**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 September 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: |   | **Common Shares, $0.01 par value**             |
|------------------------------------------------------------|--------|------------------------------------------------|
|                                                       |   | **Class  A Preferred Shares, $0.01 par value** |

** **

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Check whether the issuer (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to the filing requirements for the past90 days. Yesý  Noo

 

As of November 12, 2002,4,517,524 shares of the issuer’s common shares were outstanding.

 

Transitional Small Business Disclosure Format (Check one): Yeso Noý

(Added by Exch Act Rel No. 31905, eff 4/26/93.)

 

**This report contains 27 pages. Thereis one exhibit.**

 

 

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**STONEHAVENREALTY TRUST AND SUBSIDIARIES**

**FORM 10-QSB**

**INDEX**

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

 

2

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**Stonehaven Realty Trust and Subsidiaries**

**ConsolidatedBalance Sheet**

**September 30, 2002**

**(unaudited)**

 
| **ASSETS**                                                                                                                                                                            |   |        |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
| Investments in  real estate:                                                                                                                                                          |   |        |       |
| Land                                                                                                                                                                                  |   | $           | 1,925,034  |   |
| Buildings and  improvements                                                                                                                                                           |   | 7,763,158   |       |
| Furniture,  fixtures and equipment                                                                                                                                                    |   | 78,172      |       |
|                                                                                                                                                                                  |   | 9,766,364   |       |
| Accumulated  depreciation and amortization                                                                                                                                            |   | (748,222    | )          |
| Net investments  in real estate                                                                                                                                                       |   | 9,018,142   |       |
| Cash and cash  equivalents                                                                                                                                                            |   | 1,427,647   |       |
| Marketable  securities                                                                                                                                                                |   | 150,000     |       |
| Restricted cash                                                                                                                                                                       |   | 236,579     |       |
| Other assets,  net                                                                                                                                                                    |   | 154,282     |       |
| **TOTAL ASSETS**                                                                                                                                                                      |   | $           | 10,986,650 |   |
|                                                                                                                                                                                  |   |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                        |   |        |       |
| Liabilities:                                                                                                                                                                          |   |        |       |
| Mortgage loans  and notes payable                                                                                                                                                     |   | $           | 6,456,478  |   |
| Accounts payable  and accrued expenses                                                                                                                                                |   | 378,383     |       |
| Security  deposits                                                                                                                                                                    |   | 45,000      |       |
| Total  liabilities                                                                                                                                                                    |   | 6,879,861   |       |
|                                                                                                                                                                                  |   |        |       |
| 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  deficit                                                                                                                                                                  |   | (21,500,467 | )          |
| Treasury stock,  at cost                                                                                                                                                              |   | (39,769     | )          |
| Total shareholders’  equity                                                                                                                                                      |   | 4,106,789   |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                  |   | $           | 10,986,650 |   |

 

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

 

3

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**Stonehaven Realty Trust and Subsidiaries**

**Consolidated Statements of Operations**

**(unaudited)**

 
|                                                                                 |   | **For the  nine months ended September 30,** |       |
|--------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                 |   | **2002**                                     |       | **2001** |   |
|                                                                                 |   |                                         |       |   |   |
| **Revenues**                                                                         |   |                                         |       |   |   |
| Rental revenue                                                                       |   | $                                            | 663,235    |   | $ | 895,594 |   |
| Tenant  recoveries                                                                   |   | 342,621                                      |       | 568,061 |   |
| Interest and  other                                                                  |   | 24,687                                       |       | 58,979 |   |
| Total revenues                                                                       |   | 1,030,543                                    |       | 1,522,634 |   |
| **Expenses**                                                                         |   |                                         |       |   |   |
| Property,  operating and maintenance                                                 |   | 135,713                                      |       | 176,359 |   |
| Advertising and  promotion                                                           |   | 2,877                                        |       | 33 |   |
| Property taxes  and insurance                                                        |   | 263,513                                      |       | 353,119 |   |
| Depreciation and  amortization                                                       |   | 191,922                                      |       | 372,787 |   |
| Interest                                                                             |   | 368,314                                      |       | 589,047 |   |
| General and  administrative                                                          |   | 533,159                                      |       | 529,006 |   |
| Management fees                                                                      |   | 48,660                                       |       | 70,084 |   |
| Provision for  loss on real estate investments                                       |   | 1,350,000                                    |       | — |   |
| Total expenses                                                                       |   | 2,894,158                                    |       | 2,090,435 |   |
| Loss from  operations before loss allocated to minority interest                     |   | (1,863,615                                   | )          | (567,801 | ) |
| Loss allocated  to minority interest                                                 |   | 124,989                                      |       | 67,344 |   |
| Loss from  operations                                                                |   | (1,738,626                                   | )          | (500,457 | ) |
| Loss on sale of  investments in real estate                                          |   | —                                       |       | (165,835 | ) |
| Gain on sale of  marketable securities                                               |   | 55,889                                       |       | — |   |
| Provision for  loss on marketable securities                                         |   | (1,047,600                                   | )          | — |   |
| Loss from  continuing operations                                                     |   | (2,730,337                                   | )          | (666,292 | ) |
| Discontinued  operations:                                                            |   |                                         |       |   |   |
| Gain on disposal  of technology segment, net of tax                                  |   | —                                       |       | 347,263 |   |
| Discontinued  operations, net of tax                                                 |   | (73,355                                      | )          | (1,451,395 | ) |
| Net loss                                                                             |   | (2,803,692                                   | )          | (1,770,424 | ) |
| Preferred Share  Dividends                                                           |   | (315,063                                     | )          | (315,063 | ) |
| Net loss  available to Common Shareholders                                           |   | $                                            | (3,118,755 | ) | $ | (2,085,487 | ) |
| Net loss  available to Common Shareholders per Common Share:  Basic and Diluted |   | $                                            | (0.69      | ) | $ | (0.46 | ) |
| Weighted average  number of Common Shares outstanding                                |   | 4,517,524                                    |       | 4,517,524 |   |
|                                                                                 |   |                                         |       |   |   |
| Comprehensive  loss:                                                                 |   |                                         |       |   |   |
| Net loss                                                                             |   | $                                            | (2,803,692 | ) | $ | (1,770,424 | )  |
| Other  comprehensive income (loss):                                                  |   |                                         |       |   |   |
| Unrealized  (income) loss on marketable securities                                   |   | 30,400                                       |       | (3,108,000 | )  |
| Tax effect                                                                           |   | —                                       |       | 1,243,200 |   |
|                                                                                 |   | 30,400                                       |       | (1,864,800 | ) |
| Comprehensive  loss                                                                  |   | $                                            | (2,773,292 | ) | $ | (3,635,224 | ) |

 

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

 

4

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**Stonehaven Realty Trust andSubsidiaries**

**Consolidated Statements of****Operations**

**(unaudited)**

 
|                                                                                          |   | **For the  three months ended September 30,** |       |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                                                          |   | **2002**                                      |       | **2001** |   |
|                                                                                          |   |                                          |       |   |   |
| **Revenues**                                                                                  |   |                                          |       |   |   |
| Rental revenue                                                                                |   | $                                             | 228,254    |   | $ | 202,164 |   |
| Tenant  recoveries                                                                            |   | 129,872                                       |       | 128,585 |   |
| Interest and  other                                                                           |   | 8,201                                         |       | 1,005 |   |
| Total revenues                                                                                |   | 366,327                                       |       | 331,754 |   |
| **Expenses**                                                                                  |   |                                          |       |   |   |
| Property,  operating and maintenance                                                          |   | 59,815                                        |       | 28,355 |   |
| Advertising and  promotion                                                                    |   | 600                                           |       | 16 |   |
| Property taxes  and insurance                                                                 |   | 87,885                                        |       | 88,851 |   |
| Depreciation and  amortization                                                                |   | 64,786                                        |       | 68,975 |   |
| Interest                                                                                      |   | 124,774                                       |       | 123,767 |   |
| General and  administrative                                                                   |   | 193,688                                       |       | 111,484 |   |
| Management fees                                                                               |   | 17,344                                        |       | 16,823 |   |
| Provision for  loss on real estate investments                                                |   | 1,350,000                                     |       | — |   |
| Total expenses                                                                                |   | 1,898,892                                     |       | 438,271 |   |
| Loss from  operations before loss allocated to minority interest                              |   | (1,532,565                                    | )          | (106,517 | ) |
| Loss (income)  allocated to minority interest                                                 |   | 100,253                                       |       | (17,169 | ) |
| Loss from  operations                                                                         |   | (1,432,312                                    | )          | (123,686 | ) |
| Provision for  loss on marketable securities                                                  |   | (1,047,600                                    | )          | — |   |
| Loss from  continuing operations                                                              |   | (2,479,912                                    | )          | (123,686 | ) |
| Discontinued  operations:                                                                     |   |                                          |       |   |   |
| Gain on disposal  of technology segment, net of tax                                           |   | —                                        |       | 347,263 |   |
| Loss from  discontinued operations                                                            |   | (23,598                                       | )          | (207,022 | ) |
| Net income  (loss) available to Common Shareholders                                           |   | $                                             | (2,503,510 | ) | $ | 16,555 |   |
| Net income  (loss) available to Common Shareholders per Common Share:  Basic and Diluted |   | $                                             | (0.55      | ) | $ | 0.00 |   |
| Weighted average  number of Common Shares outstanding:   Basic and Diluted               |   | 4,517,524                                     |       | 4,517,524 |   |
|                                                                                          |   |                                          |       |   |   |
| Comprehensive loss:                                                                           |   |                                          |       |   |   |
| Net income (loss)                                                                             |   | $                                             | (2,503,510 | ) | $ | 16,555 |   |
| Other comprehensive  income (loss):                                                           |   |                                          |       |   |   |
| Unrealized (income)  loss on marketable securities                                            |   | 1,017,600                                     |       | (3,108,000 | ) |
| Tax effect                                                                                    |   | —                                        |       | 1,243,200 |   |
|                                                                                          |   | 1,017,600                                     |       | (1,864,800 | ) |
| Comprehensive loss                                                                            |   | $                                             | (1,485,910 | ) | $ | (1,848,245 | ) |

 

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

 

5

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**Stonehaven Realty Trust and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(unaudited)**

 
|                                                                          |   | **For the  nine months ended  September 30,** |       |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                                          |   | **2002**                                      |       | **2001** |   |
| **Cash flows from operating  activities:**                                    |   |                                          |       |   |   |
| Net loss                                                                      |   | $                                             | (2,803,692 | ) | $ | (1,770,424 | ) |
| Adjustments to  reconcile net loss to net cash used in continuing operations: |   |                                          |       |   |   |
| Gain on disposal  of technology segment, net of tax                           |   | —                                        |       | (347,263 | ) |
| Discontinued  operations, net of tax                                          |   | 73,355                                        |       | 1,451,395 |   |
| Depreciation and  amortization                                                |   | 191,922                                       |       | 372,787 |   |
| Loss allocated  to minority interest                                          |   | (124,989                                      | )          | (67,344 | ) |
| Loss on sale of  investment of real estate                                    |   | —                                        |       | 165,835 |   |
| Provision for  loss on real estate investments                                |   | 1,350,000                                     |       | — |   |
| Gain on sale of  marketable securities                                        |   | (55,889                                       | )          | — |   |
| Provision for  loss on marketable securities                                  |   | 1,047,600                                     |       | — |   |
| Net change in  assets and liabilities:                                        |   |                                          |       |   |   |
| Accounts  receivable, net                                                     |   | (508                                          | )          | — |   |
| Restricted cash                                                               |   | (7,276                                        | )          | 749,861 |   |
| Other assets,  net                                                            |   | 22,421                                        |       | 35,182 |   |
| Accounts payable  and accrued expenses                                        |   | 57,674                                        |       | 146,839 |   |
| Deferred revenue  and security deposits                                       |   | 10,000                                        |       | (8,000 | ) |
| Net cash (used  in) provided by continuing operations                         |   | (239,382                                      | )          | 728,868 |   |
|                                                                          |   |                                          |       |   |   |
| **Cash flows from investing  activities:**                                    |   |                                          |       |   |   |
| Additions to  real estate properties                                          |   | (19,711                                       | )          | (43,305 | ) |
| Acquisition of  furniture, fixtures and equipment                             |   | (8,250                                        | )          | — |   |
| 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                                     |       | 550,274 |   |
|                                                                          |   |                                          |       |   |   |
| **Cash flows from financing  activities:**                                    |   |                                          |       |   |   |
| Payments on  mortgage loans and notes payable                                 |   | (81,313                                       | )          | (77,443 | ) |
| Dividends/distributions  paid                                                 |   | (315,063                                      | )          | (815,063 | ) |
| Proceeds from  related party note payable                                     |   | —                                        |       | 67,000 |   |
| Net cash used in  financing activities                                        |   | (396,376                                      | )          | (825,506 | ) |
|                                                                          |   |                                          |       |   |   |
| **Net  cash used in discontinued operations**                                 |   | (671,705                                      | )          | (1,952,882 | ) |
|                                                                          |   |                                          |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                         |   | (113,119                                      | )          | (1,499,246 | ) |
| Cash and cash  equivalents                                                    |   |                                          |       |   |   |
| Beginning of  period                                                          |   | 1,540,766                                     |       | 1,635,916 |   |
| End of period                                                                 |   | $                                             | 1,427,647  |   | $ | 136,670 |   |

 

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

 

6

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**StonehavenRealty Trust and Subsidiaries**

 

**Notes toConsolidated Financial Statements**

 

**Note 1—Organization**

 

StonehavenRealty Trust (the “Company”) is areal estate company, which acquires, owns and operates commercial realestate.  As of September 30, 2002, theCompany has discontinued operations of its technology segment and all assetsrelated to the Company’s 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 September 30, 2002, the Company ownedfour commercial industrial properties that aggregate approximately 129,000rentable square 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, except for our discontinuedoperations of our technology segment) necessary for a fair presentation of thefinancial position of the Company as of September 30, 2002, the results oftheir operations for the nine months and three months ended September 30, 2002and 2001, and their cash flows for the nine month periods ended September 30,2002 and 2001 have been included. Certain amounts in the September 30, 2001 financial statements have beenreclassified to conform to the September 30, 2002 presentation.  The results of operations for such interimperiods are not necessarily indicative of the results for a full year. Forfurther information, refer to the Company’s consolidated financial statementsand footnotes included in the Annual Report of Form 10-KSB for the yearended December 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 September30, 2002, and the reported amounts of revenues and expenses for the nine monthsand three months ended September 30, 2002 and 2001. Actual results could differfrom those estimates.

 

Thefair value of investments in real estate and marketable securities aresignificant estimates that may change in the near term.

 

**Other Assets**

 

As of September 30, 2002, other assets includedeferred financing costs incurred to obtain and secure mortgage debt financing,deferred leasing costs incurred to obtain new leases and other prepaid assetsassociated with leasing activities. Other assets are carried 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 ofSeptember 30, 2002 was approximately $25,000.

 

Thedeferred leasing costs are being amortized over the life of the respectivelease term on a straight-line

 

7

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basis.  Accumulated amortization related to deferredleasing costs as of September 30, 2002 was approximately $3,000.

 

**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 recoveries are recognized as revenue inthe period the costs are incurred.

 

**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 affect taxableincome.  Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.  The Company will beeligible to re-elect REIT status on January 1, 2005.

 

At September 30, 2002,the Company has net operating losses. As of December 31, 2001, the Company’s net operating losses wereapproximately $3,365,000.  While theselosses created a deferred tax asset, a valuation allowance was applied againstthe asset because of the uncertainty of whether or not the Company will be ableto use these loss carry forwards, which will expire in varying amounts throughthe 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 a single segment, whichacquires, owns and operates commercial real estate.  As of September 30, 2002, the Company has discontinued operationsof its technology segment.

 

**Recent Accounting Pronouncements**

 

Duringfiscal 2001, the Financial Accounting Standards Board issued SFAS #142 Goodwilland Other Intangible Assets.  SFAS #142is effective for the Company’s fiscal year beginning January 1, 2002 and nolonger permits goodwill of the Company to be amortized.  Instead, goodwill is periodically tested forimpairment 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 September 30, 2002, the Company no longerhas goodwill, but will evaluate any future goodwill or intangible assets withrespect to the above.

 

In August 2001, the Financial AccountingStandards Board issued Financial Accounting Standard (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS 144 establishes a model for measurementand reporting the impairment of assets to be disposed of by sale and addressesaccounting for a segment of a business accounted for as a discontinued operation.

 

8

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SFAS 144 is effective for fiscal years beginningafter December 15, 2001. During the quarter ended September 30, 2002,management has been in discussions with various unrelated parties concerningavailable alternatives for the Company, including, among others, to sell ourcurrent real estate properties.  As aresult of these discussions and based on estimates made by management, as ofSeptember 30, 2002 a write-down of $1,350,000 was recorded to adjust thecarrying value of our properties to estimated fair value.  TheCompany has also applied SFAS 144 in accounting for discontinued operations ofits technology segment.

 

**Reclassification**

 

Certainamounts in the September 30, 2001 financial statements have been reclassifiedto conform to the September 30, 2002 presentation.  These reclassifications had no effect on net loss orshareholders’ equity as previously report.

 

**Note 3 – Investments in Real Estate**

 

In accordance with SFAS 144, impairment of investments in real estateexists when the carrying amount of the investments exceeds its fair value andis non-recoverable.  Fair value of theseassets is the amount an asset could be bought or sold for in a currenttransaction between willing parties.

 

During the quarter ended September 30, 2002, management has been indiscussions with various unrelated parties concerning available alternativesfor the Company, including, among others, to sell our current real estateproperties.  As a result of thesediscussions and based on estimates made by management, as of September 30, 2002a write-down of $1,350,000 was recorded to adjust the carrying value of ourproperties to estimated fair value.

 

**Note 4—Marketable Securities**

 

TheCompany’s investments in marketable securities are available-for-sale and represent40,000 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.  At June 30, 2002, the Companyhad approximately $1,018,000 recorded as accumulated unrealized losses on thesesecurities.  As of September 30, 2002,the fair market value of these marketable securities aggregated approximately$150,000 (based upon the NASDAQ closing quote per share of common stock ofStellent of $3.75 on September 30, 2002). Given current market conditions, management views this decline in valueper share of Stellent common stock as a permanent impairment.  Accordingly, the Company has recorded arealized loss on marketable securities in the amount of $1,047,600 as ofSeptember 30, 2002.

 

Duringthe month of January 2002, the Company sold 40,000 Stellent Shares at anaverage 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.

 

**Note 5–Pro Forma Consolidated Financial Information(Unaudited)**

 

The following pro forma condensed consolidated financial informationpresented below is as if the dispositions of Cold Springs (closed March 31,2001) and sale of certain assets of Stonehaven Technologies (closed July 10,2001) had occurred on January 1, 2001. The pro forma financial information is not necessarily indicative of theresults, which actually would have occurred if the dispositions had beenconsummated on January 1, 2001, nor does the pro forma information purport torepresent the results of operations for future periods.  The sale of certain assets of StonehavenTechnologies has been recorded as a discontinued operation, as such, all majorcategories listed below includes continuing operations only.

 

9

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** **
|                                              |   | **For the nine months ended  September 30, 2001** |      |
|---------------------------------------------------|--------|---------------------------------------------------|-----------|
| Pro forma total revenue                           |   | $                                                 | 1,144,000 |   |
| Pro forma loss from continuing operations         |   | $                                                 | 503,000   |   |
| Pro forma loss available to Common Shareholders   |   | $                                                 | 818,000   |   |
| Pro forma loss per Common Share Basic and Diluted |   | $                                                 | 0.18      |   |

 

**Note 6—Mortgage Loans and NotesPayable**

 

The mortgage loans and notes payable relating to the Plymouth I, II& III (“Note”) properties of approximately $4.3 million matured on May 31,2002 and have been extended through on June 30, 2003.  Payments are required monthly consisting of interest only at theprime rate (4.75% at September 30, 2002).

 

**Note 7—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.

 

OnOctober 31, 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 will be paidon November 27, 2002 to shareholders of record on November 13, 2002.

 

EffectiveMay 15, 2002 the Company issued 50,000 options to each of the five Trustees ata price of $0.45 per share.  The optionsvest six months after issuance and expire 90 days after the Trustee’s termends.

 

On May 6, 2002, the Company filed a Registration Statement under theSecurities Act of 1933 on Form SB-2 (“Registration Statement”) registering3,115,347 Common Shares that may be sold by the selling shareholders named inthe Registration Statement representing (a) 2,347,872 Common Shares currentlyoutstanding and (b) 509,725 Common Shares issuable upon conversion of 147,832Class A Preferred Shares, 177,750 Common Shares issuable upon conversion ofCommon Units of the Operating Partnership and 80,000 Common Shares issuableupon exercise of options.  TheRegistration Statement was effective as of May 17, 2002.

 

**Note 8 – Discontinued Operations**

 

OnFebruary 24, 2000, the Company acquired Stonehaven Technologies through anexchange of the outstanding stock of Stonehaven Technologies for the Company’sCommon Shares at $4.75 per share, or an aggregate value of approximately $4.0million.

 

OnJuly 10, 2001, Stonehaven Technologies sold all of its interest in SmartCabinetsoftware code (software technology replicating and mapping a company’s businesslogic in web base format) and related assets including its REDocs initiatives,to Stellent pursuant to an Asset Purchase Agreement between the Company,Stonehaven Technologies and Stellent. As a result of this sale a gain on disposal of technology segment, netof tax, was recorded for the nine months ended September 30, 2001 in the amountof approximately $347,000.

 

Since the sale of certain assets of Stonehaven Technologies on July 10,2001, our ability to market our licensing agreements and other related assetshas been significantly impaired primarily due to the fact that Stellent hasbecome an active competitor to our licensed technology and to generaltechnology market conditions. Stellent and other competitors have substantiallygreater resources, financial and otherwise, than we do.  Our licenses expired September 30, 2002.  As a result of the above factors, as

 

10

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of September 30, 2002, management of the Companyhas decided to discontinue operations of its technology segment and all assetsrelated to the Company’s technology segment have been written off.

 

Losses from these discontinued operations for the nine-month periodsended September 30, 2002 and September 30, 2001 were approximately $73,000 and$1,451,000, respectively.

 

**Note 9—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 nine months endedSeptember 30, 2002 and September 30, 2001 were 4,517,524. Common shareequivalents of approximately 2.7****million include outstanding convertiblepreferred shares, warrants and stock options, and are not included in net lossper weighted average Common Share outstanding—diluted as they would beanti-dilutive.

 
|                                                                                                                             |   | **For the  nine months ended September 30,** |       |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                                                             |   | **2002**                                     |       | **2001** |   |
| **Numerator**                                                                                                                    |   |                                         |       |   |   |
|                                                                                                                             |   |                                         |       |   |   |
| Net Loss from  continuing operations                                                                                             |   | (2,730,337                                   | )          | (666,292 | ) |
| Discontinued  operations:                                                                                                        |   |                                         |       |   |   |
| Gain on disposal  of technology segment, net of tax                                                                              |   | —                                       |       | 347,263 |   |
| Discontinued  operations, net of tax                                                                                             |   | (73,355                                      | )          | (1,451,395 | ) |
| Net loss                                                                                                                         |   | (2,803,692                                   | )          | (1,770,424 | ) |
| Preferred Share  Dividends                                                                                                       |   | (315,063                                     | )          | (315,063 | ) |
| Net loss  available to Common Shareholders                                                                                       |   | $                                            | (3,118,755 | ) | $ | (2,085,487 | ) |
|                                                                                                                             |   |                                         |       |   |   |
| **Denominator**                                                                                                                  |   |                                         |       |   |   |
| Weighted average  Common Shares outstanding at September 30, 2002 and September 30, 2001,  respectively:  Basic and Diluted |   | 4,517,524                                    |       | 4,517,524 |   |
|                                                                                                                             |   |                                         |       |   |   |
| **Basis  and Diluted EPS**                                                                                                       |   |                                         |       |   |   |
| Net Loss from  continuing operations                                                                                             |   | (0.60                                        | )          | (0.15 | ) |
| Discontinued  operations:                                                                                                        |   |                                         |       |   |   |
| Gain on disposal  of technology segment, net of tax                                                                              |   | —                                       |       | 0.08 |   |
| Discontinued  operations, net of tax                                                                                             |   | (0.02                                        | )          | (0.32 | ) |
| Net loss                                                                                                                         |   | (0.62                                        | )          | (0.39 | ) |
| Preferred Share  Dividends                                                                                                       |   | (0.07                                        | )          | (0.07 | ) |
| Net loss  available to Common Shareholders  -  Basic and Diluted                                                            |   | $                                            | (0.69      | ) | $ | (0.46 | ) |

 

#### **Note 10 –Commitments and Contingencies**

 

#### **Liquidity**

 

As of September 30, 2002,our unrestricted cash resources were approximately $1,428,000 and ourmarketable securities available for sale were approximately $150,000.  During the month of January 2002, theCompany sold 40,000 shares of Stellent common stock at an average price of$31.34 per share and recognized a gain on the sale of these shares totalingapproximately $56,000.  The Company’smarketable securities represented 40,000 shares of common stock of Stellent ata fair

 

11

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market value of $3.75 pershare (based on the NASDAQ closing quote per share on September 30, 2002).  Suchshares were acquired on July 10, 2001, had a fair market value as of July 9,2001 of $29.94 per share and were registered effective as of September 7, 2001with the Securities and Exchange Commission. Givencurrent market conditions, management views this decline in value per share ofStellent common stock as a permanent impairment.  Accordingly, the Company has recorded a provision for loss onmarketable securities in the amount of $1,047,600 as of September 30,2002.  On November 4, 2002 theclosing price of Stellent’s common stock was $4.20 per share.  Webelieve our cash resources and marketable securities are sufficient to sustainthe 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. As of September 30, 2002, as a result of discussions between managementand various unrelated parties and based on estimates made by management, awrite-down of $1,350,000 was recorded to adjust the carrying value of ourproperties to estimated fair value. 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.

 

In early June 2002, the Company hired an agent to potentially market$20.0 million of 10.5% Convertible Notes. On October 9, 2002, theoffering was not consummated and the agent’s agreement was terminated.

 

#### **EmploymentAgreements**

 

Duane H. Lund currently serves as the Company’s Chief Executive Officerwithout an employment contract.  Mr.Lund has informed the Board of Trustees that he is evaluating various otherprofessional opportunities.  The Companyhas not yet determined how we would staff our management if Mr. Lund’s servicebecame unavailable.

 

#### **Legal Proceeding**

 

On August 5, 2002, the Company reached a settlement with Odeh Muhawesh,a former Trustee of the Company and former Chief Knowledge Officer ofStonehaven Technologies .  Under thesettlement, the Company paid Mr. Muhawesh $160,000 in exchange for a promissorynote and related interest in connection with the promissory note assumed byStonehaven Technologies in February 2000 pursuant to the terms of the mergeragreement between the Company, Stonehaven Technologies and NETLinkInternational, Inc. (“NETLink”), a company founded and owned by Mr. Muhaweshwhereby NETLink was merged into Stonehaven Technologies.   Further under the settlement, Mr. Muhaweshassigned to the Company his options for 1.0 million Common Shares of theCompany and all of his stock in MyFreeDesk.com, Inc. and the Company released acontractual restriction restricting Mr. Muhawesh from selling publiclyapproximately 158,500 Common Shares of the Company.  The settlement provides both parties a full, final and completerelease of all claims to date.  As aresult of the settlement, the Company recorded an increase to accumulateddeficit of approximately $227,000 during the period ended September 30, 2002.

 

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#### **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.

 

#### **IncomeTax 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 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**.**

 

**Note 11—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 $49,000 and $70,000 for the nine-months ended September30, 2002 and September 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.

 

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**Note 12– Supplemental Information to Statements of Cash Flows**

** **
|                                                                                                                                    |   | **For the  nine months ended September 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                                                                    |   | **2002**                                     |       | **2001** |   |
|                                                                                                                                    |   |                                         |       |   |   |
| Interest paid                                                                                                                           |   | $                                            | 368,315    |   | $ | 625,114 |   |
| 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 |   |
| The following assets and liabilities were disposed of in connection  with the disposition of certain assets of Stonehaven Technologies: |   |                                         |       |   |   |
| Disposition of equipment,  net                                                                                                          |   | $                                            | —     |   | $ | 675,616 |   |
| Fair market  value of marketable securities received                                                                                    |   | —                                       |       | (5,988,000 | ) |
| Deferred costs  and other assets                                                                                                        |   | —                                       |       | 1,635,688 |   |
| Goodwill, net                                                                                                                           |   | —                                       |       | 2,451,695 |   |
| Gain on sale of  certain assets of Stonehaven Technologies, net of tax                                                                  |   | —                                       |       | 347,263 |   |
| Costs associated  with dispositions of certain assets of Stonehaven Technologies                                                        |   | $                                            | —     |   | $ | (877,738 | ) |
| Dividends and  distributions payable                                                                                                    |   | $                                            | —     |   | $ | 209,139 |   |
| Software  licensing prepaid minimum royalty                                                                                             |   | $                                            | —     |   | $ | 300,000 |   |

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISAND PLAN OF OPERATION**

 

Thefollowing discussion should be read in conjunction with the financialstatements and notes thereto included elsewhere herein.

 

This report on Form 10-QSB contains “forward-looking” statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Forward–lookingstatements are based on certain assumptions and describe future plans,strategies and expectations of the Company. They are generally identifiable by use of the words “believe”, “expect”,“intend”, “anticipate”, “estimate”, “project” or similar expressions. These statementsare not guarantees of future performance, events or results and involvepotential risks and uncertainties. Accordingly, actual performance, events orresults may differ materially from such forward-looking statements. Managementundertakes no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise.

 

Factors that could cause actual results to differmaterially from current expectations include, but are not limited to, changesin general economic conditions, changes in interest rates, legislative andregulatory changes, changes in monetary and fiscal policies of the U.S.government, including policies of the U.S. Treasury and the Federal ReserveBoard, changes in local real estate conditions (including rental rates and competing properties), changes inindustries in which the Company’s principal tenants compete, the failure totimely lease unoccupied space, the failure to timely re-lease occupied spacedupon expiration of leases, the inability to generate sufficient revenues tomeet debt service payments and operating expenses, the unavailability of equityand debt financing, unanticipated costs associated with the Company’sacquisitions, potential liability under environmental or other laws andregulations, ability to meet competition, loss of existing keypersonnel, ability to hire and retain future personnel, the failure of theCompany to manage its growth effectively and the other risks identified in  thisfiling or other reports of the Company filed with the Securities and ExchangeCommission. These risks and uncertainties should be considered in evaluatingforward—looking statements and undue reliance should not be placed on suchstatements. Further information concerning the Company and its business,including additional factors that could materially affect the Company’sfinancial results is included in other Company filings with the Securities andExchange Commission.

 

**Results of Operations**

 

**Comparison of the Nine-MonthPeriod Ended September 30, 2002 and 2001**

 

*Revenues from Continuing Operations*

 

Rental revenue decreased by approximately $232,000or 25.9% for the nine-month period ended September 30, 2002 compared to thenine-month period ended September 30, 2001. The decreased rental revenue was primarily a result of the Company’sdisposition of the Cold Springs property coupled with decreased occupancy,offset in part by, an increase in rental rates per square foot on astraight-line basis for new tenants. Average occupancy decreased to 87% as of September 30, 2002 from 88.4%as of September 30, 2001.

 

Tenant recoveries decreased by approximately $225,000 or 39.7% for thenine-month period ended September 30, 2002 compared to the nine-month periodended September 30, 2001. The decreasedtenant recoveries were primarily a result of the Company’s disposition of theCold Springs property coupled with decreased occupancy.

 

Interest income and other income decreased by $34,000 during these sameperiods primarily due to reduced interest income as a result of decreased restrictedcash balances and decreased interest rates.

 

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*Expenses from Continuing Operations*

 

Totalexpenses increased from approximately $2,090,000 for the nine-month periodended September 30, 2001 to $2,894,000 for the nine-month period endedSeptember 30, 2002, a net increase of $804,000 described below.

 

Property,operating and maintenance decreased approximately by $41,000 or 23.0%for the nine-month period ended September 30, 2002 compared to the nine-monthperiod ended September 30, 2001 primarily a result of the disposition of ColdSprings on March 30, 2001 coupled with decreased occupancy.

 

Advertisingand promotion increased approximately by $3,000 for the nine-monthperiod ended September 30, 2002 compared to the nine-month period endedSeptember 30, 2001 primarily as a result ofdecreased occupancy.

 

Propertytaxes and insurance decreased approximately by $89,000 or 25.4% for thenine-month period ended September 30, 2002 compared to the nine-month periodended September 30, 2001 primarily a result of the disposition of Cold Springson March 30, 2001 coupled with decreased occupancy.

 

Depreciation and amortization decreased from approximately $373,000 forthe period ended September 30, 2001 to $192,000 for the comparable period in2002, a decrease of $181,000 or 34.6%, primarily as a result of the dispositionof Cold Springs.

 

Interestdecreased approximately by $221,000 or 37.5% for the nine-month periodended September 30, 2002 compared to the nine-month period ended September 30,2001 primarily a result of the disposition of Cold Springs on March 30, 2001coupled with a decrease in the interest rate on the Plymouth Properties.

 

Generaland administrative remained relatively constant for the nine-monthperiod ended September 30, 2002 compared to the nine-month period endedSeptember 30, 2001.

 

Managementfees decreased approximately by $21,000 or 30.6% for the nine-monthperiod ended September 30, 2002 compared to the nine-month period ended September30, 2001 primarily a result of the disposition of Cold Springs on March 30,2001 coupled with decreased occupancy.

 

Provisionfor loss on real estate of approximately $1,350,000 for the nine-month periodended September 30, 2002, was a result of the write down of our real estateinvestments.  The Company will from timeto time review its assets for impairments.

 

*Loss from operations*

 

Lossfrom operations before loss allocated to minority interest increased fromapproximately $568,000 for the nine-month period ended September 30, 2001 toapproximately $1,864,000 for the nine-month period ended September 30,2002.  Loss allocated to minorityinterest increased from approximately $67,000 for the nine-month period endedSeptember 30, 2001 to approximately $125,000 for the nine-month period endedSeptember 30, 2002.  As a result of theabove, loss from operations increased from approximately $501,000 for thenine-month period ended September 30, 2001 to approximately $1,739,000 for thenine-month period ended September 30, 2002. The primary component of this change was the provision for loss on realestate investments of $1,350,000.

 

16

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*Loss on sale of investments in real estate*

 

The loss on sale of investment in real estate of approximately $166,000for the nine-month period ended September 30, 2001, was a result of theadditional loss recognized on the sale of the St. Cloud, Minnesotaproperty.  A portion of the loss fromthe sale of the St. Cloud, Minnesota property was accrued as of December 31,2000.

 

*Gain on sale of marketablesecurities*

 

The gain on sale of marketable securities of approximately $56,000 forthe nine-month period ended September 30, 2002, was a result of the Company’ssale of 40,000 shares of Stellent common stock at an average price of $31.34per share.  Such shares were acquired inconnection with the sale of certain assets of Stonehaven Technologies on July10, 2001 and valued at $29.94 per share based on the NASDAQ closing quote pershare on July 9, 2001.

 

*Provision for loss on marketablesecurities*

 

Theprovision for loss on marketable securities of approximately $1,048,000 for thenine-month period ended September 30, 2002, was a result of the decline ofmarket value of Stellent common stock. Given current market conditions, management views this decline in valueper share of Stellent common stock as a permanent impairment.  Accordingly, the Company has recorded aprovision for loss on marketable securities.

 

*Loss from continuing operations*

 

Loss from continuing operations increased fromapproximately $666,000 for the nine-month period ended September 30, 2001 toapproximately $2,730,000 for the nine-month period ended September 30,2002.  The two most significantcomponents of this change were the provision for loss on real estateinvestments of $1,350,000 and the provision for loss on marketable securitiesof approximately $1,048,000.

 

*Discontinuedoperations *

 

Gainon disposal of technology segment, net of tax of approximately $347,000 for thenine-month period ended September 30, 2001 is a result of the sale of certainassets of the Company’s technology segment on July 10, 2001.

 

Discontinued operations, net oftax of approximately $73,000 and $1,451,000 for the nine-month periods endedSeptember 30, 2002 and 2001, respectively, were a result of the Company’sdiscontinued operations of its technology segment.

 

*Net loss available to Common Shareholders*

 

Based on the above, the net loss available toCommon Shareholders increased from approximately $2,085,000 for the nine-monthperiod ended September 30, 2001 to net loss available to Common Shareholders of$3,119,000 for the nine-month period ended September 30, 2002.  The two most significant components of thischange were the provision for loss on real estate investments of $1,350,000 andthe provision for loss on marketable securities of approximately $1,048,000.

 

17

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**Comparison of the Three-MonthPeriod Ended September 30, 2002 and 2001**

 

*Revenues from Continuing Operations*

 

Rental revenue increased byapproximately $26,000 or 12.9% for the three-month period ended September 30,2002 compared to the three-month period ended September 30, 2001.  The increased rental revenue was primarily aresult of an increase in rental rates per square foot on a straight-line basisfor new tenants.

 

Tenant recoveries increased by approximately $1,000 or1.0% for the three-month period ended September 30, 2002 compared to thethree-month period ended September 30, 2001. Theincreased tenant recoveries were primarily a result of an increase in thetenant’s pro-rata share of operating expenses.

 

Interest income and other income increased by $7,000during these same periods primarily due to increased interest income as aresult of an increase in the Company’s cash balances, coupled with late feescharged to tenants.

 

*Expensesfrom Continuing Operations*

 

Totalexpenses increased from approximately $438,000 for the three-month period endedSeptember 30, 2001 to $1,899,000 for the three-month period ended September 30,2002, a net increase of $1,461,000 described below.

 

Property,operating and maintenance increased approximately by $31,000 or 111.0%for the three-month period ended September 30, 2002 compared to the three-monthperiod ended September 30, 2001 primarily a result of general buildingmaintenance, coupled with, decreased occupancy.

 

Advertisingand promotion increased approximately by $1,000 for the three-monthperiod ended September 30, 2002 compared to the three-month period endedSeptember 30, 2001 primarily as a result ofdecreased occupancy.

 

Property taxes andinsurance remained relatively constantfor the three-month period ended September 30, 2002 compared to the three-monthperiod ended September 30, 2001.

 

Depreciation and amortization remained relatively constant for thethree-month period ended September 30, 2002 compared to the three-month periodended September 30, 2001.

 

Interest remained relatively constant for thethree-month period ended September 30, 2002 compared to the three-month periodended September 30, 2001.

 

Generaland administrative increased approximately by $82,000 or 73.7% for thethree-month period ended September 30, 2002 compared to the three-month periodended September 30, 2001 primarily as a result of  costs associated with the termination of the agreement topotentially market Convertible Notes, coupled with, increased insurance andlegal and professional expense.

 

Managementfees remained relatively constant for the three-month period endedSeptember 30, 2002 compared to the three-month period ended September 30, 2001.

 

Provisionfor loss on real estate of approximately $1,350,000 for the three-month periodended September 30, 2002, was a result of the write down of our real estateinvestments.  The Company will from timeto time review its assets for impairments.

 

18

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*Loss from operations*

 

Lossfrom operations before loss allocated to minority interest increased from approximately$107,000 for the three-month period ended September 30, 2001 to approximately$1,533,000 for the three-month period ended September 30, 2002.  Income allocated to minority interestdecreased from approximately $17,000 for the three-month period ended September30, 2001 to loss allocated to minority interest of approximately $100,000 forthe three-month period ended September 30, 2002.  As a result of the above, loss from operations increased fromapproximately $124,000 for the three-month period ended September 30, 2001 toapproximately $1,432,000 for the three-month period ended September 30, 2002.The primary component of this change was the provision for loss on real estateinvestments of $1,350,000.

 

*Provision for loss on marketablesecurities*

 

Theprovision for loss on marketable securities of approximately $1,048,000 for thethree-month period ended September 30, 2002, was a result of the decline ofmarket value of Stellent common stock. Given current market conditions, management views this decline in valueper share of Stellent common stock as a permanent impairment.  Accordingly, the Company has recorded aprovision for loss on marketable securities.

 

*Loss from continuing operations*

 

Loss from continuing operations increased fromapproximately $124,000 for the three-month period ended September 30, 2001 toapproximately $2,480,000 for the three-month period ended September 30,2002.  The two most significantcomponents of this change were the provision for loss on real estateinvestments of $1,350,000 and the provision for loss on marketable securitiesof approximately $1,048,000.

 

*Discontinuedoperations *

 

Gainon disposal of technology segment, net of tax of approximately $347,000 for thenine-month period ended September 30, 2001 is a result of the sale of certainassets of the Company’s technology segment on July 10, 2001.

 

Loss from discontinuedoperations, net of tax of approximately $24,000 and $207,000 for thethree-month periods ended September 30, 2002 and 2001, respectively, were aresult of the Company’s discontinued operations of its technology segment.

 

*Net loss available to Common Shareholders*

 

Based on the above, the net income available toCommon Shareholders decreased from approximately $17,000 for the three-monthperiod ended September 30, 2001 to net loss available to Common Shareholders of$2,504,000 for the three-month period ended September 30, 2002.  Thetwo most significant components of this change were the provision for loss onreal estate investments of $1,350,000 and the provision for loss on marketablesecurities of approximately $1,048,000.

 

**Liquidity and Capital Resources**

*Short Term and Long Term Liquidity*

 

Cashprovided by operations, equity transactions, and borrowings from affiliates andlending institutions have generally provided the primary sources of liquidityto the Company. Historically, the Company has used these sources to fundoperating expenses, satisfy its debt service obligations and fund distributionsto shareholders.  Currently, theCompany’s operations do not fund operating expenses.  The Company’s current cash position is a result of the cashproceeds from sale of marketable securities relating to Stellent Common Stockreceived in connection with the sale of certain assets of Stonehaven

 

19

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Technologies,Inc. on July 10, 2001.  We have beenusing these funds to supplement our operating expenses.  For the nine-month periods ended September30, 2002 and September 30, 2001, our net cash (used in) provided by operatingactivities totaled approximately ($239,000) and $729,000, respectively.

 

As of September 30, 2002, our unrestricted cash resources wereapproximately $1,428,000 and our marketable securities available for sale wereapproximately $150,000.  The Company’smarketable securities represented 40,000 shares of common stock of Stellent ata fair market value of $3.75 per share (based on the NASDAQ closing quote pershare on September 30, 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. Given current market conditions,management views this decline in value per share of Stellent common stock as apermanent impairment.  Accordingly, theCompany has recorded a provision for loss on marketable securities in theamount of $1,047,600 as of September 30, 2002. On November 4, 2002 the closing price of Stellent’s common stockwas $4.20 per share.  We believe ourcash resources and marketable securities are sufficient to sustain theCompany’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. As of September 30, 2002, as a result of discussions between managementand various unrelated parties and based on estimates made by management, awrite down of $1,350,000 was recorded to adjust the carrying value of ourproperties to estimated fair value. 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 loans and notes payable relating to the Plymouth I, II& III (“Note”) properties of approximately $4.3 million matured on May 31,2002 and have been extended through on June 30, 2003. Payments are requiredmonthly consisting of interest only at the prime rate (4.75% at September 30,2002).

 

In early June 2002, theCompany hired an agent to potentially market $20.0 million of 10.5% ConvertibleNotes.  On October 9, 2002, the offeringwas not consummated and the agent’s agreement was terminated.

 

**Cash Flows**

 

Duringthe nine-month period ended September 30, 2002, the Company generated$1,253,000 from sale of marketable securities, net of commissions.  These cash flows were used primarily for(i) cash used in operating activities of approximately $239,000; (ii) cashused in discontinued operations of approximately $672,000 primarily a result ofthe settlement of outstanding liabilities; (iii) additions to real estate propertiesof approximately $20,000; (iv) acquisition of furniture, fixtures and equipmentof approximately $8,000 (v) payments for leasing costs of approximately$31,000; (vi) payments on mortgage loans and notes payable of approximately$81,000; and (vii) distributions to holders of Class A Preferred Shares ofapproximately $315,000.  As a result,the Company’s cash balance decreased by approximately $113,000 fromapproximately $1,541,000 at December 31, 2001 to approximately $1,428,000at September 30, 2002.

 

**Business Objectives and OperatingStrategies**

 

Since the sale of certain assets of Stonehaven Technologies on July 10,2001, our ability to market our licensing agreements and other related assetshas been significantly impaired primarily due to the fact that Stellent hasbecome an active competitor to our licensed technology and to generaltechnology

 

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market conditions. Stellent and other competitors have substantiallygreater resources, financial and otherwise, than we do.  Our licenses expired September 30,2002.  As a result of the above factors,as of September 30, 2002, management of theCompany has decided to discontinue operations of its technology segment and allassets related to the Company’s technology segment have been written off.

 

While evaluating different opportunities, we are currently maintainingand operating our remaining commercial properties, which were 86.8% leased atSeptember 30, 2002, due to the expected cash flow results.  However, the cash flow from our propertiesis not expected to fully fund our future liquid requirements, including amongother factors, our ongoing general and administrative costs and our dividendcommitment to holders of our Class A Preferred Shares (the “Class A PreferredShares”).

 

We continue to explore and evaluate all available alternatives,including, among others, to buy or sell additional properties or assets, topursue additional or alternate financing, whether debt or equity, or tocontinue to meet the ongoing dividend requirement of our Class A PreferredShares.****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’s Chief Executive Officerwithout an employment contract.  Mr.Lund has informed the Board of Trustees that he is evaluating various otherprofessional opportunities.  The Companyhas not yet determined how we would staff our management if Mr. Lund’s servicesbecame unavailable.

 

**Distributionsto 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.

 

OnOctober 31, 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 will be paidon November 27, 2002 to shareholders of record on November 13, 2002.

 

**RealEstate Segment**

 

The Company currently owns the following four commercial real estateproperties containing approximately 129,000 rentable square feet:

 

•                  A 26,186square-foot light industrial facility in Plymouth, Minnesota

 

•                  A 26,186square-foot light industrial facility in Plymouth, Minnesota 

 

•                  A 26,186square-foot light industrial facility in Plymouth, Minnesota 

 

•                  A 50,291square-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 September 30, 2002, held a 92.9% interestin the Operating Partnership.

 

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**TechnologySegment**

 

Since the sale of certain assets of Stonehaven Technologies on July 10,2001, our ability to market our licensing agreements and other related assetshas been significantly impaired primarily due to the fact that Stellent hasbecome an active competitor to our licensed technology and to generaltechnology market conditions. Stellent and other competitors have substantiallygreater resources, financial and otherwise, than we do.  Our licenses expired September 30,2002.  As a result of the above factors,as of September 30, 2002, management of theCompany has decided to discontinue operations of its technology segment and allassets related to the Company’s technology segment have been written off.

 

**CurrentTax Status**

 

At September 30, 2002,the Company has net operating losses. As of December 31, 2001, the Company’s net operating losses wereapproximately $3,365,000.  While theselosses created a deferred tax asset, a valuation allowance was applied againstthe asset because of the uncertainty of whether or not the Company will be ableto use these loss carry forwards, which will expire in varying amounts throughthe 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 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**.**

 

**Controls and Procedures**

 

Within 90 days prior to November 12, 2002, the date of this report,Duane Lund, our Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15(b) under the SecuritiesExchange Act of 1934 as of a date (the “Evaluation Date”). Based upon thisevaluation, Mr. Lund concluded that, as of the Evaluation Date, our disclosurecontrols and procedures are effective to ensure that material informationrelating to us and our consolidated subsidiaries is recorded, processed,summarized and reported in a timely manner.

 

Further, there were no significant changes in the internal controls or,to our knowledge, in other factors that could significantly affect suchcontrols subsequent to the Evaluation Date.

 

**PART II.  OTHERINFORMATION**

 

ITEM1.  LEGAL PROCEEDINGS

 

On August 5, 2002, the Company reached a settlement with Odeh Muhawesh,a former Trustee of the Company and former Chief Knowledge Officer ofStonehaven Technologies.  Under thesettlement, the Company paid Mr. Muhawesh $160,000 in exchange for a promissorynote and related interest in connection with the promissory note assumed byStonehaven Technologies in February 2000 pursuant to the terms of the mergeragreement between the Company, Stonehaven Technologies and NETLinkInternational, Inc. (“NETLink”), a company founded and owned by Mr. Muhaweshwhereby NETLink was merged into Stonehaven Technologies.  Further under the settlement, Mr. Muhawesh

 

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assigned to the Company his options for 1.0 million Common Shares ofthe Company and all of his stock in MyFreeDesk.com, Inc. and the Companyreleased a contractual restriction restricting Mr. Muhawesh from sellingpublicly approximately 158,500 Common Shares of the Company.  The settlement provides both parties a full,final and complete release of all claims to date.

 

ITEM2.  CHANGES IN SECURITIES

 

a.             None

 

b.             None

 

c.             None

 

d.             None

 

ITEM3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

ITEM5.  OTHERINFORMATION

 

None

 

ITEM6.  EXHIBITSAND 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)                                                                                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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 On Form 8-K**

 

None

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act of 1934, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                     | STONEHAVEN  REALTY TRUST |                       |
|--------------------------|--------------------------|----------------------------|
|                     |                     |                       |
|                     |                     |                       |
|                     | By:                      | /s/ Duane H. Lund          |   |
| Date:  November 12, 2002 |                     | Duane H. Lund              |   |
|                     |                     | *Chief  Executive Officer* |   |
|                     |                     | *Chief  Financial Officer* |   |
|                          |                          |                            |  |  |

 

 

**CERTIFICATIONPURSUANT TO**

**SECTION302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Duane H. Lund, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-QSB of Stonehaven Realty Trust (the“Registrant”);

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The Registrant’s other certifying officers* and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and wehave:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the Registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the Registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The Registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the Registrant’s auditorsand the audit committee of Registrant’s board of trustees  (or persons performing the equivalent function):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant’s ability to record, process, summarizeand report financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Registrant’s internal controls; and

 

6.             The Registrant’s other certifying officers and I have indicatedin this quarterly report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date:   November  12, 2002. |   |   |                                                 |
|---------------------------------------|--------|--------|------------------------------------------------------|
|                                  |   |   |                                                 |
|                                  | By:    |   | /s/ Duane H. Lund                                    |   |   |
|                                  |   |   | Duane H Lund                                         |   |   |
|                                  |   |   | Chief Executive Officer and  Chief Financial Officer |   |   |

 

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* Mr. Lund is the only certifying officer of the Registrant

 

 

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