** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

| ý | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------------------------------------------------------------------------------------------|

 

| o | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---|------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2001**

 

**CommissionFile Number: 0-25074**

 

**STONEHAVEN REALTY TRUST**

(Exact name of registrantas specified in its charter)

 

| **Maryland**                                                                                                      |   | **39-6594066**                           |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| (State or other  jurisdiction of incorporation or organization)                                                   |   | (I.R.S. Employer  Identification Number) |   |
|                                                                                                              |   |                                     |   |
| **5620  Smetana Road, Suite 330, Minnetonka, MN 55343**                                                           |   |
| (Address of principal  executive offices)           (zip  code) |   |
|                                                                                                              |   |                                     |   |
| Issuer’s telephone  number:**   952-935-5411**                                                          |   | Fax number:**   952-935-5659**      |   |
|                                                                                                              |   |                                     |   |
| **4150  Olson Memorial Highway, Minneapolis, MN 55422**                                                           |   |
| (Former address)                                                                                                  |   |

 

Securities registeredunder Section 12(b) of the Act:  None

 

Securities registeredunder to Section 12(g) of the Act: Common Shares, $0.01 par value

 

Check whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to the filing requirements for the past 90 days.

Yes  ý   No  o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S–B contained in this form, and no disclosure willbe contained to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.

 

Registrant’s revenues for its most recent fiscal year: $3,823,996.

 

At March 1, 2002, the Registrant had 4,517,524 Common Shares, $0.01 parvalue and 663,291 Class A Cumulative Convertible Preferred Shares.  The aggregate market value of the votingstock held by non-affiliates of the Registrant was approximately $3,689,000based on the closing prices of $0.30 for its Common Shares and $5.90 for itsClass A Cumulative Convertible Preferred Shares on the American Stock Exchangeon March 1, 2002.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

None

 

Transitional Small Business Disclosure Format (Check one): Yes o;No ý (Added by Exch Act Rel No. 31905, eff4/26/93.)

 

 

 

**STONEHAVENREALTY TRUST2001 ANNUAL REPORT ON FORM 10–KSBTABLE OF CONTENTS**

** **
| **PART I**     |                                                                                                                  |
|----------------|-----------------------------------------------------------------------------------------------------------------------|
| Item 1         | Description of  Business                                                                                              |
| Item 2         | Description of  Property                                                                                              |
| Item 3         | Legal Proceedings                                                                                                     |
| Item  4        | Submission  of Matters to a Vote of Security Holders                                                                  |
|           |                                                                                                                  |
| **PART II**    |                                                                                                                  |
| Item  5        | Market  for Common Equity and Related Shareholder Matters                                                             |
| Item  6        | Management’s  Discussion and Analysis or Plan of Operation                                                       |
| Item 7         | Financial Statements                                                                                                  |
| Item  8        | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                                 |
|           |                                                                                                                  |
| **PART III**   |                                                                                                                  |
| Item  9        | Trustees,  Executive Officers, Promoters and Control Persons, Compliance with  Section 16(a) of the Exchange Act |
| Item 10        | Executive  Compensation                                                                                               |
| Item  11       | Security  Ownership of Certain Beneficial Owners and Management                                                       |
| Item  12       | Certain  Relationships and Related Transactions                                                                       |
| Item 13        | Exhibits and  Reports on Form 8-K                                                                                     |
|           |                                                                                                                  |
| **SIGNATURES** |

** **

**RISK FACTORS**

** **

This report on Form 10-KSB 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 that are based on certain assumptions, and describe future plans,strategies and expectations of the Company, are generally identifiable by useof the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”or similar expressions.  Thesestatements are not guarantees of future performance, events or results andinvolve potential risks and uncertainties. Accordingly, actual performance, events or results may differ materiallyfrom such forward-looking statements. Management undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents 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 andcompeting properties), changes in industries in which the Company’s principaltenants compete, the failure to timely lease unoccupied space, the failure totimely re-lease occupied space upon expiration of leases, the inability togenerate sufficient revenues to meet debt service payments and operatingexpenses, the unavailability of equity and debt financing, unanticipated costsassociated with the Company’s acquisitions, potential liability underenvironmental or other laws and regulations, expanding a new line of business,customer demand for online services and products, uncertainty of emergingonline services, ability to meet competition, loss of existing key personnel,ability to hire and retain future personnel, the failure of the Company tomanage its growth effectively and other risks identified in this filingor other reports of the Company filed with the Securities and ExchangeCommission.  These risks anduncertainties should be considered in evaluating forward–lookingstatements and undue reliance should not be placed on such statements. Furtherinformation concerning the Company and its business, including additionalfactors that could materially affect the Company’s financial results, isincluded in other Company filings with the Securities and Exchange Commission.

 

1

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**PART I**

**Item 1.  Description of Business**

** **

**Company Overview**

 

Stonehaven Realty Trust (the “Company”) is a real estate company separated into two business segments: acommercial real estate segment which acquires, owns and operates commercialreal estate and a technology segment which through July 10, 2001,provided information technology consultingand document management solutions. Because of the sale of certain assets used in our technology divisionduring 2001, we currently derive most of our revenue from our real estateoperations.

 

The Company was formed on March 15, 1994 as a Maryland real estateinvestment trust. The Company operated as a traditional real estate investmenttrust by buying, selling, owning, and operating commercial and residentialproperties through December 31, 1999. The Company derived substantially all ofits revenues since inception through February 2000 from these real estateoperations.

 

In February 2000, we acquired Stonehaven Technologies, Inc. (formerly,RESoft, Inc.)  (“StonehavenTechnologies”), a Minnesota corporation that developed software applicationsand provided information technology services useful in real estate and otherindustries. During the remainder of 2000 and through July 10, 2001, the Companydeveloped Stonehaven Technologies’ additional product offerings and included inits overall business focus the development and sale of Stonehaven Technologies’software product and services. On July 10, 2001, Stonehaven Technologies soldcertain of these assets to Stellent, Inc., a Minnesota company (NASDAQ:STEL)(“Stellent”) pursuant to an Asset Purchase Agreement between the Company,Stonehaven Technologies and Stellent. In exchange, Stonehaven Technologies received 200,000 unregisteredshares of Stellent common stock (the “Stellent Shares”) with a market valueaggregating approximately $5, 988,000 (valued at $29.94 per share based on theNASDAQ closing quote per share on July 9, 2001).  Stellent subsequently registered the Stellent Shares with theSecurities and Exchange Commission effective September 7, 2001.

 

As a result of the operations of Stonehaven Technologies, commencing in2000, the Company is no longer a REIT for federal tax purposes.  For the year ended December 31, 2001, theCompany has taxable income as a result of the sale of certain assets on July10, 2001, and as such, the Company is subject to federal and state incometaxes.

 

As of December 31, 2001, our unrestricted cash resources were$1,541,000 and our marketable securities available for sale were$2,365,000.  The Company’s marketablesecurities represented 80,000 shares of common stock of Stellent at a fairmarket value of $29.56 per share (based on the NASDAQ closing quote per shareon December 31, 2001).  Such shares wereacquired on July 10, 2001, had a fair market value as of July 9, 2001 of $29.94per share and were registered effective as of September 7, 2001 with theSecurities and Exchange Commission. Subsequent to December 31, 2001 and throughMarch 1, 2002, the Company soldan additional 40,000 shares of Stellent stock at an average sale price of$31.34 per share, net of commissions. The NASDAQ closing quote on March 1, 2002 was $16.22 per share of commonstock of Stellent.

 

We intend to maintain and operate our remaining commercial properties,which were 82.7% leased at December 31,2001, due to the expected cash flow results.  However, the cash flow from our properties is not expected tofully fund our future liquid requirements, including among other factors, ourongoing general and administrative costs and our dividend commitment to holdersof our Class A Preferred Shares (the “Class A Preferred Shares”).

 

2

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

 

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

 

**Real EstateSegment**

 

The Company currently owns the following fourcommercial real estate properties containing approximately 129,000 rentablesquare feet:

 

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

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

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

•  A 50,291 square-foot light industrialfacility in Burnsville, Minnesota

 

The Company’s interest in the real propertiesis held through Wellington Properties Investments, LP (the “OperatingPartnership”).  The Company is the solegeneral partner of the Operating Partnership and, as of December 31,, 2001,held a 92.9% interest in the Operating Partnership.

 

On March 31, 2001, the Company sold the St.Cloud, Minnesota real property to an unrelated third party. In exchange for thereal property, the Company received approximately $8.3 million in cash.  In addition, the Company retired the relatedmortgage indebtedness of approximately $7.3 million.  The Company has recorded a loss on the sale of the investment inthe real estate of approximately $166,000 and $4.3 million as of December 31,2001 and as of December 31, 2000, respectively.

 

**Real EstateCompetition**

** **

The real estate market is highlycompetitive.  Competing properties maybe newer or have more desirable locations than the Company’s current propertyholdings. If the market does not absorb newly constructed space, marketvacancies will increase and market rents may decline.  As a result, the Company may have difficulty leasing space withinits properties and may be forced to lower rents on leases to competeeffectively.

 

The Company also competes for the acquisitionof properties with many entities, including publicly traded REITs.  Many competitors may have substantiallygreater financial resources than the Company. In addition, certain competitors may be willing to accept lower returnson their investments.  If competitorsprevent the Company from buying properties that may be targeted foracquisition, the Company’s capital appreciation and valuation goals may beimpacted.

 

3

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**Real Estate Tenants**

** **

During the year ended December 31, 2001,three tenants represented approximately 71.1% of the Company’s rentalrevenues.  During the year endedDecember 31, 2000, two tenants represented approximately 31.5% of the Company’srental revenues.

 

**Real EstateEnvironmental Matters**

** **

The Company is subject to various federal,state and local environmental laws. These laws can impose liability on property owners or operators for thecosts of removal or remediation of certain hazardous substances released on aproperty, even if the property owner was not responsible for the release of thehazardous substances.  The presence ofhazardous substances on properties of the Company may adversely affectoccupancy and the Company’s ability to sell or borrow against thoseproperties.  In addition to the costs ofgovernment claims under environmental laws, private plaintiffs may bring claimsfor personal injury or similar reasons. Various laws also impose liability for the costs of removal orremediation of hazardous substances at the disposal or treatment facility.  Any entity that arranges for the disposal ortreatment of hazardous substances at such a facility is potentially liableunder such laws.  These laws oftenimpose liability whether or not the facility is or ever was owned or operatedby such person.  To date, the impact ofthese laws has not been materially adverse to the operations of the Company.

 

**Technology Segment**

 

In February 2000, the Company acquired Stonehaven Technologies, Inc.(formerly, RESoft, Inc.)  (“StonehavenTechnologies”), a Minnesota corporation that developed software applicationsand provided information technology services useful in real estate and otherindustries. During the remainder of 2000 and through July 10, 2001, the Companydeveloped Stonehaven Technologies’ additional product offerings and included inits overall business focus the development and sale of Stonehaven Technologies’software product and services. On July 10, 2001, Stonehaven Technologies soldall of its interest in its SmartCabinet software code (software technologyreplicating and mapping a company’s business logic in web base format) andrelated assets, including its REDocs initiatives, to Stellent, Inc., aMinnesota company (NASDAQ:STEL) (“Stellent”) pursuant to an Asset PurchaseAgreement between the Company, Stonehaven Technologies and Stellent.  In exchange, Stonehaven Technologiesreceived 200,000 unregistered shares of Stellent common stock (the “StellentShares”) with a market value aggregating approximately $5, 988,000 (valued at$29.94 per share based on the NASDAQ closing quote per share on July 9,2001).  Stellent subsequently registeredthe Stellent Shares with the Securities and Exchange Commission effectiveSeptember 7, 2001.

 

As of December 31, 2001, the Company has recorded a gain on the sale ofcertain assets of Stonehaven Technologies of approximately $397,000, net of theunamortized costs of certain royalties,licensing agreements, and goodwill.

 

In connection with the July 2001 transaction, Stonehaven Technologiesand Mary Henschel, former President of Stonehaven Technologies, entered into aSeparation Agreement.  Ms. Henschel andmost of Stonehaven Technologies’ other employees are no longer employed byStonehaven Technologies. Further, Duane H. Lund terminated his employment withStonehaven Technologies as of September 9, 2001.  As of December 31, 2001, Odeh Muhawesh continues to serve asChief Knowledge Officer and the sole employee of Stonehaven Technologies underhis employment contract which expires on March 31, 2002.

 

Separately, Mr. Lund continues to serve as the Company’s ChiefExecutive Officer.

 

4

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Stonehaven Technologies also terminated its Exclusive Agency andRepresentation Agreement with Venture One Real Estate, LLC, in July 2001 andagreed to pay it a $262,500 termination fee. Further in connection with the July 2001 transaction, the warrantsassociated with certain intangible assets were cancelled.

 

**Technology Competition**

 

Sincethe sale of certain assets on July 10, 2001 to Stellent, Stellent has become anactive competitor to our licensed technology. Competition in the market for technology products is currently intenseand may increase in the future. Additionally, we may face competition fromemerging and established technology companies as well as from internaltechnology initiatives by our potential customers and from larger,well-established document management and other software companies.  Many of these companies, including Stellent,have well-established operations and have substantially greater capital,research, development, sales and marketing resources that we do.  Our ability to compete effectively withthese current and potential competitors will depend upon the perceived advantagesand proprietary nature of our products, and on our ability to attain andmaintain technological leadership and competitive pricing.  Given that our technological assets andpersonnel has decreased significantly as a result of the July 10, 2001 transaction,we cannot assure you that we will be able to compete effectively against thesecompanies, and any failure to do so will cause our business in the technologysegment to suffer.

 

**Product Development**

 

TheCompany’s product development expenditures for the years ended December 31,2001 and 2000 were $115,000 and $396,000, respectively.  All product development expenditures havebeen expensed as incurred.

 

**Employees**

 

We intend to maintain a small corporate staff.  The Company has two employees and StonehavenTechnologies has one employee.

 

5

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**Item2.  Description of Property**

 

As of December 31, 2001, the Company ownedinvestments in the properties described below.

 
| **Property Location**                        |   | **Year Built/ Renovated** |   | **% Leased as of  12/31/01** |   | **Rentable Square  Feet (1)** |   | **Total Rental Revenue (2)** |    | **Tenants Leasing  10% or More of  Rentable Sq. Ft. as  of 12/31/01 &  Lease Expiration**

**Date** |                                                                                                                            |
|----------------------------------------------|--------|---------------------------|--------|------------------------------|--------|-------------------------------|--------|-----------------------------------|---------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
| Plymouth  Technology Park I,  Plymouth, MN   |   | 1998                      |   | 73.0                         | %      | 26,186                        |   | $                                 | 176,994 |                                                                                                    | Knight Machining, Inc.  (28.2%) – 9/09; United Operations (25.6%) – 4/03; Insignia Systems, Inc.  (19.2%) – 4/03 |   |
|                                         |   |                      |   |                         |   |                          |   |                              |    |                                                                                                    |                                                                                                                            |
| Plymouth  Technology Park II,  Plymouth, MN  |   | 1998                      |   | 100.0                        | %      | 26,186                        |   | $                                 | 209,484 |                                                                                                    | Insignia Systems, Inc.  (100%) – 3/04                                                                                      |   |
|                                         |   |                      |   |                         |   |                          |   |                              |    |                                                                                                    |                                                                                                                            |
| Plymouth  Technology Park III,  Plymouth, MN |   | 1998                      |   | 100.0                        | %      | 26,186                        |   | $                                 | 240,036 |                                                                                                    | Landscape (100%) – 11/05                                                                                                   |   |
|                                         |   |                      |   |                         |   |                          |   |                              |    |                                                                                                    |                                                                                                                            |
| Nicollet Business  VI, Burnsville, MN        |   | 1997                      |   | 69.6                         | %      | 50,291                        |   | $                                 | 266,542 |                                                                                                    | Wall Effects (19.1%) –  3/02; Xata Corp. (50.5) – 6/04                                                                |   |
| Total/Average                                |   |                      |   | 82.7                         | %      | 128,849                       |   | $                                 | 893,056 |                                                                                                    |                                                                                                                            |   |

** **

----

(1) Rentable Square Feet represents gross leasable area for light industrialproperties.

(2)  Total Rental Revenue represent base rentsreceived during the twelve months ended December 31, 2001, excluding tenantreimbursements, calculated in accordance with generally accepted accountingprinciples determined on a straight-line basis.  Tenant reimbursements generally include payment of real estatetaxes, operating expenses, and escalations and common area maintenance and utilitycharges.

 

The Company’s interest in the real propertiesis held through Wellington Properties Investments, LP (the “OperatingPartnership”).  The Company is the solegeneral partner of the Operating Partnership and, as of December 31,, 2001,held a 92.9% interest in the Operating Partnership.

 

The Company has no present plans forsignificant improvements on any of its properties.

 

**Real EstateCompetition**

 

The real estate market is highlycompetitive.  Competing properties maybe newer or have more desirable locations than the Company’s current propertyholdings. If the market does not absorb newly constructed space, marketvacancies will increase and market rents may decline.  As a result, the Company may have difficulty leasing space withinits properties and may be forced to lower rents on leases to competeeffectively.

 

The Company also competes for the acquisitionof properties with many entities, including publicly traded REITs.  Many competitors may have substantiallygreater financial resources than the Company. In addition, certain competitors may be willing to accept lower returnson their investments.  If

 

6

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competitors prevent the Company from buying properties that may betargeted for acquisition, the Company’s capital appreciation and valuationgoals may be impacted.

** **

**Investments in Real Estate Depreciation and InsuranceCoverages**

 

Depreciation expense on individual real estateassets is computed using the straight-line method based on a useful life offorty years.

 

In the opinion of the Company’s management, theCompany has adequate insurance coverage for the real estate properties.

 

**Mortgage Loansand Notes Payable**

 

Mortgage loans andnotes payable as of December 31, 2001 consisted of the following:

 
|                                                                                                                                                                           |   | **Amount** |      | **Payment  Terms**                        |                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-------------------------------------------|-------------------------------------------|
| Century Bank, N.A., 7.625%, maturing on May 31,  2002, collateralized by the Plymouth I property and assignment of rents*                                                      |   | $          | 1,483,298 |                                      | Monthly principal and interest of $12,501 |   |
|                                                                                                                                                                           |   |       |      |                                      |                                      |
| Century Bank, N.A., 7.625%, maturing on May 31,  2002, collateralized by the Plymouth II and Plymouth III properties and  assignment of rents*                                 |   | 2,805,792  |      | Monthly principal and interest of $21,686 |                                      |
|                                                                                                                                                                           |   |       |      |                                      |                                      |
| GMAC Commercial Mortgage Corporation, 7.00%,  maturing February 1, 2008, collateralized by the Nicollet commercial property  and an assignment of rents and security agreement |   | 2,248,701  |      | Monthly principal and interest of $15,635 |                                      |
|                                                                                                                                                                           |   | $          | 6,537,791 |                                      |                                      |   |

 

----

*  A Trustee of the Company andhis spouse has fully guaranteed this mortgage loan.

 

Total mortgage loans and notes payable of approximately $4,289,000mature on May 31, 2002.  We anticipaterefinancing this debt at an annual fixed interest rate below the current rateof 7.625% for a three year term.  Weexpect fees associated with this refinance to total approximately $21,000.

 

7

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**Item 3.  LegalProceedings**

** **

On December 29, 2000, Stonehaven notifiedOdeh Muhawesh, a former Trustee of the Company and current Chief KnowledgeOfficer of Stonehaven Technologies, that it was suspending its payment to himunder a promissory note assumed by Stonehaven Technologies. StonehavenTechnologies assumed the payment obligation in February 2000 pursuant to theterms of the merger agreement between Company, Stonehaven Technologies andNETLink International, Inc. (“NETLink”), a company founded and owned by Mr.Muhawesh whereby NETLink was merged into Stonehaven Technologies. Management ofthe Company believes Mr. Muhawesh is in default under the merger agreement for,among other things, failure by him to cause to be transferred to StonehavenTechnologies 5% of the issued and outstanding stock of MyFreeDesk.com, Inc.

 

Subsequently, on January 8, 2001, Mr.Muhawesh filed a complaint against Stonehaven Technologies in the DistrictCourt of Hennepin County, Minnesota alleging that Stonehaven Technologiesfailed to pay him $350,000 on January 1, 2001 under the terms of a promissorynote. The Company has filed a counterclaim against Mr. Muhawesh requesting, amongother things, the repayment of amounts previously paid to him under thepromissory note.  The matter isscheduled for trial in June 2002.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

The following matters were submitted to avote of security holders on November 8, 2001:

 
| (a)    |   | Meeting type and date:                           |   | Annual Meeting of  Shareholders, November 8, 2001 |
|--------|--------|--------------------------------------------------|--------|---------------------------------------------------|
|   |   |                                             |   |                                              |
| (b)    |   | Trustees elected at  meeting:                    |   | Paul T. Lambert                                   |
|   |   |                                             |   |                                              |
| (c)    |   | Description of each matter  voted on at meeting: |   | Election of Class III Trustee                     |
|        |        |                                                  |        |                                                   |  |  |

 

Results of vote:

 
| Paul T. Lambert                  |   |      |
|----------------------------------|--------|-----------|
| For                              |   | 4,654,546 |
| Against or withheld              |   | 153,862   |
| Abstentions and broker non-votes |   | 2,018,246 |

 

As a result of the above vote, our Board ofTrustees was comprised of four Trustee members and one vacancy. Mark S. Whitingheld office until 2002.  Duane H. Lundand Steven B. Hoyt hold office until 2003. Mr. Lambert holds office until 2004. Mr. Whiting has since informed the Company of his intention not to seekre-election as a Trustee and resigned effective February 28, 2002.

 

8

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**PART II**

 

**Item 5.  Market for Common Equity and RelatedShareholder Matters**

 

The Common Shares of the Company begantrading on the AMEX on October 28, 1999 under the symbol “RPP”.  The Class A Preferred Shares of the Companybegan trading on the AMEX on October 28, 1999 under the symbol “RPP.A”.

 

The table below shows the range of the highand low sale prices for the Common Shares of the Company as reported on theAMEX.  The quotations shown representinterdealer prices without adjustment for retail markups, markdowns orcommissions, and may not reflect actual transactions.

 
| **Quarter**           |   | **High** |   | **Low** |   |
|-----------------------|--------|----------|--------|---------|--------|
| Fourth Quarter, 2001  |   | $        | 1.10   |    | $      | 0.15 |   |
| Third  Quarter, 2001  |   | $        | 1.60   |    | $      | 0.55 |   |
| Second  Quarter, 2001 |   | $        | 1.62   |    | $      | 0.70 |   |
| First  Quarter, 2001  |   | $        | 2.50   |    | $      | 1.00 |   |
|                  |   |     |   |    |   |
| Fourth  Quarter, 2000 |   | $        | 2.38   |    | $      | 0.69 |   |
| Third  Quarter, 2000  |   | $        | 3.56   |    | $      | 2.38 |   |
| Second  Quarter, 2000 |   | $        | 4.75   |    | $      | 2.63 |   |
| First  Quarter, 2000  |   | $        | 5.13   |    | $      | 3.31 |   |

 

On March 1, 2002, the last reported salesprice of the Company’s Common Shares on the AMEX was $0.30.  The number of holders of record of theCommon Shares of the Company was approximately 300****as of March 1, 2002 and theCompany estimates it has approximately 900 holders of common beneficialinterest as of that same date.

 

**DividendPolicy**

 

We have not declared or paid dividends on ourCommon Shares since the fourth quarter of 1999, and we do not anticipate payingdividends on our Common Shares in the foreseeable future.  Declaration or payment of dividends, if any,in the future, will be at the discretion of the Board of Trustees and willdepend on our then current financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Trustees.

 

The Company’s Class A Preferred Shares accrue a dividend equal to $0.475per share, with such dividend payable every six months.  During2001 and 2000, cash distributions declared with respect to the Class APreferred Shares were $0.95 per annum per Class A Preferred Share.

 

**New Issuancesand Conversions**

** **

On November 16, 1998, the Company issued 166,666 Common Shares toAmerican Real Estate Equities, LLC (“AREE”) in exchange for $1,000,000.

 

On November 20, 1998, the Company issued 2,557,707 common units in theOperating Partnership in connection with the acquisition of three commercialproperties.  Common units represent ourinterests and those of all limited partners in the Operating Partnership(“Common Units”) and are exchangeable one-for-one into Common Shares, subjectto certain conditions.  Effective June30, 1999, 838,372 of these Common Units were returned to the Company andcancelled.

 

9

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On August 12, 1999, the Company issued 254,800 Class B Preferred Sharesto American Real Estate Equities, LLC, an entity owned directly and indirectlyby our Chief Executive Officer and two Trustees of the Company (“AREE”), asconsideration for payment of advances to the Company for working capitalpurposes, costs incurred in connection with the Company’s 1998 commercialacquisitions and payments for abandoned project pursuit costs.  Further, on August 12, 1999, the Companyissued 95,000 Class B Preferred Shares to Wellington Management Corporation, anentity controlled by a former Trustee of the Company (“WMC”), as partialconsideration for the termination of the incentive advisory agreement betweenthe Company and WMC.

 

On February 18, 2000, the Board of Trustees approved the conversion of1,657,437 Common Units of the Operating Partnership into 1,468,484 CommonShares and further approved the conversion of the 254,800 Class B PreferredShares held by AREE into 808,482 Common Shares.

 

OnFebruary 24, 2000, the Company acquired Stonehaven Technologies.  The acquisition was accomplished byexchanging 914,292 of the Company’s Common Shares for all of the issued andoutstanding stock of Stonehaven Technologies valued at $4.375 per share, or anaggregate value of approximately $4.0 million.  In connection with the acquisition, the Company issued tothe President of Stonehaven Technologies, currently the Chief KnowledgeOfficer, options as to 1,000,000 Common Shares at a price of $5.375 pershare.  The options expire in February 2010 and are exercisable as to 500,000shares on February 24, 2000, with options as to 62,500 shares exercisablequarterly, commencing May 24, 2000.  TheCompany also issued to the Chief Executive Officer of Stonehaven Technologies,options as to 666,667 Common Shares at a price of $6.375 per share.  Further by agreement, the Company set asidea pool of options as to 200,000 Common Shares for future award to employees ofStonehaven Technologies.  Each ofthe above options expires 90 days after employment ends or is terminated.  In connection therewith, options issued toStonehaven Technologies’ Chief Executive Officer and the pool of options toother employees of Stonehaven Technologies have expired as of December 31,2001.

 

OnFebruary 29, 2000, the Company through the Operating Partnership acquired threecommercial real estate properties located in suburban Minneapolis, Minnesota(“Plymouth Properties”). The Plymouth Properties were purchased from a relatedparty for an aggregate purchase price of approximately $6.7 million. Thepurchase price was funded through the issuance of an aggregate of 181,629Common Units in the Operating Partnership (valued at $4.35 per Common Unit, oran aggregate value of approximately $790,000), the assumption of certain third–partydebt totaling approximately $4.5 million, secured by the Plymouth Properties,and the balance paid in cash.

 

Inissuing all of the above securities, the Company relied on the exemption fromregistration under Section 4(2) of the Securities Act of 1933, as amended.

 

**ReacquiredShares**

 

OnJune 30, 2000, the Company transferred and sold to WMC the Company’s 100%interest in Lake Pointe Apartment Homes, Inc., a Wisconsin corporation andwholly–owned subsidiary of the Company (“Lake Pointe”) and the Company’s8% equity interest in Highlander Acquisition Company, LLC, a Wisconsin limitedliability company (“Highlander”). The interests were exchanged for 95,000shares of the Company’s Class B Junior Cumulative Convertible PreferredShares owned by WMC and WMC assumed the mortgage debt totaling approximately$2.7 million associated with Lake Pointe.

 

On December 29, 2000, the Operating Partnership sold its interest inits wholly-owned subsidiary WPT I, LLC, a Delaware limited liabilitycompany (“WPT I”) and owner of the Thresher Square property (“ThresherProperty”), to four individuals (“Buyers”), in exchange for $169,874 in cash,522,416 Common Shares of the Company and 61,898 Common Units of the OperatingPartnership, all of which were cancelled, and the release of approximately $6.6million of debt.  WPT I originallypurchased the Thresher Property from the Buyers, one of which is a Trustee ofStonehaven.

 

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**Item 6.  Management’s Discussion and Analysis or Planof Operation**

** **

The following discussion should be read inconjunction with consolidated financial statements and notes thereto includedelsewhere herein.

 

**Risk Factors**

 

This report on Form 10-KSB contains“forward-looking” statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. Forward–looking statements that are based oncertain assumptions, and describe future plans, strategies and expectations ofthe Company, are generally identifiable by use of the words “believe”,“expect”, “intend”, “anticipate”, “estimate”, “project” or similarexpressions.  These statements are notguarantees of future performance, events or results and involve potential risksand uncertainties.  Accordingly, actualperformance, events or results may differ materially from such forward-lookingstatements.  Management undertakes noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

Factors that could causeactual results to differ materially from current expectations include, but arenot limited to, changes in general economic conditions, changes in interestrates, legislative and regulatory changes, changes in monetary and fiscalpolicies of the U.S. government, including policies of the U.S. Treasury andthe Federal Reserve Board, changes in local real estate conditions (includingrental rates and competing properties), changes in industries in which theCompany’s principal tenants compete, the failure to timely lease unoccupiedspace, the failure to timely re-lease occupied spaced upon expiration ofleases, the inability to generate sufficient revenues to meet debt servicepayments and operating expenses, the unavailability of equity and debt financing,unanticipated costs associated with the Company’s acquisitions, potentialliability under environmental or other laws and regulations, expanding a newline of business, customer demand for online services and products, uncertaintyof emerging online services, 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 other risks identified in this filing or other reports of theCompany filed with the Securities and Exchange Commission.  These risks and uncertainties should beconsidered in evaluating forward–looking statements and undue relianceshould not be placed on such statements. Further information concerning theCompany and its business, including additional factors that could materiallyaffect the Company’s financial results is included in other Company filingswith the Securities and Exchange Commission.

 

**Overview**

 

Stonehaven Realty Trust (the “Company”) is a real estate company separated into two business segments: acommercial real estate segment which acquires, owns and operates commercialreal estate and a technology segment which through July 10, 2001,provided information technology consultingand document management solutions.  Becauseof the sale of certain assets used in our technology division during 2001, wecurrently derive most of our revenue from our real estate operations.

 

The Company was formed on March 15, 1994 as a Maryland real estateinvestment trust. The Company operated as a traditional real estate investmenttrust by buying, selling, owning, and operating commercial and residentialproperties through December 31, 1999. The Company derived substantially all ofits revenues since inception through February 2000 from these real estateoperations.

 

In February 2000, we acquired Stonehaven Technologies, Inc. (formerly,RESoft, Inc.)  (“StonehavenTechnologies”), a Minnesota corporation that developed software applicationsand provided information technology services useful in real estate and otherindustries. During the remainder of 2000 and through

 

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July 10, 2001, the Company developed Stonehaven Technologies’additional product offerings and included in its overall business focus thedevelopment and sale of Stonehaven Technologies’ software product and services.On July 10, 2001, Stonehaven Technologies sold certain of these assets toStellent, Inc., a Minnesota company (NASDAQ:STEL) (“Stellent”) pursuant to anAsset Purchase Agreement between the Company, Stonehaven Technologies andStellent.  In exchange, StonehavenTechnologies received 200,000 unregistered shares of Stellent common stock (the“Stellent Shares”) with a market value aggregating approximately $5,988,000 (valuedat $29.94 per share based on the NASDAQ closing quote per share on July 9,2001).  Stellent subsequently registeredthe Stellent Shares with the Securities and Exchange Commission effectiveSeptember 7, 2001.

 

As a result of the operations of Stonehaven Technologies, commencing in2000, the Company is no longer a REIT for federal tax purposes.  For the year ended December 31, 2001, theCompany has taxable income as a result of the sale of certain assets on July10, 2001, and as such, the Company is subject to federal and state incometaxes.

 

As of December 31, 2001, our unrestricted cash resources were$1,541,000 and our marketable securities available for sale were$2,365,000.  The Company’s marketablesecurities represented 80,000 shares of common stock of Stellent at a fairmarket value of $29.56 per share (based on the NASDAQ closing quote per shareon December 31, 2001).  Such shares wereacquired on July 10, 2001, had a fair market value as of July 9, 2001 of $29.94per share and were registered effective as of September 7, 2001 with theSecurities and Exchange Commission. Subsequent to December 31, 2001 and throughMarch 1, 2002, the Company soldan additional 40,000 shares of Stellent stock at an average sale price of$31.34 per share, net of commissions. The NASDAQ closing quote on March 1, 2002 was $16.22 per share of commonstock of Stellent.

 

We intend to maintain and operate our remaining commercial properties,which were 82.7% leased at December 31,2001, due to the expected cash flow results.  However, the cash flow from our properties is not expected tofully fund our future liquid requirements, including among other factors, ourongoing general and administrative costs and our dividend commitment to holdersof our Class A Preferred Shares (the “Class A Preferred Shares”).

 

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

 

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

 

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**Real Estate Segment**

 

TheCompany currently owns the following four commercial real estate properties containingapproximately 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 December 31, 2001, held a 92.9% interestin the Operating Partnership.

 

On March 31, 2001,the Company sold the St. Cloud, Minnesota real property to an unrelated thirdparty. In exchange for the real property, the Company received approximately$8.3 million in cash.  In addition, theCompany retired the related mortgage indebtedness of approximately $7.3million.  The Company has recorded aloss on the sale of the investment in the real estate of approximately $166,000and $4.3 million as of December 31, 2001 and December 31, 2000, respectively.

 

**Technology Segment**

 

In February 2000, the Company acquired Stonehaven Technologies, Inc.(formerly, RESoft, Inc.)  (“StonehavenTechnologies”), a Minnesota corporation that developed software applicationsand provided information technology services useful in real estate and otherindustries. During the remainder of 2000 and through July 10, 2001, the Companydeveloped Stonehaven Technologies’ additional product offerings and included inits overall business focus the development and sale of Stonehaven Technologies’software product and services. On July 10, 2001, Stonehaven Technologies soldall of its interest in its SmartCabinet software code (software technology replicatingand mapping a company’s business logic in web base format) and related assets,including its REDocs initiatives, to Stellent, Inc., a Minnesota company(NASDAQ:STEL) (“Stellent”) pursuant to an Asset Purchase Agreement between theCompany, Stonehaven Technologies and Stellent. In exchange, Stonehaven Technologies received 200,000 unregisteredshares of Stellent common stock (the “Stellent Shares”) with a market valueaggregating approximately $5, 988,000 (valued at $29.94 per share based on the NASDAQclosing quote per share on July 9, 2001). Stellent subsequently registered the Stellent Shares with the Securitiesand Exchange Commission effective September 7, 2001.

 

As of December 31, 2001, the Company has recorded a gain on the sale ofcertain assets of Stonehaven Technologies of approximately $397,000, net of theunamortized costs of certain royalties,licensing agreements, and goodwill.

 

In connection with the July 2001 transaction, Stonehaven Technologiesand Mary Henschel, former President of Stonehaven Technologies, entered into aSeparation Agreement.  Ms. Henschel andmost of Stonehaven Technologies’ other employees are no longer employed byStonehaven Technologies. Further, Duane H. Lund terminated his employment withStonehaven Technologies as of September 9, 2001.  As of December 31, 2001, Odeh Muhawesh continues to serve asChief Knowledge Officer and the sole employee of Stonehaven Technologies underhis employment contract which expires on March 31, 2002.

 

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Separately, Mr. Lund continues to serve as the Company’s ChiefExecutive Officer.

 

Stonehaven Technologies also terminated its Exclusive Agency andRepresentation Agreement with Venture One Real Estate, LLC, in July 2001 andagreed to pay it a $262,500 termination fee. Further in connection with the July 2001 transaction, the warrantsassociated with certain intangible assets were cancelled.

 

**Loss of REIT Income Tax Status andCurrent Tax Status**

 

ThroughDecember 31, 1999, the Company historically operated as a REIT and maintainedits qualification as a REIT under Sections 856 through 860 of the InternalRevenue Code (the “Code”). As a REIT, the Company generally was not subject tofederal income tax. To qualify as a REIT under the Code for a taxable year, theCompany must meet certain requirements relating to its assets, income, stockownership and distributions to shareholders.

 

Forthe year ended December 31, 2000, the Company did not qualify as a REIT underthe Code due to Stonehaven Technologies’ operations.  Due to the Company’s failure to qualify as a REIT, the Company isnow subject to federal income tax on all of its taxable income at regularcorporate rates and will not receive a deduction for dividends paid to itsshareholders. Additionally, any distributions to shareholders generally will betaxable to the shareholders as ordinary income to the extent of current andaccumulated earnings and profits. Thus, the Company’s income would be subjectto double taxation—at the corporate level and the shareholder level to theextent such income is distributed to shareholders. For the year endedDecember 31, 2000, the Company was in a taxable loss position. Accordingly,no provision was made for federal income taxes in the accompanying consolidatedfinancial statements for the year ended December 31, 2000.  For the year ended December 31, 2001, theCompany has taxable income as a result of the sale of certain assets on July10, 2001, and accordingly, has included a provision for federal and stateincome taxes totaling $40,000 in the accompanying consolidated financialstatements.  See Note 10 to theCompany’s Consolidated Financial Statements included with this Form 10-KSB.

 

Failure to qualify as a REIT for the year endedDecember 31, 2000 disqualifies the Company from taxation as a REIT for the fourtaxable years thereafter and could result in the Company incurring indebtednessor liquidating investments should the Company not have sufficient funds to paythe resulting federal income tax liabilities. As a result, the funds availablefor distribution to the Company’s shareholders would be reduced for each of theyears involved. In addition, dividend payments subject to the Code would nolonger be required.

 

**Results of Operations**

 

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

 

*Comparison of the Year Ended December 30, 2001 and 2000:*  Rental revenue decreased by approximately$2,068,000 or 64.8% for the year ended December 31, 2001 compared to the yearended December 31, 2000. Tenantrecoveries decreased by approximately $1,229,000 or 64.0% for the year endedDecember 31, 2001 compared to the year ended December 31, 2000.  Thedecreased rental revenue and tenant recoveries were primarily a result of theCompany’s dispositions of Lake Pointe on June 30, 2000, Thresher onDecember 31, 2000 and Cold Springs on March 30, 2001, offset, in part, by theacquisition of the Plymouth Properties on February 29, 2000.  Professional services and sales ofhardware and software decreased by approximately $829,000 or 31.5% for the yearended December 31, 2001 compared to the year ended December 31, 2000.  The decrease is primarily the result of theCompany’s disposition of

 

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certain assets of Stonehaven Technologies on July 10, 2001.  Interest income and other income decreasedby $166,000 during these same periods primarily due to the use of cash and cashequivalents, offset, in part, by reimbursed expenses received from Stellent inrelation to the sale of certain assets of Stonehaven Technologies on July 10,2001.

 

Total expenses decreased from approximately $12,744,000for the year ended December 31, 2000 to $6,135,000 for the year ended December31, 2001, a net decrease of $6,609,000 as described below.

•  Decreased costs of approximately $1,248,000,in costs related to professional services and sales of hardware and software,were primarily a result of decreased costs relating to hardware sales and thedisposition of certain assets of Stonehaven Technologies offset, in part, bythe allocation of costs associated with personnel between costs related toprofessional services and sales of hardware and software and productdevelopment.

•  Decreased costs of approximately $113,000,related to advertising and promotion, were primarily a result of thedisposition of certain assets of Stonehaven Technologies on July 10, 2001.

•  Decreased costs of approximately $281,000,related to product development, were primarily a result of the allocation ofcosts associated with personnel between product development and costs relatedto professional services and sales of hardware and software.

•  Decreased costs of approximately $809,000,$541,000, $169,000, $1,155,000 and $1,069,000, related to property, operatingand maintenance, property taxes and insurance, management fees, general andadministrative and interest expense, respectively, were primarily a result ofthe dispositions of Lake Pointe on June 30, 2000, Thresher on December 31,2000, Cold Springs on March 30, 2001 and certain assets of StonehavenTechnologies on July 10, 2001.  Thedecreases were offset, in part, by the acquisitions of the Plymouth Propertieson February 29, 2000.

•  Nonrecurring charges of approximately $408,000incurred during 2000 primarily related to costs associated with abandonment ofprojects and the severance package associated with the disposition of LakePointe on June 30, 2000.

•  Depreciation and amortization decreased from approximately$2,582,000 for the period ended December 31, 2000 to $1,766,000 for thecomparable period in 2001, a decrease of $816,000 or 31.6%, primarily as aresult of the Company’s reduced depreciationresulting from the dispositions ofLake Pointe on June 30, 2000, Thresher on December 31, 2000, Cold Springs onMarch 30, 2001 and certain assets of Stonehaven Technologies on July 10, 2001.All of these decreases were offset, in part, by amortization of thenon-refundable prepaid minimum royalties, and the increased depreciation fromthe Plymouth Properties acquired in 2000.

•  There was no equity in incomeof unconsolidated subsidiary for the year ended December 31, 2001 as comparedto $2,912 for the year ended December31, 2000 due to the sale and transfer of the Company’s 8% interest inHighlander on June 30, 2000.

 

The loss on sale of investment in real estate of $166,000for the year ended December 31, 2001 was a result of the additional lossrecognized on the sale of the St. Cloud, Minnesota property.  A loss from the sale of the St. Cloud,Minnesota property of $4.3 million was accrued as of December 31, 2000.

 

The gain on sale of certain assets of StonehavenTechnologies of $397,000 was a result of the disposition of certain assets ofStonehaven Technologies, net of the unamortized costs of certain royalties,licensing agreements and goodwill.

 

As a result of the above factors, the loss fromoperations before equity in income of unconsolidated subsidiary and lossallocated to minority interest decreased from approximately $4,628,000 for theyear ended December 31, 2000 to approximately $2,311,000 for the year endedDecember 31, 2001.  Additionally, thenet loss available to Common Shareholders decreased from approximately$8,959,000 for the year ended December 31, 2000 to $3,285,000 for the yearended December 31, 2001.

 

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**Liquidity and Capital Resources**

*Short Term and Long Term Liquidity*

 

Cash provided by operations, equity transactions, andborrowings from affiliates and lending institutions have generally provided theprimary sources of liquidity to the Company. Historically, the Company has usedthese sources to fund operating expenses, satisfy its debt service obligationsand fund distributions to shareholders. For the year ended December 31, 2001 and December 31, 2000, our net cashused in operating activities totaled $1,176,000 and $2,715,000, respectively.

 

As of December 31, 2001, our unrestricted cash resources were$1,541,000 and our marketable securities available for sale were$2,365,000.  The Company’s marketablesecurities represented 80,000 shares of common stock of Stellent at a fair marketvalue of $29.56 per share (based on the NASDAQ closing quote per share onDecember 31, 2001).  Such shares wereacquired on July 10, 2001, had a fair market value as of July 9, 2001 of $29.94per share and were registered effective as of September 7, 2001 with theSecurities and Exchange Commission. We believe our cash resources andmarketable securities are sufficient to sustain the Company’s liquidity needsfor the next twelve months.

 

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

 

Total mortgage loans and notes payable of approximately $4,289,000mature on May 31, 2002.  We anticipaterefinancing this debt at an annual fixed interest rate below the current rateof 7.625% for a three year term      Weexpect fees associated with this refinance to total approximately $21,000.

 

Subsequent to December 31, 2001 and through March 1, 2002, the Company sold an additional 40,000 shares ofStellent stock at an average sale price of $31.34 per share, net ofcommissions.  The NASDAQ closing quoteon March 1, 2002 was $16.22 per share of common stock of Stellent.

 

We intend to maintain and operate our remaining commercial properties,which were 82.7% leased at December 31,2001, due to the expected cash flow results.  However, the cash flow from our properties is not expected tofully fund our future liquid requirements, including among other factors, ourongoing general and administrative costs and our dividend commitment to holdersof our Class A Preferred Shares.

 

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

 

We continue to explore and evaluate all available alternatives,including, among others, to buy or sell additional properties or assets, todevelop and sell future technology products or expand through the acquisitionof new technology products, to pursue additional or alternate financing,whether debt or equity, or to continue to meet the ongoing dividend requirementof our Class A Preferred Shares.****Therecan be no assurance that any of the alternatives will be adopted, or if adopted,will be successful.

 

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Additionally, we may determine not to adopt any additional businessinitiative.

 

During 2001 and 2000, cash distributions declared with respect to theClass A Preferred Shares were $0.95 per annum per Class A Preferred Share.  No cash distributions were declared during2001 and 2000 with respect to the Common Shares.

 

**Cash Flows**

 

During the year ended December 31, 2001, theCompany generated (i) approximately $594,000 from net cash proceeds inconnection with the disposition of Cold Springs and (ii) $2,926,000 from saleof marketable securities, net of commissions. These cash flows coupled with our unrestricted cash funds were usedprimarily for (i) cash used in operating activities of approximately$1,176,000, including payments of minimum royalty on licensing agreementstotaling $1,350,000; (ii) additions to real estate properties of approximately$43,000; (iii) acquisition of computer hardware, software and other fixed assetsof approximately $64,000; (iv) payments associated with the acquisition oflicensing agreements of approximately $300,000; (v) costs associated withthe disposition of certain assets of Stonehaven Technologies of approximately$588,000; (vi) payments on mortgage loans and notes payable of approximately$105,000; and (vii) distributions to holders of Class A Preferred Shares for2001 declared distributions ($630,000) and to holders of Common Units for 1998and 1999 declared distributions ($709,000) totaling approximately$1,339,000.  As a result, the Company’scash balance decreased by approximately $95,000 from approximately $1,636,000at December 31, 2000 to $1,541,000 at December 31, 2001.

 

**Recent Accounting Pronouncements**

 

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“FAS 133”) FAS 133, as amended,establishes methods of accounting for derivative financial instruments andhedging activities related to those instruments as well as other hedgingactivities.  The Company was required toadopt FAS 133 effective January 1, 2001. Because the Company does not use derivative financial instruments, theCompany’s adoption of FAS 133 effective January 1, 2001 did not have an effecton the Company’s consolidated financial position or results of operations.

 

In December 1999, the Securities and Exchange Commission (“SEC”) issuedSEC Staff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements” (“SAB 101”).  SAB 101provides guidance on the recognition, presentation, and disclosure of revenuein financial statements.  In October2000, the SEC issued a “Frequently Asked Questions” document on SAB 101 toprovide further definitive guidance on the implementation of SAB 101.  SAB 101 is effective for years beginningafter December 15, 1999 and the Company was required to adopt SAB 101 in thequarter ended December 31, 2000, retroactive to the beginning of the year.  SAB 101 did not have an effect on theCompany’s results of operations, financial position or cash flows.

 

During fiscal 2001, the Financial Accounting Standards Board issued SFAS#142 Goodwill and Other Intangible Assets. SFAS #142 will be effective for the Company’s fiscal year beginningJanuary 1, 2002 and will no longer permit goodwill of the Company to beamortized.  Instead, goodwill will beperiodically tested for impairment and written down if impairment is determinedto exist.  Other intangible assets mustbe reviewed, and assessed at least annually, in order to ascertain if theirlives are deemed to be finite (amortized) or indefinite (not amortized).  At December 31, 2001, the Company no longerhas goodwill, but will evaluate any future goodwill or intangible assets withrespect to the above.

 

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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 discontinuedoperation.  SFAS 144 is effective for fiscalyears beginning after December 15, 2001.

 

**Inflation**

 

Inflation has not generally had a significantimpact during the periods presented on the Company because of the relativelylow inflation rates in the markets in which the Company’s properties operate.Most of the Company’s tenants in the commercial properties are contractuallyobligated to pay their share of operating expenses thereby reducing exposure toincreases in such costs resulting from inflation.

 

**Item 7.  Financial Statements**

** **

The required audited consolidated financialstatements of the Company are included herein commencing on page F-1.

 

**Item 8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

** **

On November 9, 2000, PricewaterhouseCoopersLLP (“PWC”) resigned as the Company’s independent auditors.

 

On February 2, 2001, the Company’s Board ofTrustees’ appointed Boulay, Heutmaker, Zibell & Co. P.L.L.P. as independentauditors for the Company.  The Companyis not aware of any disagreement with PWC during the year ended December 31,1999 and through November 9, 2000, the date PWC resigned as the independentaccountants of the Company, on any matters of accounting principles orpractices, financial statement disclosures, or auditing scope or procedures.

 

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**PART III**

 

**Item 9.  Trustees, Executive Officers, Promoters andControl Persons, Compliance with Section 16(a) of the Exchange Act**

** **

**Board ofTrustees, Executive Officers, Significant Employees and Family Relationships**

 

Thenames, ages and positions of our Trustees, executive officers and key employeesare as follows:

 
| **Name**          |   | **Age** |   | **Position**                                                             |
|-------------------|--------|---------|--------|--------------------------------------------------------------------------|
| Duane  H. Lund    |   | 38      |   | Chief  Executive Officer, Chief Financial Officer, Secretary and Trustee |
|              |   |    |   |                                                                     |
| Steven  B. Hoyt   |   | 50      |   | Trustee                                                                  |
|              |   |    |   |                                                                     |
| Paul  T. Lambert  |   | 49      |   | Trustee                                                                  |
|              |   |    |   |                                                                     |
| Odeh  A. Muhawesh |   | 43      |   | Chief  Knowledge Officer, Stonehaven Technologies                        |

 

Thebusiness experience, principal occupations and employment, as well as theperiods of service, of each of our Trustees and executive officers during atleast the last five years are set forth below.

 

Duane H. Lund has been the Chief ExecutiveOfficer of the Company since November 1998, and Chief Financial Officer andSecretary since February 2, 2001, and has been a Trustee since December 1999.  Mr. Lund was a founding shareholder of FirstIndustrial Realty Trust, Inc. and served as a Senior Regional Director of FirstIndustrial from 1994 to 1998.  In suchcapacity, Mr. Lund acquired and managed over 11,000,000 square feet ofcommercial property with a value in excess of $750 million.  From 1989 to 1994, Mr. Lund was anacquisition partner with The Shidler Group, where he was involved incoordinating the underwriting and due diligence for over $200 million ofcommercial property.  Mr. Lund is amember of the Board of Directors of the Wisconsin Real Estate AlumniAssociation and a former Board member of the National Association of Industrialand Office Properties, Minnesota Chapter and former member of the AdvisoryBoards of the Midwest Real Estate News, the Minnesota Real Estate Journal and acurrent member of the KPMG Peat Marwick Alumni Association.

 

Steven B. Hoyt has been a Trustee sinceNovember 1998.  He has served as ChiefExecutive Officer of Hoyt Properties, Inc. from 1989 to present.  Hoyt Properties currently owns over1,000,000 square feet of industrial and office property in Minnesota and hasdeveloped over 5,000,000 square feet of commercial property since itsinception.  From 1994 to 1995, Mr. Hoytserved as a Senior Regional Director of First Industrial Realty Trust, Inc. Mr.Hoyt is a member of the Board of Directors of the Better Business Bureau andhas served in numerous state and national positions for the NationalAssociation of Industrial and Office Parks (NAIOP).

 

PaulT. Lamberthas been a Trustee sinceNovember 1998.  Mr. Lambert is currently the Chief Executive Officer ofLambert Capital Corporation.  Heserved on the Board of Directors and was the Chief Operating Officer of FirstIndustrial Realty Trust, Inc. from its initial public offering in October 1994to the end of 1995.  Mr. Lambert was oneof the largest contributors to the formation of First Industrial and one of itsfounding shareholders.  Prior to formingFirst Industrial, Mr. Lambert was managing partner of the Midwest region forThe Shidler Group, a national private real estate investment company.  Prior to joining Shidler, Mr. Lambert was acommercial real estate developer with Dillingham Corporation and, prior to that,was a consultant with The Boston Consulting Group.  Mr. Lambert was also a founding 

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shareholderof CGA Group, Ltd., a holding company whose subsidiary is a AAA-rated financialguarantor based in Bermuda.

 

Odeh A. Muhawesh was a Trustee of the Companythrough November 8, 2001 and was appointed in connection with the Company’sacquisition of Stonehaven Technologies in February 2000 (formerly NETLinkInternational, Inc.”).  Currently, Mr.Muhawesh serves as Stonehaven Technologies’ Chief Knowledge Officer. Mr.Muhawesh is also Chairman of the Board and CEO of Stratika.  Mr.Muhawesh was the founder, Chairman and CEO of NETLink International, Inc. andwas an Advisory Board Member of Intellops, Inc. Mr. Muhawesh has served asthe Chairman of 3B Software and as a Board member of RSSI.

 

On December 29, 2000, the Company notifiedMr. Muhawesh that it was suspending its payment of $350,000 to him under apromissory note assumed by Stonehaven Technologies. Stonehaven Technologiesassumed the payment obligation in February 2000 pursuant to the terms of the merger agreement between Stonehaven,  Stonehaven Technologies and NetlinkInternational, Inc., a company founded and owned by Mr. Muhawesh wherebyNetlink was merged into Stonehaven Technologies.  Management of the Company believes Mr. Muhawesh is in default under the merger agreement for, amongother things, failure by him to cause to be transferred to StonehavenTechnologies 5% of the issued and outstanding stock of MyFreeDesk.com, Inc.

 

On January 8, 2001, Mr. Muhawesh the filed a complaint againstStonehaven Technologies in the District Court of Hennepin County Minnesotaalleging that Stonehaven Technologies failed to pay him $350,000 on January 1,2001 under the terms of a promissory note. The Company has filed a counterclaimagainst Mr. Muhawesh requesting, among other things, the repayment of amountspreviously paid to him under the promissory note.  The matter is scheduled for trial in June 2002.

 

OurBoard of Trustees is currently comprised of three Trustee members and twovacancies. Messrs. Lund and Hoyt hold office until 2003.  Mr. Lambert holds office until 2004.  Mark S. Whiting served as a Trustee, ClassI, with his term expiring in 2002.  Mr.Whiting recently informed the Company of his intention not to seek re-electionas a Trustee and resigned his position as a Trustee of the Company effectiveFebruary 28, 2002.  The Company is inthe process of selecting replacements for the Trustee vacancies.

 

Trusteescurrently do not receive cash compensation for serving on the Board ofTrustees. Officers are elected by the Board of Trustees and serve at thediscretion of the Board.

 

**Compliance withSection 16(a) of the Exchange Act**

 

Section 16(a) of the Securities Exchange Actof 1934 requires the Company’s officers, Trustees and persons who own more that10% of the Common Shares of the Company to file reports of ownership andchanges in ownership with the Securities and Exchange Commission.  Officers, Trustees and greater than 10%shareholders are required by regulation to furnish the Company with copies ofall Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to theCompany, or written representations that no Annual Statements of BeneficialOwnership of Securities on Form 5 were required to be filed, the Companybelieves that for the fiscal year ended December 31, 2001, all Section 16(a)filing requirements applicable to its officers, Trustees and greater than 10%shareholders were complied with.

 

20

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**Item10.  Executive Compensation**

 

The following table sets forth thecompensation paid for the years ended December 31, 1999, 2000 and 2001.

 
| **Name and Principal Position**                          |   | **Year** |   | **Salary (1)** |          | **Securities  Underlying****Options** |      |
|----------------------------------------------------------|--------|----------|--------|----------------|---------------|---------------------------------------|-----------|
| Duane  H. Lund                                           |   | 2001     |   | $              | 184,000  | (2)                                   | —    |   |
| Chief  Executive Officer, Chief Financial                |   | 2000     |   | $              | 180,000       | (2)                                   | 666,667   | (6) |
| Officer  and Secretary                                   |   | 1999     |   | $              | 132,500       | (2)                                   | 80,000    | (5) |
|                                                     |   |     |   |           |          |                                  |      |
| Mary S. Henschel                                         |   | 2001     |   | $              | 93,000        | (3)                                   | —    |   |
| Former  President, Stonehaven  Technologies, Inc.        |   | 2000     |   | $              | 100,000       | (3)                                   | —    |   |
|                                                     |   |     |   |           |          |                                  |      |   |
| Odeh A. Muhawesh                                    |   | 2001     |   | $              | 120,000       | (4)                                   | —    |   |
| Chief Knowledge Officer,  Stonehaven  Technologies, Inc. |   | 2000     |   | $              | 100,000       | (4)                                   | 1,000,000 | (7) |

 

----

(1)                                  Nobonuses were paid for the years ended December 31, 2001, 2000 andd 1999.

(2)                                  Amountsrepresent a base annual salary of $150,000 for the period from September 10,2001 through December 31, 2001, $200,000 for the period from February 24, 2000through September 9, 2001, $80,000 for the period from October 1, 1999 throughFebruary 23, 2000, and $150,000 for the period from January 1, 1999 throughSeptember 30, 1999.  Amounts do notinclude $240,000 termination fee accrued as of December 31, 2001 in connectionwith Mr. Lund’s termination as an employee of Stonehaven Technologies during2001.

(3)                                  Amountsrepresent a base annual salary of $120,000 for the period from February 24,2000 through July 10, 2001.  Inconnection with the transaction, Stonehaven Technologies and Mary Henschel,former President of Stonehaven Technologies, entered into a SeparationAgreement.  Amounts do not include$262,000 fee paid during 2001 in connection with Ms. Henschel’s separation fromemployment with Stonehaven Technologies.

(4)                                  Amountrepresents a base annual salary of $120,000 for the period from February 24,2000 through December 31, 2001.

(5)                                  Alloptions were granted in February 2000, bore an exercise price of $6.375 perCommon Share and were exercisable as to 333,333 shares on February 24, 2000,with options as to 41,667 shares exercisable quarterly, commencing on May 24,2000. As of December 31, 2001, all of these options have expired.

(6)                                  Alloptions were granted in October 1999 in accordance with the Company’s plan ineffect at that date and bear an exercise price of $2.90 per Common Share. Theseoptions were exercisable as to 40,000 shares commencing on December 31, 1999and 40,000 shares commencing on December 31, 2000.

(7)                                  Alloptions were granted in February 2000 and bear an exercise price of $5.375 perCommon Share. These options are exercisable as to 500,000 shares on February24, 2000, with options as to 62,500 shares exercisable quarterly, commencing onMay 24, 2000.

 

21

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**AGGREGATEDOPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES**

** **
| **Name and Principal Position**                                                        |   | **Common  Shares  Acquired  on  Exercise** |   | **Value  Realized** |   | **# of  Unexercised Securities Underlying   Options/SARs at Fiscal  Year End Exercisable/   Unexercisable** |   | **Value of  Unexercised   in-the-money  Options/SARs at  Fiscal Year End  ($)****Exercisable/   Unexercisable** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
| Duane  H. Lund  Chief Executive Officer and Chief Financial Officer and Secretary |   | —                                     |   | —              |   | 80,000/0                                                                                                    |   |                                                                                                            | $0/$0  | (1) |
|                                                                                   |   |                                       |   |                |   |                                                                                                        |   |                                                                                                            |   |
| Odeh A. Muhawesh Chief  Knowledge Officer, Stonehaven Technologies, Inc.               |   | —                                     |   | —              |   | 937,500/62,500                                                                                              |   |                                                                                                            | $0/$0  | (1) |

 

----

(1)  Calculations are based upon the closing bidprice of $0.30 per share as of December 31, 2001.

 

**EmploymentAgreements**

 

The Company currently has one employment agreement with Odeh Muhawesh,the Chief Knowledge Officer of Stonehaven Technologies, dated February 23,2000.  The employment agreement providesfor an initial base annual salary of $120,000, health, life, disability andother benefits extended by the Board to other similarly situated executives anda discretionary performance bonus. The employment agreement expires on March31, 2002. In the event that the Company terminates the executive’s employmentwithout cause or following a change of control of the Company, the Company or,in the case of change of control, its successor, will be obligated to pay theexecutive’s base salary and benefits for a two-year period.

 

Prior to December 31, 2001, Stonehaven Technologies had employmentagreements with Duane H. Lund, the former Chief Executive Officer of StonehavenTechnologies and Mary S. Henschel, former President of Stonehaven Technologieswhich provided terms identical to that of Mr. Muhawesh identified above.  In connection with a sale of certain assetsof Stonehaven Technologies on July 10, 2001, Stonehaven Technologies and Ms.Henschel entered into a Separation Agreement whereby Ms. Henschel received apayment of $262,000 and was required to separate from her employment withStonehaven Technologies. Further, Stonehaven Technologies’ employment agreementwith Mr. Lund was terminated on September 9, 2001****and as of December 31, 2001,the Company has accrued related termination costs of $240,000**.**

 

In addition, the Company had an employmentagreement with Duane Lund, the Company’s Chief Executive Officer, dated October1, 1999 which provided for an initial base salary of $80,000, health, life anddisability and other benefits extended by the Board of Trustees to othersimilarly situated executives and a bonus of up to 100% of base salary undercertain conditions.  The employmentagreement expired on December 31, 2000. No bonus was paid to Mr. Lund under the employment agreement.  As of December 31, 2001, Mr. Lund continuesto serve as the Company’s Chief Executive Officer without an employmentcontract at an annual salary of $150,000.

 

22

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**Committees ofthe Board of Trustees**

 

**Audit Committee**

 

The Audit Committee for the year ended December 31,2001 and through February 28, 2001 consisted of Messrs. Lund, Whiting andLambert and held five meetings during the year ended December 31, 2001.  The Company is in the process of selecting areplacement for Mr. Whiting.

 

The Audit Committee makes recommendations concerning the engagement ofindependent public accountants, reviews the performance of independent publicaccountants, considers the range of audit and non-audit fees and reviews theadequacy of the Company’s internal accounting controls.

 

**CompensationCommittee**

 

The Company’s Compensation Committee currently consists of Messrs.Hoyt, Whiting and Lambert and held no meetings during the year ended December31, 2001.  The Compensation Committeemakes recommendations and exercises all powers of the Board of Trustees inconnection with certain compensation matters, including incentive compensationand benefit plans.  The CompensationCommittee administers, and has authority to grant awards under, the Company’s1998 Stock Incentive Plan.

 

**Meetings of Trustees**

 

The Trustees held five meetings during theyear ended December 31, 2001**.**

 

**Compensation of Trustees**

 

None.

 

23

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**Item 11. ****Security Ownership ofManagement and Certain Beneficial Owners**

 

The following table sets forth certain information with respect to thebeneficial ownership of the Company’s voting shares as of March 1, 2002 by: (i)each person known by the Company to own more than 5% in interest of theoutstanding voting shares: (ii) each of the Company’s Trustees;  (iii) each of the Company’s executiveofficers included in the Summary Compensation Table included elsewhere herein;and (iv) all of the Company’s Trustees and executive officers as a group.Except as otherwise noted, the person or entity named has sole voting andinvestment power over the shares indicated. Information as to the beneficial ownership of Common Shares and Class APreferred Shares by Trustees and executive officers has been furnished by therespective person.

 
|                                                                               |   | **BENEFICIAL  OWNERSHIP** |   |
|------------------------------------------------------------------------------------|--------|---------------------------|--------|
| **NAME**                                                                           |   | **Number (1)**            |   | **Percent (1)** |   |
| Steven B. Hoyt  (2) (3)                                                            |   | 1,674,981                 |   | 24.6 | % |
| Paul T. Lambert  (2) (4)                                                           |   | 1,524,946                 |   | 22.4 | % |
| Duane H. Lund  (2) (5)                                                             |   | 1,111,847                 |   | 16.3 | % |
| American Real  Estate Equities, LLC (6)                                            |   | 964,803                   |   | 14.2 | % |
| Odeh Muhawesh  (7)(8)                                                              |   | 477,501                   |   | 7.0 | % |
| Mary S. Henschel  (9)                                                              |   | 138,011                   |   | 2.0 | % |
| All Trustees and  current or former executive officers as a group (5 persons) (10) |   | 2,997,680                 |   | 44.1 | % |

 

----

*Indicates less than one percent.

 

(1)  Based on 4,517,524 Common Shares and 663,291Class A Preferred Shares outstanding as of the January 1, 2002.

 

(2)  The business address for each of the current Trustees andexecutive officers is 5620 Smetana Road, Suite 330, Minnetonka, Minnesota55343.

 

(3)  Includes 390,890 Common Shares issuable upon conversion of113,367 Class A Preferred Shares and 964,803 Common Shares held by AmericanReal Estate Equities, LLC, of which Mr. Hoyt is a member.

 

(4)  Includes 115,388 Common Shares issuable uponconversion of 33,465 Class A Preferred Shares, 444,755 Common Shares held byLambert Equities II, LLC, of which Mr. Lambert is the controlling majoritymember and sole manager and 964,803 Common Shares held by American Real EstateEquities, LLC, of which Lambert Equities II, LLC is a member.

 

(5)  Includes 3,448 Common Shares issuable upon conversion of 1,000Class A Preferred Shares, 143,596 Common Shares held by WLPT Funding, LLC, ofwhich Mr. Lund is the owner and sole manager and 964,803 Common Shares held byAmerican Real Estate Equities, LLC, of which WLPT Funding, LLC is a member.Excludes options as to 80,000 Common Shares which are currently exercisable butnot in the money.

 

(6)  The business address for American Real Estate Equities, LLC is300 First Avenue North, Suite 115, Minneapolis, MN 55401.

 

(7)  The business address for Mr. Muhawesh is 6465 Wavzata Boulevard,Suite 810, Minneapolis, MN  55426.

 

(8)  Excludes options as to 1,000,000 Common Shares which arecurrently exercisable but not in the money.

 

24

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(9)  In connection with a sale of certain assets of Stonehaven Technologiesto Stellent on July 10, 2001, Ms. Henschel is no longer employed as thePresident of Stonehaven Technologies as of July 10, 2001.

 

(10) Includes512,664 Common Shares issuable upon conversion of 148,684 Class A PreferredShares. Figures do not reflect an aggregate of 181,629 Common Units of theCompany’s Operating Partnership andoptions as to 1,017,500 Common Shares, which are currently exercisable by theTrustees and executive officers of the Company but not in the money.

 

**Item 12.  Certain Relationships and RelatedTransactions**

 

On February 24, 2000, the Company acquiredStonehaven Technologies (formerly NETLink International, Inc. “Netlink”).  The Company exchanged 914,292 Common Shares(valued at $4.375 per share or an aggregate of $4.0 million) for all of theoutstanding stock of Netlink.  OdehMuhawesh and Mary Henschel, former shareholders of Netlink, received, eitherdirectly or indirectly a significant portion of such consideration and becameofficers of Stonehaven Technologies.  OnJuly 10, 2001, Stonehaven Technologies’ sold certain of its assets toStellent, Inc., a Minnesota company (NASDAQ:STEL) (“Stellent”) pursuant to anAsset Purchase Agreement between the Company, Stonehaven Technologies andStellent.  In connection with the July2001 transaction, Stonehaven Technologies and Mary Henschel, former Presidentof Stonehaven Technologies, entered into a Separation Agreement whereby Ms.Henschel was required to separate from her employment with StonehavenTechnologies.  Further, StonehavenTechnologies’ employment agreement with Mr. Lund was terminated on September 9,2001****andas of December 31, 2001, the Company has accrued related termination costs of$240,000**. **Odeh Muhawesh continues to serveas Chief Knowledge Officer and the sole employee of Stonehaven Technologiesunder his employment contract which expires on March 31, 2002. Unpaid costs through the end of Mr.Muhawesh’s employment agreement totaling $37,000 have been accrued as ofDecember 31, 2001.

 

Separately,Mr. Lund continues to serve as the Company’s Chief Executive Officer.

 

On December 29, 2000, the OperatingPartnership sold its interest in its wholly-owned subsidiary WPT I, LLC, aDelaware limited liability company (“WPT I”) and owner of the Thresher Squareproperty (“Thresher Property”), to four individuals (“Buyers”), in exchange for$169,874 in cash, 522,416 Common Shares of the Company and 61,898 Common Unitsof the Operating Partnership, all of which were cancelled, and the release ofapproximately $6.6 million of debt.  WPTI originally purchased the Thresher Property from the Buyers, one of which is aTrustee of Stonehaven.

 

On June 30, 2000, the Company transferred andsold to Wellington Management Corporation (WMC), an affiliate of Arnold Leas,the former Chairman of the Board of the Company until that date, the Company’s100% interest in Lake Point and 8% equity interest in Highlander.  The interests were exchanged for 95,000shares of the Company’s Class B Preferred Shares owned by WMC, includingaccrued distributions, and WMC assumed the mortgage debt totaling approximately$2.7 million associated with Lake Pointe. Further in connection with the dispositions, the listing agreementbetween the Company and WMC’s affiliate, WMC Realty, Inc., was terminated andno brokerage commission was paid to WMC’s affiliate.  Additionally, Mr. Leas resigned, and Robert F. Rice, thenSecretary and Trustee of the Company, entered into a Separation Agreement withthe Company pursuant to which he resigned as Secretary and Trustee of theCompany and received from the Company a severance payment of $40,000.

 

On February 29, 2000, the Company, throughthe Operating Partnership, acquired the Plymouth

 

25

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Properties from Plymouth Partners II, LLC, ofwhich Steven B. Hoyt, a Trustee of the Company is the chief manager andco-owner.  The total purchase price was$6.7 million and was funded through the issuance of an aggregate of 181,629Common Units in the Operating Partnership (valued at $4.35 per Common Unit, oran aggregate value of $790,000), the assumption of certain third-party debttotaling $4.5 million secured by the Plymouth Properties and the balance paidin cash.

 

On February 18, 2000, the Board of Trusteesapproved the conversion of 1,657,437 Common Units of the Operating Partnership****into 1,468,484 Common Shares and furtherapproved the conversion of the 254,800 Class B Preferred Shares held byAmerican Real Estate Equities, LLC into 808,482 Common Shares.

 

**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 $87,000 and $241,000 for the years ended December 31,2001 and December 31, 2000, respectively.

** **

**Transactions between Companies under Common Management**

 

Stonehaven Technologies had a customer relationship in which OdehMuhawesh, an officer of Stonehaven Technologies, and certain other formermembers of the Company’s management performed certain managementresponsibilities for the customer from approximately January 1 through June 30,2000.  Revenues recognized from thiscustomer for the year ended December 31, 2001 and for the period commencingwith the February 24, 2000 acquisition date through December 31, 2000 wereapproximately zero and $353,000, respectively. As of December 31, 2000, accounts receivable from the customer totaledapproximately $114,000 and amounts due to the customer totaled $30,000.  As of December 31, 2001, such amounts werewritten off.

 

**Rental Income**

 

During the years ended December 31, 2001 and December 31, 2000, theCompany recognized revenue of approximatelyzero and $23,000, respectively, on office space leased to Hoyt.

 

**RentalExpense**

 

During the years ended December 31, 2001 and December 31, 2000, theCompany recognized rental expense of approximately $10,000 and $175,000,respectively, related to office space leased from Hoyt.

 

26

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**Item 13.  Exhibits and Reports on Form 8–K**

** **

**(a)**          Exhibits

** **
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |   | Amended and Restated  Contribution Agreement between the Company, the Operating Partnership, AREE  and other limited partnership Unit recipients dated as of August 31, 1998  (filed as Exhibit A with the Company’s Schedule 14A on November 6, 1998 and  incorporated herein by reference)                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2                 |   | Agreement and Plan of  Reorganization dated as of February 25, 2000, by and among the Company, NTLI  Acquisition Corporation, a Delaware corporation, NETLink International, Inc.,  a Minnesota corporation and Odeh A. Muhawesh, Mary Henschel, Alan Schmidt,  Ahmad Yassine, Patrick Archbold, Ann Wessels, Art Carruth, Patricia Hewitt,  Thomas walker and Sherry Ajax (filed as Exhibit 2.2 with the Company’s Form  8-K on March 17, 2000 and incorporated herein by reference) |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.3                 |   | Contribution Agreement  between Wellington Partners, L.P., the Company and Plymouth Partners II, LLC  and other LP Unit Recipients dated as of February 29, 2000 (filed as Exhibit  2.3 with the Company’s Form 8-K on March 17, 2000 and incorporated herein by  reference)                                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                 |   | Declaration of Trust  (filed with the Company’s Registration Statement on Form SB-2 (Commission  File No. 33-82888C) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                 |   | Bylaws of the Company  (filed with the Company’s Registration Statement on Form SB-2 (Commission  file No. 33-82888C) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                           |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.3                 |   | Articles of Amendment and  Restatement of the Declaration of Trust (filed as Exhibit E with the  Company’s Schedule 14A on November 6, 1998 and incorporated herein by  reference)                                                                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |   | Agreement of Limited  Partnership of the Operating Partnership dated as of August 31, 1998 (filed  as Exhibit C with the Company’s Schedule 14A on November 6, 1998 and  incorporated herein by reference)                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |   | 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)                                                                                                                                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                |   | Common Stock Purchase  Warrant by the Company to Credit Suisse First Boston Mortgage Capital LLC,  dated March 5, 1998 (filed with the Company’s Current Report on Form 8-K on  August 31, 1998 and incorporated herein by reference)                                                                                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                |   | Registration Rights  Agreement by and between the Company and Credit Suisse First Boston Mortgage  Capital, LLC dated March 5, 1998 (filed with the Company’s Current Report on  Form 8-K on August 31, 1998 and incorporated herein by reference)                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9                |   | 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)                                                                                                                                                                                                                                                             |

 

27

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| 10.10  |   | Warrant to Purchase Shares  of Stock dated March 28, 2000 between the Company and Venture One Real Estate  LLC (filed with the Company’s Quarterly Report for the period ended June 30,  2000 on Form 10-QSB filed on August 14, 2000 and incorporated herein by  reference)                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Call Agreement dated March 28, 2000 between  the Company and Venture One Real Estate LLC (filed with the Company’s  Quarterly Report for the period ended June 30, 2000 on Form 10-QSB filed on  August 14, 2000 and incorporated herein by reference)                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Warrant to Purchase Shares  of Stock dated June 22, 2000 between the Company and Venture One Real Estate  LLC (filed with the Company’s Quarterly Report for the period June 30, 2000  on Form 10-QSB filed on August 14, 2000 and incorporated herein by reference)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Exclusive Agency and  Representation Agreement between RESoft, Inc. and Venture One Real Estate,  LLC (filed with the Company’s Quarterly Report for the period September 30,  2000 on Form 10-QSB filed on November 14, 2000 and incorporated herein by  reference)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | 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) |

 

**(b) Reports on Form 8–K**

 

None

 

28

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**SIGNATURES**

 

 
| By:                       | /s/  Duane H. Lund           |
|---------------------------|------------------------------|
| Duane  H. Lund, Secretary | Dated:   March 18, 2002 |
|                           |                              |  |

 

KNOW ALL PERSON BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Duane H. Lund,jointly and severally, his attorneys–in–fact, each with the powerof substitution, for him in any and all capacities, to sign any amendments tothis Report on Form 10-KSB and to file the same, with exhibits thereto andother documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of said attorney–in–fact,or his substitute or substitutes, may do or cause to be done by virtue hereof.

 

In accordance with Section 13 or 15(d) of theSecurities Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

**STONEHAVEN REALTY TRUST**
| **Signature**       | **Title**                            | **Date**       |
|---------------------|--------------------------------------|----------------|
|                |                                 |           |
| /s/ Duane H. Lund   | Trustee and Chief  Executive Officer | March 18, 2002 |
| Duane H. Lund       | (Principal Executive  Officer)       |           |
|                |                                 |           |
| /s/ Steven B. Hoyt  | Trustee                              | March 18, 2002 |
| Steven B. Hoyt      |                                 |           |
|                |                                 |           |
| /s/ Paul T. Lambert | Trustee                              | March 18, 2002 |
| Paul  T. Lambert    |                                 |           |
|                |                                 |           |

 

29

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**STONEHAVEN REALTY TRUST AND SUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| **Report of Independent Auditors**                                                                              |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| Consolidated Balance Sheet  as of December 31, 2001                                                             |
|                                                                                                            |
| Consolidated  Statements of Operations—Years ended December 31, 2001 and December 31, 2000                 |
|                                                                                                            |
| Consolidated  Statements of Shareholders’ Equity—Years ended December 31, 2001 and December  31, 2000 |
|                                                                                                            |
| Consolidated  Statements of Cash Flows—Years ended December 31, 2001 and December 31, 2000                 |
|                                                                                                            |
| Notes to  Consolidated Financial Statements                                                                     |

 

 

F-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

To the Board of Trustees and Shareholders ofStonehaven Realty Trust and Subsidiaries:

 

We have audited the accompanying consolidatedbalance sheet of Stonehaven Realty Trust and Subsidiaries as ofDecember 31, 2001, and the related consolidated statements of operations,changes in shareholders’ equity, and cash flows for the years ending December31, 2001 and 2000.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall consolidated financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Stonehaven Realty Trust and Subsidiaries as of December31, 2001, and the results of their operations and their cash flows for theyears ending December 31, 2001 and 2000 in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| /s/ Boulay, Heutmaker,  Zibell & Co. P.L.L.P. |
|---------------------------------------------------|
|                                              |
|                                              |
| Minneapolis, Minnesota                            |
| February 15, 2002                                 |

 

F-2

----

** **

**Stonehaven Realty Trust and SubsidiariesConsolidated Balance Sheet**

**December 31, 2001**

 
| **ASSETS**                                                                                                                                                                      |   |        |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
| Investments in  real estate:                                                                                                                                                    |   |        |       |
| Land                                                                                                                                                                            |   | $           | 2,195,034  |   |
| Buildings and  improvements                                                                                                                                                     |   | 8,823,447   |       |
| Computer  hardware, software and other fixed assets                                                                                                                             |   | 69,922      |       |
|                                                                                                                                                                            |   | 11,088,403  |       |
| Accumulated  depreciation and amortization                                                                                                                                      |   | (564,090    | )          |
| Net investments  in real estate                                                                                                                                                 |   | 10,524,313  |       |
| Cash and cash  equivalents                                                                                                                                                      |   | 1,540,766   |       |
| Marketable  securities, net                                                                                                                                                     |   | 2,364,800   |       |
| Restricted cash                                                                                                                                                                 |   | 229,303     |       |
| Other assets,  net                                                                                                                                                              |   | 152,801     |       |
| **TOTAL  ASSETS**                                                                                                                                                               |   | $           | 14,811,983 |   |
|                                                                                                                                                                            |   |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                  |   |        |       |
| Liabilities:                                                                                                                                                                    |   |        |       |
| Mortgage loans and notes payable                                                                                                                                                |   | $           | 6,537,791  |   |
| Related party  notes payable                                                                                                                                                    |   | 335,000     |       |
| Income taxes  payable                                                                                                                                                           |   | 40,000      |       |
| Accounts payable  and accrued expenses                                                                                                                                          |   | 771,049     |       |
| Security  deposits                                                                                                                                                              |   | 35,000      |       |
| Total  liabilities                                                                                                                                                              |   | 7,718,840   |       |
|                                                                                                                                                                            |   |        | ** ** |
| **Minority interest in  consolidated subsidiary**                                                                                                                               |   | **8,810**   | ** ** |
|                                                                                                                                                                            |   |        | ** ** |
| **COMMITMENTS  AND CONTINGENCIES:**                                                                                                                                             |   |        | ** ** |
|                                                                                                                                                                            |   |        | ** ** |
| Shareholders’  equity:                                                                                                                                                     |   |        | ** ** |
| Preferred Shares – $0.01 par value, 10,000,000  authorized: 663,291 Class A cumulative convertible shares issued and  outstanding, $10.00 per share liquidation preference |   | 6,633       |       |
| Common Shares – $0.01 par value, 100,000,000  authorized;   4,517,524 shares issued and outstanding                                                                        |   | 45,176      |       |
| Additional  paid-in capital                                                                                                                                                     |   | 25,595,216  |       |
| Accumulated  other comprehensive loss; net unrealized loss on marketable securities                                                                                             |   | (30,400     | )          |
| Accumulated  deficit                                                                                                                                                            |   | (18,492,523 | )          |
| Treasury stock,  at cost                                                                                                                                                        |   | (39,769     | )          |
| Total  shareholders’ equity                                                                                                                                                |   | 7,084,333   |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                            |   | $           | 14,811,983 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-3

----

 

**Stonehaven Realty Trust andSubsidiariesConsolidated Statements ofOperations**

 
|                                                                                                                |   | **For the  year ended December 31,** |       |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                                |   | **2001**                             | ** ** | **2000** | ** ** |
| **Revenues**                                                                                                        |   |                                 |       |   |   |
| Rental revenue                                                                                                      |   | $                                    | 1,122,127  |   | $ | 3,189,791 |   |
| Tenant  recoveries                                                                                                  |   | 692,308                              |       | 1,921,114 |   |
| Professional  services and sales of hardware andsoftware                                                            |   | 1,803,266                            |       | 2,632,825 |   |
| Interest and  other                                                                                                 |   | 206,295                              |       | 372,334 |   |
| Total revenues                                                                                                      |   | 3,823,996                            |       | 8,116,064 |   |
| **Expenses**                                                                                                        |   |                                 |       |   |   |
| Property,  operating and maintenance                                                                                |   | 209,045                              |       | 1,017,904 |   |
| Advertising and  promotion                                                                                          |   | 108,471                              |       | 221,550 |   |
| Property taxes  and insurance                                                                                       |   | 417,686                              |       | 959,102 |   |
| Depreciation and  amortization                                                                                      |   | 1,766,389                            |       | 2,582,297 |   |
| Interest                                                                                                            |   | 721,682                              |       | 1,790,804 |   |
| General and  administrative                                                                                         |   | 1,814,488                            |       | 2,969,153 |   |
| Management fees                                                                                                     |   | 86,905                               |       | 255,422 |   |
| Costs related to  professional services and sales of hardware and software                                          |   | 895,785                              |       | 2,143,524 |   |
| Product  development                                                                                                |   | 114,917                              |       | 396,181 |   |
| Nonrecurring  expenses                                                                                              |   | –                               |       | 408,415 |   |
| Total expenses                                                                                                      |   | 6,135,368                            |       | 12,744,352 |   |
| Loss from operations  before equity in income of unconsolidated subsidiary and loss allocated to  minority interest |   | (2,311,372                           | )          | (4,628,288 | ) |
| Equity in income  of unconsolidated subsidiary                                                                      |   | –                               |       | 2,912 |   |
| Loss allocated  to minority interest                                                                                |   | 132,080                              |       | 571,333 |   |
| Loss from operations                                                                                                |   | (2,179,292                           | )          | (4,054,043 | ) |
| Loss on sale of  investments in real estate                                                                         |   | (165,835                             | )          | (4,260,910 | ) |
| Loss on sale of  marketable securities                                                                              |   | (667,117                             | )          | – |   |
| Gain on sale of  certain assets of Stonehaven Technologies                                                          |   | 397,263                              |       | – |   |
| Loss before  provision for income taxes                                                                             |   | (2,614,981                           | )          | (8,314,953 | ) |
| Provision  for  income taxes                                                                                   |   | (40,000                              | )          | – |   |
| Net Loss                                                                                                            |   | (2,654,981                           | )          | (8,314,953 | ) |
| Preferred Share  Dividends                                                                                          |   | (630,141                             | )          | (643,558 | ) |
| Net loss  available to Common Shareholders                                                                          |   | $                                    | (3,285,122 | ) | $ | (8,958,511 | ) |
| Net loss available to  Common Shareholders per Common Share:   Basic and Diluted                               |   | $                                    | (0.73      | ) | $ | (2.01 | ) |
| Weighted average  number of Common Shares outstanding                                                               |   | 4,517,524                            |       | 4,459,656 |   |
| Comprehensive  loss:                                                                                                |   |                                 |       |   |   |
| Net Loss                                                                                                            |   | $                                    | (2,654,981 | ) | $ | (8,314,953 | ) |
| Other comprehensive  loss:                                                                                          |   |                                 |       |   |   |
| Unrealized loss  on marketable securities                                                                           |   | (30,400                              | )          | – |   |
| Comprehensive  loss                                                                                                 |   | $                                    | (2,685,381 | ) | $ | (8,314,953 | ) |

 

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

 

F-4

----

 

**Stonehaven Realty TrustConsolidated Statements ofShareholders’ Equity**

**For theyear ended December 31, 2001 and 2000**

** **
|                                                                                                                             |   | **Class A  Preferred  Shares** |   | **Class B  Preferred  Shares** |   | **Common  Shares** |   | **Additional  Paid-in  Capital** |   | **Accumulated  other  comprehensive  income: net  unrealized loss  on marketable  securities** |   | **Accumulated  Deficit** |   | **Cost of  Shares held  in Treasury** |    | **Total**  |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|--------------------------------|--------|--------------------|--------|----------------------------------|--------|------------------------------------------------------------------------------------------------|--------|--------------------------|--------|---------------------------------------|---------|------------|--------|
| Balance  at December 31, 1999                                                                                                    |   | $                              | 7,840  |                           | $      | 3,498              |   | $                                | 13,881 |                                                                                           | $      | 20,764,877               |   | $                                     | —  |       | $      | (6,250,624 | ) | $ | — |   | $ | 14,539,472 |   |
| Cash dividends  declared                                                                                                         |   | —                         |   | —                         |   | —             |   | —                           |   | —                                                                                         |   | (643,558                 | )      | 3⁄4                                |    | (643,558   | )      |
| Common Shares  issued in connection with dividend reinvestments                                                                  |   | —                         |   | —                         |   | 167                |   | 47,498                           |   | —                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | 47,665     |   |
| Common Shares  issued in connection with Stonehaven Technologies acquisition                                                     |   | —                         |   | —                         |   | 9,143              |   | 3,990,857                        |   | —                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | 4,000,000  |   |
| Issuance of  Common Shares for services                                                                                          |   | —                         |   | —                         |   | 429                |   | 149,571                          |   | 3⁄4                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | 150,000    |   |
| Issuance of  warrants                                                                                                            |   | —                         |   | —                         |   | —             |   | 682,338                          |   | 3⁄4                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | 682,338    |   |
| Cost of 15,300  shares of common shares acquired for treasury                                                                    |   | 3⁄4                         |   | 3⁄4                         |   | (153               | )      | 153                              |   | 3⁄4                                                                                         |   | 3⁄4                   |   | (39,769                               | )       | (39,769    | )      |
| Lake Pointe  return of capital and sale                                                                                          |   | 3⁄4                         |   | (950                           | )      | 3⁄4             |   | (760,646                         | )      | 3⁄4                                                                                         |   | (45,000                  | )      | 3⁄4                                |    | (806,596   | )      |
| Thresher  Property return of capital and sale                                                                                    |   | 3⁄4                         |   | 3⁄4                         |   | (5,224             | )      | (7,120,036                       | )      | 3⁄4                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | (7,125,260 | )      |
| Conversion of  Preferred Shares and units to Common Shares                                                                       |   | (1,207                         | )      | (2,548                         | )      | 26,933             |   | (23,178                          | )      | 3⁄4                                                                                         |   | 3⁄4                   |   | 3⁄4                                |    | 3⁄4     |   |
| Adjustment to  minority interest resulting from operations and changes in ownership of the  operating partnership by the Company |   | 3⁄4                         |   | 3⁄4                         |   | 3⁄4             |   | 7,863,782                        |   | 3⁄4                                                                                         |   | 121,299                  |   | 3⁄4                                |    | 7,985,081  |   |
| Net loss                                                                                                                         |   | —                         |   | —                         |   | —             |   | —                           |   | —                                                                                         |   | (8,314,953               | )      | 3⁄4                                |    | (8,314,953 | )      |
| Balance  at December 31, 2000                                                                                                    |   | $                              | 6,633  |                           | $      | —             |   | $                                | 45,176 |                                                                                           | $      | 25,595,216               |   | $                                     | —  |       | $      | (15,132,836 | ) | $ | (39,769 | ) | $ | 10,474,420 |   |
| Cash dividends  declared                                                                                                         |   |                           | — |                           |   | —             |   |                             | — |                                                                                           |   | —                   |   |                                  | —  |       |   | (630,141 | ) |   | — |   |   | (630,141 | ) |
| Unrealized loss  on marketable securities                                                                                        |   |                           | — |                           |   | —             |   |                             | — |                                                                                           |   | —                   |   |                                  | (30,400 | )          |   | — |   |   | — |   |   | (30,400 | ) |
| Adjustment to  minority interest resulting from operations of the operating partnership by  the Company                          |   |                           | — |                           |   | —             |   |                             | — |                                                                                           |   | —                   |   |                                  | —  |       |   | (74,565 | ) |   | — |   |   | (74,565 | ) |
| Net loss                                                                                                                         |   |                           | — |                           |   | —             |   |                             | — |                                                                                           |   | —                   |   |                                  | —  |       |   | (2,654,981 | ) |   | — |   |   | (2,654,981 | ) |
| Balance  at December 31, 2001                                                                                                    |   | $                              | 6,633  |                           |   | —             |   | $                                | 45,176 |                                                                                           | $      | 25,595,216               |   | $                                     | (30,400 | )          | $      | (18,492,523 | ) | $ | (39,769 | ) | $ | 7,084,333 |   |
|                                                                                                                                  |        |                                |        |                                |        |                    |        |                                  |        |                                                                                                |        |                          |        |                                       |         |            |        |  |  |  |  |  |  |  |  |  |

 

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

 

F-5

----

 

**StonehavenRealty Trust**

**ConsolidatedStatement of Cash Flows**

 
|                                                                                                      |   | **For the  year ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                      |   | **2001**                             | ** ** | **2000** | ** ** |
| **Cash  flows from operating activities:**                                                                |   |                                 |       |   |   |
| Net loss                                                                                                  |   | $                                    | (2,654,981 | ) | $ | (8,314,953 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                              |   |                                 |       |   |   |
| Depreciation and  amortization                                                                            |   | 1,766,389                            |       | 2,582,297 |   |
| Bad debt expense                                                                                          |   | 392,134                              |       | — |   |
| Loss allocated to  minority interest                                                                      |   | (132,080                             | )          | (571,333 | ) |
| Loss on sales of  investment in real estate                                                               |   | 165,835                              |       | 4,260,910 |   |
| Gain on sale of certain  assets of Stonehaven  Technologies                                               |   | (397,263                             | )          | — |   |
| Loss on sale of  marketable securities                                                                    |   | 667,117                              |       | — |   |
| Equity in income of  unconsolidated subsidiary                                                            |   | —                               |       | (2,912 | ) |
| Net change in assets  and liabilities:                                                                    |   |                                 |       |   |   |
| Accounts receivable,  net                                                                                 |   | 81,380                               |       | (40,771 | ) |
| Restricted cash                                                                                           |   | 804,731                              |       | (906,985 | ) |
| Other assets, net                                                                                         |   | (10,204                              | )          | 8,543 |   |
| Income taxes payable                                                                                      |   | 40,000                               |       | — |   |
| Accounts payable and  accrued expenses                                                                    |   | (1,787,759                           | )          | 147,898 |   |
| Deferred revenue and  security deposits                                                                   |   | (111,214                             | )          | 122,385 |   |
| Net cash used in  operating activities                                                                    |   | (1,175,915                           | )          | (2,714,921 | ) |
|                                                                                                      |   |                                 |       |   |   |
| **Cash  flows from investing activities:**                                                                |   |                                 |       |   |   |
| Acquisition of and  additions to real estate properties                                                   |   | (43,305                              | )          | (1,359,246 | ) |
| Acquisition of computer  hardware, software and other fixed assets                                        |   | (63,649                              | )          | (902,172 | ) |
| Acquisition of  licensing agreements                                                                      |   | (300,000                             | )          | — |   |
| Cash proceeds from  disposition of real estate property and investment in unconsolidated subsidiary,  net |   | 593,579                              |       | 170,999 |   |
| Costs associated with  disposition of certain assets of Stonehaven Technologies                           |   | (587,738                             | )          | — |   |
| Cash proceeds from  acquisition of consolidated subsidiary                                                |   | —                               |       | 160,759 |   |
| Cash proceeds from sale  of marketable securities,                                                        |   | 2,925,683                            |       | 5,188,779 |   |
| Investment in  unconsolidated subsidiary                                                                  |   | —                               |       | 7,425 |   |
| Net cash provided by  investing activities                                                                |   | 2,524,570                            |       | 3,266,544 |   |
|                                                                                                      |   |                                 |       |   |   |
| **Cash  flows from financing activities:**                                                                |   |                                 |       |   |   |
| Payments on mortgage  loans and notes payable                                                             |   | (104,526                             | )          | (536,614 | ) |
| Payments on line of  credit                                                                               |   | —                               |       | (68,466 | ) |
| Payments of related  party note payable                                                                   |   | —                               |       | (415,000 | ) |
| Repurchase of Common  Shares                                                                              |   | —                               |       | (39,769 | ) |
| Dividends/distributions  paid                                                                             |   | (1,339,279                           | )          | (748,582 | ) |
| Net cash used in  financing activities                                                                    |   | (1,443,805                           | )          | (1,808,431 | ) |
|                                                                                                      |   |                                 |       |   |   |
| Net decrease in cash  and cash equivalents                                                                |   | (95,150                              | )          | (1,256,808 | ) |
| Cash and cash  equivalents                                                                                |   |                                 |       |   |   |
| Beginning of year                                                                                         |   | 1,635,916                            |       | 2,892,724 |   |
| End of year                                                                                               |   | $                                    | 1,540,766  |   | $ | 1,635,916 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-6

----

 

**Stonehaven Realty Trust and Subsidiaries**

 

**Notes to Consolidated Financial Statements**

 

**Note1—Organization**

 

Stonehaven Realty Trust (the “Company”) is a real estate company separated into two business segments: acommercial real estate segment which acquires, owns and operates commercialreal estate and a technology segment which through July 10, 2001,provided information technology consultingand document management solutions.

 

The Company’s real estate investments are owned through its operatingpartnership, Wellington Properties Investments, L.P. (“OperatingPartnership”), of which the Company is the sole general partner and owns anapproximate 92.9% interest.  As ofDecember 31, 2001, the Company owned four commercial industrial properties thataggregate approximately 129,000 rentable square feet.

 

On July 10, 2001, Stonehaven Technologies, Inc. (Formerly, RESoft, Inc.)(“Stonehaven Technologies”), a Delaware company and a wholly-owned subsidiaryof Stonehaven Realty Trust, sold certain of its assets to Stellent, Inc.(Formerly, IntraNet Solutions, Inc.) (“Stellent”), a Minnesota company (NASDAQ:STEL).

 

**Note 2—Basisof Presentation**

 

Minority interest at December 31, 2001represents approximately a 7.1% aggregate partnership interest in the OperatingPartnership held by the limited partners thereof.

 

The consolidated financial statements of theCompany at December 31, 2001 and for the years ended December 31, 2001 and 2000include the accounts and operating results of the Company, its subsidiaries andthe Operating Partnership as the Company’s general partnership interestprovides for control over all significant Operating Partnership activities.  The consolidated financial statementsinclude the Company’s 8% equity interest in Highlander Acquisition Company, LLC(“Highlander”) under the equity method of accounting for the periods theCompany retained its equity interests. All significant intercompany transactions have been eliminated inconsolidation.

 

**Note 3—Summaryof Significant Accounting Policies**

 

**Use of Estimatesin the Preparation of Financial Statements**

 

In order to conform with generally accepted accounting principles,management, in preparation of the Company’s consolidated financial statements,is required to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of December 31, 2001, and the reported amounts of revenues and expenses forthe years ended December 31, 2001 and 2000. Actual results could differ fromthose estimates.  Significant estimatesinclude, among other items, the valuation of investments in real estate anddeferred taxes.

 

**Investments in Real Estate**

 

Investments in real estate assets are carried at the lower of cost orestimated net realizable value.  TheCompany periodically reviews its properties for impairment and provides for aprovision if impairments are determined. First, to determine if impairment may exist, the Company reviews itsproperties and identifies those, if any, which have had either an event ofchange or event of circumstances warranting further assessment ofrecoverability.  Then, the Companyestimates the fair value of those properties on an individual basis bycapitalizing the expected net operating income, among various otherfactors.  Such amounts are then comparedto the property’s depreciated cost to determine whether an impairmentexists.  The Company has not recognized

 

F-7

----

impairment losses on real estate assets at December 31, 2001.

 

Depreciation expense is computed using the straight-line method basedon the following useful lives:

 
|                                                |   | **Years** |
|-----------------------------------------------------|--------|-----------|
| Building and improvements                           |   | 40        |
| Computer hardware,  software and other fixed assets |   | 3-5       |

 

Expenditures for ordinary maintenance and repairs are expensed tooperations as incurred and significant renovations and improvements thatimprove or extend the useful life of the asset are capitalized and depreciatedover their estimated useful life.

 

When a property is sold or retired, the costsand related accumulated depreciation are removed from the accounts and theresulting gain or loss is reflected in the statement of operations.

 

**Cash and cash equivalents**

 

Cash and cash equivalents include investments purchased with anoriginal maturity date of three months or less.  The carrying amount approximates fair value due to short maturityof these investments.

 

The Company maintains its cash and cash equivalents in bank accountswhich may exceed amounts insured by Federal Deposit Insurance Corporation.  Cash in money market funds is not federallyinsured.  As of December 31, 2001, cashin money market funds totaled $1,071,000.

 

**AccountsReceivable**

 

Accounts receivable is reported net of allowance for doubtfulaccounts.  As of December 31, 2001, allaccounts receivable have been written off as uncollectible.  Therefore, no allowance exists at December31, 2001.

 

**OtherAssets**

 

As of December 31, 2001, other assets primarily consist of deferredfinancing costs incurred to obtain and secure mortgage debt financing.  Other assets are carried at cost, lessaccumulated amortization.  The deferredfinancing costs are being amortized over the life of the respective loans on astraight-line basis.  Accumulatedamortization related to deferred financing costs as of December 31, 2001 wasapproximately $20,000.

 

As a result of the sale of certain assets ofStonehaven Technologies on July 10, 2001, our ability to market our royaltiesand licensing agreements has been significantly impaired primarily due to thefact that Stellent has become an active competitor to our technology.  As a result, the Company recorded the unamortizedcosts of these assets as of July 10, 2001 of approximately $1,620,000($2,482,000 net of accumulated amortization of approximately $862,000) as anoffset to the gain on sale of certainassets of Stonehaven Technologies.

 

Further, as a result of the sale of certain assets of Stonehaven Technologieson July 10, 2001, goodwill incurred in connection with the acquisition ofStonehaven Technologies was recorded as an offset to gain on sale of certainassets of Stonehaven Technologies.

 

**RevenueRecognition**

 

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

 

Revenue generated from professional services and sales of hardware andsoftware is recognized as services

 

F-8

----

 

and goods are provided.  Servicesbilled in advance are recorded as deferred revenues and recognized when revenueis earned.

 

**SoftwareDevelopment**

 

As of December 31, 2001, the Company is not incurring costs related todevelopment of new software product. When such costs are incurred, they are charged to software developmentexpense as incurred.  Softwaredevelopment costs are capitalized beginning when a product’s technologicalfeasibility has been established, which to date has been when the Company has aworking model of the software, and ending, when a product is available forgeneral release to customers. Substantially all development costs are incurred prior to establishing aworking model.  As a result, the Companyhas not capitalized any software development costs since costs have not beensignificant.

 

**Income Taxes**

 

ThroughDecember 31, 1999, the Company historically operated as a REIT and maintainedits qualification as a REIT under Sections 856 through 860 of the InternalRevenue Code (the “Code”). As a REIT, the Company generally was not subject tofederal income tax. To qualify as a REIT under the Code for a taxable year, theCompany must meet certain requirements relating to its assets, income, stockownership and distributions to shareholders.

 

Forthe year ended December 31, 2000, the Company did not qualify as a REIT underthe Code due to Stonehaven Technologies’ operations.  Due to the Company’s failure to qualify as a REIT, the Company isnow subject to federal income tax on all of its taxable income at regularcorporate rates and will not receive a deduction for dividends paid to itsshareholders. Additionally, any distributions to shareholders generally will betaxable to the shareholders as ordinary income to the extent of current andaccumulated earnings and profits. Thus, the Company’s income would be subjectto double taxation—at the corporate level and the shareholder level to theextent such income is distributed to shareholders. For the year endedDecember 31, 2000, the Company was in a taxable loss position. Accordingly,no provision was made for federal income taxes in the accompanying consolidatedfinancial statements for the year ended December 31, 2000.  For the year ended December 31, 2001, theCompany expects to have taxable income as a result of the sale of certainassets on July 10, 2001, and accordingly, has included a provision for federaland state income taxes totaling $40,000 in the accompanying consolidatedfinancial statements.

 

Failure to qualify as a REIT for the year endedDecember 31, 2000 disqualifies the Company from taxation as a REIT for the fourtaxable years thereafter and could result in the Company incurring indebtednessor liquidating investments should the Company not have sufficient funds to paythe resulting federal income tax liabilities. As a result, the funds availablefor distribution to the Company’s shareholders would be reduced for each of theyears involved. In addition, dividend payments subject to the Code would nolonger be required.

 

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

 

The 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.

 

**Investment inUnconsolidated Subsidiary**

 

The Company accounted for the investment in Highlander under the equitymethod.  The investment was recordedinitially at the Company’s cost and subsequently adjusted for the Company’s netequity in income or loss and cash

 

F-9

----

 

contributions and distributions. On June 30, 2000, the Company sold its 8% interest in Highlander.

 

**Fair Value ofFinancial Instruments**

 

The Company’s financial instruments include cash and cash equivalents,accounts receivable, accounts payable and accrued liabilities and mortgageloans and notes payable.  It is notcurrently practicable to estimate the fair value of mortgage loans and notespayable because those agreements contain unique terms, conditions, covenantsand restrictions, which were negotiated at arm’s length with the Company’slenders.  There is no readilydeterminable similar instrument on which to base an estimate of fair value forthose financial instruments.  For allother financial instruments, the fair values of the financial instruments werenot materially different from their carrying or contract values.

 

**SegmentDisclosure**

 

In June 1997, the FASB issued Statement of Financial AccountingStandards No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation”.  This Statement requiresthat a public company report financial and descriptive information about itsreportable operating segments. Generally, financial information is required to be reported on the basisthat it is used internally for evaluating segment performance and deciding howto allocate resources to segments, Management views the Company as two businesssegments: a commercial real estate segment which acquires, owns and operatescommercial real estate and a technology segment which provides informationtechnology consulting and document management solutions.

 

**RecentAccounting Pronouncements**

 

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“FAS 133”) FAS 133, as amended,establishes methods of accounting for derivative financial instruments andhedging activities related to those instruments as well as other hedgingactivities.  The Company was required toadopt FAS 133 effective January 1, 2001. Because the Company does not use derivative financial instruments, theCompany’s adoption of FAS 133 effective January 1, 2001 did not have an effecton the Company’s consolidated financial position or results of operations.

 

In December 1999, the Securities and Exchange Commission (“SEC”) issuedSEC Staff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements” (“SAB 101”).  SAB 101provides guidance on the recognition, presentation, and disclosure of revenuein financial statements.  In October2000, the SEC issued a “Frequently Asked Questions” document on SAB 101 toprovide further definitive guidance on the implementation of SAB 101.  SAB 101 is effective for years beginningafter December 15, 1999 and the Company was required to adopt SAB 101 in thequarter ended December 31, 2000, retroactive to the beginning of the year.  SAB 101 did not have an effect on theCompany’s results of operations, financial position or cash flows.

 

During fiscal 2001, the Financial AccountingStandards Board issued SFAS #142 Goodwill and Other Intangible Assets.  SFAS #142 will be effective for theCompany’s fiscal year beginning January 1, 2002 and will no longer permitgoodwill of the Company to be amortized. Instead, goodwill will be periodically tested for impairment and writtendown if impairment is determined to exist. Other intangible assets must be reviewed, and assessed at leastannually, in order to ascertain if their lives are deemed to be finite(amortized) or indefinite (not amortized). At December 31, 2001, the Company no longer has goodwill, but willevaluate any future goodwill or intangible assets with respect to the above.

 

In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS 144 establishes a model for measurement and reporting the impairment of assets to be disposed of by sale and addresses accounting for a segment of a business accounted for as a discontinued operation.  SFAS 144 is effective for fiscal years beginning after December 15, 2001.

 

F-10

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**Note 4—MarketableSecurities**

 

The Company’s investments in marketable securities areavailable-for-sale and, as of December 31, 2001, represent 80,000 shares ofcommon stock of Stellent (“Stellent Shares”). Such shares were acquired in connection with the sale of certain assetsof Stonehaven Technologies on July 10, 2001 and were recorded at $29.94 pershare based on the NASDAQ closing quote per share of common stock of Stellenton July 9, 2001.  The shares wereunregistered when acquired and Stellent subsequently registered the shares withthe Securities and Exchange Commission effective September 7, 2001.  As of December 31, 2001, the fair marketvalue of these marketable securities aggregate $2,365,000 (based upon theNASDAQ closing quote per share of common stock of Stellent of $29.56 onDecember 31, 2001).  As a result theCompany has recorded an unrealized loss of $30,400.

 

During the year ended December 31, 2001, the Company sold 120,000Stellent Shares at an average price of $24.38 per share and recognized a lossof the sale of these shares totaling approximately $667,000.  The Company recognizes gain or loss on thesale of marketable securities based upon the first-in first-out method.Subsequent to December 31, 2001 and through February 15, 2002, the Company soldan additional 40,000 shares at an average sale price of $31.34 per share net ofcommissions.  As of February 15, 2002,the NASDAQ closing quote per share of common stock of Stellent was $16.21.

 

**Note 5—Acquisitionsand Dispositions**

 

**Disposition ofCertain Assets of Stonehaven Technologies**

 

On July 10, 2001, Stonehaven Technologies sold all of its interest in SmartCabinet software code (software technology replicating and mapping a company’s business logic 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.  In exchange, Stonehaven Technologies received 200,000 unregistered shares of Stellent common stock (the “Stellent Shares”) with a market value aggregating approximately $5,988,000 (valued at $29.94 per share based on the NASDAQ closing quote per share on July 9, 2001).  Stellent subsequently registered the Stellent Shares with the Securities and Exchange Commission effective September 7, 2001.  As of December 31, 2001, the Company has recorded a gain on the sale of approximately $397,000, net of the unamortized costs of certain royalties, licensing agreements, and goodwill.

 

In connection with the transaction, Stonehaven Technologies and Mary Henschel, former President of Stonehaven Technologies, entered into a Separation Agreement.  Ms. Henschel and most of Stonehaven Technologies’ other employees are no longer employed by Stonehaven Technologies.  Further, Duane H. Lund terminated his employment with Stonehaven Technologies as of September 9, 2001****and as of December 31, 2001, the Company has accrued related termination costs of $240,000**.**  Odeh Muhawesh continues to serve as Chief Knowledge Officer and the sole employee of Stonehaven Technologies under his employment contract which expires on March 31, 2002.  Unpaid costs through the end of Mr. Muhawesh’s employment agreement totaling $37,000 have been accrued as of December 31, 2001.

 

Stonehaven Technologies also terminated itsExclusive Agency and Representation Agreement with Venture One Real Estate,LLC, in July 2001 and agreed to pay it a $262,500 termination fee.  Further in connection with the July 2001transaction, the warrants associated with certain intangible assets werecancelled.

 

**Disposition of Investments in Real Estate**

 

On March 31, 2001, the Company sold the St. Cloud, Minnesota realproperty (“Cold Springs Property”) to an unrelated third party.  In exchange for the real property, theCompany received approximately $8.3 million in cash.  In addition, the Company retired the related mortgage indebtednessof approximately $7.3 million.  TheCompany recorded a loss on the sale of the investment in the real estate ofapproximately $166,000 as of 

 

F-11

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December 31, 2001 and an expected loss on the sale of the investment inreal estate of approximately $4.3 million as of December 31, 2000.

 

On December 29, 2000,the Operating Partnership sold its membership interest in its wholly-ownedsubsidiary WPT I, LLC, a Delaware limited liability company (“WPT I”) and ownerof the Thresher Square property (“Thresher Property”), to four individuals(“Buyers”), in exchange for $169,874 in cash, 522,416 Common Shares of theCompany and 61,898 Common Units of the Operating Partnership (“Common Units”),all of which were cancelled, and the release of approximately $6.6 million ofdebt. In connection with the sale, cash in the amount of $805,000 securing aletter of credit granted by the Company in favor of the mortgagee of theThresher Property and the letter of credit was released. Additionally, theCompany was released from its obligation to indemnify one of the Buyers, who isalso a member of the Board of Trustees of the Company, from amounts incurred byhim under personal guaranties related to the Thresher Property which remainedin place after the original purchase by WPT I. WPT I originally purchased the Thresher Property from the Buyers, one ofwhich is a Trustee of the Company.  Thedisposition resulted in no gain or loss being recorded in the accompanyingconsolidated statement of operations due to the related party nature of thetransaction.  The disposition wasconsidered a return of capital and resulted in a $7.1 million reduction inshareholders’ equity.

 

OnJune 30, 2000, the Company transferred and sold to Wellington ManagementCorporation (“WMC”) the Company’s 100% interest in Lake Pointe ApartmentHomes, Inc., a Wisconsin corporation and wholly owned subsidiary of theCompany (“Lake Pointe”) and the Company’s 8% equity interest in Highlander. Theinterests were exchanged for 95,000 shares of the Company’s Class B JuniorCumulative Convertible Preferred Shares (“Class B Preferred Shares”) owned byWMC and WMC assumed the mortgage debt totaling approximately $2.7 millionassociated with Lake Pointe. The disposition resulted in no gain or lossbeing recorded in the accompanying consolidated statement of operations due tothe related party nature of the transaction. The disposition was considered areturn of capital and resulted in a $807,000 reduction in shareholders’ equity.

 

**Acquisition of Investments in RealEstate and Consolidated Subsidiary**

 

OnFebruary 29, 2000, the Company through the Operating Partnership acquiredthree commercial real estate properties located in suburban Minneapolis,Minnesota (“Plymouth Properties”). The Plymouth Properties were purchased froma related party for an aggregate purchase price of approximately $6.7 million.The purchase price was funded through the issuance of an aggregate of 181,629Common Units in the Operating Partnership (valued at $4.35 per Common Unit, oran aggregate value of approximately $790,000), the assumption of certain third–partydebt totaling approximately $4.5 million, secured by the Plymouth Properties,and the balance paid in cash.  Theacquisition was accounted for using the purchase method of accounting.

 

OnFebruary 24, 2000, the Company acquired Stonehaven Technologies.  The acquisition was accomplished byexchanging 914,292 of the Company’s Common Shares for all of the issued andoutstanding stock of Stonehaven Technologies valued at $4.375 per share, or anaggregate value of approximately $4.0 million.  The acquisition was accounted for using the purchase method ofaccounting.

 

**ProForma Consolidated Financial Information (Unaudited)**

 

The following pro formacondensed consolidated financial information presented below is as if the acquisitionof the Plymouth Properties and the dispositions of Lake Pointe, Highlander,Cold Springs Property, Thresher Property and certain assets of StonehavenTechnologies had occurred on January 1, 2000. The pro forma financial information is not necessarily indicative of theresults, which actually would have occurred if the acquisitions or dispositionshad been consummated on January 1, 2000, nor does the pro forma informationpurport to represent the results of operations for future periods.

** **
|                                               |   | **For the  year ended December 31,** |       |
|----------------------------------------------------|--------|--------------------------------------|------------|
|                                               |   | **2001**                             | ** ** | **2000** | ** ** |
| Pro forma total revenue                            |   | $                                    | 1,495,000  |   | $ | 1,964,000 |   |
| Pro forma loss                                     |   | $                                    | 1,419,000  |   | $ | 806,000 |   |
| Pro forma loss available to  Common Shareholders   |   | $                                    | 2,049,000  |   | $ | 1,450,000 |   |
| Pro forma loss per Common Share  Basic and Diluted |   | $                                    | 0.45       |   | $ | 0.35 |   |

 

F-12

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**Note 6—MortgageLoans and Notes Payable**

 

Mortgage loans andnotes payable as of December 31, 2001 consisted of the following:

 
|                                                                                                                                                                            |   | **Amount** |      | **Payment  Terms**                        |                                      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-------------------------------------------|-------------------------------------------|
| Century Bank, N.A., 7.625%, maturing on May 31,  2002, collateralized by the Plymouth I property and  assignment of rents*                                                      |   | $          | 1,483,298 |                                      | Monthly principal and interest of $12,501 |   |
|                                                                                                                                                                            |   |       |      |                                      |                                      |
| Century Bank, N.A., 7.625%, maturing on May 31,  2002, collateralized by the Plymouth II and Plymouth  III properties and assignment of rents*                                  |   | 2,805,792  |      | Monthly principal and interest of $21,686 |                                      |
|                                                                                                                                                                            |   |       |      |                                      |                                      |
| GMAC Commercial Mortgage Corporation, 7.00%,  maturing February 1, 2008, collateralized by the  Nicollet commercial property and an assignment of  rents and security agreement |   | 2,248,701  |      | Monthly principal and interest of $15,635 |                                      |
|                                                                                                                                                                            |   | $          | 6,537,791 |                                      |                                      |   |

 

----

*   A Trusteeof the Company and his spouse has fully guaranteed this mortgage loan.

 

The mortgage loans and notes payable mature asfollows:

 
| **Year  ending  December 31,** |   |      |      |
|-------------------------------------|--------|-----------|-----------|
| 2002                                |   | $         | 4,320,284 |   |
| 2003                                |   | 33,450    |      |
| 2004                                |   | 35,868    |      |
| 2005                                |   | 38,460    |      |
| 2006                                |   | 41,241    |      |
| Thereafter                          |   | 2,068,488 |      |
|                                |   | $         | 6,537,791 |   |

 

Total mortgage loans and notes payable of approximately $4,289,000mature on May 31, 2002.  We anticipaterefinancing this debt at an annual fixed interest rate below the current rateof 7.625% for a three year term.  Weexpect fees associated with this refinance to total approximately $21,000.

 

The Company has anote payable to the former Chief Executive Officer of Stonehaven Technologiesand former Trustee of the Company, who is the current Chief Knowledge Officerof Stonehaven Technologies.  The notetotaled $335,000 as of December 31, 2001 and was due on January 2, 2001.  On December 29, 2000, the Company notifiedthe Chief Knowledge Officer that is was suspending its payment under thepromissory note assumed by Stonehaven Technologies pending the resolution ofthe currently outstanding legal proceeding. The Company has accrued interest on the note through December 31, 2001at 9.50%.  The payment of interest maybe made in cash or Common Shares of the Company, at the option of the Company.

 

**Note 7 — Shares,Warrants and Options**

 

During 1999, the Company issued 785,037 Class A Cumulative ConvertiblePreferred Shares (“Class A Preferred Shares”) to the public (“PreferredOffering”). Each of the Class A Preferred Shares is entitled, at all meetingsof shareholders, to 3.448 votes, the number of Common Shares into which theyare convertible, subject to adjustment for stock splits and similarevents.  The Class A Preferred Sharesare entitled to vote as a

 

F-13

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class on certain matters that affect their respective rights.  The Class A Preferred Shares bear aliquidation value of $10.00 per share and accrue a dividend equal to $0.475 pershare, with such dividend payable every six months.  The Class A Preferred Shares are convertible into the number ofCommon Shares equal to the quotient obtained by dividing (1) $10.00 plus anydividends then accrued but unpaid on the Class A Preferred Shares, by (2)$2.90, a price equal to 110% of the average closing bid price of Common Sharesover the 10 trading days preceding the effective date of the registrationstatement covering the Class A Preferred Shares.  The Company has the right to redeem the Class A Preferred Shares,under certain circumstances, after the two-year anniversary date of the initialclosing of the Preferred Offering. Proceeds from the Preferred Offering, net of underwriters’ discount andtotal offering expenses, were approximately $6.7 million.

 

Further during1999, the Company issued 254,800 Class B Preferred Shares to AREE asconsideration for payment of advances to the Company for working capitalpurposes, costs incurred in connection with the Company’s 1998 commercialacquisitions and payments for abandoned project pursuit costs and issued 95,000Class B Preferred Shares to WMC as partial consideration for the termination ofthe incentive advisory agreement between the Company and WMC.  As of December 31, 2001 and 2000, no Class BPreferred Shares are outstanding.

 

On February 18, 2000, the Board of Trustees approved the conversion of1,657,437 Common Units of the Operating Partnership into 1,468,484 CommonShares and further approved the conversion of the 254,800 Class B PreferredShares held by AREE into 808,482 Common Shares.

 

In connection with the acquisition of Stonehaven Technologies, onFebruary 24, 2000, the Company issued 914,292 Common Shares (valued at $4.375per share or an aggregate of $4.0 million).

 

OnFebruary 29, 2000, in connection with the Company’s acquisition of thePlymouth Properties, the Operating Partnership issued an aggregate of 181,629Common Units in the Operating Partnership (valued at $4.35 per Common Unit, oran aggregate value of approximately $790,000).

 

During the second quarterof 2000, the Company issued to an individual contractor 42,857 Common Shares inexchange for consulting services provided in connection with the acquisition bythe Company of the Plymouth Properties. The shares were valued at an aggregate price of $150,000 or $3.50 pershare.  The Company expensed the cost ofthe consulting services during the year ended December 31, 2000.

 

OnJune 30, 2000, in connection with the Company’s disposition of Lake Pointeand Highlander, 95,000 shares of the Company’s Class B Preferred Sharesowned by WMC were cancelled.

 

On July 1, 2000, the Board of Trustees of the Company authorized theCompany to repurchase, on a quarterly basis, up to 150,000 Common Shares of theCompany in open market transactions. To facilitate such repurchase program, nodividend was declared on the Company’s Common Shares. During the year endedDecember 31, 2000, the Company repurchased 15,300 Common Shares at an aggregatecost of approximately $40,000.  NoCommon Shares were repurchased during the year ended December 31, 2001.  As of December 31, 2001, the 15,300 CommonShares represented all of the treasury stock as recorded in the accompanyingconsolidated balance sheet.

 

On December 29, 2000, in connection with the disposition of theThresher Properties, 522,416 Common Shares of the Company and 61,898 CommonUnits of the Operating Partnership were cancelled.

 

During the year ended December 31, 2000, 120,746 Class A PreferredShares were converted into 416,331 Common Shares.  No Class A Preferred Shares were converted into Common Sharesduring the year ended December 31, 2001.

 

**DividendReinvestment Plan**

 

The Company maintains a dividend reinvestment andshare purchase plan whereby holders of Common Shares may automatically reinvestcash dividends into additional Common Shares. Under the plan, certain investors

 

F-14

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may also make optional cash payments on a quarterlybasis to acquire even more Common Shares. The price of the shares sold under the plan is the average of the highand low sale prices of the Company’s Common Shares on the scheduled date ofreinvestment.

 

**Warrants**

 

On March 5, 1998, the Company issued warrants toCredit Suisse First Boston Mortgage LLC in connection with the refinancing ofdebt.  The warrants provide for theright to purchase 47,500 Common Shares at a price of $5.37 per CommonShare.  The warrant is exercisable atany time through March 5, 2008.  Thewarrant remains unexercised as of December 31, 2001.

 

In connection with the Company’s Preferred Offering on October 28,1999, the Company issued to a representative of the underwriters a warrant topurchase 35,500 Class A Preferred Shares at a price of $10.00 per share.  The warrants issued to the underwriters’representative will become exercisable one year after date of issuance and willbe exercisable for a period of four years thereafter.  The warrants contain provisions for (1) “cashless exercise,”whereby the underwriters’ representative may forfeit a portion of the warrantsat the time of exercise in lieu of the cash payment of the exercise price, (2)appropriate adjustment in the event of a merger, consolidation,recapitalization, reclassification, share dividend, shared split or similartransaction, (3) a one-time right to demand registration of the Common Sharesunderlying the warrants under the Securities Act of 1933, and (4) participationof the Common Shares underlying such warrant, on a “piggy-back” basis, inspecified registrations by the Company during the duration of the underwriters’warrant and for two years thereafter.

 

On March 28, 2000, the Company acquired a proprietary database from asales and marketing company and issued to it 366,670 warrants to purchase theCompany’s Common Shares.  The warrantsbore an exercise price of $6.375 per share, were immediately vested and were toexpire at the earlier of July 1, 2005 or upon the occurrence of certaincorporate events, as defined in the warrant agreement.  On June 22, 2000, the Company acquiredadditional proprietary material from the same sales and marketing company andin exchange issued an additional 700,000 warrants to purchase the Company’sCommon Shares.  One half of the warrantsbore an exercise price of $6.375 per share and the remainder bore an exerciseprice of $9.375 per share.  The warrantswere immediately vested and were to expire at the earlier of July 1, 2007 orupon the occurrence of certain corporate events, as defined in the warrantagreement.  The estimated fair value ofthese warrants on the respective grant dates using the Black-Scholes pricingmodel totaled approximately $682,000. In connection with the sale of certain assets of Stonehaven Technologieson July 10, 2001, the warrants issued to purchase a total of 1,066,670 CommonShares of the Company were canceled.

 

**Options**

 

On May 27, 1998, in accordance with the Company’s former stock optionplan (“Former Plan”) the Company granted options as to 54,387 Common Shares tothe existing employees and Trustees of the Company. The options are exercisableon any date through May 26, 2008 at a price of $5.37 per share.

 

On November 16, 1998, the shareholders of the Company adopted the 1998Share Option Plan (“Current Plan”), which provides for the granting of shareoptions to officers, Trustees and employees at a price determined by a formulain the Current Plan agreement.  Theoptions are to be exercisable over a period of time determined by the CurrentPlan committee, but no longer than ten years after the grant date.  Compensation resulting from the shareoptions is initially measured at the grant date based on fair market value ofthe shares.

 

In connection with employment agreements entered into during 1999 andin accordance with the Current Plan, the Company issued options to purchase80,000 Common Shares at $2.90 per share to each of the Company’s ChiefExecutive Officer and former President. The Chief Executive Officer’s options expire on September 30, 2009 andthe former President’s options expire on December 31, 2005.

 

In connection with the StonehavenTechnologies acquisition in February of 2000, the Company issued to the

 

F-15

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currentChief Knowledge Officer of Stonehaven Technologies, options as to 1.0 millionCommon Shares at a price of $5.375 per share. The options expire in February 2010 and are exercisable as to 500,000shares on February 24, 2000, with options as to 62,500 shares exercisablequarterly, commencing May 24, 2000.  TheCompany also issued to the Chief Executive Officer of Stonehaven Technologies,options as to 666,667 Common Shares at a price of $6.375 per share.  Further by agreement, the Company set asidea pool of options as to 200,000 Common Shares for future award to employees ofStonehaven Technologies.  Each ofthe above options expires 90 days after employment ends or is terminated.  In connection therewith, options issued toStonehaven Technologies’ Chief Executive Officer and the pool of options toother employees of Stonehaven Technologies have expired as of December 31,2001.

 

The following summarizes the Company’s activity relative to options:

 
|                             |   | **Options to  Purchase  Common Shares** |   | **Weighted  Average  Exercise Price  per Share** |   | **Range of  Exercise  Price per Share** |                 |
|----------------------------------|--------|-----------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------|----------------------|
| Outstanding at January 1, 2000   |   | 214,387                                 |   | $                                                | 3.53   |                                    | $2.90 – $5.37   |   |
| Granted                          |   | 1,666,667                               |   | $                                                | 5.78   |                                    | $5.375 – $6.375 |   |
| Outstanding at December 31, 2000 |   | 1,881,054                               |   | $                                                | 5.52   |                                    | $2.90 – $6.375  |   |
| Expired                          |   | (666,667                                | )      | $                                                | 6.38   |                                    | $6.38                |   |
| Outstanding at December 31, 2001 |   | 1,214,387                               |   | $                                                | 5.05   |                                    | $2.90 – $5.375  |   |
| Exercisable at December 31, 2000 |   | 1,360,221                               |   | $                                                | 5.42   |                                    | $2.90 – $5.375  |   |
| Exercisable at December 31, 2001 |   | 1,151,887                               |   | $                                                | 5.03   |                                    | $2.90 – $5.375  |   |

 

The options outstanding as of December 31, 2001 have a weighted averageremaining contractual life of 7.8 years. No options were granted during the year ended December 31, 2001.  The weighted average grant date fair valuefor options granted during 2000 was $0.79. No options were exercised during the years ended December 31, 2001 and2000.  During the year ended December31, 2001, 666,667 options were canceled. No options were canceled during the year ended December 31, 2000.

 

The Companyapplies Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”, in accounting for its stock incentive plans.  Accordingly, no compensation expense hasbeen recognized in the consolidated statements of operations.  Had compensation expense for the Company’sstock incentive plans been determined based upon the fair value at the grantdate for awards under the Stock Incentive Plans consistent with the methodologyprescribed under Statement of Financial Accounting Standards No. 123“Accounting for Stock-Based Compensation”, net loss and loss per share for theyear ended December 31, 2000 would have been the pro forma amounts indicated inthe table below: 

** **
|                                                  |   | **2000** |       |
|-------------------------------------------------------|--------|----------|------------|
| Net  loss available to Common Shares, as reported     |   | $        | (8,958,511 | ) |
| Net loss  available to Common Shares, pro forma       |   | $        | (9,893,511 | ) |
| Loss per share —  basic and diluted, as reported |   | $        | (2.01      | ) |
| Loss per share —  basic and diluted, pro forma   |   | $        | (2.22      | ) |

 

As nooptions were granted during the year ended December 31, 2001, no pro formainformation for the period is included above. The assumptions used in estimating the fair value on the grant dateusing the Black-Scholes option-pricing model are as follows:

 
|                     |   | **2000** |   |
|--------------------------|--------|----------|--------|
| Risk-free  interest rate |   | 6.63     | %      |
| Expected life in  years  |   | 7.47     |   |
| Expected volatility      |   | 53.85    | %      |
| Expected  dividend yield |   | 7.30     | %      |

 

F-16

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**Note 8—LossPer Share**

 

The Company 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 is computed based on theweighted average number of Common Shares outstanding for the period. Theweighted average number of Common Shares outstanding for the years endedDecember 31, 2001 and December 31, 2000 were 4,517,524 and 4,459,656 respectively. Common share equivalents ofapproximately 3.6 million include outstanding convertible preferred shares,warrants and stock options, and are not included in net loss per weightedaverage Common Share outstanding—diluted as they would be anti-dilutive.

 
|                                                                                                             |   | **For the  years ended December 31,** |           |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|----------------|
|                                                                                                             |   | **2001**                              | ** **     | **2000** | ** ** |
| **Numerator**                                                                                                    |   |                                  |           |   |   |
| Net Loss                                                                                                         |   | $                                     | (2,654,981     | ) | $ | (8,314,953 | ) |
| Preferred Share  Dividends                                                                                       |   | (630,141                              | )              | (643,558 | ) |
|                                                                                                             |   |                                  | ** **     |   | ** ** |
| **Net loss available to Common  Shareholders**                                                                   |   | **$**                                 | **(3,285,122** | **)** | **$** | **(8,958,511** | **)** |
|                                                                                                             |   |                                  |           |   |   |
| **Denominator**                                                                                                  |   |                                  | ** **     |   | ** ** |
| Weighted average  Common Shares outstanding at December 31, 2001 and 2000, respectively:  Basic and Diluted |   | 4,517,524                             |           | 4,459,656 |   |
|                                                                                                             |   |                                  |           |   |   |
| **Basic and Diluted EPS**                                                                                        |   |                                  |           |   |   |
| Net loss available to Common Shareholders – Basic  and Diluted                                              |   | $                                     | (0.73          | ) | $ | (2.01 | ) |

 

**Note 9—Dividends/Distributions**

 

During 2001 and 2000, cash distributions declared with respect to theClass A Preferred Shares were $0.95 per annum per Class A Preferred Share.  No cash distributions were declared during2001 and 2000 with respect to the Common Shares.

 

**Note 10 — Incometaxes**

 

Theincome tax provision consists of the following components:

 
|                |   | **2001** |   | **2000** |   |
|---------------------|--------|----------|--------|----------|--------|
| Current             |   | $        | 40,000 |     | $      | — |   |
| Deferred            |   | —   |   | —   |   |
| Total tax provision |   | $        | 40,000 |     | $      | — |   |

 

F-17

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Thetax provision differs from the expense that would result from applying Federalstatutory rates as follows:

 
|                                            |   | **2001** |     | **2000**  |   |
|-------------------------------------------------|--------|----------|----------|-----------|--------|
| Benefit at Federal statutory rate               |   | $        | (894,000 | )         | $      | (2,827,000 | ) |
| Alternative minimum tax                         |   | 40,000   |     | —    |   |
| State income benefit, net of Federal tax effect |   | (170,000 | )        | (538,000  | )      |
| Permanent differences:                          |   |     |     |      |   |
| Amortization of goodwill                        |   | 530,000  |     | 420,000   |   |
| Reduction of real estate basis                  |   | 248,000  |     | 1,720,000 |   |
| Disposal of Stonehaven Technologies net assets  |   | 993,000  |     | —    |   |
| Change in valuation allowance                   |   | (654,000 | )        | 2,180,000 |   |
| Other                                           |   | (53,000  | )        | (955,000  | )      |
|                                            |   |     |     |      |   |
| Tax  provision                             |   | $        | 40,000   |      | $      | — |   |

 

Thepresentation of the reconciliation of the tax provision to the expense thatwould result from applying Federal statutory rates for 2000 has been changed toconform to the classifications used in 2001 and to properly record the permanentdifferences and the valuation allowance. This change had no effect on the tax provision or net income aspreviously reported.

 

Deferredtax assets and liabilities consist of the following:

 
|                               |   | **2001**   |      |
|------------------------------------|--------|------------|-----------|
| Deferred tax assets:               |   |       |      |
| Net operating loss carryforwards   |   | $          | 1,301,000 |   |
| Accrual and other timing variances |   | 185,000    |      |
| Alternative minimum tax credit     |   | 40,000     |      |
| Valuation allowance                |   | (1,526,000 | )         |
| Deferred tax liabilities           |   | —     |      |
|                               |   |       |      |
| Net deferred tax assets            |   | $          | —    |   |

 

Realizationof deferred tax assets is dependent upon generation of sufficient futuretaxable income.  Management hasdetermined that sufficient uncertainty exists regarding the realizability of asignificant portion of the net deferred tax assets.  As such, management has provided a valuation allowance of$1,526,000 against such net deferred tax assets of the Company as of December31, 2001.

 

AtDecember 31, 2001, the Company had net operating loss carryforwards ofapproximately $3,215,000 available to be carried to future periods.  The loss carryforwards expire as follows:

 
|                                   |   | **2001**  |      |
|----------------------------------------|--------|-----------|-----------|
| 2012                                   |   | $         | 308,000   |   |
| 2018                                   |   | 739,000   |      |
| 2019                                   |   | 115,000   |      |
| 2020                                   |   | 2,053,000 |      |
|                                   |   |      |      |
| Total net operating loss carryforwards |   | $         | 3,215,000 |   |

 

F-18

----

 

**Note 11 — Related Party Transactions**

 

**Transactions with Officers**

 

On February 24, 2000, the Company acquiredStonehaven Technologies (formerly NETLink International, Inc. “Netlink”).  The Company exchanged 914,292 Common Shares(valued at $4.375 per share or an aggregate of $4.0 million) for all of theoutstanding stock of Netlink.  OdehMuhawesh and Mary Henschel, former shareholders of Netlink, received, eitherdirectly or indirectly a significant portion of such consideration and becameofficers of Stonehaven Technologies.  OnJuly 10, 2001, Stonehaven Technologies’ sold certain of its assets toStellent pursuant to an Asset Purchase Agreement between the Company,Stonehaven Technologies and Stellent. In connection with the July 2001 transaction, Stonehaven Technologiesand Mary Henschel, former President of Stonehaven Technologies, entered into aSeparation Agreement whereby Ms. Henschel was required to separate from heremployment with Stonehaven Technologies. Further, Stonehaven Technologies’ employment agreement with Mr. Lund wasterminated on September 9, 2001****and as of December 31, 2001, the Companyhas accrued related termination costs of $240,000**. **Odeh Muhawesh continues to serve as Chief Knowledge Officerand the sole employee of Stonehaven Technologies under his employment contractwhich expires on March 31, 2002. Unpaidcosts through the end of Mr. Muhawesh’s employment agreement totaling $37,000have been accrued as of December 31, 2001.

 

Separately,Mr. Lund continues to serve as the Company’s Chief Executive Officer.

 

**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 $87,000 and $241,000 for the years ended December 31,2001 and December 31, 2000, respectively.

** **

**Transactions between Companies under Common Management**

 

Stonehaven Technologies had a customer relationship in which OdehMuhawesh, an officer of Stonehaven Technologies, and certain other formermembers of the Company’s management performed certain managementresponsibilities for the customer from approximately January 1 through June 30,2000.  Revenues recognized from thiscustomer for the year ended December 31, 2001 and for the period commencingwith the February 24, 2000 acquisition date through December 31, 2000 wereapproximately zero and $353,000, respectively. As of December 31, 2000, accounts receivable from the customer totaledapproximately $114,000 and amounts due to the customer totaled $30,000.  As of December 31, 2001, such amounts werewritten off.

 

**Rental Income**

 

During the years ended December 31, 2001 and December 31, 2000, theCompany recognized revenue of approximatelyzero and $23,000, respectively, on office space leased to Hoyt.

 

**RentalExpense**

 

During the years ended December 31, 2001 and December 31, 2000, theCompany recognized rental expense of approximately $10,000 and $175,000,respectively, related to office space leased from Hoyt.  In connection with the sale of certainassets of Stonehaven Technologies on July 10, 2001, the Company’s five-yearlease agreement was transferred to Stellent.

 

**Note 12— Rentals under operating leases**

 

The Company and itssubsidiaries lease residential and commercial space to individual and corporatetenants.  These leases expire at varioustimes through 2009.  The following is aschedule by year of minimum rental income under such operating leases.

 

F-19

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| **Year**   |   |    |      |
|------------|--------|---------|-----------|
| 2002       |   | $       | 798,882   |   |
| 2003       |   | 738,652 |      |
| 2004       |   | 438,165 |      |
| 2005       |   | 272,965 |      |
| 2006       |   | 52,932  |      |
| Thereafter |   | 141,152 |      |
|       |   | $       | 2,442,748 |   |

 

The total minimum futurerentals presented above do not include amounts that may be received fromcommercial properties as tenant reimbursements.

 

During the year ended December 31, 2001, three tenants representedapproximately 71.1% of the Company’s rental revenues.  During the year ended December 31, 2000, two tenants representedapproximately 31.5% of the Company’s rental revenues.

 

Two of the commercial properties have one primary tenant who eachleases 100% of each property’s rentable square footage and represent 20.3% ofthe Company’s aggregate rentable square footage of its commercial portfolio.The future minimum rental income from these tenants represents approximately57.8% of the above total.

 

**Note 13 — Commitments andContingencies**

 

**Liquidity**

 

As of December 31, 2001, our unrestricted cash resources were$1,541,000 and our marketable securities available for sale were$2,365,000.  The Company’s marketablesecurities represented 80,000 shares of common stock of Stellent at a fairmarket value of $29.56 per share (based on the NASDAQ closing quote per shareon December 31, 2001).  Such shares wereacquired on July 10, 2001, had a fair market value as of July 9, 2001 of $29.94per share and were registered effective as of September 7, 2001 with theSecurities and Exchange Commission. We believe our cash resources andmarketable securities are sufficient to sustain the Company’s liquidity needsfor the next twelve months.

 

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

 

Subsequent to December 31, 2001 and through February 15, 2002, the Company sold an additional 40,000 shares ofStellent stock at an average sale price of $31.34 per share, net ofcommissions.  The NASDAQ closing quoteon February 15, 2002 was $16.21. per share of common stock of Stellent.

 

**EmploymentAgreements**

 

As of December 31, 2001, the Company has one employment agreement withOdeh Muhawesh, the Chief Knowledge Officer of Stonehaven Technologies, datedFebruary 23, 2000. The employment agreement provides for an initial base salaryof $120,000, health, life and disability and other benefits extended by theBoard of Trustees to other similarly situated executives and a discretionaryperformance bonus. The employment agreement expires on March 31, 2002. In theevent that the Company terminates the executive’s employment without cause orfollowing a change of control of the Company, the Company or, in the case of 

 

F-20

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change of control, its successor, will be obligated to pay theexecutive’s base salary and benefits for a two-year period**.**

 

Prior to December 31, 2001, StonehavenTechnologies had employment agreements with Duane H. Lund, the former ChiefExecutive Officer of Stonehaven Technologies and Mary S. Henschel, formerPresident of Stonehaven Technologies which provided terms identical to that ofMr. Muhawesh identified above.  Inconnection with the July 2001 transaction, Stonehaven Technologies and MaryHenschel, former President of Stonehaven Technologies, entered into aSeparation Agreement whereby  Ms.Henschel was required to separate from her employment with StonehavenTechnologies.  Further,Stonehaven Technologies’ employment agreement with Mr. Lund was terminated onSeptember 9, 2001****and as of December 31, 2001, the Company has accrued relatedtermination costs of $240,000**. **OdehMuhawesh continues to serve as Chief Knowledge Officer and the sole employee ofStonehaven Technologies under his employment contract which expires on March31, 2002. Unpaid costs throughthe end of Mr. Muhawesh’s employment agreement totaling $37,000 have beenaccrued as of December 31, 2001.

 

Mr. Lund continues to serve as the Company’s Chief Executive Officer without an employment agreement.

 

**Legal Proceeding**

 

On December 29, 2000,Stonehaven notified Odeh Muhawesh, a former Trustee of the Company and currentChief Knowledge Officer of Stonehaven Technologies, that it was suspending itspayment to him under a promissory note assumed by Stonehaven Technologies.Stonehaven Technologies assumed the payment obligation in February 2000pursuant to the terms of the merger agreement between the Company, StonehavenTechnologies and NETLink International, Inc. (“NETLink”), a company founded andowned by Mr. Muhawesh whereby NETLink was merged into Stonehaven Technologies.Management of the Company believes Mr. Muhawesh is in default under the mergeragreement for, among other things, failure by him to cause to be transferred toStonehaven Technologies 5% of the issued and outstanding stock ofMyFreeDesk.com, Inc.

 

On January 8, 2001, Mr. Muhawesh filed a complaint against StonehavenTechnologies in the District Court of Hennepin County, Minnesota alleging thatStonehaven Technologies failed to pay him $350,000 on January 1, 2001 under theterms of a promissory note. The Company has filed a counterclaim against Mr.Muhawesh requesting, among other things, the repayment of amounts previouslypaid to him under the promissory note.  The matter is scheduled for trial in June2002.

 

**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.

 

**License Agreements and Sales andMarketing Contract**

 

In connection with the sale of certain assets of StonehavenTechnologies on July 10, 2001, Stonehaven Technologies terminated its two-yearlicense agreement with Stellent Inc. entered into during 2000.  As a result, unamortized costs totalingapproximately $148,000 as of July 10, 2001, are recorded as an offset to thegain on sale of certain assets of Stonehaven Technologies.

 

Further as aresult of the sale of certain assets of Stonehaven Technologies on July 10,2001, our ability to market our royalties and licensing agreements entered intoduring 2000 and 2001 has been significantly impaired primarily due to the factthat Stellent has become an active competitor to our technology.  As a result, the Company recorded theunamortized costs of these assets as of July 10, 2001 of approximately$1,210,000 ($1,800,000 net of accumulated amortization of approximately$590,000) as an offset to the gain onsale of certain assets of Stonehaven Technologies.  Of this amount $300,000 represents costs incurred in connectionwith

 

F-21

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additional licenses acquired during 2001.

 

**Sales and Marketing Contract**

 

In connection with thesale of certain assets of Stonehaven Technologies in July 2001, StonehavenTechnologies terminated its sales and marketing contract entered into during2000.

 

**Note 14— Supplemental Information toStatements of Cash Flows**

** **
|                                                                                                               |   | **For the  year ended December 31,** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                               |   | **2001**                             |       | **2000** |   |
| Interest paid                                                                                                      |   | $                                    | 751,012    |   | $ | 1,789,504 |   |
| Supplemental schedule of non-cash investing  and financing activities:                                             |   |                                 |       |   |   |
| The following assets and liabilities were assumed in  connection with the acquisition of Stonehaven  Technologies: |   |                                 |       |   |   |
| Furniture and  equipment                                                                                           |   | $                                    | —     |   | $ | (74,672 | ) |
| Accounts  receivable                                                                                               |   | —                               |       | (430,888 | ) |
| Goodwill                                                                                                           |   | —                               |       | (4,499,777 | ) |
| Other assets                                                                                                       |   | —                               |       | (74,604 | ) |
| Line of credit                                                                                                     |   | —                               |       | 68,466 |   |
| Related party  note payable                                                                                        |   | —                               |       | 750,000 |   |
| Other liabilities                                                                                                  |   | —                               |       | 422,233 |   |
| Common Shares                                                                                                      |   | —                               |       | 9,143 |   |
| Additional paid  in capital                                                                                        |   | —                               |       | 3,990,858 |   |
| **Cash proceeds from acquisition  of consolidated  subsidiary**                                                    |   | **$**                                | **—** | ** ** | **$** | **160,759** | ** ** |

 

F-22

----

 
|                                                                                                                                                             |   | **For the  year ended December 31,** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                                                                                             |   | **2001**                             | ** **  | **2000** | ** ** |
| The following assets and  liabilities were assumed in  connection with the acquisition of the Plymouth  Properties and additions to other properties:            |   |                                 |        |   |   |
| Purchase of real  estate                                                                                                                                         |   | $                                    | —      |   | $ | (6,772,313 | ) |
| Additions to  real estate                                                                                                                                        |   | (43,305                              | )           | (3,254 | ) |
| Mortgage notes  payable                                                                                                                                          |   | —                               |        | 4,471,694 |   |
| Minority  interests                                                                                                                                              |   | —                               |        | 794,627 |   |
| Common shares                                                                                                                                                    |   | —                               |        | 429 |   |
| Additional paid  in capital                                                                                                                                      |   | —                               |        | 149,571 |   |
| **Acquisition of and additions to  real estate properties**                                                                                                      |   | **$**                                | **(43,305** | **)** | **$** | **(1,359,246** | **)** |
| The following assets and liabilities were disposed of  in connection with the dispositions of Lake Pointe,  Highlander, the Thresher Property and Cold  Springs: |   |                                 |        |   |   |
| Disposition of real estate                                                                                                                                       |   | $                                    | 8,184,686   |   | $ | 16,575,767 |   |
| Disposition of  investment in unconsolidated  subsidiary                                                                                                         |   | —                               |        | 95,756 |   |
| Restricted cash                                                                                                                                                  |   | —                               |        | 582,965 |   |
| Deferred costs  and other assets                                                                                                                                 |   | 26,552                               |        | 244,710 |   |
| Mortgage note  payable                                                                                                                                           |   | (7,306,716                           | )           | (9,289,460 | ) |
| Accounts payable  and accrued liabilities                                                                                                                        |   | (140,997                             | )           | (62,972 | ) |
| Security  deposits                                                                                                                                               |   | (4,111                               | )           | (43,914 | ) |
| Dividends paid                                                                                                                                                   |   | —                               |        | (45,000 | ) |
| Preferred shares                                                                                                                                                 |   | —                               |        | (950 | ) |
| Additional paid  in capital                                                                                                                                      |   | —                               |        | (5,224 | ) |
| Loss on sale of  investment in real estate                                                                                                                       |   | (165,835                             | )           | (7,880,679 | ) |
| Cash proceeds from dispositions of real estate  properties                                                                                                       |   | $                                    | 593,579     |   | $ | 170,999 |   |
| 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                            |        | — |   |
| Accrued expenses                                                                                                                                                 |   | 240,000                              |        | — |   |
| Gain on sale of  certain assets of Stonehaven Technologies                                                                                                       |   | 397,263                              |        | — |   |
| Costs associated with dispositions of certain assets  of  Stonehaven Technologies                                                                                |   | $                                    | (587,738    | ) | $ | — |   |
| Dividends and distributions payable                                                                                                                              |   | $                                    | —      |   | $ | 709,139 |   |
| Sales and marketing warrant valuation                                                                                                                            |   | $                                    | —      |   | $ | 682,338 |   |
| Software licensing prepaid minimum royalty                                                                                                                       |   | $                                    | —      |   | $ | 1,500,000 |   |

 

F-23

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**Note 15 — Information by BusinessSegment**

 

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

 
|                                   |   | **Real  Estate  Properties** |       | **Technology** |       | **Total** |       |
|----------------------------------------|--------|------------------------------|------------|----------------|------------|-----------|------------|
| **Year ended December 31, 2001**       |   |                         | ** ** |           | ** ** |      | ** ** |
| Revenues                               |   | $                            | 1,910,924  |           | $          | 1,913,072 |       | $ | 3,823,996 |   |
| Operating expenses                     |   | 714,319                      |       | 1,003,573      |       | 1,717,892 |       |
| Income  from operations                |   | $                            | 1,196,605  |           | $          | 909,499   |       | $ | 2,106,104 |   |
| Segment  assets at December 31, 2001   |   | $                            | 11,226,677 |           | $          | 3,585,306 |       | $ | 14,811,983 |   |
|                                   |   |                         | ** ** |           | ** ** |      | ** ** |
| **Year  ended December 31, 2000** |   |                         |       |           |       |      |       |
| Revenues                               |   | $                            | 5,483,239  |           | $          | 2,632,825 |       | $ | 8,116,064 |   |
| Operating  expenses                    |   | 2,182,761                    |       | 2,414,741      |       | 4,597,502 |       |
| Income  from operations                |   | $                            | 3,300,478  |           | $          | 218,084   |       | $ | 3,518,562 |   |
| Segment assets at December 31, 2000    |   | $                            | 22,208,316 |           | $          | 5,935,731 |       | $ | 28,144,047 |   |

 

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

 
|                                           |   | **Year ended  December 31,** |       |
|------------------------------------------------|--------|------------------------------|------------|
|                                           |   | **2001**                     | ** ** | **2000** | ** ** |
| Income from operations for reportable segments |   | $                            | 2,106,104  |   | $ | 3,518,562 |   |
| Add:                                           |   |                         |       |   |   |
| Equity in income of unconsolidated entities    |   | –                       |       | 2,912 |   |
| Minority interests                             |   | 132,080                      |       | 571,333 |   |
| Less:                                          |   |                         |       |   |   |
| General and administrative                     |   | (1,814,488                   | )          | (2,969,153 | ) |
| Interest                                       |   | (721,682                     | )          | (1,790,804 | ) |
| Product development                            |   | (114,917                     | )          | (396,181 | ) |
| Nonrecurring expenses                          |   | –                       |       | (408,415 | ) |
| Amortization                                   |   | (1,319,846                   | )          | (1,629,539 | ) |
| Depreciation                                   |   | (446,543                     | )          | (952,758 | ) |
| Loss from operations                           |   | $                            | (2,179,292 | ) | $ | (4,054,043 | ) |

 

F-24

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