**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

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**Form 10-QSB**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2002**

 

**Commission FileNumber:**

 

**0-25074**

 

**STONEHAVEN REALTY TRUST**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                                      |   | **39-6594066**                          |
|---------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation)    |   | (I.R.S. Employer Identification Number) |
|                                              |   |                                    |
| **5620 Smetana  Road, Suite 130, Minnetonka, MN** |   | **55343**                               |
| (Address of principal executive offices)          |   | (Zip code)                              |

 

Issuer’s telephone number:**952-935-5411** Fax number: **952-935-5659**

 

Securities registered under Section 12(b) of the Act: **None**

 

Securities registered under Section 12(g) of the Act: CommonShares, $0.01 par value

 

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Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file suchreports), and (2) has been subject to the filing requirements for the past90 days. Yes ý No o

 

As of August 8, 2002, 4,517,524 shares of theissuer’s common shares were outstanding.

 

Transitional Small Business Disclosure Format(Check one): Yes o No ý

(Added by Exch Act Rel No. 31905, eff4/26/93.)

 

**This reportcontains 23 pages. There is one exhibit.**

 

 

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**STONEHAVENREALTY TRUST AND SUBSIDIARIES**

**FORM 10-QSB**

**INDEX**

 

** **
| **PART I.  Financial Information**                                                                         |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| **Consolidated Balance Sheet—June 30,  2002 (unaudited)**                                                  |
|                                                                                                            |
| Consolidated  Statements of Operations**—**Six  months endedJune 30, 2002 and June  30, 2001 (unaudited)   |
|                                                                                                            |
| Consolidated  Statements of Operations**—**Three  months endedJune 30, 2002 and June  30, 2001 (unaudited) |
|                                                                                                            |
| Consolidated  Statements of Cash Flows**—**Six  months endedJune 30, 2002 and June  30, 2001 (unaudited)   |
|                                                                                                            |
| Notes to  Consolidated Financial Statements                                                                     |
|                                                                                                            |
| Management’s Discussion and  Analysis of Financial Condition andPlan  of Operation                         |
|                                                                                                            |
| **Part II.  Other Information**                                                                            |
|                                                                                                            |
| Other Information                                                                                               |
|                                                                                                            |
| Exhibits  and Reports on Form 8-K                                                                               |
|                                                                                                            |
| Signatures                                                                                                      |

 

2

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**Stonehaven Realty Trust andSubsidiaries****Con****solidated Balance Sheet****June 30, 2002(unaudited)**

 
| **ASSETS**                                                                                                                                                                             |   |        |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
| Investments in real estate:                                                                                                                                                            |   |        |       |
| Land                                                                                                                                                                                   |   | $           | 2,195,034  |   |
| Buildings and  improvements                                                                                                                                                            |   | 8,843,158   |       |
| Computer  hardware, software and other fixed assets                                                                                                                                    |   | 78,172      |       |
|                                                                                                                                                                                   |   | 11,116,364  |       |
| Accumulated  depreciation and amortization                                                                                                                                             |   | (686,520    | )          |
| Net investments  in real estate                                                                                                                                                        |   | 10,429,844  |       |
| Cash and cash  equivalents                                                                                                                                                             |   | 1,935,959   |       |
| Marketable  securities, net                                                                                                                                                            |   | 180,000     |       |
| Restricted cash                                                                                                                                                                        |   | 248,088     |       |
| Other assets,  net                                                                                                                                                                     |   | 185,380     |       |
| **TOTAL  ASSETS**                                                                                                                                                                      |   | $           | 12,979,271 |   |
|                                                                                                                                                                                   |   |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                         |   |        |       |
| Liabilities:                                                                                                                                                                           |   |        |       |
| Mortgage loans and notes payable                                                                                                                                                       |   | $           | 6,481,167  |   |
| Related party  notes payable                                                                                                                                                           |   | 335,000     |       |
| Income taxes  payable                                                                                                                                                                  |   | 23,235      |       |
| Accounts payable  and accrued expenses                                                                                                                                                 |   | 628,907     |       |
| Security  deposits                                                                                                                                                                     |   | 45,000      |       |
| Total  liabilities                                                                                                                                                                     |   | 7,513,309   |       |
|                                                                                                                                                                                   |   |        |       |
| **Minority interest in  consolidated subsidiary**                                                                                                                                      |   | **—**  |       |
|                                                                                                                                                                                   |   |        |       |
| **COMMITMENTS  AND CONTINGENCIES:  (Note 8)**                                                                                                                                     |   |        |       |
|                                                                                                                                                                                   |   |        |       |
| Shareholders’  equity:                                                                                                                                                            |   |        |       |
| Preferred Shares – $0.01 par value, 10,000,000  authorized:  663,291 Class A  cumulative convertible shares issued and outstanding, $10.00 per share  liquidation preference |   | 6,633       |       |
| Common Shares - $0.01 par value, 100,000,000  authorized; 4,517,524 shares issued and outstanding                                                                                      |   | 45,176      |       |
| Additional  paid-in capital                                                                                                                                                            |   | 25,595,216  |       |
| Accumulated other  comprehensive loss; net unrealized loss on marketable securities                                                                                                    |   | (1,017,600  | )          |
| Accumulated  deficit                                                                                                                                                                   |   | (19,123,694 | )          |
| Treasury stock,  at cost                                                                                                                                                               |   | (39,769     | )          |
| Total  shareholders’ equity                                                                                                                                                       |   | 5,465,962   |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                   |   | $           | 12,979,271 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

3

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**StonehavenRealty Trust and SubsidiariesConsolidated Statements of Operations**

**(unaudited)**

 
|                                                                                 |   | **For the six months ended June 30,** |       |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                 |   | **2002**                              |       | **2001** |   |
|                                                                                 |   |                                  |       |   |   |
| **Revenues**                                                                         |   |                                  |       |   |   |
| Rental revenue                                                                       |   | $                                     | 434,981    |   | $ | 693,430 |   |
| Tenant  recoveries                                                                   |   | 212,749                               |       | 439,476 |   |
| Professional  services and sales of hardware and software                            |   | —                                |       | 1,615,748 |   |
| Interest and  other                                                                  |   | 16,486                                |       | 59,302 |   |
| Total revenues                                                                       |   | 664,216                               |       | 2,807,956 |   |
| **Expenses**                                                                         |   |                                  |       |   |   |
| Property,  operating and maintenance                                                 |   | 75,898                                |       | 148,004 |   |
| Advertising and  promotion                                                           |   | 2,277                                 |       | 94,198 |   |
| Property taxes  and insurance                                                        |   | 175,628                               |       | 264,268 |   |
| Depreciation and  amortization                                                       |   | 127,136                               |       | 1,558,409 |   |
| Interest                                                                             |   | 251,256                               |       | 472,678 |   |
| General and  administrative                                                          |   | 381,512                               |       | 1,073,049 |   |
| Management fees                                                                      |   | 31,316                                |       | 53,261 |   |
| Costs related to  professional services and sales of hardware and software           |   | —                                |       | 734,829 |   |
| Product  development                                                                 |   | —                                |       | 114,917 |   |
| Total expenses                                                                       |   | 1,045,023                             |       | 4,513,613 |   |
| Loss from  operations before loss allocated to minority interest                     |   | (380,807                              | )          | (1,705,657 | ) |
| Loss allocated  to minority interest                                                 |   | 24,736                                |       | 84,513 |   |
| Loss from  operations                                                                |   | (356,071                              | )          | (1,621,144 | ) |
| Loss on sale of  investments in real estate                                          |   | —                                |       | (165,835 | ) |
| Gain on sale of  marketable securities                                               |   | 55,889                                |       | — |   |
| Net loss                                                                             |   | (300,182                              | )          | (1,786,979 | ) |
| Preferred Share  Dividends                                                           |   | (315,063                              | )          | (315,063 | ) |
| Net loss  available to Common Shareholders                                           |   | $                                     | (615,245   | ) | $ | (2,102,042 | ) |
| Net loss  available to Common Shareholders per Common Share:  Basic and Diluted |   | $                                     | (0.14      | ) | $ | (0.47 | ) |
| Weighted average  number of Common Shares outstanding                                |   | 4,517,524                             |       | 4,517,524 |   |
|                                                                                 |   |                                  |       |   |   |
| Comprehensive  loss:                                                                 |   |                                  |       |   |   |
| Net loss                                                                             |   | $                                     | (300,182   | ) | $ | (1,786,979 | ) |
| Other  comprehensive loss:                                                           |   |                                  |       |   |   |
| Unrealized loss  on marketable securities                                            |   | (987,200                              | )          | — |   |
| Comprehensive  loss                                                                  |   | $                                     | (1,287,382 | ) | $ | (1,786,979 | ) |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

4

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**Stonehaven Realty Trust and SubsidiariesConsolidated Statements of Operations(unaudited)**

 
|                                                                                 |   | **For the three months ended June 30,** |     |
|--------------------------------------------------------------------------------------|--------|-----------------------------------------|----------|
|                                                                                 |   | **2002**                                |     | **2001** |   |
|                                                                                 |   |                                    |     |   |   |
| **Revenues**                                                                         |   |                                    |     |   |   |
| Rental revenue                                                                       |   | $                                       | 213,975  |   | $ | 221,949 |   |
| Tenant  recoveries                                                                   |   | 132,568                                 |     | 125,906 |   |
| Professional  services and sales of hardware and software                            |   | —                                  |     | 813,434 |   |
| Interest and  other                                                                  |   | 10,082                                  |     | 24,293 |   |
| Total revenues                                                                       |   | 356,625                                 |     | 1,185,582 |   |
| **Expenses**                                                                         |   |                                    |     |   |   |
| Property,  operating and maintenance                                                 |   | 31,948                                  |     | 7,146 |   |
| Advertising and  promotion                                                           |   | 277                                     |     | 14,513 |   |
| Property taxes  and insurance                                                        |   | 87,836                                  |     | 123,579 |   |
| Depreciation and  amortization                                                       |   | 64,471                                  |     | 759,524 |   |
| Interest                                                                             |   | 125,299                                 |     | 131,655 |   |
| General and  administrative                                                          |   | 175,192                                 |     | 560,502 |   |
| Management fees                                                                      |   | 16,710                                  |     | 16,363 |   |
| Costs related to  professional services and sales of hardware and software           |   | —                                  |     | 325,995 |   |
| Product  development                                                                 |   | —                                  |     | 63,315 |   |
| Total expenses                                                                       |   | 501,733                                 |     | 2,002,592 |   |
| Loss from  operations before loss allocated to minority interest                     |   | (145,108                                | )        | (817,010 | ) |
| Loss allocated  to minority interest                                                 |   | 17,786                                  |     | 43,756 |   |
| Net Loss                                                                             |   | (127,322                                | )        | (773,254 | ) |
| Preferred Share  Dividends                                                           |   | (315,063                                | )        | (315,063 | ) |
| Net loss  available to Common Shareholders                                           |   | $                                       | (442,385 | ) | $ | (1,088,317 | ) |
| Net loss  available to Common Shareholders per Common Share:  Basic and Diluted |   | $                                       | (0.10    | ) | $ | (0.24 | ) |
| Weighted average  number of Common Shares outstanding                                |   | 4,517,524                               |     | 4,517,524 |   |
|                                                                                 |   |                                    |     |   |   |
| Comprehensive  loss:                                                                 |   |                                    |     |   |   |
| Net loss                                                                             |   | $                                       | (127,322 | ) | $ | (773,254 | ) |
| Other  comprehensive loss:                                                           |   |                                    |     |   |   |
| Unrealized loss  on marketable securities                                            |   | (205,200                                | )        | — |   |
| Comprehensive  loss                                                                  |   | $                                       | (332,522 | ) | $ | (773,254) |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

5

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**Stonehaven Realty Trust and SubsidiariesConsolidated Statements of Cash Flows**

**(unaudited)**

** **
|                                                                         |   | **For the six months  ended June 30,** |      |
|------------------------------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                                         |   | **2002**                               |      | **2001** |   |
| **Cash flows from operating  activities:**                                   |   |                                   |      |   |   |
| Net loss                                                                     |   | $                                      | (300,182  | ) | $ | (1,786,979 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                   |      |   |   |
| Depreciation and  amortization                                               |   | 127,136                                |      | 1,558,409 |   |
| Loss allocated  to minority interest                                         |   | (24,736                                | )         | (84,513 | ) |
| Loss on sales of  investment of real estate                                  |   | —                                 |      | 165,835 |   |
| Gain on sale of  marketable securities                                       |   | (55,889                                | )         | — |   |
| Net change in  assets and liabilities:                                       |   |                                   |      |   |   |
| Accounts  receivable, net                                                    |   | —                                 |      | (226,993 | ) |
| Restricted cash                                                              |   | (6,101                                 | )         | 298,552 |   |
| Other assets,  net                                                           |   | (18,785                                | )         | 13,466 |   |
| Income taxes  payable                                                        |   | (16,765                                | )         | — |   |
| Accounts payable  and accrued expenses                                       |   | (142,142                               | )         | (1,470,378 | ) |
| Deferred revenue  and security deposits                                      |   | 10,000                                 |      | (7,980 | ) |
| Net cash used in  operating activities                                       |   | (427,464                               | )         | (1,540,581 | ) |
|                                                                         |   |                                   |      |   |   |
| **Cash flows from investing  activities:**                                   |   |                                   |      |   |   |
| Additions to  real estate properties                                         |   | (19,711                                | )         | — |   |
| Acquisition of  computer hardware, software and other fixed assets           |   | (8,250                                 | )         | (57,491 | ) |
| Cash proceeds  from disposition of real estate property                      |   | —                                 |      | 593,579 |   |
| Cash proceeds  from sale of marketable securities                            |   | 1,253,489                              |      | — |   |
| Additions to  leasing costs                                                  |   | (31,184                                | )         | — |   |
| Net  cash provided by investing activities                                   |   | 1,194,344                              |      | 536,088 |   |
|                                                                         |   |                                   |      |   |   |
| **Cash flows from financing  activities:**                                   |   |                                   |      |   |   |
| Payments on  mortgage loans and notes payable                                |   | (56,624                                | )         | (51,749 | ) |
| Dividends/distributions  paid                                                |   | (315,063                               | )         | (315,063 | ) |
| Proceeds from  related party note payable                                    |   | —                                 |      | 200,000 |   |
| Net cash used in  financing activities                                       |   | (371,687                               | )         | (166,812 | ) |
|                                                                         |   |                                   |      |   |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 395,193                                |      | (1,171,305 | ) |
| Cash and cash  equivalents                                                   |   |                                   |      |   |   |
| Beginning of period                                                          |   | 1,540,766                              |      | 1,635,916 |   |
| End of period                                                                |   | $                                      | 1,935,959 |   | $ | 464,611 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

6

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**StonehavenRealty Trust and Subsidiaries**

 

**Notes****to ConsolidatedFinancial Statements**

 

**Note 1—Organization**

 

StonehavenRealty Trust (the “Company”) is areal estate company separated into two business segments: a commercial realestate segment which acquires, owns and operates commercial real estate and atechnology segment which through July 10, 2001, provided information technology consulting and documentmanagement solutions.  As of June 30, 2002, all assets related toour technology segment are written off.

 

TheCompany’s real estate investments are owned through its operating partnership, WellingtonProperties Investments, L.P. (“Operating Partnership”), of which the Company isthe sole general partner and owns an approximate 92.9% interest.  As of June 30, 2002, the Company owned fourcommercial industrial properties that aggregate approximately 129,000 rentablesquare feet.

 

**Note 2—Basis of Presentation andSummary of Significant Accounting Policies**

 

TheCompany has prepared the consolidated financial statements without auditpursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included inthe financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to such rules andregulations.  However, the Companybelieves that the included disclosures are adequate to make the informationpresented not misleading. In the opinion of the Company, all adjustments(consisting solely of normal recurring items) necessary for a fair presentationof the financial position of the Company as of June 30, 2002, the results oftheir operations for the six months and three months ended June 30, 2002 and2001, and their cash flows for the six month periods ended June 30, 2002 and2001 have been included. The results of operations for such interim periods arenot necessarily indicative of the results for a full year. For furtherinformation, refer to the Company’s consolidated financial statements andfootnotes included in the Annual Report of Form 10-KSB for the year endedDecember 31, 2001.

 

**Use of Estimates in the Preparation ofFinancial Statements**

 

Inorder to conform with generally accepted accounting principles, management, inpreparation of the Company’s consolidated financial statements, is required tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of June 30,2002, and the reported amounts of revenues and expenses for the six months andthree months ended June 30, 2002 and 2001. Actual results could differ fromthose estimates.

# ** **

# **Other Assets**

 

Asof June 30, 2002, other assets include deferred financing costs incurred toobtain and secure mortgage debt financing and deferred leasing costs incurredto obtain new leases.  Other assets arecarried at cost, less accumulated amortization.

 

Thedeferred financing costs are being amortized over the life of the respectiveloans on a straight-line basis. Accumulated amortization related to deferred financing costs as of June30, 2002 was approximately $23,400.

 

Thedeferred leasing costs are being amortized over the life of the respectivelease term on a straight-line basis. Accumulated amortization related to deferred leasing costs as of June30, 2002 was approximately $1,500.

 

7

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**Revenue Recognition**

 

Rentalrevenue from tenants is recognized on a straight-line basis over the term ofthe lease agreements regardless of when payments are due.  Tenant recoveries include payments fromcommercial property tenants for reimbursement of the tenant’s share of realestate taxes and certain common area maintenance costs.  Such costs are recognized as revenue in theperiod the costs are incurred.

 

Revenuegenerated from professional services and sales of hardware and software isrecognized as services and goods are provided. Services billed in advance are recorded as deferred revenues andrecognized when revenue is earned.

 

**Software Development Costs**

 

Costsrelated to development of the Company’s new software product are charged toproduct development expense as incurred. Software development costs are capitalized beginning when a product’stechnological feasibility has been established, which to date has been when theCompany has a working model of the software, and ending, when a product isavailable for general release to customers. Substantially all development costsare incurred prior to establishing a working model.  As a result, the Company has not capitalized any softwaredevelopment costs since costs have not been significant.

 

# **Income Taxes**

 

Becausethe Company is no longer a REIT for federal income tax purposes, the Companynow accounts for income taxes using the liability method under which deferredtax assets and liabilities are determined based on differences between thefinancial reporting and tax bases of assets and liabilities using enacted taxrates in effect for the period in which the differences are expected to affecttaxable income.  Valuation allowancesare established when necessary to reduce deferred tax assets to the amountexpected to be realized.  The Companywill be eligible to re-elect REIT status on January 1, 2005.

 

At June 30, 2002, theCompany has net operating losses.  As ofDecember 31, 2001, the Company’s net operating losses were approximately$3,215,000.  While these losses, as wellas the marketable securities valuation allowance, created a deferred tax asset,a valuation allowance was applied against the asset because of the uncertaintyof whether or not the Company will be able to use these loss carry forwards,which will expire in varying amounts through the year 2021.

 

The Company and certainof its subsidiaries are also subject to certain state and local income, exciseand franchise taxes.  The provision forsuch state and local taxes has been reflected in general and administrativeexpense in the consolidated statements of operations and has not beenseparately stated due to its insignificance.

 

**Segment Disclosure**

 

InJune 1997, the FASB issued Statement of Financial Accounting Standards No. 131,“Disclosures about Segments of an Enterprise and Related Information”.  This statement requires that a publiccompany report financial and descriptive information about its reportableoperating segments.  Generally,financial information is required to be reported on the basis that it is usedinternally for evaluating segment performance and deciding how to allocateresources to segments. Management views the Company as two business segments: acommercial real estate segment which acquires, owns and operates commercialreal estate and a technology segment which through July 10, 2001,provided information technology consultingand document management solutions and is currently evaluating other technologyopportunities.

 

8

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**Recent Accounting Pronouncements**

 

During fiscal 2001, the Financial Accounting Standards Board issued SFAS #142 Goodwill and OtherIntangible Assets.  SFAS #142 will beeffective for the Company’s fiscal year beginning January 1, 2002 and will nolonger permit goodwill of the Company to be amortized.  Instead, goodwill will be periodicallytested for impairment and written down if impairment is determined to exist.  Other intangible assets must be reviewed,and assessed at least annually, in order to ascertain if their lives are deemedto be finite (amortized) or indefinite (not amortized).  At June 30, 2002, the Company no longer hasgoodwill, but will evaluate any future goodwill or intangible assets withrespect to the above.

 

In August 2001, theFinancial Accounting Standards Board issued Financial Accounting Standard(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  SFAS 144 establishes a modelfor measurement and reporting the impairment of assets to be disposed of bysale and addresses accounting for a segment of a business accounted for as adiscontinued operation.  SFAS 144 iseffective for fiscal years beginning after December 15, 2001. At June 30, 2002,SFAS 144 did not have an effect on the Company’s results of operations,financial position or cash flows.

 

**Note 3—Marketable Securities**

 

TheCompany’s investments in marketable securities are available-for-sale andrepresent 40,000 shares of common stock of Stellent, Inc. (“Stellent”).  Such shares were acquired in connection withthe sale of certain assets of Stonehaven Technologies on July 10, 2001 andvalued at $29.94 per share based on the NASDAQ closing quote per share on July9, 2001.   As of June 30, 2002, the fairmarket value of these marketable securities aggregated approximately $180,000(based upon the NASDAQ closing quote per share of common stock of Stellent of$4.50 on June 28, 2002) and, accordingly, the Company has recorded a grossunrealized loss of $1,017,600 with a related non-cash adjustment to accumulatedother comprehensive loss.

 

Duringthe six months ended June 30, 2002, the Company sold 40,000 Stellent Shares atan average price of $31.34 per share and recognized a gain on the sale of theseshares totaling approximately $56,000. The Company recognizes gain or loss on the sale of marketable securitiesbased upon the first-in-first-out method.

 

9

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**Note 4—Pro Forma Consolidated Financial Information(Unaudited)**

 

The following pro formacondensed consolidated financial information presented below is as if thedispositions of Cold Springs (closed March 31, 2001) and certain assets ofStonehaven Technologies (closed July 10, 2001) had occurred on January 1, 2001.  The pro forma financial information is not necessarily indicative of the results,which actually would have occurred if the acquisitions or dispositions had beenconsummated on January 1, 2001, nor does the pro forma information purport torepresent the results of operations for future periods.

** **
|                                               |   | **For the six months  ended** |    |
|----------------------------------------------------|--------|-------------------------------|---------|
|                                               |   | **June 30, 2001**             |    |
| Pro forma total revenue                            |   | $                             | 812,000 |   |
| Pro forma loss                                     |   | $                             | 326,000 |   |
| Pro forma loss available to  Common Shareholders   |   | $                             | 641,000 |   |
| Pro forma loss per Common Share  Basic and Diluted |   | $                             | 0.14    |   |

 

**Note 5—Mortgage Loans and NotesPayable**

 

The mortgage loansand notes payable relating to the Plymouth I, II & III properties ofapproximately $4.3 million matured on May 31, 2002 and are currently under averbal extension on a month-to-month basis. The Company anticipates refinancing this indebtedness pursuant to a termsheet from the current lender dated March 15, 2002.  This term sheet provides for a refinance of the debt based upon athree-year term at an annual fixed rate of 7.25% with a cost of fifty basispoints.

 

**Note 6—Equity/Distributions**

 

OnApril 12, 2002, the Company declared a dividend of $0.475 per share withrespect to the Class A Preferred Shares. The dividend with respect to the Class A Preferred Shares was paid onMay 15, 2002 to shareholders of record on May 1, 2002.

 

Effective May 15, 2002 the Company issued 50,000options to each of the five Trustees at a price of $0.45 per share.  The options vest six months after issuanceand expire 90 days after the Trustee’s term ends.

 

On May 6, 2002, the Company filed aRegistration Statement under the Securities Act of 1933 on Form SB-2(“Registration Statement”) registering 3,115,347 Common Shares that may be soldby the selling shareholders named in the Registration Statement representing(a) 2,347,872 Common Shares currently outstanding and (b) 509,725 Common Sharesissuable upon conversion of 147,832 Class A Preferred Shares, 177,750 CommonShares isssuable upon conversion of Common Units of the Operating Partnershipand 80,000 Common Shares issuable upon exercise of options.  The Registration Statement was effective asof May 17, 2002.

 

10

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**Note 7—Loss Per Share**

 

TheCompany has adopted the Statement of Financial Accounting StandardsNo. 128, “Earnings Per Share” (“EPS”) for all periods presented herein.Net loss per weighted average Common Share outstanding—basic and net loss perweighted average Common Share outstanding—diluted are computed based on theweighted average number of Common Shares outstanding for the period. Theweighted average number of Common Shares outstanding for the six months endedJune 30, 2002 and June 30, 2001 were 4,517,524. Common share equivalents ofapproximately 2.7****million includeoutstanding convertible preferred shares, warrants and stock options, and arenot included in net loss per weighted average Common Share outstanding—dilutedas they would be anti-dilutive.

 
|                                                                                                             |   | **For the six months ended June 30,** |         |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------------|
|                                                                                                             |   | **2002**                              |         | **2001** |   |
| **Numerator**                                                                                                    |   |                                  |         |   |   |
| **Net Loss**                                                                                                     |   | **(300,182**                          | **)**        | **(1,786,979** | **)** |
| **Preferred Share Dividends**                                                                                    |   | **(315,063**                          | **)**        | **(315,063** | **)** |
| **Net loss available to Common  Shareholders**                                                                   |   | **$**                                 | **(615,245** | **)** | **$** | **(2,102,042** | **)** |
|                                                                                                             |   |                                  |         |   |   |
| **Denominator**                                                                                                  |   |                                  | ** **   |   | ** ** |
| Weighted average  Common Shares outstanding at June 30, 2002 and June 30, 2001, respectively:  Basic and Diluted |   | 4,517,524                             |         | 4,517,524 |   |
|                                                                                                             |   |                                  |         |   |   |
| Net loss available to Common Shareholders - Basic  and Diluted                                                   |   | $                                     | (0.14        | ) | $ | (0.47 | ) |

 

#### **Note8 — Commitments and Contingencies**

#### ** **

#### **Liquidity**

 

As of June 30, 2002, our unrestricted cash resources were approximately$1,936,000 and our marketable securities available for sale were approximately$180,000.  During the six months endedJune 30, 2002, the Company sold 40,000 shares of Stellent common stock at anaverage price of $31.34 per share and recognized a gain on the sale of theseshares totaling approximately $56,000. The Company’s marketable securities represented 40,000 shares of commonstock of Stellent at a fair market value of $4.50 per share (based on the NASDAQclosing quote per share on June 28, 2002).  Such shares were acquired on July 10, 2001,had a fair market value as of July 9, 2001 of $29.94 per share and wereregistered effective as of September 7, 2001 with the Securities and ExchangeCommission.  On August 7, 2002 theclosing price of Stellent’s common stock was $4.337 per share.  We believe our cash resources and marketablesecurities are sufficient to sustain the Company’s liquidity needs for the nexttwelve months.

 

In addition to our current cash resources and marketable securities, theCompany may have additional borrowing capacity available based on our realestate investments subject to certain loan to value ratios and otherconditions.  Further, we believe thesale of our investments in real estate, if required, would generate additionalcash to meet our ongoing liquidity needs. There can be no assurance that the Company will pursue such additionalfinancing or disposition or that should the Company pursue such additionalfinancing or disposition, that such financing would be available to the Companyor that such disposition would occur or that either would be on termsacceptable to the Company.

 

11

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#### **EmploymentAgreements**

 

Duane H. Lund currently serves as the Company’sChief Executive Officer without an employment contract.  Mr. Lund has informed the Board of Trusteesthat he is evaluating various other professional opportunities.  The Company has not yet determined how wewould staff our management if Mr. Lund’s service became unavailable.

#### ** **

#### **LegalProceeding**

### ** **

On December 29, 2000,Stonehaven notified Odeh Muhawesh, a former Trustee of the Company and formerChief Knowledge Officer of Stonehaven Technologies, that it was suspending itspayment to him under a promissory note assumed by Stonehaven Technologies(“Promissory Note”). Stonehaven Technologies assumed the payment obligation inFebruary 2000 pursuant to the terms of the merger agreement between theCompany, Stonehaven Technologies and NETLink International, Inc. (“NETLink”), acompany founded and owned by Mr. Muhawesh whereby NETLink was merged intoStonehaven Technologies. Management of the Company believes Mr. Muhawesh is indefault under the merger agreement for, among other things, failure by him tocause to be transferred to Stonehaven Technologies 5% of the issued andoutstanding stock of MyFreeDesk.com, Inc.

 

On January 8, 2001, Mr. Muhawesh filed a complaint against StonehavenTechnologies in the District Court of Hennepin County, Minnesota alleging thatStonehaven Technologies failed to pay him $350,000 on January 1, 2001 under theterms of the Promissory Note. The Company has filed a counterclaim against Mr.Muhawesh requesting, among other things, the repayment of amounts previouslypaid to him under the Promissory Note.

 

On August 5, 2002, theCompany reached a settlementwith Mr. Muhawesh whereby the Company paid Mr. Muhawesh $160,000 in exchangefor the Promissory Note and related accrued interest and Mr. Muhawesh assignedto the Company his options for 1.0 million Common Shares of the Company and allof his stock in MyFreeDesk.com, Inc. The Company will release a contractual restriction restricting Mr.Muhawesh from selling publicly approximately 158,500 Common Shares of the Company.  Furthermore, the settlement provides bothparties a full, final and complete release of all claims to date.

 

#### **Legal Actions**

 

In the normal course ofbusiness, the Company is involved in legal actions arising from the ownershipand administration of its properties and its technology segment.  In management’s opinion, the liabilities, ifany, that may ultimately result from such legal actions are not expected tohave a materially adverse effect on the consolidated financial position,operations or liquidity of the Company.

 

#### **Income Tax Audit**

 

The OperatingPartnership’s income tax returns are currently under audit by the InternalRevenue Service for the tax periods ended December 31, 1998, 1999 and2000.  Management believes the taxreturns as filed appropriately state the taxable income/loss for eachyear.  However, there can be noassurance that changes will not result to the taxable income/loss as originallyfiled.  Management believes that changesproposed, if any, may affect the net operating loss carry forward amounts ofthe Company but would not have any substantial effect on the Company’s cashresources.

 

12

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**Note 9—Related Party Transactions**

 

**Management Fees**

 

TheCompany maintains a property management agreement with HoytProperties Inc. (“Hoyt”), an entity controlled by a Trustee of theCompany, to serve as Property Manager of the commercial properties owned by theCompany.  In connection with theagreement, Hoyt manages the day-to-day operations of properties owned by theCompany and receives a management fee for this service. Management fees paid toHoyt were approximately $31,000 and $53,000 for the six months ended June 30,2002 and June 30, 2001, respectively.

 

TheBoard of Trustees recently elected two new Trustees to fill existing vacancieson our Board.  One of the new Trustees,Kim A. Culp, is a Regional Chairman and Board member of Marshall & IlselyBank, of Milwaukee, which holds the mortgage on our Plymouth Properties.  Mr. Culp was an original investor, ViceChairman and President of Century Bank, which was sold to Marshall & IlselyBank.  Our mortgage on the PlymouthProperties originated with Century Bank and was transferred to Marshall &Ilsely Bank in the acquisition.

 

13

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**Note 10— Supplemental Information to Statements of Cash Flows**

** **
|                                                                                                       |   | **For the six months ended June 30,** |    |
|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                       |   | **2002**                              |    | **2001** |   |
|                                                                                                       |   |                                  |    |   |   |
| Interest paid                                                                                              |   | $                                     | 243,541 |   | $ | 501,347 |   |
| Supplemental schedule of non-cash investing and financing activities:                                      |   |                                  |    |   |   |
| The following assets and liabilities were disposed of in connection  with the disposition of Cold Springs: |   |                                  |    |   |   |
| Disposition of real estate                                                                                 |   | $                                     | —  |   | $ | 8,184,686 |   |
| Deferred costs  and other assets                                                                           |   | —                                |    | 26,552 |   |
| Mortgage note  payable                                                                                     |   | —                                |    | (7,306,716 | ) |
| Accounts payable  and accrued liabilities                                                                  |   | —                                |    | (140,997 | ) |
| Security  deposits                                                                                         |   | —                                |    | (4,111 | ) |
| Loss on sale of  investment in real estate                                                                 |   | —                                |    | (165,835 | ) |
| Cash proceeds from dispositions of real estate  properties                                                 |   | **$**                                 | —  |   | $ | 593,579 |   |
| Dividends and distributions payable                                                                        |   | $                                     | —  |   | $ | 209,139 |   |

 

**Note 11— Information by Business Segment**

 

In June 1997, the FASB issued Statement of FinancialAccounting Standards No. 131, “Disclosure about Segments of an Enterprise andRelated Information”.  This statementrequires that a public business enterprise report financial and descriptiveinformation about its reportable operating segments.  Generally, financial information is required to be reported onthe basis that it is used internally for evaluating segment performance anddeciding how to allocate resources to segments.  Management views the operations of its real estate properties andthe operations of Stonehaven Technologies as two segments.

 
|                                |   | **Real  estate  Properties** |       | **Technology** |   | **Total** |   |
|-------------------------------------|--------|------------------------------|------------|----------------|--------|-----------|--------|
| **Six  months ended June 30, 2002** |   |                         |       |           |   |      |   |
| Revenues                            |   | $                            | 664,216    |           | $      | —    |   | $ | 664,216 |   |
| Operating  Expenses                 |   | 285,119                      |       | —         |   | 285,119   |   |
| Income from  operations             |   | $                            | 379,097    |           | $      | —    |   | $ | 379,097 |   |
| Segment assets  at June 30, 2002    |   | $                            | 12,979,271 |           | $      | —    |   | $ | 12,979,271 |   |
|                                |   |                         |       |           |   |      |   |
| **Six  months ended June 30, 2001** |   |                         |       |           |   |      |   |
| Revenues                            |   | $                            | 1,190,879  |           | $      | 1,617,077 |   | $ | 2,807,956 |   |
| Operating  Expenses                 |   | 465,550                      |       | 829,010        |   | 1,294,560 |   |
| Income from  operations             |   | $                            | 725,329    |           | $      | 788,067   |   | $ | 1,513,396 |   |
| Segment assets  at June 30, 2001    |   | $                            | 16,539,000 |           | $      | 136,560   |   | $ | 16,675,560 |   |

 

Thefollowing table reconciles income from operations for reportable segments toloss from operations as reported in the Consolidated Statements of Operations.

 

14

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|                                           |   | **Six months  ended June 30,** |     |
|------------------------------------------------|--------|--------------------------------|----------|
|                                           |   | **2002**                       |     | **2001** |   |
|                                           |   |                           |     |   |   |
| Income from operations for reportable segments |   | $                              | 379,097  |   | $ | 1,513,396 |   |
| Add:                                           |   |                           |     |   |   |
| Minority interests                             |   | 24,736                         |     | 84,513 |   |
| Less:                                          |   |                           |     |   |   |
| General and administrative                     |   | (381,512                       | )        | (1,073,049 | ) |
| Interest                                       |   | (251,256                       | )        | (472,678 | ) |
| Product development                            |   | —                         |     | (114,917 | ) |
| Amortization                                   |   | (4,706                         | )        | (1,241,332 | ) |
| Depreciation                                   |   | (122,430                       | )        | (317,077 | ) |
| Loss from operations                           |   | $                              | (356,071 | ) | $ | (1,621,144 | ) |

 

**Note 12— Subsequent Event**

 

The Company is considering a private placement and inearly June 2002 hired an agent to potentially market $20.0 million of 10.5%Convertible Notes (“Notes”).  The Noteswould be offered to accredited investors in minimum investments amounts of $1.0million with an initial minimum funding of $5 million.  Interest payments on the Notes would be duesemi-annually and the Notes may be prepaid at any time without premium orpenalty.  The Notes would be convertibleinto a maximum of 2.5 million of the Company’s Class A Preferred Shares.  The offering would commence on or aboutSeptember 15, 2002, if at all.  Therecan be no assurance that such private placement will be consummated or ifconsummated that the Company will be profitable.

 

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**ITEM2.  MANAGEMENT’SDISCUSSION AND ANALYSIS AND PLAN OF OPERATION**

 

The following discussion should be read in conjunctionwith the financial statements and notes thereto included elsewhere herein.

 

This report on Form 10-QSB contains“forward-looking” statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. Forward–looking statements are based on certainassumptions and describe future plans, strategies and expectations of theCompany.  They are generallyidentifiable by use of the words “believe”, “expect”, “intend”, “anticipate”,“estimate”, “project” or similar expressions. These statements are notguarantees of future performance, events or results and involve potential risksand uncertainties. Accordingly, actual performance, events or results maydiffer materially from such forward-looking statements. Management undertakesno obligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

Factors that could causeactual results to differ materially from current expectations include, but arenot limited to, changes in general economic conditions, changes in interestrates, legislative and regulatory changes, changes in monetary and fiscalpolicies of the U.S. government, including policies of the U.S. Treasury andthe Federal Reserve Board, changes in local real estate conditions (includingrental rates and competing properties), changes in industries in which theCompany’s principal tenants compete, the failure to timely lease unoccupiedspace, the failure to timely re-lease occupied spaced upon expiration ofleases, the inability to generate sufficient revenues to meet debt servicepayments and operating expenses, the unavailability of equity and debtfinancing, unanticipated costs associated with the Company’s acquisitions,potential liability under environmental or other laws and regulations,expanding a new line of business, customer demand for online services andproducts, uncertainty of emerging online services, ability to meet competition,loss of existing key personnel, ability to hire and retain future personnel,the failure of the Company to manage its growth effectively and the other risksidentified in  this filing or other reports of the Companyfiled with the Securities and Exchange Commission. These risks anduncertainties should be considered in evaluating forward–looking statements andundue reliance should not be placed on such statements. Further informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results is included in otherCompany filings with the Securities and Exchange Commission.

 

**Results ofOperations**

 

TheCompany’s revenues include the following: rental revenues, tenant recoveries,revenues from technology consulting services, and revenues from sales ofhardware and software.

 

*Comparison ofthe Six Month Period Ended June 30, 2002 and 2001:*  Rental revenue decreased by approximately$258,000 or 37.3% for the six-month period ended June 30, 2002 compared to thesix-month period ended June 30, 2001.  Tenant recoveries decreased by approximately$227,000 or 51.6% for the six-month period ended June 30, 2002 compared to thesix-month period ended June 30, 2001. Thedecreased rental revenue and tenant recoveries were primarily a result of theCompany’s disposition of the Cold Springs property coupled with decreasedoccupancy.  Average occupancy decreasedto 87% as of June 30, 2002 from 100% as of June 30, 2001.  Professional services and sales ofhardware and software decreased by approximately $1,616,000 or 100.0% for thesix-month period ended June 30, 2002 compared to the six-month period endedJune 30, 2001.  The decrease is theresult of the disposition of certain assets of Stonehaven Technologies on July10, 2001.  Interest income and otherincome decreased by $43,000 during these same periods primarily due to reducedinterest income as a result of decreased restricted cash balances

 

Total expenses decreased from approximately $4,514,000for the six-month period ended June 30, 2001 to $1,045,000 for the six-monthperiod ended June 30, 2002, a net decrease of $3,469,000 described below.

 

16

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•             Decreased costs ofapproximately $92,000, $735,000 and $115,000, related to advertising andpromotion, costs related to professional services and sales of hardware andsoftware, and product development, respectively, were primarily a result of thedisposition of certain assets of Stonehaven Technologies on July 10, 2001.

•             Decreased costs ofapproximately $72,000, $89,000, $22,000 and $221,000, related to property,operating and maintenance, property taxes and insurance, management fees andinterest expense, respectively, were primarily a result of the disposition ofCold Springs on March 30, 2001 coupled with decreased occupancy.

•             Decreased costs ofapproximately $692,000 related to general and administrative expense wereprimarily a result of the disposition of certain assets of StonehavenTechnologies on July 10, 2001, coupled with bad debts on the Company’sproperties recorded in 2001.

•             Depreciation and amortization decreased fromapproximately $1,558,000 for the period ended June 30, 2001 to $127,000 for thecomparable period in 2002, a decrease of $1,431,000 or 91.8%, primarily as aresult of the elimination of goodwill and royalties and licensing agreements inconnection with the Company’s sale of certain assets of StonehavenTechnologies, and reduced depreciation resulting from the disposition of ColdSprings.

 

The loss on sale of investment in real estate of $166,000 for thesix-month period ended June 30, 2001, was a result of the additional lossrecognized on the sale of the St. Cloud, Minnesota property.  A portion of the loss from the sale of theSt. Cloud, Minnesota property was accrued as of December 31, 2000.

 

As aresult of the above factors, the loss from operations before loss allocated tominority interest decreased from approximately $1,706,000 for the six-monthperiod ended June 30, 2001 to approximately $381,000 for the six-month periodended June 30, 2002.  Additionally, thenet loss available to Common Shareholders decreased from approximately$2,102,000 for the six-month period ended June 30, 2001 to net loss availableto Common Shareholders of $615,000 for the six-month period ended June 30,2002.

 

*Comparison ofthe Three Month Period Ended June 30, 2002 and 2001:*  Rental revenue decreased by approximately$8,000 or 3.6% for the three-month period ended June 30, 2002 compared to thethree month period ended June 30, 2001. The decreased revenue was primarily a result of decreasedoccupancy.  Average occupancy decreasedto 87% as of June 30, 2002 from 100% as of June 30, 2001.  Tenantrecoveries increased by approximately $7,000 or 5.3% for the three-month periodended June 30, 2002 compared to the three-month period ended June 30,2001.  Theincreased tenant recoveries were primarily a result of an increase in thetenant’s pro-rata share of operating expenses, offset, in part by decreasedoccupancy.  Professional servicesand sales of hardware and software decreased by approximately $813,000 or100.0% for the three-month period ended June 30, 2002 compared to thethree-month period ended June 30, 2001. The decrease is the result of the disposition of certain assets ofStonehaven Technologies on July 10, 2001. Interest income and other income decreased by $14,000 during these sameperiods primarily due to reduced interest income as a result of decreasedrestricted cash balances.

 

Total expenses decreased from approximately $2,003,000for the three-month period ended June 30, 2001 to approximately $502,000 forthe three-month period ended June 30, 2002, a net decrease of $1,501,000described below.

•             Increased costs ofapproximately $25,000 related to property, operating and maintenance, wereprimarily a result of decreased occupancy.

•             Decreased costs ofapproximately $14,000, $326,000 and $63,000, related to advertising andpromotion, costs related to professional services and sales of hardware andsoftware, and product development, respectively, were primarily a result of thedisposition of certain assets of Stonehaven Technologies on July 10, 2001.

•             Decreased costs ofapproximately $36,000 and $6,000, related to property taxes and insurance andinterest expense, respectively, were primarily a result of the disposition ofCold Springs on March 30, 2001.

•             Decreased costs of approximately $385,000related to general and administrative expense were

 

17

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primarilya result of the disposition of certain assets of Stonehaven Technologies onJuly 10, 2001, coupled with bad debts on the Company’s properties recorded in2001.

•             Depreciation and amortization decreased fromapproximately $760,000 for the period ended June 30, 2001 to $64,000 for thecomparable period in 2002, a decrease of $696,000 or 91.5%, primarily as aresult of the elimination of goodwill and royalties and licensing agreements inconnection with the Company’s sale of certain assets of StonehavenTechnologies.

 

As a result of the above factors, the loss fromoperations before loss allocated to minority interest decreased fromapproximately $817,000 for the three-month period ended June 30, 2001 toapproximately $145,000 for the three-month period ended June 30, 2002.  Additionally, the net loss available toCommon Shareholders decreased from approximately $1,088,000 for the three-monthperiod ended June 30, 2001 to net loss available to Common Shareholders of approximately$442,000 for the three-month period ended June 30, 2002.

 

**Liquidity andCapital Resources**

*Short Termand Long Term Liquidity*

 

Cash provided by operations, equity transactions, andborrowings from affiliates and lending institutions have generally provided theprimary sources of liquidity to the Company. Historically, the Company has usedthese sources to fund operating expenses, satisfy its debt service obligationsand fund distributions to shareholders. Currently, the Company’s operations do not fund operating expenses.  The Company’s current cash position is aresult of the cash proceeds from sale of marketable securities relating toStellent Common Stock received in connection with the sale of certain assets ofStonehaven Technologies, Inc. on July 10, 2002.  We have been using these funds to supplement our operatingexpenses.  For the six-month periodsended June 30, 2002 and June 30, 2001, our net cash used in operatingactivities totaled $427,000 and $1,541,000, respectively.

 

As of June 30, 2002, our unrestricted cash resources were approximately$1,936,000 and our marketable securities available for sale were approximately$180,000.  The Company’s marketablesecurities represented 40,000 shares of common stock of Stellent at a fairmarket value of $4.50 per share (based on the NASDAQ closing quote per share onJune 28, 2002).  Such shares wereacquired on July 10, 2001, had a fair market value as of July 9, 2001 of $29.94per share and were registered effective as of September 7, 2001 with theSecurities and Exchange Commission.  OnAugust 7, 2002 the closing price of Stellent’s common stock was $4.337****per share.  We believe our cash resources and marketable securities aresufficient to sustain the Company’s liquidity needs for the next twelve months.

 

In addition to our current cash resources and marketable securities,the Company may have additional borrowing capacity available based on our realestate investments subject to certain loan to value ratios and otherconditions.  Further, we believe thesale of our investments in real estate, if required, would generate additionalcash to meet our ongoing liquidity needs. There can be no assurance that the Company will pursue such additionalfinancing or disposition or that should the Company pursue such additionalfinancing or disposition, that such financing would be available to the Companyor that such disposition would occur or that either would be on termsacceptable to the Company.

 

The mortgage loansand notes payable relating to the Plymouth I, II & III properties ofapproximately $4.3 million matured on May 31, 2002 and are currently under averbal extension on a month-to-month basis. We anticipate refinancing this indebtedness pursuant to a term sheetfrom our current lender dated March 15, 2002. This term sheet provides for a refinance of the debt based upon athree-year term at an annual fixed rate of 7.25% with a cost of fifty basispoints.

 

The Company isconsidering a private placement and in early June 2002 hired an agent to market$20.0 million of 10.5% Convertible Notes (“Notes”).  The Notes are being offered to accredited investors in minimuminvestments amounts of $1.0 million with an initial minimum funding of $5

 

18

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million.  Interest payments on the Notes are duesemi-annually and the Notes may be prepaid at any time without premium orpenalty.  The Notes are convertible intoa maximum of 2.5 million of the Company’s Class A Preferred Shares.  The offering would commence on or aboutSeptember 15, 2002, if at all.  Therecan be no assurance that such private placement will be consummated or ifconsummated that the Company will be profitable.  The Company has not sold any notes to date and, at the Board’sdiscretion, may accept to sell less than $20.0 million.

 

**Cash Flows**

 

During the six-month period ended June 30, 2002, theCompany generated $1,253,000 from sale of marketable securities, net ofcommissions.  These cash flows were usedprimarily for (i) cash used in operating activities of approximately$427,000; (ii) additions to real estate properties of approximately $20,000;(iii) acquisition of computer hardware, software and other fixed assets ofapproximately $8,000 (iv) payments for leasing costs of approximately $31,000;(v) payments on mortgage loans and notes payable of approximately $57,000; and(vi) distributions to holders of Class A Preferred Shares of approximately$315,000.  As a result, the Company’scash balance increased by approximately $395,000 from approximately $1,541,000at December 31, 2001 to approximately $1,936,000 at June 30, 2002.

 

**BusinessObjectives and Operating Strategies**

 

We intend to maintain and operate our remaining commercial properties,which were 87.0% leased at June 30,2002, due to the expected cash flow results.  However, the cash flow from our properties is not expected tofully fund our future liquid requirements, including among other factors, ourongoing general and administrative costs and our dividend commitment to holdersof our Class A Preferred Shares (the “Class A Preferred Shares”).

 

We further intend to continue to operate a technology segment, however,in a much more limited capacity. Since the sale of certain assets of StonehavenTechnologies on July 10, 2001, our ability to market our licensing agreementsand other related assets has been significantly impaired primarily due to thefact that Stellent has become an active competitor to our licensed technology.Stellent and other competitors have substantially greater resources, financialand otherwise, than we do.  Our existinglicenses expire September 30, 2002.

 

We continue to explore and evaluate all available alternatives,including, among others, to buy or sell additional properties or assets, todevelop and sell future technology products or expand through the acquisitionof new technology products, to pursue additional or alternate financing,whether debt or equity, or to continue to meet the ongoing dividend requirementof our Class A Preferred Shares.****Therecan be no assurance that any of the alternatives will be adopted, or ifadopted, will be successful. Additionally, we may determine not to adopt any additional businessinitiative.

#### ** **

#### **EmploymentAgreements**

 

Duane H. Lund currently serves as the Company’sChief Executive Officer without an employment contract.  Mr. Lund has informed the Board of Trusteesthat he is evaluating various other professional opportunities.  The Company has not yet determined how wewould staff our management if Mr. Lund’s services became unavailable.

 

**Distributions to Shareholders**

 

OnApril 12, 2002, the Company declared a dividend of $0.475 per share withrespect to the Class A Preferred Shares. The dividend with respect to the Class A Preferred Shares was paid onMay 15, 2002 to shareholders of record on May 1, 2002.

 

19

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**Real Estate Segment**

 

TheCompany currently owns the following four commercial real estate propertiescontaining approximately 129,000 rentable square feet:

 

•             A26,186 square-foot light industrial facility in Plymouth, Minnesota

 

•             A26,186 square-foot light industrial facility in Plymouth, Minnesota 

 

•             A26,16 square-foot light industrial facility in Plymouth, Minnesota 

 

•             A50,291 square-foot light industrial facility in Burnsville, Minnesota 

 

 

The Company’s interest in the real properties is held throughWellington Properties Investments, LP (the “Operating Partnership”).  The Company is the sole general partner ofthe Operating Partnership and, as of June 30, 2002, held a 92.9% interest inthe Operating Partnership.

 

**Technology Segment**

 

As of June 30, 2002, all assets related toour technology segment are written off.  We continue to explore and evaluate alternatives related to the sale ordevelopment of our current or future technology products or the acquisition ofnew technology products.  There can beno assurance that any of the alternatives will be pursued, or if pursued, willbe successful.

 

**Current Tax Status**

 

At June 30, 2002, theCompany has net operating losses.  As ofDecember 31, 2001, the Company’s net operating losses were approximately$3,215,000.  While these losses, as wellas the marketable securities valuation allowance, created a deferred tax asset,a valuation allowance was applied against the asset because of the uncertaintyof whether or not the Company will be able to use these loss carry forwards,which will expire in varying amounts through the year 2021.

 

The Company and certain of its subsidiaries are also subject to certainstate and local income, excise and franchise taxes.  The provision for such state and local taxes has been reflectedin general and administrative expense in the consolidated statements ofoperations and has not been separately stated due to its insignificance.

 

The Operating Partnership’sincome tax returns are currently under audit by the Internal Revenue Servicefor the tax periods ended December 31, 1998, 1999 and 2000.  Management believes the tax returns as filedappropriately state the taxable income/loss for each year.  However, there can be no assurance thatchanges will not result to the taxable income/loss as originally filed.  Management believes that changes proposed,if any, may affect the net operating loss carry forward amounts of the Companybut would not have any substantial effect on the Company’s cash resources**.**

 

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**PART II****. OTHER INFORMATION**

 

ITEM 1.  LEGALPROCEEDINGS

 

On December 29, 2000,Stonehaven notified Odeh Muhawesh, a former Trustee of the Company and formerChief Knowledge Officer of Stonehaven Technologies, that it was suspending itspayment to him under a promissory note assumed by Stonehaven Technologies(“Promissory Note”). Stonehaven Technologies assumed the payment obligation inFebruary 2000 pursuant to the terms of the merger agreement between theCompany, Stonehaven Technologies and NETLink International, Inc. (“NETLink”), acompany founded and owned by Mr. Muhawesh whereby NETLink was merged intoStonehaven Technologies. Management of the Company believes Mr. Muhawesh is indefault under the merger agreement for, among other things, failure by him tocause to be transferred to Stonehaven Technologies 5% of the issued andoutstanding stock of MyFreeDesk.com, Inc.

 

On January 8, 2001, Mr. Muhawesh filed a complaint against StonehavenTechnologies in the District Court of Hennepin County, Minnesota alleging thatStonehaven Technologies failed to pay him $350,000 on January 1, 2001 under theterms of the Promissory Note. The Company has filed a counterclaim against Mr.Muhawesh requesting, among other things, the repayment of amounts previouslypaid to him under the Promissory Note.

 

On August 5, 2002, theCompany reached a settlementwith Mr. Muhawesh whereby the Company paid Mr. Muhawesh $160,000 in exchangefor the Promissory Note and related accrued interest and Mr. Muhawesh assignedto the Company his options for 1.0 million Common Shares of the Company and allof his stock in MyFreeDesk.com, Inc. The Company will release a contractual restriction restricting Mr.Muhawesh from selling publicly approximately 158,500 Common Shares of theCompany.  Furthermore, the settlementprovides both parties a full, final and complete release of all claims to date.

 

ITEM 2.  CHANGESIN SECURITIES

 

a.        None

 

b.        None

 

c.        None

 

d.        None

 

ITEM 3.  DEFAULTSUPON SENIOR SECURITIES

 

None

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None

 

21

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ITEM 5.  OTHER INFORMATION

 

In May 2002, the Board of Trustees elected Messrs. EdwardPadilla and Kim Culp as Trustees to fill tow vacancies on our board.  Mr. Padilla is the President and ChiefExecutive Officer of NorthMarq Capital, a nation real estate banking firm inMinneapolis, Minnesota.  Mr. Culp was an original investor, Vice Chairmanand President of Century Bankm, which was acquired by Marshall & IlselyBank.  Our mortgage on the Plymouthproperties originated with Century Bank and was acquired by Marshall &Ilsely Bank in the acquisition.

 

OnMay 15, 2002, we announced that our annual shareholder meeting is scheduled forSeptember 12, 2002.  The Company haspostponed this meeting to later in the fourth quarter.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

**(a) Exhibits**

 
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                 |   | Amended and Restated  Contribution Agreement between the Company, the Operating Partnership, AREE  and other limited partnership Unit recipients dated as of August 31, 1998  (filed as Exhibit A with the Company’s Schedule 14A on November 6, 1998 and incorporated  herein by reference)                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2                 |   | Agreement and Plan of  Reorganization dated as of February 25, 2000, by and among the Company, NTLI  Acquisition Corporation, a Delaware corporation, NETLink International, Inc.,  a Minnesota corporation and Odeh A. Muhawesh, Mary Henschel, Alan Schmidt,  Ahmad Yassine, Patrick Archbold, Ann Wessels, Art Carruth, Patricia Hewitt,  Thomas walker and Sherry Ajax (filed as Exhibit 2.2 with the Company’s Form  8-K on March 17, 2000 and incorporated herein by reference) |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.3                 |   | Contribution Agreement  between Wellington Partners, L.P., the Company and Plymouth Partners II, LLC  and other LP Unit Recipients dated as of February 29, 2000 (filed as Exhibit  2.3 with the Company’s Form 8-K on March 17, 2000 and incorporated herein by  reference)                                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                 |   | Declaration of Trust  (filed with the Company’s Registration Statement on Form SB-2 (Commission  File No. 33-82888C) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                 |   | Bylaws of the Company  (filed with the Company’s Registration Statement on Form SB-2 (Commission  file No. 33-82888C) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                           |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.3                 |   | Articles of Amendment and  Restatement of the Declaration of Trust (filed as Exhibit E with the  Company’s Schedule 14A on November 6, 1998 and incorporated herein by  reference)                                                                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |   | Agreement of Limited  Partnership of the Operating Partnership dated as of August 31, 1998 (filed  as Exhibit C with the Company’s Schedule 14A on November 6, 1998 and  incorporated herein by reference)                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                |   | Master Registration Rights  Agreement dated as of August 31, 1998 (filed as Exhibit E of Exhibit C with  the Company’s Schedule 14A on November 6, 1998 and incorporated herein by  reference)                                                                                                                                                                                                                                                                                        |

 

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| 10.3   |   | Stock Exchange Agreement between  the Company and Wellington Management Corporation effective June 30, 2000  (filed with the Company’s Current Report on Form 8-K on July 14, 2000 and  incorporated herein by reference)                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | Membership Unit Purchase  Agreement dated December 29, 2000, between the Company, Wellington Properties  Investments, L.P., and Steven B. Hoyt, Bruce K. Hoyt, Donald Ringrose, and  Richard Wolsfeld (filed with the Company’s Current Report as Exhibit 10.1 on  Form 8-K on January 16, 2001 and incorporated herein by reference) |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Asset Purchase Agreement  between Stonehaven Realty Trust, RESoft, Inc. and Stellent, Inc. (filed with  the Company’s Current Report on Form 8-K filed July 18, 2001 and incorporated  herein by reference)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 99.1   |   | CEO/CFO Certification under  Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                    |

 

**(b) Reports OnForm 8-K**

 

None

 

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                        | STONEHAVEN REALTY TRUST |
|-----------------------------|-------------------------|
|                        | By:                     | /s/ Duane H. Lund |
| Date:  August 8,  2002 |                    | Duane H. Lund |
|                        |                    | *Chief Executive Officer* |
|                        |                    | *Chief Accounting Officer* |

 

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