not include the Company's obligations to make principal
payments under the Term Note, the Subordinated Notes, or the note
payable to such officer based on percentages of future Gross Revenues
or future Excess Cash Flow.
Year ending December 31 2004
----------
2005 $ 2,507
2006 574
2007 424
2008 461
2009 501
Thereafter 62,687
----------
Total $ 67,154
==========
10. FRANCHISE AGREEMENT AND ROYALTY FEES
Douglas Elliman is party to a franchise agreement with PREA entered
into in March 2003. The agreement provides for Douglas Elliman to make
monthly payments of royalty fees to PREA based on the level of gross
revenue, with a royalty rate ranging from 1.8% to 6.0% of gross
revenues earned. Pursuant to the franchise agreement, Douglas Elliman
was granted a 50% deferral of applicable royalty fees for 2004, which
is payable in monthly installments beginning in the first month of the
fourth year. A balance of $1,394 was accrued at December 31, 2004. The
royalty percentage was 2.07% for the year ended December 31, 2004. The
agreement also provides for Douglas Elliman to remit advertising and
annual franchise fees to PREA, which are based on gross revenues and
the number of offices occupied.
14
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
Prudential Douglas Elliman is party to a franchise agreement with PREA
entered into in December 2002. The Agreement provides for Prudential
Douglas Elliman to make monthly payments of royalty fees to PREA based
on 2.24% of gross revenues earned for the first five years and on a
scale ranging from 1.8% to 6.0% of gross revenues earned thereafter.
The agreement also provides for Prudential Douglas Elliman to remit
advertising and annual franchise fees, which are based on gross
revenues and the number of offices occupied.
For the year ended December 31, 2004, total fees incurred under the
franchise agreements amounted to approximately $4,515.
The Franchiser has significant rights over the use of the franchised
service marks and the conduct of the brokerage companies' business. The
franchise agreements require the companies to coordinate with the
Franchiser on significant matters relating to their operations,
including the opening and closing of offices, make substantial royalty
payments to the Franchiser and contribute significant amounts to
national advertising funds maintained by the Franchiser, indemnify the
Franchiser against losses arising out of the operations of their
business under the franchise agreements and maintain standards and
comply with guidelines relating to their operations which are
applicable to all franchisees of the Franchiser's real estate franchise
system.
The Franchiser has the right to terminate Douglas Elliman's and
Prudential Douglas Elliman's franchises, upon the occurrence of certain
events, including a bankruptcy or insolvency event, a change in
control, a transfer of rights under the franchise agreement and a
failure to promptly pay amounts due under the franchise agreements. A
termination of Douglas Elliman's or Prudential Douglas Elliman's
franchise agreement could have a material adverse affect on the
Company.
The franchise agreements grant Douglas Elliman and Prudential Douglas
Elliman exclusive franchises in New York for the counties of Nassau and
Suffolk on Long Island and for Brooklyn, Queens and Manhattan, subject
to various exceptions and to meeting certain annual revenue thresholds.
If Douglas Elliman or Prudential Douglas Elliman fails to achieve these
levels of revenues for two consecutive years or otherwise materially
breaches the franchise agreements, the Franchiser would have the right
to terminate the applicable brokerage company's exclusivity rights. A
loss of these rights could have a material adverse affect on the
Company.
11. DEFINED CONTRIBUTION PLANS
Douglas Elliman, Prudential Douglas Elliman and DEPM sponsor individual
401(k) plans which allow eligible employees to make pre-tax
contributions. Employees who have completed one year of service, as
defined, are eligible to participate in the plans. The plans provide
for matching employer contributions of 10% of employee contributions up
to a maximum annual contribution of $12 per employee. Participants are
immediately vested in their contributions made. Matching contributions
for the years ended December 31, 2004 amounted to $252.
15
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
LAWSUITS
The Company is involved in litigation through the normal course of
business. Certain claims arising before the date of acquisition of
Douglas Elliman and DEPM are subject to indemnification agreements with
the prior owners. The majority of these claims have been referred to
the insurance carrier and related counsel. The Company believes that
the resolution of these matters will not have a material adverse effect
on the financial position, results of operations or cash flows of the
Company.
LEASES
The Company and its subsidiaries are obligated under various operating
lease agreements for office facilities. Certain leases are
non-cancelable and expire on various dates through September 2013.
Future minimum rental payments under the operating leases at December
31, 2004 are as follows:
Year ending December 31 2004
----------
2005 $ 10,465
2006 9,775
2007 8,752
2008 7,670
2009 4,190
Thereafter 31,408
----------
Total $ 72,260
==========
13. CONCENTRATION OF CREDIT RISK
The Company and its subsidiaries may, from time to time, maintain
demand deposits in excess of federally insured limits in the normal
course of business. At December 31, 2004, cash balances in excess of
insured limits were approximately $24,384.
16
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2004
--------------------------------------------------------------------------------
14. BUSINESS SEGMENT INFORMATION
The Company reports using separate business segments, defined by the
different services offered. The following table presents certain
financial information of the Company's continuing operations as of and
for the year ended December 31, 2004. Corporate loss consists solely of
the Company's net interest expense.
REAL ESTATE PROPERTY
BROKERAGE MANAGEMENT CORPORATE TOTAL
------------ -------- ---------- --------
Revenues $263,877 $ 22,939 $ -- $286,816
Net income (loss) 27,126 (244) (6,282) 20,600
Identifiable assets 96,960 6,860 -- 103,820
Depreciation and amortization 3,992 1,509 -- 5,501
Capital expenditures 7,909 504 -- 8,413
17
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Unaudited)
Page
----
Consolidated Balance Sheet.................................................2
Consolidated Statement of Operations.......................................3
Consolidated Statement of Changes in Members' Deficiency...................4
Consolidated Statement of Cash Flows.......................................5
Notes to Consolidated Financial Statements.................................6-16
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 9,062
Commission receivables .................................. 1,217
Escrow deposits ......................................... 312
Due from affiliate ...................................... 415
Due from officer ........................................ 1,485
Prepaid expenses and other current assets ............... 2,956
--------
Total current assets .................................. 15,447
--------
Property and equipment, net ............................. 11,310
Goodwill ................................................ 34,319
Trademarks .............................................. 21,663
Other intangible assets, net ............................ 3,821
Deferred financing charges .............................. 156
Security deposits ....................................... 634
Other assets ............................................ 58
--------
Total assets .......................................... $ 87,408
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Current portion of notes payable and other obligations .. $ 2,400
Current portion of notes payable to related parties ..... 1,658
Accounts payable and accrued expenses ................... 7,353
Commissions payable ..................................... 2,525
Escrow deposits payable ................................. 312
Other current liabilities ............................... 500
--------
Total current liabilities ............................. 14,748
--------
Notes payable and other obligations, less current portion 2,250
Notes payable to related parties, less current portion .. 70,698
Commitments and contingencies ........................... --
Members' deficiency ....................................... (288)
--------
Total liabilities and members' deficiency ............. $ 87,408
========
The accompanying notes are an integral part of
these consolidated financial statements.
2
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
Revenues:
Commission revenues ..................................... $ 157,958
Property management fees ................................ 19,807
Other revenues .......................................... 2,088
---------
Total ............................................... 179,853
---------
Costs and expenses:
Commissions and royalties .............................. 100,461
Sales administration ................................... 15,099
Administration ......................................... 28,480
Rent ................................................... 8,677
Advertising and promotions ............................. 11,643
Depreciation ........................................... 3,640
Amortization of intangible assets....................... 5,037
Other costs and expenses ............................... 1,917
---------
Total .............................................. 174,954
---------
Operating income ....................................... 4,899
---------
Other:
Other income ........................................... 67
Interest income ........................................ 15
Interest expense ....................................... (4,782)
---------
Total .............................................. (4,700)
---------
Net income .................................................. $ 199
=========
The accompanying notes are an integral part of
these consolidated financial statements.
3
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
Balance, January 1, 2003.......................................... $ (2,541)
Net income................................................... 199
Issuance of membership interests............................. 2,500
Distributions................................................ (446)
--------
Balance, December 31, 2003........................................ $ (288)
========
The accompanying notes are an integral part of
these consolidated financial statements.
4
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
Cash flows from operating activities
Net income ................................................................ $ 199
-------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................................... 3,640
Amortization .......................................................... 5,037
Interest paid-in-kind ................................................. 308
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable ............................................... 655
Prepaid expenses and other assets ................................. (3,686)
Accounts payable and accrued expenses ............................. (1,420)
Commissions payable ............................................... 1,555
Escrow deposits payable and other liabilities ..................... 711
-------
Cash provided by operating activities ................................. 6,999
-------
Cash flows used in investing activities
Capital expenditures ...................................................... (2,321)
Cash acquired in acquisition .............................................. 650
Investment in affiliate ................................................... (325)
-------
Cash used in investing activities ..................................... (1,996)
-------
Cash flows used in financing activities
Proceeds from notes payable to related parties ............................ 3,322
Repayments of notes payable to related parties ............................ (2,127)
Proceeds from notes payable and other obligations ......................... 657
Repayments of notes payable and other obligations ......................... (2,344)
Deferred financing charges ................................................ (475)
Distributions to members .................................................. (446)
-------
Cash used in financing activities .................................... (1,413)
-------
Net increase in cash and cash equivalents ...................................... 3,590
Cash and cash equivalents, beginning of year ................................... 5,472
-------
Cash and cash equivalents, end of year ......................................... $ 9,062
=======
Interest paid .................................................................. $ 4,237
Income taxes paid .............................................................. 4
Non cash investing and financing activities:
See Note 3 for the acquisition of Douglas Elliman and RMG.
Fixed assets acquired through incurrence of debt ............................... $ 95
The Company recorded an increase of $2,500 to members' equity in connection with
the issuance of the subordinated debt. See Note 8
The accompanying notes are an integral part of
these consolidated financial statements.
5
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(Unaudited)
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Douglas
Elliman Realty, LLC (formerly Montauk Battery Realty, LLC), a New York limited
liability company, and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Company is primarily engaged in the real estate brokerage business
through its principal subsidiaries, Douglas Elliman, LLC ("Douglas Elliman"), a
residential real estate brokerage company based in New York, New York and its
Long Island based operations, B&H Associates of New York, LLC and B&H of the
Hamptons, LLC, both of which conduct business as Prudential Douglas Elliman Real
Estate ("Prudential Douglas Elliman"). The Company is also engaged in property
management through its subsidiary, Residential Management Group, LLC ("RMG").
ORGANIZATION
On October 15, 2002 Montauk Battery Realty, LLC was formed to
consolidate the ownership of the then Company's operating entities, B&H
Associates of New York, LLC and B&H of the Hamptons, LLC, under one company,
which was completed on December 19, 2002. On March 14, 2003, the Company
acquired Douglas Elliman and RMG and, on May 19, 2003, Montauk Battery Realty,
LLC changed its name to Douglas Elliman Realty, LLC. See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.
PROPERTY AND EQUIPMENT. Property, equipment and leasehold improvements
are stated at cost. Maintenance and repairs are charged to expense as incurred;
costs of major additions and betterments are capitalized. When property and
equipment are sold or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in other income.
6
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
Depreciation is provided on the straight line method over the estimated
useful lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the estimated
useful lives of the improvements.
GOODWILL AND TRADEMARKS. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company does not amortize goodwill and other intangible assets,
primarily trademarks, deemed to have an indefinite useful life. The Company
assesses goodwill and certain intangible assets deemed to have an indefinite
useful life for impairment using fair value measurement techniques on an annual
basis.
OTHER INTANGIBLE ASSETS. Other intangible assets consist primarily of
non-compete agreements and management contracts. Amortization of non-compete
agreements is being provided on a straight line basis over the contractual term,
generally three years or less. Amortization of management contracts is being
provided on a straight line basis over fifteen years.
DEFERRED FINANCING CHARGES. Deferred financing charges consist
primarily of professional fees related to the acquisition of new financing and
the restructuring of the Company's debt obligations in March 2003. These are
being amortized over the life of the related debt obligations.
REVENUE RECOGNITION. Real estate commissions earned by the Company's
real estate brokerage business are recorded as revenue on a gross basis upon the
closing of a real estate transaction (i.e., the purchase or sale of a home).
Property management fees earned by RMG are recorded as revenue when the related
services are performed.
ADVERTISING COSTS. Advertising costs are expensed as incurred
and are included in operating expenses.
INCOME TAXES. The Company is a limited liability company. The members
of a limited liability company are taxed on their proportionate share of the
Company's taxable income. Accordingly, no provision or liability for federal or
state income taxes is included in the financial statements.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2003, Financial Accounting
Standards Board Interpretation ("FIN") No. 46(R), "Consolidation of Variable
Interest Entities (revised December 2003)" was issued. The interpretation
revises FIN No. 46, "Consolidation of Variable Interest Entities" to exempt
certain entities from the requirements of FIN No. 46. The interpretation
requires a company to consolidate a variable interest entity ("VIE"), as
defined, when the company will absorb a majority of the VIE's expected losses,
receive a majority of the VIE's expected residual returns, or both. FIN No.
46(R) also requires consolidation of existing, non-controlled affiliates if the
VIE is unable to finance its operations without investor support, or where the
other investors do not have exposure to the significant risks and rewards of
ownership. The interpretation applies immediately to a VIE created or acquired
after January 31, 2003. For a VIE acquired before February 1, 2003, FIN No.
46(R) applies in the first interim period ending after March 15, 2004. The
Company has not completed its assessment of the impact of this interpretation,
but does not anticipate a material impact on its consolidated financial
statements.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
7
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of this statement did not have an impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
immediately for financial instruments entered into or modified after May 15,
2003 and in the first interim period after June 15, 2003 for all other financial
instruments. The adoption of this statement did not have an impact on the
Company's consolidated financial statements.
3. ACQUISITION OF DOUGLAS ELLIMAN AND RMG
On March 14, 2003, the Company acquired from Insignia Financial Group,
Inc. ("Insignia") the operations of Douglas Elliman and RMG and related
trademarks for $67,250 cash, $175 in closing costs and the assumption of up to
$4,000 of liabilities. The results of their operations are included in the
consolidated financial statements from the date of acquisition. The Company's
acquisition objective was to leverage and expand its position in the real estate
brokerage business in the New York metropolitan area.
Douglas Elliman was founded in 1911 and is one of Manhattan's leading
residential real estate brokers, specializing in the high-end of the sales and
rental marketplaces. Douglas Elliman has nine New York City offices with more
than 900 real estate brokers. RMG is a leading manager of rental, co-op and
condominium housing in the New York metropolitan area. RMG provides full service
third-party fee management for approximately 250 properties, representing
approximately 50,000 units in New York City, Nassau County, Northern New Jersey
and Westchester County.
To fund the acquisition, the Company borrowed $71,500 from two of its
members, Prudential Real Estate Financial Services of America, Inc. ("PREFSA")
and New Valley Corporation ("New Valley"). PREFSA lent the Company $52,500 of
senior secured debt and PREFSA and New Valley each lent the Company $9,500 of
subordinated debt. In connection with the issuance of the subordinated debt,
PREFSA and New Valley each acquired additional membership interests representing
a 15% fully diluted interest in the Company. Based on an appraisal conducted by
an independent third party, the Company valued these additional membership
interests at $2,500 and recorded this amount as a reduction to the principal
amount of the subordinated debt. The Company is amortizing the value of these
membership interests over the term of the subordinated debt.
The acquisition of Douglas Elliman and RMG has been accounted for in
accordance with SFAS No. 141, "Business Combinations". The cost of acquisition
was allocated to the assets acquired and liabilities assumed based on estimates
of their respective fair values at the date of acquisition. Fair values were
determined by an independent third-party appraisal.
8
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
The following table summarizes the final purchase price allocation of
Douglas Elliman's and RMG's assets acquired and liabilities assumed at the date
of acquisition.
ASSETS:
Cash $ 650
Receivables 2,860
Other assets 462
Property and equipment 10,864
Customer-based intangible assets 4,057
Management contract intangible assets 2,734
Trademarks 21,663
Goodwill 33,617
--------
Total $ 76,907
========
LIABILITIES:
Accounts payable and accrued expenses $ 6,407
Other obligations 4,000
Acquisition financing from related parties 66,500
--------
Total $ 76,907
========
The Company assesses intangible assets for impairment using fair value
measurement techniques on an annual basis. In accordance with SFAS No. 142, the
Company does not amortize goodwill and trademarks, which are deemed to have an
indefinite useful live. Douglas Elliman amortized the entire amount of the
acquired customer-based intangible assets of $4,057 in the year ended December
31, 2003. RMG is amortizing management contracts using the straight line method
over 15 years. This represents the expected period of benefit from such assets
and will result in future annual amortization expense of $181. For U.S. income
tax purposes, the Company and Insignia elected to treat the acquisition of
Douglas Elliman, RMG and the related trademarks as an asset acquisition. As a
result, the entire amount of intangible assets is amortizable over 15 years for
U.S. income tax purposes.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 consist of the following:
Furniture, fixtures and office equipment................. $ 9,773
Internally developed software............................ 4,362
Leasehold improvements................................... 4,394
Automobiles.............................................. 49
--------
Total............................................... 18,578
Less: Accumulated depreciation and amortization......... (7,268)
--------
Total............................................... $ 11,310
========
The estimated useful life of the property and equipment, excluding
leasehold improvements, at December 31, 2003 ranges from one to seven years.
Leasehold improvements are depreciated based on the lesser of the
9
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
remaining life of the lease or the useful life of the leasehold improvement.
Depreciation expense for the year ended December 31, 2003 was $3,640.
5. INTANGIBLE ASSETS
Intangible assets at December 31, 2003 consist of the following:
Goodwill............................................. $ 34,329
Trademarks........................................... 21,663
Deferred financing charges........................... 505
Other intangible assets.............................. 4,084
--------
Total........................................... 60,581
Less: Accumulated amortization...................... (622)
--------
Total........................................... $ 59,959
========
In accordance with SFAS No. 142, the Company does not amortize goodwill
and trademarks, which have indefinite lives. Amortization expense for the year
ended December 31, 2003 was $5,037, which includes $4,057 of amortization of
customer-based intangible assets acquired and fully amortized during the year.
The changes in the carrying amount of goodwill for the year ended
December 31, 2003 were as follows:
Real Estate Property
Brokerage Management Total
----------- ---------- ---------
Balance as of December 31, 2002 $ 387 $ -- $ 387
Acquisition of Douglas Elliman (Note 3) 33,614 -- 33,614
Acquisition of RMG (Note 3) -- 3 3
Other acquisitions 325 -- 325
--------- --------- ---------
Balance as of December 31, 2003 $ 34,326 $ 3 $ 34,329
========= ========= =========
6. DUE FROM RELATED PARTIES
As of December 31, 2003, the Company had a receivable of $415 due from
Burr Enterprises, Ltd., doing business as Preferred Empire Mortgage Company
("Preferred Empire Mortgage"), for advances made during 2002, and for allocation
of expenses in 2003. The balances are payable on demand and bear interest at the
prime rate (4.00% at December 31, 2003) plus 1.5% per annum compounded monthly.
In December 2002, the Company advanced $300 to an officer in connection
with the purchase by the Company of the officer's stock ownership interest in
Preferred Empire Mortgage. In January 2003, the Company lent $1,150 to the
officer to finance the officer's purchase of additional stock in Preferred
Empire Mortgage. The loan bears interest at prime plus 1.5%, and is due in
January 2005. Upon receipt of the required regulatory approvals, the Company has
agreed to purchase this officer's shares at a price of $1,150.
10
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
7. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable, capital leases and other obligations at December 31,
2003 consist of:
Payment obligation - former owner.................................. $2,000
Term note payable - bank........................................... 1,780
Notes payable issued in connection with acquisitions............... 667
Capital leases payable............................................. 203
-------
Total notes payable, capital leases and
other obligations............................................ 4,650
Less:
Current maturities........................................... (2,400)
-------
Amount due after one year.......................................... $ 2,250
======
PAYMENT OBLIGATION - FORMER OWNER:
In connection with the acquisition of Douglas Elliman, the Company
assumed an obligation to make a payment to a former owner of Douglas Elliman in
an amount up to $4,000. The obligation is subject to certain claims and offsets
the Company has against this former owner. During 2003, $2,000 of this
obligation was paid by the Company. The remaining balance is due in August 2004.
TERM NOTE PAYABLE - BANK:
In December 2002, Prudential Douglas Elliman borrowed $1,940, bearing
interest at 7% per annum and due in January 2006, from North Fork Bank.
Principal is amortized in the amount of $15 per month during the term of the
loan. The loan is collateralized by the assets of Prudential Douglas Elliman to
the extent of the unpaid principal and interest.
NOTES PAYABLE ISSUED IN CONNECTION WITH ACQUISITIONS AND CAPITAL LEASES PAYABLE:
Prudential Douglas Elliman has various other notes issued in connection
with acquisitions of real estate brokerage companies and capital leases payable
bearing interest at rates between 0% and 14.5% outstanding at December 31, 2003,
which mature through 2009. Assets under capital lease have a net book value of
$207 at December 31, 2003.
11
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
SCHEDULED MATURITIES:
Scheduled maturities of notes payable, capital leases and other
obligations are as follows:
Year ending December 31:
2004............................ $ 2,400
2005............................ 387
2006............................ 1,558
2007............................ 103
2008............................ 102
Thereafter...................... 100
------
Total.................. $4,650
======
8. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at December 31, 2003 consist of:
Acquisition term note payable - PREFSA.................... $50,790
Acquisition subordinated notes payable - PREFSA........... 8,459
Acquisition subordinated notes payable - New Valley....... 8,459
Franchise term notes payable - PREA....................... 4,121
Note payable - Dorothy Herman............................. 527
-------
Total notes payable to related parties.............. 72,356
Less:
Current maturities.................................. (1,658)
-------
Amount due after one year................................. $70,698
=======
ACQUISITION TERM NOTE PAYABLE - PREFSA:
In connection with the acquisition of Douglas Elliman and RMG, PREFSA
lent the Company $52,500 of Senior Secured Debt, maturing in 2011 (the "Term
Note"). The Term Note bears interest at prime rate plus 2% and is collateralized
by substantially all the assets of the Company. The Term Note provides for
monthly payments of 3% of gross revenues of Douglas Elliman and Prudential
Douglas Elliman prior to March 15, 2005 and 4.5% thereafter so long as the Term
Note is outstanding. The payments based on gross revenues are applied first to
interest and then to outstanding principal. Additional principal payments are
due on June 1 of each year in the amount equal to 60% of the Company's Excess
Cash Flow, which is defined in the Term Note loan agreement as the prior year's
net income plus cash proceeds received from asset sales and depreciation and
amortization expense, less cash capital expenditures, principal payments on
notes payable and capital leases (excluding the revolving note facility
discussed below), and tax distributions made to the Company's members. The Term
Note includes covenants that, among other things, require the Company to meet
certain financial ratios, limit the Company's ability to incur debt, and limit
capital expenditures.
12
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
SUBORDINATED NOTES PAYABLE - PREFSA AND NEW VALLEY:
In connection with the acquisition of Douglas Elliman and RMG, PREFSA
and New Valley each lent the Company $9,500 of subordinated debt, due 2013 (the
"Subordinated Debt"). The Subordinated Debt is subordinate to the Term Note and
bears interest at 12% per annum, of which 10% is payable in cash and 2% accrues
and is added to the principal amount. Interest added to the principal balance in
2003 was $418. In connection with the issuance of the Subordinated Debt, PREFSA
and New Valley each acquired additional membership interests representing a 15%
fully-diluted interest in the Company. Based on an appraisal conducted by an
independent third party, the Company valued those membership interests at $2,500
and recorded this amount as a reduction to the principal amount of the
Subordinated Debt. The Company is amortizing the value of these membership
interests over the term of the Subordinated Debt. The amount amortized to
interest expense for the year ended December 31, 2003 was $110. Principal
payments are due on June 1 of each year in an amount equal to 20% of the
Company's Excess Cash Flow computed in the same manner as defined in the Term
Note loan agreement.
FRANCHISE TERM NOTES PAYABLE:
In December 2002, The Prudential Real Estate Affiliates, Inc. ("PREA"
or the "Franchiser"), an affiliate of PREFSA, lent Prudential Douglas Elliman
$3,300 bearing interest at 9% per annum and due in annual installments of
principal and interest of $514 through 2012. A portion of the royalties received
by PREA are applied to the annual principal payments due under the note.
In March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8%
per annum and due in annual installments of principal and interest of $186
through 2013. A portion of the royalties received by PREA are applied to the
annual principal payments due under the note.
REVOLVING LOAN FACILITY:
In March 2003, the Company and PREFSA entered into a revolving loan
facility for $5,000, available until March 2006. Borrowings under the facility
bear interest at prime rate plus 1.5% and are collateralized by substantially
all the assets of the Company. As of December 31, 2003, $5,000 was available
under the facility.
NOTE PAYABLE - DOROTHY HERMAN:
As of December 31, 2003, the Company was indebted to Dorothy Herman, a
member and executive officer of Realty, in the amount of $527 with interest at
prime rate plus 1.5%. The principal amount is due on June 1 of each year in the
amount equal to approximately 8.29% of the Company's Excess Cash Flow, which is
computed in the same manner as defined in the Term Loan agreements, provided New
Valley receives an equal payment and PREFSA receives a proportionate payment,
each as a return of capital.
13
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
SCHEDULED MATURITIES:
Scheduled maturities of debt to related parties are presented below.
The table does not include the Company's obligations to make principal payments
under the Term Note, the Subordinated Notes, or the note payable to Dorothy
Herman based on percentages of future Gross Revenues or future Excess Cash Flow.
Year ending December 31:
2004........................... $ 1,658
2005........................... 455
2006........................... 455
2007........................... 455
2008........................... 455
Thereafter..................... 68,878
-------
Total.................. $72,356
=======
9. FRANCHISE AGREEMENT AND ROYALTY FEES
Douglas Elliman is party to a franchise agreement with PREA entered into
in March 2003. The agreement provides for Douglas Elliman to make monthly
payments of royalty fees to PREA based on the level of gross revenue, with a
royalty rate ranging from 1.8% to 6.0% of gross revenues earned. Pursuant to the
franchise agreement, Douglas Elliman was granted a 50% reduction in royalty fees
for the first year and a 50% deferral of applicable royalty fees for the second
year, which is payable in monthly installments beginning in the first month of
the fourth year. The percentage was 0.90% for the period ended December 31,
2003. The agreement also provides for Douglas Elliman to remit advertising and
annual franchise fees to PREA, which are based on gross revenues and the number
of offices occupied.
Prudential Douglas Elliman is party to a franchise agreement with PREA
entered into in December 2002. The agreement provides for Prudential Douglas
Elliman to make monthly payments of royalty fees to PREA based on 2.24% of gross
revenues earned for the first five years and on a scale ranging from 1.8% to
6.0% of gross revenues earned thereafter. The agreement also provides for
Prudential Douglas Elliman to remit advertising and annual franchise fees, which
are based on gross revenues and the number of offices occupied. Prudential
Douglas Elliman operates each of its offices under its franchiser's brand name,
but generally does not own any of the brand names under which it operates.
For the year ended December 31, 2003, total fees incurred under the
franchise agreements amounted to approximately $2,162.
The Franchiser has significant rights over the use of the franchised
service marks and the conduct of the brokerage companies' business. The
franchise agreements require the companies to coordinate with the Franchiser on
significant matters relating to their operations, including the opening and
closing of offices, make substantial royalty payments to the Franchiser and
contribute significant amounts to national advertising funds maintained by the
Franchiser, indemnify the Franchiser against losses arising out of the
operations of their business under the franchise agreements and maintain
standards and comply with guidelines relating to their operations which are
applicable to all franchisees of the Franchiser's real estate franchise system.
14
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
The Franchiser has the right to terminate Douglas Elliman's and
Prudential Douglas Elliman's franchises, upon the occurrence of certain events,
including a bankruptcy or insolvency event, a change in control, a transfer of
rights under the franchise agreement and a failure to promptly pay amounts due
under the franchise agreements. A termination of Douglas Elliman's or Prudential
Douglas Elliman's franchise agreement could have a material adverse affect on
the Company.
The franchise agreements grant Douglas Elliman and Prudential Douglas
Elliman exclusive franchises in New York for the counties of Nassau and Suffolk
on Long Island and for Manhattan, subject to various exceptions and to meeting
certain annual revenue thresholds. If Douglas Elliman or Prudential Douglas
Elliman fails to achieve these levels of revenues for two consecutive years or
otherwise materially breaches the franchise agreements, the Franchiser would
have the right to terminate the applicable brokerage company's exclusivity
rights. A loss of these rights could have a material adverse affect on the
Company.
10. DEFINED CONTRIBUTION PLANS
Douglas Elliman, Prudential Douglas Elliman and RMG sponsor individual
401(k) plans which allow eligible employees to make pre-tax contributions.
Employees who have completed one year of service, as defined, are eligible to
participate in the plans. The plans provide for matching employer contributions
of 10% of employee contributions up to a maximum annual contribution of $12 per
employee. Participants are immediately vested in their contributions made.
Matching contributions for the years ended December 31, 2003 amounted to $106.
11. COMMITMENTS AND CONTINGENCIES
LAWSUITS
The Company is involved in litigation through the normal course of
business. Certain claims arising before the date of acquisition of Douglas
Elliman and RMG are subject to indemnification agreements with the prior owners.
The majority of these claims have been referred to the insurance carrier and
related counsel. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the Company.
LEASES
The Company and its subsidiaries are obligated under various operating
lease agreements for office facilities. Certain leases are non-cancelable and
expire on various dates through September 2013. Rent expense during the year
ended December 31, 2003 was approximately $6,602.
15
DOUGLAS ELLIMAN REALTY, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(DOLLARS IN THOUSANDS)
(Unaudited)
Future minimum rental payments under the operating leases at December
31, 2003 are as follows:
Year ending December 31:
2004........................... $ 7,452
2005........................... 7,970
2006........................... 6,953
2007........................... 6,121
2008........................... 5,194
Thereafter..................... 24,700
-------
Total.................. $58,390
=======
12. CONCENTRATION OF CREDIT RISK
The Company and its subsidiaries may, from time to time, maintain
demand deposits in excess of federally insured limits in the normal course of
business. At December 31, 2003, cash balances in excess of insured limits were
approximately $10,008.
13. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations as of and for the year ended December 31, 2003.
Corporate loss consists solely of the Company's net interest expense.
Real
Estate Property
Brokerage Management Corporate Total
--------- ---------- --------- -----
Revenues.................... $ 160,046 $ 19,807 $ -- $ 179,853
Net income (loss)........... 4,171 795 (4,767) 199
Identifiable assets......... 77,934 9,474 -- 87,408
Depreciation and
amortization............. 7,672 1,005 -- 8,677
Capital expenditures........ 2,169 152 -- 2,321
16
MONTAUK BATTERY REALTY LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
TABLE OF CONTENTS
DECEMBER 31, 2002
================================================================================
Page
Consolidated Financial Statements
Balance Sheet.........................................................2-3
Statement of Operations...............................................4
Statement of Changes in Members' Equity (Deficit).....................5
Statement of Cash Flows...............................................6-7
Notes to Consolidated Financial Statements................................8-16
2
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(Unaudited)
================================================================================
Assets
CURRENT ASSETS
Cash and cash equivalents $ 5,472,069
Escrow deposits 100,500
Due from affiliate 321,992
Other receivables 289,642
Due from officer 300,000
Prepaid expenses and other current assets 10,333
------------
6,494,536
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -
net of accumulated depreciation of $3,860,691 1,764,923
------------
OTHER ASSETS
Goodwill 376,939
Other intangibles - net of accumulated amortization
of $5,333 754,667
Deferred financing charges 350,718
Security deposits 294,815
Investment in joint venture 48,408
------------
1,825,547
------------
$ 10,085,006
============
Liabilities and Members' Equity (Deficit)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,366,071
Commissions payable 969,705
Escrow deposit payable 100,500
Current maturities of term notes payable - bank 160,413
Current maturities of other long-term debt 62,210
Current maturities of notes payable - related parties 3,757,839
Current maturities of capital leases 89,276
------------
7,506,014
------------
OTHER LIABILITIES
Term-notes payable - bank - net of current maturities 1,779,587
Other long-term debt - net of current maturities 116,615
Notes payable - related parties - net of current maturities 3,095,356
Capital leases - net of current maturities 128,870
------------
5,120,428
------------
MEMBERS' EQUITY (DEFICIT) (2,541,436)
------------
$ 10,085,006
============
3
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
================================================================================
COMMISSION REVENUE $ 59,289,992
------------
COMMISSION EXPENSES
Sales agents 36,025,709
Royalty fees 1,251,540
------------
37,277,249
------------
GROSS PROFIT 22,012,743
OPERATING EXPENSES 20,216,469
------------
INCOME BEFORE OTHER INCOME (EXPENSES) 1,796,274
------------
OTHER INCOME (EXPENSES)
Income from joint venture 86,560
Interest income 83
Interest expense (369,982)
------------
(292,936)
------------
NET INCOME $ 1,512,935
============
4
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
================================================================================
MEMBERS' EQUITY (DEFICIT) - December 31, 2001 $ (3,956,237)
Net income 1,512,935
Redemption of interests (2,805,034)
Contribution of capital 2,750,000
Distributions (23,100)
--------------
MEMBERS' EQUITY (DEFICIT) - December 31, 2002 $ (2,541,436)
==============
5
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 PAGE 1 OF 2
(Unaudited)
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,512,935
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 569,215
Impairment loss 5,597
Non-cash income earned on joint venture (24,866)
Changes in operating assets and liabilities:
(Increase) decrease in:
Escrow deposit (20,660)
Other receivables (14,590)
Prepaid expenses and other current assets (4,833)
Security deposits and other assets (71,894)
Increase (decrease) in:
Accounts payable and accrued expenses 119,359
Commissions payable 494,613
Escrow deposit payable 20,660
---------------
Net cash from operating activities 2,585,536
---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (809,173)
Intangibles paid for (750,000)
Cash paid for business acquisition (75,000)
(Increase) of due from affiliates (54,366)
(Increase) in due from officer (300,000)
---------------
(1,988,539)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable - related parties (1,634,159)
Repayments of term notes payable - bank (505,316)
Payments of capital leases (160,109)
Deferred financing charges (350,718)
Proceeds from related party loan 5,045,760
Proceeds of bridge loan 1,000,000
Repayments of other long-term debt (64,516)
Capital returned to members (2,343,197)
Distributions to members (23,100)
Contributions by members 2,750,000
---------------
3,714,645
---------------
6
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 PAGE 2 OF 2
(Unaudited)
================================================================================
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 4,311,642
CASH AND CASH EQUIVALENTS - beginning 1,160,427
--------------
CASH AND CASH EQUIVALENTS - end $ 5,472,069
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 774,233
==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment and leasehold improvements
in exchange for debt $ 161,072
==============
Transfer of portion outstanding line of credit obligation
to term obligation $ 1,750,000
==============
Debt incurred for business acquisition $ 225,000
==============
Transfer of bridge loan to related party loan $ 1,000,000
==============
7
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MONTAUK BATTERY REALTY LLC & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
================================================================================
1 - THE COMPANY
Montauk Battery Realty LLC ("Montauk") was formed on December 17, 2002 as
a limited liability company to acquire the membership interests in B&H
Associates of New York LLC d/b/a Prudential Long Island Realty ("B&H"),
B&H of the Hamptons LLC ("Hamptons") and PE Title Agency LLP ("PE"). As
such, B&H, Hamptons and PE became wholly-owned subsidiaries of Montauk.
The acquisitions were accounted as the merger of entities under common
control. Accordingly, the accompanying financial statements present the
results of operations and cash flows for the entire year ended December
31, 2002 on a consolidated basis.
B&H and Hamptons operate a network of real estate brokerage offices under
the name of Prudential Long Island Realty, primarily in Long Island , New
York. PE has an investment in a joint venture which provides title
abstract services.
2 - Summary of Significant Accounting Policies
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with accounting principles
generally accepted in the United States of America and have been applied
consistently in all material respects.
a. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Montauk and its subsidiaries. All
significant intercompany items and transactions have been eliminated.
b. CASH AND CASH EQUIVALENTS - Cash equivalents include all
highly-liquid debt instruments purchased with a maturity of three
months or less at the time of purchase.
c. REVENUE RECOGNITION. Real estate commissions earned by the B&H and
Hamptons real estate brokerage business are recorded as revenue on a
gross basis upon the closing of a real estate transaction (i.e., the
purchase or sale of a home).
Continued
8
d. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Property, equipment
and leasehold improvements are stated at cost. Maintenance and
repairs are charged to expense as incurred; costs of major additions
and betterments are capitalized. When property and equipment are sold
or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gain
or loss is reflected in income.
Depreciation is provided for on the straight-line method over the
estimated useful lives of the related assets. The cost of leasehold
improvements is amortized over the lesser of the length of the
related leases or the estimated useful lives of the improvements.
e. GOODWILL - Goodwill, resulting from the acquisition of various real
estate branch offices, in accordance with Statement on Financial
Accounting Standards No. 142, is stated at carrying value as of
January 1, 2002 or its acquisition amount, if later, and was not
subject to amortization during 2002. Goodwill is tested for
impairment on an annual basis.
f. INTANGIBLE ASSETS - Intangible assets consist of non-compete
agreements. Amortization of non-compete agreements is being provided
on a straight line basis over the contractual term, generally three
years or less. Future estimated aggregate amortization is
approximately $252,000 per annum through 2005.
g. DEFERRED FINANCING CHARGES - Deferred charges consist of professional
fees related to the acquisition of new financing and the
restructuring of the Company's debt obligations in December 2002.
Amortization will be provided on a straight-line basis over five
years beginning January 1, 2003.
h. INCOME TAXES - The Company is a limited liability company. The
members of a limited liability company are taxed on their
proportionate share of the Company's taxable income. Accordingly, no
provision or liabilities for federal income taxes are included in the
financial statements. State taxes have been provided as appropriate.
i. INVESTMENT IN JOINT VENTURE - Investment in joint venture represents
PE's 50% ownership interest in a company that performs title
searches. Income from this investment is recorded under the equity
method of accounting.
j. ADVERTISING COSTS - Advertising costs are expensed as incurred and
are included in operating expenses. For the year ended December 31,
2002, advertising expense amounted to approximately $2,757,000.
k. ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Continued
9
3 - Other Receivables
Other receivables consist primarily of receivables from employees, agents
and landlords whose properties are managed by the Company. These amounts
are non-interest bearing and have no definite repayment terms. It is
anticipated by management that such amounts will be collected within one
year.
4 - Property, Equipment and Leasehold Improvements
At December 31, 2002, property, equipment and leasehold improvements
consist of the following:
Estimated
Useful
Amount Lives
------ ---------
Furniture, fixtures and office equipment $3,278,105 5-7 years
Leasehold improvements 2,298,514 Life of lease
Automobiles 48,995 5 years
----------
5,625,614
LESS: Accumulated depreciation and amortization 3,860,691
----------
$1,764,923
==========
Depreciation and amortization expense for the year ended December 31,
2002 amounted to $565,216.
5 - Due from Affiliate
As of December 31, 2002, Montauk has a receivable of $250,000 due from
Burr Enterprises, Ltd. ("Burr"), a company under common control for
advances made during 2002 and B&H has a receivable of $71,992 from Burr
for allocation of expenses in prior periods. Such balances are interest
bearing and are expected to be collected during 2003.
6 - Business Acquisitions and Goodwill
In January and May of 2002, B&H acquired certain net assets of two
separate real estate brokerage companies for total renumeration of
$300,000. The purchase method was used to account for these transactions
and the purchase price for each acquisition was allocated based upon the
estimated fair value of the assets acquired. As a result of these
transactions, $11,000 was allocated to Furniture, Fixtures and Equipment
and $289,000 was allocated to Goodwill.
Continued
10
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
Balance - January 1, 2002 $ 93,536
Goodwill acquired during the year 289,000
Impairment losses (5,597)
---------
Balance - December 31, 2002 $ 376,939
=========
During 2002, previously recorded goodwill was subject to evaluation and
it was determined that the valued goodwill associated with certain
offices was impaired due to the existence of recurring operating losses.
An aggregate impairment loss of $5,597 was recorded in 2002.
7 - Unused Revolving Line of Credit
In December 2002, the Company obtained a revolving line of credit from
PREFSA in the aggregate amount of $2,500,000, expiring December 20, 2005,
with interest due monthly at the rate of prime plus 1.5%. Commencing upon
the full repayment of the $2,500,000 term loan as described in Note 8,
the Company shall make additional mandatory repayments on the term loan
equal to 40% of excess cash flows, as defined in the agreement.
The line of credit is collateralized by the Company's assets. There was
no outstanding balance at December 31, 2002.
8 - Term Notes Payable - Bank
At December 31, 2001, B&H had a credit facility that provided for a term
loan in the amount of $750,000 and a credit line of up to $1,750,000. In
December 2002, B&H refinanced the balances on the existing line of credit
and term loan with a new term note with the same bank and the credit line
was cancelled. The new term note was for $1,940,000 and bears interest at
7%. Monthly payments of $14,583, including interest, beginning February
1, 2003 to January 2006 are due under the obligation. In January 2006,
the remaining principal and interest, if any, becomes due. The loan is
secured by the assets of B&H and is guaranteed by B&H, Hamptons and
Montauk.
Aggregate maturities required on the term note payable at December 31,
2002 are as follows:
For the Year Ending December 31, 2003 $ 160,413
2004 174,996
2005 174,996
2006 1,429,595
----------
$1,940,000
==========
Continued
11
9 - Notes Payable - Related Parties
At December 31, 2002, notes payable - related parties consist of the
following:
FRANCHISE FEE LOAN - The Prudential Real Estate Financial Services of
America, Inc. ("PREFSA") - original amount of $3,300,000 - due in annual
payments of $514,206, including interest at 9% with remaining principal
and interest due December 20, 2012 $3,300,000
TERM LOAN - PREFSA - original amount of $2,500,000 - due in monthly
payments, including interest at a rate of 1.25% of the gross revenues (as
defined in the franchise agreement) - in addition, beginning June 2, 2003
and June 1st of each succeeding year, the Company is required to make a
payment equal to 40% of excess cash flow (as defined) 2,500,000
TERM NOTE PAYABLE - to current and former members who had obtained the
same loan from a bank with identical terms - due in monthly installments
of $23,611, plus interest at the bank's prime rate (4.25% at December 31,
2002) through June 1, 2003 - the underlying notes between the bank and
related parties are secured by substantially all of the assets of the
Company 141,667
TERM NOTE PAYABLE - to a former member - due in monthly installments of
$5,077, including interest at 7%, through December 2003 - payment of
interest and principal is subject to the provisions of the membership
agreement 245,760
NOTE PAYABLE - to a current member - due on demand - interest at prime
plus 1.5% (5.75% at December 31, 2002) per annum - payment of interest
and principal is subject to the provisions of the membership agreement 110,000
----------
NOTE PAYABLE - to withdrawing member - due January 6, 2003 6,853,194
NOTE PAYABLE - to withdrawing member - due January 6, 2003 3,757,839
----------
LESS: Current maturities $3,095,356
==========
Aggregate maturities required on the notes payable - related parties at
December 31, 2002 are as follows:
For the Year Ending December 31, 2003 $3,757,839
2004 223,841
2005 244,838
2006 267,806
2007 292,928
Thereafter 2,065,943
----------
$6,853,195
==========
Continued
12
In accordance with the terms of the franchise fee loan agreement, the
scheduled annual principal and interest payments on the franchise
obligation may be offset by the aggregate royalties paid by the Company
to the franchiser for the year. Such offset is based upon the adherence
of the Company to the terms of the franchise fee agreement and as
evaluated by the franchisor.
In April 2002, B&H received a bridge loan of $1,000,000 from PREFSA which
was refinanced by B&H and Montauk in December 2002 into a $2,500,000 term
loan to Montauk.
Interest expense incurred on related party obligations during the year
ended December 31, 2002 was approximately $175,000.
10 - Notes Payable - Other
At December 31, 2002, notes payable - other consist of the following:
NOTE PAYABLE - acquisition - in the original principal amount of $200,000
- due in 48 monthly installments of $4,743, including interest at 6.5% $154,751
NOTE PAYABLE - acquisition - in the original principal amount of $25,000
- due in monthly installments of $1,000 - non-interest bearing 15,000
VEHICLE TERM LOANS PAYABLE - due in 60 monthly installments aggregating
$854, including interest at 6.9% through November 11, 2003 - secured
by the underlying vehicles 9,074
--------
178,825
62,210
--------
LESS: Current maturities $116,615
========
Aggregate maturities required on the notes payable - other at December
31, 2002 are as follows:
For the Year Ending December 31, 2003 $ 62,210
2004 57,235
2005 54,667
2006 4,713
--------
$178,825
========
11 - Capital Leases
The Company has acquired certain equipment under the provisions of
long-term capital leases, whereby the minimum lease payments related to
the equipment have been capitalized. As of December 31, 2002, the net
present value of such obligations amounted to $218,147. The leases expire
at various times through November 2005. The leased property under capital
lease as of December 31, 2002 has an aggregate cost of approximately
$457,000, accumulated amortization of approximately $162,000, and an
approximate carrying value of $295,000. Amortization of the leased
equipment is included in depreciation expense. Lease obligations are
generally secured by leased equipment.
Continued
13
The future minimum lease payments under the capital leases and the
aggregate net present value of the future minimum lease payments at
December 31, 2002 are as follows:
Years Ending December 31, 2003 $105,781
2004 65,439
2005 48,978
2006 24,228
2007 6,132
--------
250,558
LESS: Amounts representing interest 32,412
--------
Present Value of Minimum Lease Payments 218,146
Current Maturities of Capital Leases 89,276
--------
Capital Leases - net of current maturities $128,870
========
12 - Franchise Agreement and Royalty Fees
B&H is party to a franchise agreement (the "Agreement") with The
Prudential Real Estate Affiliates, Inc. (the "Franchisor"). B&H renewed
the Agreement on March 7, 1997 for a period of five years. In March
2002, the agreement was extended until December 2002. In December 2002,
a new ten-year Agreement was executed. The Agreement provides for B&H to
make monthly payments of royalty fees of 2.24% of gross revenue
attained, advertising fees of up to $900 per month per sales office and
an annual franchise fee of $2,500 for each additional office opened.
For the year ended December 31, 2002, total fees incurred under the
agreement amounted to approximately $1,252,000.
13 - Related Party Transactions
In December 2002, the Company advanced $300,000 to an officer. Such
amount is non-interest bearing and is expected to be collected during
the year ending December 31, 2003.
The Company leases several offices from related parties. Included in
rent expense is approximately $305,000 of rent expense to related
parties.
14 - Defined Contribution Plan
The Company has a 401(k) plan (the "Plan") which allows eligible
employees to make before-tax contributions. Employees who have completed
one year of service, as defined, are eligible to become participants in
the Plan. The Plan provides for matching employer contributions of 10%
of employee contributions. Participants are immediately vested in their
contributions made. Matching contributions for the years ended December
31, 2002 amounted to $23,960.
Continued
14
15 - Commitments and Contingencies
OPERATING LEASES - The Company is obligated under various operating
lease agreements for its office facilities. Certain leases are
non-cancelable and expire on various dates through September 2013. Rent
expense during the year ended December 31, 2002 approximated $2,400,000.
Future minimum rental payments under the operating leases at December
31, 2002 are as follows:
For the Year Ending December 31, 2003 $ 2,249,000
2004 2,300,000
2005 2,173,000
2006 1,749,000
2007 1,263,000
Thereafter 970,000
-----------
$10,704,000
===========
LITIGATION - The Company is involved in litigation through the normal
course of business. The majority of these claims have been referred to
the insurance carrier and related counsel. The Company believes that the
resolution of these matters will not have a material adverse effect on
the financial position of the Company. The accompanying financial
statements include an accrual of approximately $200,000 for potential
out-of-pocket costs and/or settlements that may arise in the future
related to such cases.
16 - Concentration of Credit Risk
The Company may from time-to-time maintain demand deposits in excess of
federally insured limits in the normal course of business. At December
31, 2002, cash balances in excess of insured limits were approximately
$4,296,000.
17 - Redemption of Capital Interests and Capital Withdrawals
Effective December 17, 2002, B&H, Hamptons and PE redeemed the interests
of certain of its minority members/partners. In addition, another partner
received a partial distribution of their account in the amount of
$500,000. Total withdrawals of capital aggregated to $2,805,034 during
2002.
18 - Subsequent Infusion of Capital and Business Acquisition
Continued
15
On March 14, 2003, Montauk acquired 100% of the ownership interest of
Insignia Douglas Elliman LLC, a New York City residential broker and
Insignia Residential Group, a property management firm operating
principally in New York City. Total purchase price was approximately
$71,000,000. In connection with this transaction, Montauk received
$2,500,000 in additional capital contributions from members and incurred
an aggregate of approximately $71,000,000 in debt.
In December 2002, Montauk entered into an agreement with the stockholders
of Burr to acquire all the then outstanding shares of Burr in exchange
for membership interests in Montauk. Such transaction is pending subject
to regulatory approval.
16
KOA INVESTORS, LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
DECEMBER 31, 2004
KOA INVESTORS, LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
C O N T E N T S
Page
Report of Independent Registered Public Accounting Firm 1
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Members' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6 - 10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
of KOA Investors, LLC
(A Limited Liability Company)
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of KOA
Investors, LLC (a Delaware limited liability company) at December 31, 2004 and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ Weiser LLP
New York, New York
February 7, 2005
-1-
KOA INVESTORS, LLC
(A Limited Liability Company)
BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Real estate under development $32,625,132
Fixed assets, at cost, net of accumulated depreciation of $634,141 44,714,014
Cash and cash equivalents 2,062,317
Cash - restricted 5,538,372
Accounts receivable 507,011
Prepaid expenses and other assets 480,612
Deferred financing costs, net of accumulated amortization of $847,854 1,723,952
-----------
$87,651,410
===========
LIABILITIES AND MEMBERS' EQUITY
Mortgage note payable $57,000,000
Capital lease obligation 3,355,616
Construction costs and accounts payable 7,537,786
Due to affiliates 66,950
Deferred ground rent payable 3,459,145
-----------
71,419,497
===========
Commitments, contingencies, and other matters
Members' equity 16,231,913
-----------
$87,651,410
===========
See notes to financial statements.
-2-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Revenue $ 2,806,376
Costs and expenses 2,286,061
-----------
Gross Profit 520,315
-----------
Operating expenses:
General and administrative 574,317
Repairs and maintenance 233,862
Marketing 810,493
Utilities 380,995
Ground rent 140,226
Management fees 60,201
Real estate taxes 27,470
Insurance 73,423
Depreciation 634,141
Amortization 104,488
-----------
Total operating expenses 3,039,616
-----------
Operating loss (2,519,301)
-----------
Other expenses:
Interest expense 709,480
-----------
Total other expenses 709,480
-----------
Net loss $(3,228,781)
===========
See notes to financial statements.
-3-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004
Balance - January 1, 2004 $ 12,459,794
Contributions 7,000,900
Net loss (3,228,781)
------------
Balance - December 31, 2004 $ 16,231,913
============
See notes to financial statements.
-4-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
Cash flows from operating activities:
Net loss $(3,228,781)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation 634,141
Amortization 104,488
Ground rent 138,782
Changes in assets:
Increase in accounts receivable (507,011)
Increase in prepaid expenses and other assets (338,672)
-----------
Net cash used in operating activities (3,197,053)
-----------
Cash flows from investing activities:
Real estate under development (50,037,743)
-----------
Net cash used in investing activities (50,037,743)
-----------
Cash flows from financing activities:
Proceeds from mortgage note payable 58,500,000
Loan payoff (6,500,000)
Restricted cash deposits (5,538,372)
Capital lease obligation 3,355,616
Members' contributions 7,000,900
Deferred financing costs (2,200,095)
-----------
Net cash provided by financing activities 54,618,049
-----------
Net increase in cash and cash equivalents 1,383,253
Cash and cash equivalents - beginning of year 679,064
-----------
Cash and cash equivalents - end of year $ 2,062,317
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of amounts capitalized $ 506,401
===========
Supplemental disclosure of non-cash financing activities:
Deferred ground rent payable $ 1,013,376
===========
See notes to financial statements.
-5-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note 1 - Organization
KOA Investors, LLC (the "Company"), was formed as a limited
liability company under the laws of the State of Delaware in
November 1999. The Company was formed to acquire a mortgage note
(see Note 3) and foreclose on the note for the purpose of owning,
developing and operating a hotel resort in Keauhou, Hawaii (the
"Project").
The Project contains 521 guest rooms, cabana style dining services,
and a multilevel pool with a poolside grill and bar. Management
projects the renovation of the hotel will be completed by the
beginning of 2005. The Company has engaged Starwood Hotels & Resorts
Worldwide, Inc. ("Starwood") as its exclusive managing agent to
operate the Project.
Pursuant to the operating agreement, the Company will continue in
existence until the earlier of December 31, 2051 or upon the
decision of the Decision Members, as defined, to terminate the
Company.
Note 2 - Summary of Significant Accounting Policies
a) Basis of Accounting
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America.
b) Real Estate Under Development
Costs for the acquisition, development and construction of the
Project are charged to real estate under development. Capitalized
costs include deferred ground rent and interest expenditures
incurred during the acquisition, development and construction of
the Project.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and overnight
investments that at various times during the year have exceeded
the Federally insured limits. The Company believes it mitigates
its risk by banking with major financial institutions.
d) Accounts Receivable
Accounts receivable consists of the receivables from guests for
guest room revenue. Accounts receivable does not bear interest
and is periodically evaluated for collectibility. At December 31,
2004, the Company considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is
required. The Company generally does not require collateral for
accounts receivable.
-6-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note 2 - Summary of Significant Accounting Policies (continued)
e) Inventories
Inventories are comprised primarily of hotel operating supplies
and are valued at the lower of cost or market. Cost is determined
by the first-in, first-out method.
f) Revenue Recognition
Revenues are primarily derived from hotel and resort revenues at
the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii and
the Company recognizes revenues when services are rendered.
g) Deferred Financing Costs
Costs incurred in obtaining financing are amortized over the term
of the related financing instrument. Amortization of such costs
from inception through completion of construction is capitalized
as a cost of the Project and is amortized on a straight-line basis
over the life of the related debt, which approximates amortization
expense under the effective interest method.
h) Property and Equipment Under Capital Lease
Property and equipment under capital lease represents property
and equipment, which have been leased and have been capitalized
by the Company. The property and equipment are recorded at cost
and are depreciated on the straight-line basis over the term of
the lease.
i) Leasehold Improvements and Equipment
Leasehold improvements and furniture, fixtures and equipment are
carried at cost and depreciated on the straight-line basis over
their estimated useful lives.
Expenditures for maintenance and repairs are charged to
operations as incurred. Significant renovations or betterments,
which extend the useful life of the assets, are capitalized.
j) Deferred Ground Rent Payable
Base rental expense on the ground lease is recognized ratably
over its non-cancelable term. The difference between the ground
rent expense recognized using the straight-line method and the
ground rent in accordance with the lease is shown as deferred
ground rent payable on the balance sheet.
k) Income Taxes
No provision or benefit for income taxes has been included in the
financial statements because such taxable income or loss passes
through to, and is reportable by, the members.
-7-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note 2 - Summary of Significant Accounting Policies (continued)
1) Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Note 3 - Fixed Assets and Real Estate Under Development
FIXED ASSETS
As of December 31, 2004, fixed assets consists of the following:
Building and leasehold interest $ 32,287,529
Land improvements 2,937,572
Furniture and equipment 10,123,055
------------
45,338,156
Less: accumulated depreciation 634,141
------------
Total $ 44,714,014
============
Depreciation expense for the year ended December 31, 2004 amounted to
$634,141.
REAL ESTATE UNDER DEVELOPMENT
The Company purchased a non-performing note, collateralized by a
leasehold interest in a hotel resort in Hawaii, for approximately
$7,300,000. The Company foreclosed on the note and took possession of
the leasehold for renovation and operation of the hotel. During 2004,
the Company began to phase-in operations at the Project. At December
31, 2004, real estate under development of $32,625,132 represents the
portion of the Project that has yet to be placed in service,
including approximately $1,399,000 of capitalized deferred ground
rent and $936,632 of capitalized interest.
Note 4 - Mortgage Note Payable
On August 18, 2002, the Company entered into a pre-development loan
agreement (the "Loan") with Far East National Bank in an amount up
to $5,000,000. The Loan bore interest at the Prime Rate (as defined
in the Loan) plus 2.00% per annum. Interest only payments were
required on the first day of every month in arrears. All principal
and all accrued and unpaid interest were due and payable at the
Loan's maturity date, February 28, 2004. Far East National Bank
funded additional loan proceeds in the amount of $1,500,000 to the
Company in January 2004, at which time the Loan's maturity date was
extended to May 31, 2004. The Loan was collateralized by the
Company's real estate under development. Interest expense relating
to the Loan amounted to approximately $269,000, all of which was
capitalized as a cost of the Project.
The Company entered into a loan agreement ("New Loan Agreement")
with Canpartners Realty Holding Company IV, LLC (the "Lender") in
the amount of $57,000,000 (the "New Loan") on April 15th 2004.
Proceeds of the New Loan included amounts to payoff the principal
and interest of the Loan, $6,500,000 and $22,750, respectively.
The New Loan bears interest at 10% per annum and calculated on
360-day year. Principal and interest payments are due on the first
day of the month beginning May 1, 2004 through January 31, 2007, the
maturity date. For the year ending December 31, 2004 the Company
incurred interest pf $2,935,043, of which $2,223,563 was capitalized
as a costs of the Project and $709,480 was expensed.
-8-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note 5 - Cash - Restricted
Cash - restricted represents unused funds from the proceeds of the
New Loan. Cash - restricted is disbursed upon requisition of project
expenditures in agreement with the funding schedule and approved
budget in accordance with the New Loan Agreement. Unused funds
available from the New Loan as of December 31, 2004 amounted to
$5,538,372.
Note 6 - Deferred Ground Rent Payable
In conjunction with the purchase of the hotel mortgage note the
Company assumed two ground leases for the leasehold. On December 20,
2002, the Company entered into a Lease Escrow Agreement, which
modified the provisions of the two ground leases.
As of December 31, 2004, the minimum amounts payable under the terms
of the ground lease for the next five years and in the aggregate
thereafter are approximately as follows:
Year Ending
December 31, Amount
------------ ------
2005 $ 12,000
2006 12,000
2007 12,000
2008 12,000
2009 12,000
Thereafter 76,729,110
--------------
$ 76,789,110
==============
Subsequent to December 31, 2037 minimum payments are to be agreed
upon at a later date in accordance with the Lease Escrow Agreement,
but in no event will be less than $1,537,000. The ground lease
expires on December 31, 2067.
The Company is also obligated to pay to the ground lessor percentage
rent, as stipulated in the original ground lease agreement, once the
hotel begins operations.
For the year ended December 31, 2004 the Company incurred ground
rent expense of approximately $1,165,000, of which approximately
$1,025,000 capitalized as a cost of the Project.
-9-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note 7 - Capital Lease Obligations
The Company has entered into a lease agreement with GMAC Commercial
Mortgage Corporation ("GMAC") on November 11, 2004, whereby the
Company may receive advances in the amount of $5,000,000 for
furniture, fixtures and equipment for the Project. Monthly payments
will be determined upon commencement of the lease in May 2005. The
lease terminates on May 5, 2012 at which time the Company has the
option to purchase the leased equipment for $1, unless terminated
earlier in accordance with the lease agreement. Accordingly, the
Company's leasehold interest has been recorded as an asset and the
capital lease is recorded as a liability in the accompanying balance
sheet as capital lease obligation at the lower of the present value
of the minimum lease payments or the fair market value of the asset.
At December 31, 2004 the Company has drawn $3,355,516 of advances
from GMAC.
Note 8 - Related Party Transactions
Due to Affiliates
Due to affiliates represents advances from affiliates of the Company
through common control to finance short-term cash flow requirements
of the Company. The advance is non-interest bearing and due on
demand.
Management Fees
In accordance with the terms of the operating agreement, the
managing member shall provide asset management services to the
Company for an annual fee equal to the greater of $500,000 or 2% of
the gross asset value, at cost, of the assets owned by the Company
and the project entities, prior to depreciation. For the year ended
December 31, 2004 the Company incurred management fees in the amount
of $500,000, of which $439,803 have been capitalized as costs of the
Project.
Note 9 - Commitments, Contingencies and Other Matters
a) Management Agreement - Starwood
On December 20 of 2002, the Company entered into a management
agreement (the "Management Agreement") with Sheraton Operating
Corporation ("Starwood"), which requires Starwood to provide
managerial and promotional services for the Project. The
Management Agreement has an operating term of two (2) periods
of five (5) years each, as more fully described in the
Management Agreement.
Starwood has the option to renew the Management Agreement for
two successive terms of five years each. The Management
Agreement provides for a base management fee equal to 2% of the
Gross Operating Revenue of the Project, as defined in the
Management Agreement. Management fees in the amount of $56,200
were incurred for the year ending December 31, 2004.
b) A Leasehold Mortgage and Security Agreement secure the New Loan.
Individuals that are affiliates of the Company are the guarantors
of the New Loan.
-10-
KOA INVESTORS, LLC
(A Limited Liability Company)
BALANCE SHEET
DECEMBER 31, 2003
KOA INVESTORS, LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
(Unaudited)
C O N T E N T S
Page
Balance Sheet 1
Statement of Changes in Members' Equity 2
Statement of Cash Flows 3
Notes to Financial Statements 4 - 7
KOA INVESTORS, LLC
(A Limited Liability Company)
BALANCE SHEET
DECEMBER 31, 2003
(Unaudited)
ASSETS
Real estate under development $19,850,414
Cash and cash equivalents 679,064
Deferred financing costs, net of accumulated amortization of $233,139 138,572
Prepaid expenses and other assets 141,940
-----------
$20,809,990
===========
LIABILITIES AND MEMBERS' EQUITY
Mortgage note payable $5,000,000
Construction costs and accounts payable 976,259
Due to affiliates 66,950
Deferred ground rent payable 2,306,987
-----------
8,350,196
Commitments, contingencies and other matters
Members' equity 12,459,794
-----------
$20,809,990
===========
See notes to financial statements.
-1-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
Balance - January 1, 2003................................... $ 9,400,694
Contributions............................................... 3,059,100
-----------
Balance - December 31, 2003................................. $12,459,794
===========
-2-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
Cash flows from operating activities:
Net income ........................................... $ --
Changes in asset and liabilities:
Increase in accounts receivable .................. 139,927
Increase in prepaid expenses and other assets .... 11,750
-----------
Net cash provided from operating activities ... 151,677
-----------
Cash flows from investing activities:
Real estate under development .................... (5,388,567)
-----------
Net cash used in investing activities ......... (5,388,567)
-----------
Cash flows from financing activities:
Proceeds from mortgage note payable .............. 5,000,000
Payment of mortgage note payable ................. (2,384,544)
Members' contributions ........................... 3,059,100
-----------
Net cash provided by financing activities ..... 5,674,556
-----------
Net increase in cash and cash equivalents ................ 437,666
Cash and cash equivalents - beginning of year ............ 241,398
-----------
Cash and cash equivalents - end of year .................. $ 679,064
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net
of amounts capitalized ............................. $ --
===========
Supplemental disclosure on non-cash financing activities:
Deferred ground rent payable ......................... $ 1,152,158
===========
Amortization of deferred finance costs ............... $ 70,564
===========
-3-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO BALANCE SHEET
DECEMBER 31, 2003
(Unaudited)
Note 1 - Organization
KOA Investors, LLC (the "Company"), was formed as a limited
liability company under the laws of the State of Delaware in
November 1999. The Company was formed to acquire a mortgage note
(see Note 3) and foreclose on the note for the purpose of owning,
developing and operating a hotel resort in Keauhou, Hawaii (the
"Project").
Pursuant to the operating agreement, the Company will continue in
existence until the earlier of December 31, 2051 or upon the
decision of the Decision Members, as defined, to terminate the
Company.
Note 2 - Summary of Significant Accounting Policies
a) Basis of Accounting
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America.
b) Real Estate Under Development
Costs for the acquisition, development and construction of the
Project are charged to real estate under development. Capitalized
costs include deferred ground rent and interest expenditures
incurred during the acquisition, development and construction of
the Project.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and overnight
investments that at various times during the year have exceeded
the Federally insured limits. The Company believes it mitigates
its risk by banking with major financial institutions.
d) Deferred Financing Costs
Costs incurred in obtaining financing are amortized over the term
of the related financing instrument. Amortization of such costs
from inception through completion of construction is capitalized
as a cost of the Project and is amortized on a straight-line basis
over the life of the related debt, which approximates amortization
expense under the effective interest method.
e) Deferred Ground Rent Payable
Base rental expense on the ground lease is recognized ratably
over its non-cancelable term. The difference between the ground
rent expense recognized using the straight-line method and the
ground rent in accordance with the lease is shown as deferred
ground rent payable on the balance sheet.
-4-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO BALANCE SHEET
DECEMBER 31, 2003
(Unaudited)
Note 2 - Summary of Significant Accounting Policies (continued)
f) Income Taxes
The Company is treated as the equivalent of a partnership for
income tax purposes. Accordingly, all components of income and
expense are reported in the income tax returns of the Company's
members.
g) Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet. Actual results
could differ from those estimates.
Note 3 - Real Estate Under Development
The Company purchased a non-performing note, collateralized by a
leasehold interest in a hotel resort in Hawaii, for approximately
$7,300,000. The Company foreclosed on the note and took possession
of the leasehold for renovation and operation of the hotel. At
December 31, 2003, the Company's real estate under development
includes approximately $5,700,000 of predevelopment costs.
Note 4 - Mortgage Note Payable
On August 18, 2002, the Company entered into a pre-development loan
agreement (the "Loan") with Far East National Bank in an amount up
to $5,000,000. The Loan bears interest at the Prime Rate (as defined
in the Loan) plus 2.00% per annum. Interest only payments are
required on the first day of every month in arrears. All principal
and all accrued and unpaid interest are due and payable at the
Loan's maturity date, February 28, 2004. The Loan is secured by the
Company's real estate under development. Interest expense relating
to the Loan amounted to approximately $269,000 all of which was
capitalized and is included in real estate under development. The
Company is currently in negotiations for new construction financing.
-5-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO BALANCE SHEET
DECEMBER 31, 2003
(Unaudited)
Note 5 - Deferred Ground Rent Payable
In conjunction with the purchase of the hotel mortgage note the
Company assumed two ground leases for the leasehold. On December 20,
2002, the Company entered into a Lease Escrow Agreement, which
modified the provisions of the two ground leases.
As of December 31, 2003, the amounts payable under the terms of the
ground lease for the next five years and in the aggregate thereafter
are approximately as follows:
Year Ending
December 31, Amount
------------ ------
2004 $ 12,000
2005 12,000
2006 12,000
2007 12,000
2008 12,000
Thereafter 76,741,110
--------------
$ 76,801,110
==============
Subsequent to December 31, 2037 minimum payments are to be agreed
upon at a later date in accordance with the Lease Escrow Agreement,
but in no event will be less $1,537,000. The ground lease expires on
December 31, 2067.
The Company is also obligated to pay to the ground lessor percentage
rent, as stipulated in the original ground lease agreement, once the
hotel begins operations.
For the year ended December 31, 2003 the Company incurred ground
rent expense of approximately $1,165,000 all of which was
capitalized and included in real estate under development.
Note 6 - Related Party Transactions
Due to Affiliates
Due to affiliates of the members presents costs paid on behalf of
the Company. The amounts due are non-interest bearing and due upon
demand.
-6-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Unaudited)
Note 6 - Related Party Transactions (continued)
Management Fees
In accordance with the terms of the operating agreement, the
managing member shall provide asset management services to the
Company for an annual fee of the greater of $500,000 or 2% of the
gross asset value, at cost, of the assets owned by the Company and
the project entities, prior to depreciation. For the year ended
December 31, 2003 management fees in the amount of $500,000 have
been capitalized and are included in real estate under development.
-7-
KOA INVESTORS, LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 31, 2002
KOA INVESTORS, LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
(Unaudited)
CONTENTS
Page
Financial Statements
Balance Sheet............................................... 1
Statement of Operations..................................... 2
Statement of Changes in Members' Equity..................... 3
Statement of Cash Flows..................................... 4
Notes to Financial Statements............................... 5 - 8
KOA INVESTORS, LLC
(A Limited Liability Company)
BALANCE SHEET
DECEMBER 31, 2002
(Unaudited)
ASSETS
Real estate under development........................ $13,077,473
Cash and cash equivalents............................ 241,398
Accounts receivable.................................. 139,927
Deferred financing costs............................. 209,136
Prepaid expenses and other assets.................... 153,690
------------
$13,821,624
============
LIABILITIES AND MEMBERS' EQUITY
Mortgage note payable................................ $ 2,384,544
Construction costs and accounts payable.............. 814,607
Due to affiliates.................................... 66,950
Deferred ground rent payable......................... 1,154,829
-----------
4,420,930
Commitments, contingencies and other matters......... -
Members' equity...................................... 9,400,694
-----------
$13,821,624
============
See Notes to Financial Statements
-2-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
Expenses:
Loss on disposal of fixed assets.......................... $ 2,108,924
------------
Net loss...................................................... $(2,108,924)
===========
See Notes to Financial Statements
-3-
KOA INVESTORS, LLC
(A Limited Liability Company)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
Balance - January 1, 2002....... $10,069,618
Contributions................... 1,440,000
Net loss........................ (2,108,924)
----------
Balance - December 31, 2002..... $ 9,400,694
===========
See Notes to Financial Statements
-4-
KOA INVESTOR, LLC
(A Limited Liability Company)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
Cash flows from operating activities:
Net loss.................................................. $(2,108,924)
Adjustment to reconcile net loss to net cash used
in operating activities:
Amortization.......................................... 59,753
Loss on disposal of fixed assets...................... 2,108,924
Changes in asset and liabilities:
Increase in accounts receivable....................... (139,927)
Increase in prepaid expenses and other assets......... (153,690)
-----------
Net cash used in operating activities.............. (233,884)
-----------
Cash flows from investing activities:
Real estate under development......................... (2,989,225)
Construction costs and accounts payable............... (183,191)
-----------
Net cash used in investing activities.............. (3,172,416)
-----------
Cash flows from financing activities:
Proceeds from mortgage note payable................... 2,384,544
Members' contributions................................ 1,440,000
Deferred financing costs.............................. (268,889)
Due to affiliate...................................... (114,445)
-----------
Net cash provided by financing activities.......... 3,441,210
-----------
Net increase in cash and cash equivalents..................... 34,930
Cash and cash equivalents - beginning of year................. 206,468
-----------
Cash and cash equivalents - end of year....................... $ 1,154,829
============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 29,706
============
Supplemental disclosure of non-cash investing activities:
Foreclosure on mortgage note.............................. $ 9,004,879
============
Supplemental disclosure on non-cash financing activities:
Deferred ground rent payable.............................. $ 1,154,829
============
See Notes to Financial Statements
-5-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
Note 1 - Organization
KOA Investors, LLC (the "Company") was formed as a limited liability
company under the laws of the State of Delaware in November 1999. The
Company was formed to acquire a mortgage note (see Note 3) and
foreclose on the note for the purpose of owning, developing and
operating a hotel resort in Keauhou, Hawaii (the "Project").
Pursuant to the operating agreement, the Company will continue in
existence until the earlier of December 31, 2051 or upon the decision
of the Decision Members, as defined, to terminate the Company.
Note 2 - Summary of Significant Accounting Policies
a) Basis of Accounting
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America.
b) Real Estate Under Development
Costs for the acquisition, development and construction of the
Project are charged to real estate under development. Capitalized
costs include deferred ground rent and interest expenditures
incurred during the acquisition, development and construction of
the Project.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and overnight
investments that at various times during the year have exceeded
the Federally insured limits. The Company believes it mitigates
its risk by banking with major financial institutions.
d) Deferred Financing Costs
Deferred financing costs are amortized over the term of the
related financing instrument. Amortization of such costs from
inception through completion of construction is capitalized as a
cost of the Project and is amortized on a straight-line basis over
the life of the related debt, which approximates amortization
expense under the effective interest method.
e) Deferred Ground Rent Payable
Base rental expense on the ground lease is recognized ratably
over its non-cancelable term. The difference between the ground
rent expense recognized using the straight-line method and the
ground rent in accordance with the lease is shown as deferred
ground rent payable on the balance sheet.
-6-
KOA INVESTORS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 2002
(Unaudited)
Note 2 - Summary of Significant Accounting Policies (continued)
f) Income Taxes
The Company is treated as the equivalent of a partnership for
income tax purposes. Accordingly, all components of income and
expense are reported in the income tax returns of the Company's
members.
g) Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Note 3 - Real Estate Under Development
In July 2001, the Company purchased a non-performing mortgage note,
collateralized by a leasehold interest in a hotel resort in Hawaii,
for approximately $7,300,000. In June 2002, the Company foreclosed on
the note and took possession of the leasehold for renovation and
operation of the hotel. At December 31, 2002, the Company's real
estate under development includes approximately $5,700,000 of
pre-development costs.
Note 4 - Mortgage Note Payable
On August 18, 2002, the Company entered into a pre-development loan
agreement (the "Loan") with Far East National Bank in an amount up to
$5,000,000. The Loan bears interest at the Prime Rate (as defined in
the Loan) plus 2.00%, subject to a minimum interest rate of 6.75% per
annum. Interest only payments are required on the first day of every
month in arrears. All principal and all accrued and unpaid interest is
due and payable at the Loan's maturity date, February 28, 2004. The
Loan is secured by the Company's real estate under development.
Interest expense relating to the Loan amounted to approximately
$42,000, all of which was capitalized and is included in real estate
under development.
Note 5 - Deferred Financing Costs
Deferred financing costs consist of costs incurred with the Loan (see
Note 3). For the year ended December 31, 2002, amortization of the
deferred financing costs amounted to approximately $60,000, all of
which was capitalized and is included in real estate under
development.
Note 6 - Deferred Ground Rent Payable
In conjunction with the purchase of the hotel mortgage note, the
Company assumed two ground leases for the leasehold. On December 20,
2002, the Company entered into a Lease Escrow Agreement, which
modified the provisions of the two ground leases.
-7-
As of December 31, 2002, the amounts payable under the terms of the
ground lease for the next five years and in the aggregate thereafter
are approximately as follows:
Year Ending
December 31, Amount
------------ ------
2003 $ 12,000
2004 12,000
2005 12,000
2006 12,000
2007 12,000
Thereafter 76,753,110
------------
$ 76,813,110
=============
Subsequent to December 31, 2037, minimum payments are to be agreed
upon at a later date in accordance with the Lease Escrow Agreement,
but in no event will be less $1,537,000. The ground lease expires on
December 31, 2067.
The Company is also obligated to pay to the ground lessor percentage
rent, as stipulated in the original ground lease agreement, once the
hotel begins operations.
For the year ended December 31, 2002, the Company incurred ground rent
expense of approximately $1,165,000, all of which was capitalized and
included in real estate under development.
Note 7 - Related Party Transactions
Due to affiliates
Amounts due to affiliates are non-interest bearing and due upon
demand.
Management Fees
In accordance with the terms of the operating agreement, the managing
member shall provide asset management services to the Company for an
annual fee of the greater of $500,000 or 2% of the gross asset value,
at cost, of the assets owned by the Company and the project entities,
prior to depreciation. Management fees in the amount of $500,000 have
been capitalized and are included in real estate under development at
December 31, 2002.
Note 8 - Other Matters
The Company called for capital contributions in the amount of
$1,500,000. Contributions in the amount of $1,440,000 were received at
December 31, 2002. The remaining $60,000 was contributed subsequent to
December 31, 2002.
-8-
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.
VECTOR GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
---------------------------------
Joselynn D. Van Siclen
Vice President, Chief Financial
Officer and Treasurer
Date: March 31, 2005