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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________.
Commission File Number 001-12917
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WELLSFORD REAL PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 13-3926898
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(State of organization) (I.R.S. employer identification number)
535 MADISON AVENUE, NEW YORK, NY 10022
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 838-3400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $.02 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). YES |X| NO |_|
The aggregate market value of the voting shares held by non-affiliates of the
registrant was approximately $124,232,000 based on the closing price on the
American Stock Exchange for such shares on June 28, 2002.
THE NUMBER OF THE REGISTRANT'S SHARES OF COMMON STOCK OUTSTANDING WAS 6,452,092
AS OF MARCH 25, 2003 (INCLUDING 169,903 SHARES OF CLASS A-1 COMMON STOCK).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Shareholders' Meeting
to be held on June 9, 2003 are incorporated by reference into Part III.
Additionally, the Company's registration statement on Form S-3 (File No.
333-73874) filed with the Securities and Exchange Commission on December 14,
2001 is also incorporated by reference herein.
1
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TABLE OF CONTENTS
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FORM
10-K
ITEM REPORT
NO. PAGE
--- ----
PART I
1. Business................................................................3
2. Properties..............................................................17
3. Legal Proceedings.......................................................21
4. Submission of Matters to a Vote of Security Holders.....................21
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters .................................................22
6. Selected Consolidated Financial Data....................................23
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................24
7a. Quantitative and Qualitative Disclosures about Market Risk..............42
8. Consolidated Financial Statements and Supplementary Data................43
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................43
PART III
10. Directors and Executive Officers of the Registrant......................44
11. Executive Compensation..................................................44
12. Security Ownership of Certain Beneficial Owners and Management..........44
13. Certain Relationships and Related Transactions..........................44
14. Controls and Procedures.................................................44
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........45
FINANCIAL STATEMENTS
15a. Consolidated Balance Sheets as of December 31, 2002 and 2001............F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000.....................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.................................F-7
Notes to Consolidated Financial Statements..............................F-9
Wellsford/Whitehall Group, L.L.C. Consolidated Financial
Statements and Notes............................................F-51
FINANCIAL STATEMENT SCHEDULES
III. Real Estate and Accumulated Depreciation................................S-1
All other schedules have been omitted because the required information for such
other schedules is not present, is not present in amounts sufficient to require
submission of the schedule or is included in the consolidated financial
statements.
2
PART I
ITEM 1. BUSINESS
Wellsford Real Properties, Inc. and subsidiaries, (collectively, the "Company")
was formed as a Maryland corporation on January 8, 1997, as a corporate
subsidiary of Wellsford Residential Property Trust (the "Trust"). On May 30,
1997, the Trust merged (the "Merger") with Equity Residential Properties Trust
("EQR"). Immediately prior to the Merger, the Trust contributed certain of its
assets to the Company and the Company assumed certain liabilities of the Trust.
Immediately after the contribution of assets to the Company and immediately
prior to the Merger, the Trust distributed to its common shareholders all of the
outstanding shares of the Company owned by the Trust (the "Spin-off"). On June
2, 1997, the Company sold 6,000,000 shares of its common stock in a private
placement (the "Private Placement") to a group of institutional investors at
$20.60 per share, the Company's then book value per share.
The Company is a real estate merchant banking firm headquartered in New York
City which acquires, develops, finances and operates real properties and
organizes and invests in private and public real estate companies. The Company's
operations are organized into three Strategic Business Units ("SBUs") within
which it executes its business plan. The portfolio of investments held in each
SBU at December 31, 2002 includes:
Commercial Property Operations--Wellsford/Whitehall Group, L.L.C.
A 32.59% interest in a private joint venture that owned and operated
34 properties (substantially all office properties) at December 31,
2002 totaling approximately 3,874,000 square feet (including
approximately 546,000 square feet under renovation), primarily located
in New Jersey, Massachusetts and Maryland.
Debt and Equity Activities--Wellsford Capital
o Approximately $28,612,000 of direct debt investments which bore
interest at a weighted average annual yield of 11.69% during 2002 and
had an average remaining term to maturity of 4.2 years at December 31,
2002;
o Approximately $31,797,000 of equity investments in companies which
were organized to invest in debt instruments including $28,166,000 in
Second Holding Company, LLC, a company which was organized to purchase
investment and non-investment grade rated real estate debt instruments
and investment grade rated other asset-backed securities;
o Approximately $6,792,000 invested in Reis, Inc. ("Reis"), a real
estate information and database company; and
o Two commercial properties totaling approximately 175,000 square feet
located in Salem, New Hampshire and Philadelphia, Pennsylvania.
Property Development and Land Operations--Wellsford Development
An 85.85% interest as managing owner in Palomino Park, a five phase,
1,800 unit multifamily residential development in Highlands Ranch, a
south suburb of Denver, Colorado. Three phases aggregating 1,184 units
are completed and operational as a rental property. A 264 unit fourth
phase is being converted into condominiums. The Company has sold 153
units as of December 31, 2002 and 40 of the unsold units are available
for rent and included in operations until the sales inventory has to
be replenished. The land for the remaining approximate 352 unit fifth
phase is being held for possible future development or sale.
See the accompanying consolidated financial statements for certain financial
information regarding the Company's industry segments.
On June 9, 2000, the shareholders of the Company approved a reverse stock split
whereby every two outstanding shares of common stock and class A-1 common stock
were converted into one share of outstanding common stock and class A-1 common
stock. The par value of both classes of stock increased from $0.01 per share to
$0.02 per share and the number of authorized shares was halved from 197,650,000
to 98,825,000 for
3
common shares and from 350,000 to 175,000 for class A-1 common shares. The
reverse split was effective for trading beginning June 12, 2000. Resulting
fractional shares were redeemed for cash.
All share and per share amounts in this filing, including the financial
statements and the notes thereto, have been adjusted for the impact of the
split, for all periods presented.
The Company's executive offices are located at 535 Madison Avenue, New York, New
York, 10022; telephone, (212) 838-3400; web address, www.wellsford.com; e-mail,
wrpny@wellsford.com. To access the Company's other documents filed with the
Securities and Exchange Commission, visit www.wellsford.com. The Company has 17
employees as of December 31, 2002.
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL
- ----------------------------------------------------
The Company's commercial property operations consist solely of its interest in
Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall"), a joint venture by
and among the Company, various entities affiliated with the Whitehall Funds
("Whitehall"), private real estate funds sponsored by The Goldman Sachs Group,
Inc. ("Goldman Sachs"), as well as a family based in New England. The Company
had a 32.59% interest in Wellsford/Whitehall as of December 31, 2002. The
manager of the joint venture is a Whitehall affiliate. At December 31, 2002,
Wellsford/Whitehall owned and operated 34 properties, including ten properties
held for sale (substantially all office properties) totaling approximately
3,874,000 square feet (including approximately 546,000 square feet under
renovation), primarily located in New Jersey, Massachusetts and Maryland.
Subsequent to February 28, 2003, after the completion of certain sales,
Wellsford/Whitehall owned 27 properties totaling approximately 2,908,000 square
feet.
Wellsford/Whitehall leases and re-leases space, performs construction for tenant
improvements, expands buildings, re-develops properties and based on general and
local economic conditions and specific conditions in the real estate industry,
may from time to time sell properties for an appropriate price. It is not
expected that Wellsford/Whitehall will purchase any new assets in the future.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $55,592,000 and $57,790,000 at December 31,
2002 and 2001, respectively. The Company's share of (loss) income from
Wellsford/Whitehall was approximately $(1,292,000), $4,367,000 and $1,675,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
Wellsford/Whitehall was formed in August 1997 as a private real estate operating
company. The Company contributed six properties and Whitehall contributed four
properties upon formation of Wellsford/Whitehall. Initial capital aggregating
$150,000,000 was committed by the partners including the net amount of
contributed properties, net of assumed debt. Prior to December 31, 2000, the
Company managed Wellsford/Whitehall on a day-to-day basis.
In June 1999, the capital commitment requirements of Wellsford/Whitehall were
modified from an aggregate of $150,000,000 ($75,000,000 by each partner) to an
aggregate of $250,000,000. The Company's total portion of $85,000,000 and
Whitehall's total portion of $165,000,000 were fully funded as of December 31,
2001.
In December 2000, the Company and Whitehall executed definitive agreements
modifying the terms of the joint venture, effective January 1, 2001 (the
"Amendments"). The Amendments, which, among other items, provided for the
Company and Whitehall to extend their existing capital commitments to
Wellsford/Whitehall for one year to December 31, 2001 and to provide an
aggregate of $10,000,000 of additional financing or preferred equity to
Wellsford/Whitehall through December 2003, if required.
As a result of the Amendments, an affiliate of Whitehall replaced the Company as
the managing member of Wellsford/Whitehall. All employees working on
Wellsford/Whitehall business were transferred from the Company to WP Commercial,
L.L.C. ("WP Commercial"), the new management company, which is owned by
affiliates of Whitehall and senior management of WP Commercial. WP Commercial
provides management,
4
construction, development and leasing services to Wellsford/Whitehall based upon
an agreed fee schedule. WP Commercial also provides similar services to a new
venture formed by Whitehall (the "New Venture") as well as other affiliates of
Whitehall and to third parties, including tenants of Wellsford/Whitehall and new
owners of properties disposed of by Wellsford/Whitehall.
WP Commercial receives an administrative management fee of 93 basis points on a
predetermined value for each asset owned at the time of the Amendments. As
Wellsford/Whitehall sells assets, the basis used to determine the fee is reduced
by the respective asset's predetermined value six months after the completion of
such sales. The fees earned by WP Commercial related to this service were
approximately $5,826,000 and $6,422,000 for the years ended December 31, 2002
and 2001, respectively.
Wellsford/Whitehall, pursuant to the terms of the Amendments, discontinued
payment of a $600,000 annual administrative fee to the Company as of December
31, 2000; however, Whitehall has agreed to pay the Company fees with respect to
assets disposed of by Wellsford/Whitehall equal to 25 basis points of the sales
proceeds and up to 60 basis points (30 basis points are deferred pending certain
return on investment hurdles being reached) for each acquisition of real estate
made by certain other affiliates of Whitehall, until such acquisitions aggregate
$400,000,000. The following table presents fees earned by the Company related to
this provision:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001
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Asset disposition fees....... $ 7,000 $365,000
Asset acquisition fees....... 22,000 23,000
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Total fees................... $ 29,000 $388,000
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Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's
common stock, which had previously been issued to Whitehall, were returned and
cancelled. The Amendments included a buy/sell agreement of equity interests
between the Company and Whitehall effective after December 31, 2003 with respect
to the venture (the "Buy/Sell Agreement").
As a condition to the formation of Wellsford/Whitehall in 1997, the Company had
agreed with Whitehall to conduct its business and activities relating to office
properties (but not other types of commercial properties) located in North
America solely through its interest in Wellsford/Whitehall. Whitehall has agreed
to waive this condition in connection with the Amendments.
5
During the years ended December 31, 2002, 2001 and 2000, Wellsford/Whitehall
participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts)
2002 ACTIVITY
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
June ......... Owings Mills, MD 31,732 1 $ 2.9 $ 91.39 $ (0.3)
====== = ======== ========== ========
2001 ACTIVITY
Purchases (1):
Gross Leasable Purchase Price per
Square Number of Purchase Square
Month Location Feet Properties Price Foot Occupancy
----- -------- ---- ---------- ----- ---- ---------
April ........ Various 54,000 5 $ 18.7 $ 342.20 100%
October ...... Decatur, GA 10,000 1 2.3 231.51 100%
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64,000 6 $ 21.0 324.91 100%
====== = ========
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
February ..... Newton, MA 102,000 5 $ 18.0 $ 176.47 $ 3.5
April ........ Portland, ME 24,000 1 1.6 66.67 --
May .......... Parsippany, NJ 257,000 1 61.5 239.30 17.9
August ....... Andover, MA 63,000 1 9.2 146.03 1.5
September .... Wayne, NJ (Pointview) 564,000 1 35.5 62.94 -- (2)
November ..... Wayne, NJ 56,000 1 8.2 146.43 2.4
November ..... Chatham, NJ 63,000 1 12.0 190.48 2.0
--------- -- -------- --------
1,129,000 11 $ 146.0 129.32 $ 27.3
========= == ======== ========
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(1) Acquisitions of these six properties completed the purchase requirements
with respect to properties sold in February and April 2001 as part of a
tax-free exchange pursuant to the rules of the Internal Revenue Code.
(2) Loss reflected as part of impairment provision (see below).
2000 ACTIVITY
Purchases:
Purchases that were made during the year ended December 31, 2000, were
transferred to the New Venture, pursuant to the Amendments.
Sale:
Gross Leasable Sales Price per
Square Number of Sales Square
Month Location Feet Properties Price Foot Gain
----- -------- ---- ---------- ----- ---- ----
August ....... Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2
====== = ======== ========== ========
6
In February 2003, Wellsford/Whitehall completed the sales of a portfolio of six
properties to one purchaser for an aggregate of $136,800,000 and realized
aggregate net gains of approximately $10,554,000 before income taxes. The
Company's pre-tax income to be realized during the first quarter of 2003 from
these transactions was approximately $2,700,000. The Company will not receive a
distribution related to the sale of these properties as almost all of the
proceeds were used to paydown $129,557,000 of Wellsford/Whitehall debt. In a
separate transaction, Wellsford/Whitehall sold an unencumbered property in
January 2003 for which the Company received a distribution of approximately
$738,000 on January 31, 2003. The following table details the assets sold:
Gross Sales Price
Leasable per
Property Location Square Feet Sales Price Square Foot Gain (Loss)
-------- -------- ----------- ----------- ----------- -----------
Portfolio sale:
Mountain Heights Center #1 Berkeley Hts, NJ 183,000
Mountain Heights Center #2 Berkeley Hts, NJ 123,000
Greenbrook Corporate Center Fairfield, NJ 201,000
180/188 Mt. Airy Road ..... Basking Ridge, NJ 104,000
One Mall North ............ Columbia, MD 97,000
Gateway Tower ............. Rockville, MD 248,000
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Total portfolio sale ......... 956,000 $136,800,000 $ 143 $ 10,554,000
Decatur ...................... Decatur, GA 10,000 2,370,000 234 --
------- ------------ ------------
966,000 $139,170,000 144 $ 10,554,000
======= ============ ============
In anticipation of the sales of the Decatur, GA and two other properties in
Boston, MA, Wellsford/Whitehall recorded impairment provisions aggregating
approximately $1,351,000 at December 31, 2002 as the expected sale prices net of
selling expenses were less than the carrying amount of the properties. The
Company's share of these impairments was approximately $440,000 before a
write-off by the Company in 2002 of related unamortized warrant costs of
$284,000.
During July 2001, Wellsford/Whitehall entered into a contract to sell the
Pointview property, a 194 acre complex with two buildings totaling approximately
564,000 square feet, located in Wayne, New Jersey. This property, which was a
major development project of Wellsford/Whitehall, had been unoccupied since its
purchase in 1997. In anticipation of the consummation of the sale,
Wellsford/Whitehall recorded a $15,561,000 impairment provision at June 30,
2001, of which the Company's allocable share was approximately $5,908,000. This
impairment arose from the change in the intended mixed-use of the property from
office space, a conference center and residential development to an available
for sale headquarters complex. The sale was completed in September 2001. As a
result of a sales price adjustment and cost savings during the third and fourth
quarters of 2001, Wellsford/Whitehall recorded an additional net impairment
provision of $178,000, of which the Company's share was $64,000. Aggregate
impairment provisions recorded during 2001, including the Pointview provision
noted above, was $16,545,000, of which the Company's share was $6,256,000.
During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000
revolving credit facility from General Electric Capital Corporation
("Wellsford/Whitehall GECC Facility") with an initial funding of approximately
$273,000,000 before transaction costs. The remaining balance will be available
to be drawn to fund certain capital expenditures and upon achieving certain
operating results from six properties through June 30, 2003, which results are
not expected to be achieved by that time. Accordingly, Wellsford/Whitehall is in
the process of negotiating with GECC for an extension of the June 30, 2003
expiration. The facility bears interest at LIBOR + 2.90% per annum (4.28% at
December 31, 2002) and matures in June 2004 with two 12-month extension options,
subject to meeting certain operating and valuation covenants. Upon the initial
funding, the facility was secured by interests in twenty-four commercial office
properties in the Wellsford/Whitehall portfolio. The Wellsford/Whitehall GECC
Facility replaced the previously existing facility which was due to mature in
December 2001. The outstanding balance of the Wellsford/Whitehall GECC
7
Facility was $264,160,000 and $258,060,000 at December 31, 2002 and 2001,
respectively. Details of the changes to the Wellsford/Whitehall GECC Facility
balance are as follows:
NUMBER OF
SECURING
BALANCE PROPERTIES
------- ----------
June 2001 proceeds .......................... $ 272,912,000 24
2001 asset sales ............................ (14,852,000) (2)
------------- --
Balance at December 31, 2001 ................ 258,060,000 22
2002 asset sales ............................ -- --
Additional asset encumbered by the facility . 6,100,000 1
------------- --
Balance at December 31, 2002, including
$131,811,000 reflected in liabilities held
for sale ................................. $ 264,160,000 23
============= ==
Balance at December 31, 2002, adjusted for
completed sales from January 1, 2003 to
February 28, 2003 ........................ $ 141,976,000 18
============= ==
This financing was arranged by Goldman Sachs, to whom Wellsford/Whitehall paid a
fee of approximately $2,644,500.
In July 2001, Wellsford/Whitehall entered into an interest rate protection
contract at a cost of $1,780,000 (the "Cap"), which limits Wellsford/Whitehall's
LIBOR exposure to 5.83% until June 2003 and 6.83% for the following year to June
2004 on $285,000,000 of debt. The market value of the Cap was approximately
$13,000 and $1,089,000 at December 31, 2002 and 2001, respectively. This Cap was
purchased from Goldman Sachs based upon the results of a competitive bidding
process.
The following table summarizes the long-term debt at Wellsford/Whitehall:
BALANCE AT DECEMBER 31,
INITIAL MATURITY STATED INTEREST -----------------------
DEBT/PROJECT DATE RATE 2002 2001
------------ ---- ---- ---- ----
Wellsford/Whitehall GECC Facility.. June 2004 LIBOR + 2.90% $264,160,000 $258,060,000
Nomura Loan (A).................... February 2027 8.03% 65,458,000 66,189,000
Oakland Ridge Loan (B)............. March 2003 LIBOR + 2.00% 6,959,000 4,649,000
Retail properties (C).............. January 2024 7.28% 16,371,000 16,600,000
Other loans on office properties... (D) Various 15,410,000 24,511,000
------------ ------------
$368,358,000 $370,009,000
============ ============
- ----------
(A) In connection with a 1998 transaction, Wellsford/Whitehall assumed a
mortgage loan held by Nomura Asset Capital Corporation with an initial
principal balance of approximately $68,300,000.
(B) The non-recourse loan is secured by the leasehold interest in the Oakland
Ridge office park in Columbia, Maryland. The loan has a twelve-month
extension at Wellsford/Whitehall's option.
(C) Comprised of five mortgages secured by the leasehold interest in five
retail properties.
(D) Includes a property collateralizing the aggregate loan balances outstanding
of $7,373,000 at December 31, 2002, which was sold in February 2003. The
loans were repaid from sales proceeds.
The Company made temporary advances to Wellsford/Whitehall during 2000 which
bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid
in full by December 31, 2000. The Company earned approximately $703,000 of
interest income during 2000 from such advances.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility
with a predecessor of Fleet National Bank ("Wellsford/Whitehall Fleet
Facility"). Under the terms, $300,000,000 represented a senior secured credit
facility which bore interest at LIBOR + 1.65% per annum and $75,000,000
represented a second mezzanine facility which bore interest at LIBOR + 3.20% per
annum. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full,
terminated and replaced with the Wellsford/Whitehall GECC Facility.
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DEBT AND EQUITY ACTIVITIES - WELLSFORD CAPITAL
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The Company, through the Wellsford Capital SBU, makes debt investments directly,
or through joint ventures, predominantly in real estate related senior, junior
or otherwise subordinated debt instruments and also in investment grade rated
commercial mortgage backed securities and other asset-backed securities. The
debt investments may be unsecured or secured by liens on real estate, liens on
equity interests in real estate, pools of mortgage loans, or various other
assets including, but not limited to, leases on aircraft, truck or car fleets,
leases on equipment, consumer receivables, pools of corporate bonds and loans
and sovereign debt, as well as interests in such assets or their economic
benefits. Junior and subordinated loans and investments generally have the
potential for high yields or returns more characteristic of equity ownership.
They may include debt that is acquired at a discount, mezzanine financing,
commercial mortgage-backed securities, secured and unsecured lines of credit,
distressed loans, tax exempt bonds secured by real estate and loans previously
made by foreign and other financial institutions. The Company believes that
there are opportunities to acquire real estate debt and other debt, especially
in the low or below investment grade tranches, at significant returns as a
result of inefficiencies in pricing in the marketplace, while utilizing both our
and our joint venture partners' expertise to analyze the underlying assets and
thereby effectively minimizing risk.
At December 31, 2002, the Company had the following investments: (i)
approximately $28,612,000 of direct debt investments which bore interest at a
weighted average annual yield of approximately 11.69% during 2002 and had an
average remaining term to maturity of approximately 4.2 years; (ii)
approximately $31,797,000 of equity investments in companies which were
organized to invest in debt instruments, including $28,166,000 in Second Holding
Company, LLC, a company which was organized to purchase investment and
non-investment grade rated real estate debt instruments and investment grade
rated other asset-backed securities ("Second Holding"); and (iii) approximately
$6,792,000 invested in Reis, a real estate information and database company. In
addition, the Company owned and operated two commercial properties with a net
book value of approximately $6,027,000, totaling approximately 175,000 square
feet located in Salem, New Hampshire and Philadelphia, Pennsylvania.
DEBT INVESTMENTS
277 PARK LOAN
In April 1997, the Company and a predecessor of Fleet National Bank originated
an $80,000,000 loan (the "277 Park Loan") to entities which own substantially
all of the equity interests (the "Equity Interests") in the entity which owns a
1,750,000 square foot office building located in New York City (the "277 Park
Property"). The Company advanced $25,000,000 pursuant to the 277 Park Loan. The
277 Park Loan is secured primarily by a pledge of the Equity Interests owned by
the borrowers and thus is junior to a 10-year $345,000,000 first mortgage loan
(amortized balance of $314,485,000 at December 31, 2002) (the "REMIC Loan") on
the 277 Park Property.
The 277 Park Loan bears interest at the rate of 12.00% per annum for the first
nine years of its term and at a floating rate during the tenth year equal to
LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per
annum, as elected by the borrowers. The principal amount of the 277 Park Loan
and all accrued interest will be payable in May 2007; the REMIC Loan is also due
in May 2007. The Company earned approximately $3,042,000, $3,042,000 and
$3,050,000 per year of interest revenue from the 277 Park Loan during 2002, 2001
and 2000, respectively, or 9.6%, 7.3% and 11.9% of total non-joint venture
revenues during such periods.
PATRIOT LOAN
In September 1999, the Company and Fleet National Bank originated a $10,000,000
second mortgage loan, of which the Company advanced $5,000,000 (its 50% share)
(the "Patriot Loan"). The Patriot Loan was subordinate to a $75,000,000 first
mortgage loan made by Fleet National Bank. During May 2002, the Patriot
9
Loan was paid in full and the Company received its loan balance of approximately
$4,951,000. The loan bore interest at LIBOR + 4.75% per annum with payments of
interest only from origination through August 2001 and, thereafter, principal
and interest based on a 25-year amortization. The Patriot Loan was secured by a
second mortgage lien on a 608,000 square foot mixed-use property in Boston,
Massachusetts. The loan balance due to the Company on December 31, 2001 was
approximately $4,973,000. The Company earned approximately $129,000, $449,000
and $564,000 of interest revenue from the Patriot Loan during 2002, 2001 and
2000, respectively, or 0.4%, 1.1% and 2.2% of total non-joint venture revenues
during such periods.
THE ABBEY COMPANY CREDIT FACILITY
In August 1997, the Company and a predecessor of J.P. Morgan Chase ("JPMC")
originated a $70,000,000 credit facility secured by first mortgages (the "Abbey
Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May
1998, the Company and JPMC expanded the Abbey Credit Facility to $120,000,000.
In December 1998, Abbey repaid $20,000,000, thereby reducing the total available
balance to $100,000,000. In September 1999, an additional $83,500,000 was
repaid, thereby reducing the total available balance to $16,500,000. Advances
under the Abbey Credit Facility were made for up to 75% of the value of the
borrowing base collateral which consisted of office, industrial and retail
properties, all cross collateralized, totaling approximately 250,000 square
feet. The Company's portion of the outstanding balance of approximately
$4,300,000 was repaid in August 2000 and the Abbey Credit Facility was
terminated.
The Company was entitled to interest on its advances under the Abbey Credit
Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000
of interest revenue from the Abbey Credit Facility during 2000, or 1.2% of total
non-joint venture revenues during such period.
SAFEGUARD CREDIT FACILITY
In December 1998, the Company and JPMC originated a $90,000,000 credit facility
cross-collateralized by nine self-storage properties (the "Safeguard Credit
Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit
Facility, which was made available to Safeguard until April 2001, was terminated
on January 30, 2001 when the outstanding balance of $2,900,000 was repaid.
Advances under the facility were made for up to 75% of the value of the
borrowing base collateral which consisted of nine self-storage properties
totaling approximately 608,000 square feet. The Company was entitled to interest
on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum.
Approximately $5,900,000 had been advanced by the Company under the Safeguard
Credit Facility at December 31, 1998, with additional advances made of
approximately $2,200,000 through March 1999, at which time, the loan with a
balance of $8,100,000 was contributed to the Company's joint venture investment,
Second Holding. This venture also assumed the first $25,000,000 of the Company's
commitment to fund additional advances under the Safeguard Credit Facility
(including amounts advanced through December 31, 1999). The Company retained the
remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard
in September 1999 and was outstanding at December 31, 2000 and 1999,
respectively. The Safeguard Credit Facility was repaid in full in January 2001.
The Company earned approximately $25,000 and $306,000 of interest revenue from
the Safeguard Credit Facility during 2001 and 2000, respectively, or 0.1% and
1.2% of total non-joint venture revenues during such periods.
LIBERTY HAMPSHIRE
In July and August 1998, the Company invested a total of approximately
$2,100,000 for an approximate 4.20% equity interest in The Liberty Hampshire
Company, L.L.C. ("Liberty Hampshire"), a venture which structures, establishes
and provides management and services for special purpose finance companies
formed to invest in financial assets. In December 2000, the Company sold this
interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded
a gain of approximately $2,500,000. The Company received $1,032,000 of cash and
a note for the remaining balance of $4,128,000 which bears interest at 8.25% per
annum, is due in December 2005 and has scheduled annual principal and interest
payments (the "Guggenheim Loan"). The
10
balance of the Guggenheim Loan was $3,612,000 at December 31, 2002 and 2001. The
Company earned approximately $302,000 and $345,000 of interest revenue from the
Guggenheim Loan during 2002 and 2001, respectively or 0.9% and 0.8% of total
non-joint venture revenues during the period. On January 2, 2003, the Company
received a payment of approximately $818,000, which included the 2002 interest
payment and the 2002 principal paydown of $516,000.
The following table summarizes interest revenue and its share of consolidated
non-joint venture revenue during such periods for the Wellsford Capital SBU:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
INTEREST INTEREST INTEREST
REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE
------- ---------- ------- ---------- ------- ----------
277 Park Loan .............. $ 3,042,000 9.6% $ 3,042,000 7.3% $ 3,050,000 11.9%
Patriot Loan ............... 129,000 0.4% 449,000 1.1% 564,000 2.2%
Abbey Credit Facility ...... -- 0.0% -- 0.0% 295,000 1.2%
Safeguard Credit Facility .. -- 0.0% 25,000 0.1% 306,000 1.2%
Guggenheim Loan ............ 302,000 0.9% 345,000 0.8% -- 0.0%
Other ...................... 18,000 0.1% 233,000 0.6% 151,000 0.5%
----------- ---- ----------- ---- ----------- ----
Interest revenue from loans 3,491,000 11.0% 4,094,000 9.9% 4,366,000 17.0%
Interest revenue from cash
and cash equivalents .... 5,000 0.0% 72,000 0.2% 70,000 0.3%
----------- ---- ----------- ---- ----------- ----
Total interest revenue ..... $ 3,496,000 11.0% $ 4,166,000 10.1% $ 4,436,000 17.3%
=========== ==== =========== ==== =========== ====
Consolidated non-joint
venture revenue (base
from which percentage
is calculated) .......... $31,718,466 $41,492,999 $25,623,789
=========== =========== ===========
SECOND HOLDING
Second Holding, a joint venture special purpose finance company, has been
organized to purchase investment and non-investment grade rated real estate debt
instruments and investment grade rated other asset-backed securities. These
other asset-backed securities that Second Holding may purchase may be secured
by, but not limited to, leases on aircraft, truck or car fleets, bank deposits,
leases on equipment, fuel/oil receivables, consumer receivables, pools of
corporate bonds and loans and sovereign debt. It is Second Holding's intent to
hold all securities to maturity. Many of these securities were obtained through
private placements and current public market pricing is not available.
The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and
1998, respectively, to obtain an approximate 51.1% non-controlling interest in
Second Holding, with Liberty Hampshire owning 10% and an affiliate of a
significant shareholder of the Company (the Caroline Hunt Trust Estate, which
owns 405,500 shares of the Company at December 31, 2002 ("Hunt Trust")) who,
together with other entities, own the remaining approximate 39%. The Company's
1999 contribution was comprised of two of the Company's debt investments
totaling $25,700,000, net of $1,500,000 of cash received back from Second
Holding. The other partners contributed their respective shares of their capital
contributions in cash.
During the latter part of 2000, an additional partner was admitted to the
venture, who received a share of income, as defined, pursuant to a cumulative
preference on earnings in return for providing an insurance policy for payment
of the long-term debt issued by Second Holding. Effective January 1, 2002, the
partners of Second Holding modified the terms of the agreement with the
additional partner, which eliminated the additional partner's cumulative
preference on earnings. The additional partner is entitled to 35% of net income
as defined by the agreement, while the other partners, including the Company,
share in the remaining 65%. The Company's allocation of income is approximately
51.1% of the remaining 65%.
11
The Company's investment in Second Holding, which is accounted for on the equity
method, was approximately $28,166,000 and $27,803,000 at December 31, 2002 and
2001, respectively. The Company's share of income (loss) from Second Holding was
approximately $723,000, $(163,000) and $1,432,000 for the years ended December
31, 2002, 2001 and 2000, respectively. The Company also earns management fees
for its role in analyzing real estate-related investments for Second Holding.
The net fees earned by the Company, which are based upon total assets of Second
Holding, amounted to approximately $646,000, $217,000 and $(182,000) for the
years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, Second Holding had real estate debt and other
asset-backed securities investments of approximately $1,785,758,000 and
$926,453,000, respectively. The investment-grade assets are variable rate based
and have a weighted average annual interest rate of 2.21% and 2.58% at December
31, 2002 and 2001, respectively.
Second Holding utilizes funds from the issuance of bonds, medium term notes and
commercial paper to make investments. Second Holding had total debt of
approximately $1,722,933,000 and $962,465,000 at December 31, 2002 and 2001 with
a weighted average annual interest rate of 1.69% and 2.15%, respectively, after
the effect of swaps on fixed rate debt to a floating rate.
In August 2001, Second Holding purchased an aggregate of $24,825,000 in two
classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC
Certificates"). The WTC Certificates, rated AA and A at issuance, were part of a
total bond offering of $563,000,000 which was used to finance the acquisition of
the leasehold interests in towers 1 and 2 and in the office components of
buildings 4 and 5 of the World Trade Center in New York City. Subsequent to the
events of September 11, 2001 which resulted in the destruction of these
buildings, the Company has been informed by GMAC Commercial Mortgage
Corporation, the master and special servicer, that the WTC Certificates are not
in default. The property casualty and business interruption insurance obtained
in connection with the WTC Certificates does not exclude acts of terrorism; such
insurance is from a consortium of 22 insurers. The policies of three of the
insurance companies have been found by the United States District Court,
Southern District of New York, to define the events of September 11, 2001 as a
single occurrence. The owner of the leasehold interests is appealing this
decision. The remaining insurance companies and the owner of the leasehold
interests are in litigation to determine whether the events of September 11,
2001 constitute a single occurrence or a double occurrence. A single occurrence
entitles the beneficiary of the policies to a payment equal to the face amount
of the insurance policies, while a double occurrence entitles the beneficiary to
a payment equal to twice the face amount.
As of December 31, 2002, the rating agencies have not changed their ratings on
the WTC Certificates and all payments of principal and interest were current.
The Company and Second Holding management believe that the insurance coverage,
whether the courts determine that the destruction of the towers was a single or
double occurrence, will be sufficient to cover Second Holding's investment and
that an impairment reserve is not required. Both Second Holding and the Company
will continue to evaluate the ultimate collectibility of the principal and
interest.
REIS, INC.
The Company has direct and indirect investments in a real estate information and
database company, Reis, a leading provider of real estate market information to
institutional investors. At December 31, 2002 and 2001, the Company's aggregate
investment in Reis, which is accounted for under the cost method, was
approximately $6,792,000 and $6,583,000, respectively, or approximately 21.4% of
Reis' equity on an as converted basis. The president and primary common
shareholder of Reis is the brother of Mr. Lynford, the Chairman, President and
Chief Executive Officer of the Company. Mr. Lowenthal, the Company's former
President and Chief Executive Officer, who currently serves on the Company's
Board of Directors, has served on the board of directors of Reis since the third
quarter of 2000. Messrs. Lynford, Lowenthal and certain directors of the Company
whom have invested directly in Reis, have and will continue to recuse themselves
from any investment decisions made by the Company pertaining to Reis.
12
CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS
In January 1998, the Company formed Creamer Vitale Wellsford, L.L.C. ("CVW") in
which it had a 49% interest and acquired the same percentage interest in a
related real estate advisory and consulting firm. CVW, together with Prudential
Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance
Company, established the Clairborne Investors Mortgage Investment Program
("Clairborne") to make opportunistic investments and to provide liquidity to
lenders and participants in mortgage loan transactions. The parties agreed to
contribute up to $150,000,000 to fund acquisitions approved by the parties, of
which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW
was to originate, co-invest and manage the investments of the program.
The Company's original investment in the CVW entities was $1,250,000 of cash and
74,000 five-year warrants to purchase the Company's common shares at $30.35 per
share, valued at approximately $750,000 at that time. In September 2000, one of
the two principals of CVW left CVW to pursue other employment, the venture was
terminated and the investment balance was written off. In July 2001, the
warrants issued to the CVW partners were repurchased for $80,000 and cancelled.
FORDHAM TOWER
In October 2000, the Company and PREI organized a new venture which provided an
aggregate of $34,000,000 of mezzanine financing for the construction of Fordham
Tower, a 50-story, 244 unit, luxury condominium apartment project to be built on
Chicago's near northside ("Fordham Tower"). The Company fully funded its share
of the loan of $3,400,000. The loan, which matures in October 2003, bears
interest at a fixed rate of 10.50% per annum with provisions for additional
interest to PREI and the Company and fees to the Company and the two former
principals of CVW, based upon certain levels of returns on the project and is
secured by a lien on equity interests in the property. Such additional interest
and fees have not been earned or accrued by the Company. The Company's
investment in the Fordham Tower venture is accounted for on the equity method.
The Company's share of income from Fordham Tower was approximately $361,000,
$361,000 and $85,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Construction is nearing completion and delivery of certain units commenced in
December 2002. As of December 31, 2002, approximately 93% of the units were
under contract and 23 unit sales had closed for gross proceeds of approximately
$11,300,000.
OTHER INVESTMENTS
VALUE PROPERTY TRUST
In February 1998, the Company completed the merger with Value Property Trust
("VLP") (the "VLP Merger") for total consideration of approximately
$169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP
properties were under contract and subsequently sold to an affiliate of
Whitehall for an aggregate of approximately $64,000,000. The Company retained
seven of the VLP properties, with an allocated value upon purchase of
approximately $38,300,000, aggregating approximately 597,000 square feet with
one property located in California and the remaining six properties located in
the northeastern United States. VLP had cash of $60,800,000 and other net assets
of $5,900,000 at the close of the transaction. In October 1998, the Company
obtained a $28,000,000 loan, which was cross-collateralized by the seven
retained VLP properties, bore interest at LIBOR + 2.75% per annum and was
scheduled to mature in October 2001.
During the fourth quarter of 2000, the Company made the strategic decision to
sell the seven VLP properties. One of the properties was sold in December 2000
and four other properties were sold during 2001 for aggregate sales of
approximately $34,217,000. Two unencumbered properties remain unsold at December
31, 2002. The Company recorded a gain of approximately $4,943,000 on the
December 2000 transaction which was offset by a provision for impairment of
$4,725,000, also recorded in 2000, attributable to expected sales proceeds being
less
13
than the respective carrying amounts on four of the remaining six unsold VLP
properties at December 31, 2000. The Company repaid in full the $28,000,000 loan
in December 2000 and expensed all of the remaining unamortized deferred loan
costs associated with the financing. The net book value after a remaining
impairment reserve of $2,175,000 for the two unsold properties was approximately
$6,027,000 and $5,560,000 at December 31, 2002 and 2001, respectively. The
Company determined that no additional impairment provision was required at
December 31, 2002 and 2001.
PROPERTY DEVELOPMENT AND LAND OPERATIONS - WELLSFORD DEVELOPMENT
- ----------------------------------------------------------------
The Company, through the Wellsford Development SBU, engages in selective
development activities as opportunities arise and when justified by expected
returns. The Company believes that by pursuing selective development activities,
it can achieve returns which are greater than returns that could be achieved by
acquiring stabilized properties. As part of its strategy, the Company may seek
to issue tax-exempt bond financing authorized by local governmental authorities
which generally bears interest at rates substantially below rates available from
conventional financing.
PALOMINO PARK
Presently, the Company's Wellsford Development activities consist solely of an
interest in a five-phase 1,800 unit class A multifamily development ("Palomino
Park") in Highlands Ranch, a south suburb of Denver, Colorado. At December 31,
2002 and 2001, the Company had an 85.85% interest as the managing owner in this
project and a subsidiary of EQR had the remaining 14.15% interest.
In January 2003, the Company's board of directors approved a plan for the
Company to seek institutional investors to purchase an interest in the
residential rental phases at Palomino Park. There can be no assurance that the
Company will be able to find suitable investors or that such a transaction will
be completed.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to
fund construction at Palomino Park (the "Palomino Park Bonds"). Initially, all
five phases of Palomino Park were collateral for the Palomino Park Bonds. In
June 2000, the Company obtained a five-year AA rated letter of credit from
Commerzbank AG to provide additional collateral for the Palomino Park Bonds.
This letter of credit, which expires in 2005, replaced an expiring letter of
credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit;
such guarantee also expires in 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed
at a cost of approximately $41,500,000. At that time, the Company obtained a
$34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first
mortgage on Blue Ridge. The Blue Ridge Mortgage matures in December 2007 and
bears interest at a fixed rate of 6.92% per annum. Principal payments are based
on a 30-year amortization schedule.
In November 1998, Phase II, the 304 unit phase known as Red Canyon, was
completed at a cost of approximately $33,900,000. At that time, the Company
acquired the Red Canyon improvements and the related construction loan was
repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon
Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage
matures in December 2008 and bears interest at a fixed rate of 6.68% per annum.
Principal payments are based on a 30-year amortization schedule.
In October 2000, Phase III, the 264 unit phase known as Silver Mesa was
completed at a cost of approximately $44,200,000. The Company made the strategic
decision to convert Silver Mesa into condominium units and sell them to
individual buyers. In conjunction with this decision, the Company prepared
certain units to be sold and continued to rent certain of the remaining unsold
units during the sellout period until the inventory available for sale has been
significantly reduced and additional units are required to be prepared for sale.
In conjunction with this decision, the Company made a payment of $2,075,000 to
reduce the outstanding balance on the tax-exempt bonds in order to obtain the
release of the Silver Mesa phase from the Palomino Park Bond collateral. In
December 2000, the Company obtained a $32,000,000 loan from KeyBank National
Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR +
2.00% per annum (3.38% at December 31, 2002), is
14
collateralized by the unsold Silver Mesa units, matures in December 2003 and
provides for one six-month extension at the Company's option. Generally, 90% of
net sales proceeds per unit is applied to principal repayments until the loan is
paid in full. The balance of the Silver Mesa Conversion Loan was $4,318,000 and
$13,352,000 at December 31, 2002 and 2001, respectively.
Sales of condominium units at the Silver Mesa phase of Palomino Park commenced
in February 2001 and 153 units have been sold through December 31, 2002. The
following table provides information regarding sales of Silver Mesa units:
FOR THE YEARS ENDED
DECEMBER 31,
------------------- PROJECT
2002 2001 TOTALS
---- ---- ------
Number of units sold ........... 48 105 153
Gross proceeds ................. $10,635,000 $21,932,000 $32,567,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 9,034,000 $18,648,000 $27,682,000
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, future rental
revenues and corresponding operating expenses will diminish.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Rental revenue ......... $1,462,000 $2,224,000 $ 592,000
Net operating income (A) $ 884,000 $1,488,000 $ 379,000
- ----------
(A) Net operating income is defined as rental revenue, less property operating
and maintenance expenses, real estate taxes and property management fees.
In December 2001, Phase IV, the 424 unit phase known as Green River, was
completed at a cost of approximately $56,400,000. Effective December 31, 2001,
the Company (i) became obligated for the construction loan, (ii) released the
developer of the economic risks it bore during construction and initial lease-up
as the developer carried the construction loan and a significant portion of the
costs incurred on its balance sheet and (iii) the developer no longer
participated in any positive operating income generated during the period. The
construction loan balance was $37,111,000 and $36,747,000 at December 31, 2002
and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at
December 31, 2002).
On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured
by a first mortgage on Green River (the "Green River Mortgage"). The Green River
mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per
annum. Principal payments are based on a 30-year amortization schedule. Proceeds
were used to repay the Green River Construction Loan and excess proceeds are
generally available for working capital purposes.
Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known
as Gold Peak, had a cost basis of approximately $5,411,000 and $5,400,000 at
December 31, 2002 and 2001, respectively. The Company has not determined if it
will construct this phase or sell the improved land.
SONTERRA AT WILLIAMS CENTRE ("SONTERRA")
From the time of the Spin-off through January 1998, the Company held a
$17,800,000 mortgage on, and option to purchase, a 344-unit class A residential
apartment complex located in Tucson, Arizona. In January 1998, the Company
exercised its option and acquired Sonterra for approximately $20,500,000,
including satisfaction of the mortgage. In February 1998, the Company closed on
$16,400,000 of first mortgage financing (the
15
"Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in
March 2008. Principal payments were based on a 30-year amortization schedule.
In November 2000, the Company sold the Sonterra property for $22,550,000 and
recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed
the Sonterra Mortgage, which had an unamortized balance of approximately
$15,971,000, and paid the balance of the purchase price in cash.
SEGMENT FINANCIAL INFORMATION
See Note 12 to the Company's consolidated financial statements for additional
information regarding the Company's industry segments.
FUTURE INVESTMENTS
The Company may in the future make equity investments in entities owned and/or
operated by unaffiliated parties which may engage in real estate-related
businesses and activities or businesses that service the real estate industry.
Some of the entities in which the Company may invest, may be start-up companies
or companies in need of additional capital. The Company may also manage and
lease properties owned by it or in which it has an equity or debt investment.
Some investments may be in entities which make investments in non-real estate
assets, such as certain of the debt investments that Second Holding may invest
in.
16
ITEM 2. PROPERTIES.
The following property information is presented by SBU.
WELLSFORD/WHITEHALL
As of December 31, 2002, Wellsford/Whitehall owned and operated 34 properties,
including ten properties held for sale (substantially all office properties),
totaling approximately 3,874,000 square feet. By February 28, 2003, after the
completion of certain sales, Wellsford/Whitehall owned 27 properties totaling
approximately 2,908,000 square feet. The following table sets forth certain
information related to all of these properties at December 31, 2002:
LEASABLE
BUILDING YEAR NUMBER
SQUARE CONSTRUCTED/ OF
PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY
-------- ---- -------- ---- ------------- ------- ---------
OPERATING PROPERTIES - OFFICE
300 Atrium Drive.... Office Somerset, NJ 147,000 1983 5 100%
400 Atrium Drive**.. Office Somerset, NJ 355,000 1985 2 52%
500 Atrium Drive.... Office Somerset, NJ 169,000 1984 4 95%
700 Atrium Drive.... Office Somerset, NJ 181,000 1985 1 100%
Garden State Exhibit
Center........... Flex Somerset, NJ 82,000 1968/1989 N/A N/A
333 Elm Street...... Office Dedham, MA 48,000 1983 7 70%
Dedham Place........ Office Dedham, MA 160,000 1987/2002 6 29%
201 University Avenue Office Westwood, MA 82,000 1982 1 100%
7/57 Wells Avenue.... Office Newton, MA 88,000 1982 14 100%
75/85/95 Wells Avenue Office Newton, MA 242,000 1976/1986 5 83%
105 Challenger Road.. Office Ridgefield 147,000 1992 3 100%
Park, NJ
Oakland Ridge........ Flex Columbia, MD 144,000 1972/2002 2 65%
117 Kendrick Street.. Office Needham, MA 211,000 1963/2000 2 38%
Airport Park......... Office Hanover Twp, NJ 96,000 1979/2002 10 85%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 2,152,000 62 74%
--------- -- ---
OPERATING PROPERTIES - RETAIL
Essex................ Retail Essex, MD 10,000 2000 1 100%
Pennsauken........... Retail Pennsauken, NJ 12,000 2001 1 100%
Runnemeade........... Retail Runnemeade, NJ 12,000 2001 1 100%
Wetumpa.............. Retail Wetumpa, AL 10,000 2001 1 100%
Richmond............. Retail Richmond, VA 10,000 2001 1 100%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 54,000 5 100%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES ........ 2,206,000 67 74%
--------- -- ---
PRINCIPAL TENANTS BASE ESCALATED MARKET
--------------------------------- RENT PER RENT PER RENT PER
LEASE SQUARE SQUARE SQUARE
PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE
-------- ---- ---------- ---- ---- ----- -----------
OPERATING PROPERTIES - OFFICE
300 Atrium Drive.... AT&T March 2004 $ 20.69 $ 23.37 $ 21.00 (A)
400 Atrium Drive**.. Merrill Lynch December 2003 22.01 23.61 21.00 (A)
500 Atrium Drive.... AT&T December 2003 20.01 24.40 21.00 (A)
700 Atrium Drive.... Merck June 2005 17.39 20.83 21.00 (A)
Garden State Exhibit
Center........... N/A N/A 25.71 25.71 N/A (A)
333 Elm Street...... RNK, Inc. June 2006 17.13 18.43 24.00 (C)
Dedham Place........ Washington Mutual January 2007 15.97 24.51 27.00 (C)
201 University Avenue RCN Corp. December 2009 18.00 20.33 21.50 (C)
7/57 Wells Avenue.... GEO Centers November 2004 26.79 28.30 27.00 (C)
75/85/95 Wells Avenue Wonderware Corp. April 2005 28.23 28.87 27.00 (C)
105 Challenger Road.. Samsung America, Inc. December 2003 26.74 31.38 26.00 (A)
Oakland Ridge........ Wells Fargo May 2012 15.64 15.90 18.00 (E)
117 Kendrick Street.. MCK Communication March 2007 30.36 32.10 26.00 (A)
Airport Park......... CapGemini January 2006 20.82 24.98 26.00 (E)
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 22.23 24.99 23.40
----- ----- -----
OPERATING PROPERTIES - RETAIL
Essex................ CVS January 2024 37.00 37.00 37.00 (E)
Pennsauken........... CVS January 2024 24.85 24.85 24.85 (E)
Runnemeade........... CVS January 2024 26.06 26.06 26.06 (E)
Wetumpa.............. CVS January 2024 20.46 20.46 20.46 (E)
Richmond............. CVS January 2024 24.70 24.70 24.70 (E)
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 26.53 26.53 26.53
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES ........ 22.34 25.03 23.48
----- ----- -----
17
WELLSFORD/WHITEHALL: PROPERTY TABLE - CONTINUED
LEASABLE
BUILDING YEAR NUMBER
SQUARE CONSTRUCTED/ OF
PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY
-------- ---- -------- ---- ------------- ------- ---------
PROPERTIES UNDER RENOVATION
600 Atrium Drive........ Land Somerset, NJ N/A N/A (H) --
Airport Park............ Land Hanover Twp, NJ N/A N/A (H) --
150 Mt. Bethel Road..... Office/Flex Warren, NJ 129,000 1981 5 56%
377/379 Campus Drive**.. Office Franklin Twp, NJ 199,000 1984 1 10%
128 Technology Center**. Office Waltham, MA 218,000 1986 -- 0%
--------- --- ---
SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 546,000 6 17%
--------- --- ---
PROPERTIES HELD FOR SALE - OFFICE
Greenbrook Corporate
Center (B)........... Office Fairfield, NJ 201,000 1987 14 78%
Mountain Heights
Center #1 (B)........ Office Berkeley Hts, NJ 183,000 1968/1986/1998 14 79%
Mountain Heights
Center #2 (B)........ Office Berkeley Hts, NJ 123,000 1968/1998/2000 1 100%
180/188 Mt. Airy Road
(B).................. Office Basking Ridge, NJ 104,000 1980 11 83%
One Mall North (B)...... Office Columbia, MD 97,000 1978/1998 27 61%
401 North Washington (B) Office Rockville, MD 248,000 1972/2002 11 82%
60 Turner Street (D).... Office/Land Waltham, MA 16,000 1970 1 100%
79 Milk Street (D)...... Office Boston, MA 65,000 1920/1998/2001 8 54%
24 Federal Street (D)... Office Boston, MA 75,000 1921/1997/2001 11 73%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 1,112,000 98 79%
--------- --- ---
PROPERTIES HELD FOR SALE - RETAIL
Decatur (B)............. Retail Decatur, GA 10,000 2001 1 100%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 10,000 1 100%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE ........ 1,122,000 99 79%
--------- --- ---
TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ 3,874,000 172 68%
========= === ===
PRINCIPAL TENANTS BASE ESCALATED MARKET
--------------------------------- RENT PER RENT PER RENT PER
LEASE SQUARE SQUARE SQUARE
PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE
-------- ---- ---------- ---- ---- ----- -----------
PROPERTIES UNDER RENOVATION
600 Atrium Drive..... -- -- -- -- -- (G)
Airport Park......... -- -- -- -- -- (G)
150 Mt. Bethel Road.. GMAC March 2008 18.40 20.15 21.50 (A)
377/379 Campus Drive** Royal Consumer September 2009 9.85 10.41 19.50 (A)
Products
128 Technology Center** -- N/A -- -- 29.00 (C)
-------- ------- -------
SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 7.94 8.55 23.77
-------- ------- -------
PROPERTIES HELD FOR SALE -
Greenbrook Corporate
Center (B)........... Information Resources December 2003 23.36 25.92 22.00 (A)
& 2008
Mountain Heights
Center #1 (B)........ The Santa Cruz Org. September 2006 29.79 32.30 27.00 (A)
Mountain Heights
Center #2 (B)........ Compaq August 2010 28.50 32.15 28.00 (A)
180/188 Mt. Airy Road
(B).................. Avaya Inc. October 2004 25.49 27.92 26.50 (A)
One Mall North (B)...... GSA November 2005 22.21 24.45 22.00 (E)
401 North Washington (B) Automatic Data February 2007 17.13 18.43 26.50 (A)
Processing
60 Turner Street (D).... Brandeis University June 2002 (F) 8.00 8.00 8.00 (A)
79 Milk Street (D)...... International Data February 2009 43.92 46.20 36.50 (A)
Group (IDG)
24 Federal Street (D)... IDG February 2009 46.65 49.55 36.50 (A)
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 26.25 28.57 26.54
-------- ------- -------
PROPERTIES HELD FOR SALE - RETAIL
Decatur (B)............. CVS April 2019 19.75 22.86 23.00 (G)
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 19.75 22.86 23.00
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE ........ 26.19 28.52 26.50
-------- ------- -------
TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ $ 21.40 $ 23.69 $ 24.41
======== ======= -------
- ----------
(A) Encumbered by the Wellsford/Whitehall GECC Facility.
(B) Property sold by February 28, 2003. Total square feet of sold properties
was 966,000 square feet.
(C) Encumbered by a $65,458,000 mortgage.
(D) Property expected to be sold during second quarter of 2003. The total
square feet of properties expected to be sold is 156,000 square feet.
(E) Encumbered by other mortgages.
(F) Hold over tenant on a month-to-month lease.
(G) Unencumbered.
(H) Land zoned for office development.
* Represents the judgment of WP Commercial as managing member as to specific
property market rent per square foot as of December 31, 2002.
** Wellsford/Whitehall is in the process of converting building from single to
multi-tenant.
18
The following table sets forth historical Wellsford/Whitehall portfolio
information by year:
SQUARE FEET OF OCCUPANCY
TOTAL BUILDING TOTAL PORTFOLIO OPERATING OF OPERATING
AT DECEMBER 31, SQUARE FEET OCCUPANCY PROPERTIES PROPERTIES
--------------- ----------- --------- ---------- ----------
2002 Pro forma (A).... 2,908,000 63% 2,362,000 74%
2002.................. 3,874,000 68% 3,328,000 76%
2001.................. 3,905,000 70% 3,307,000 69%
2000.................. 4,953,000 69% 3,431,000 87%
- ----------
(A) December 31, 2002 adjusted to reflect all sales from January 1, 2003 to
February 28, 2003.
Leases typically provide for step-ups in base rent periodically over the term of
a lease and pass throughs to tenants of their pro rata share of increases in
certain expenses (real estate taxes and operating expenses) over a base year.
Leases generally provide for improvement allowances for all or a portion of the
tenant's initial construction of its premises. The following table sets forth as
of December 31, 2002 lease expirations for each of the next ten years, assuming
tenants do not exercise any renewal options and excludes properties sold from
January 1, 2003 to February 28, 2003:
LEASABLE ANNUAL BASE RENT OF EXPIRING LEASES
NUMBER OF SQUARE FEET PERCENTAGE OF -----------------------------------
EXPIRING OF EXPIRING TOTAL LEASED PER SQUARE
YEAR LEASES LEASES SQUARE FEET TOTAL FOOT
---- ------ ------ ----------- ----- ----
2003......... 36 494,000 28% $10,424,000 $21.10
2004......... 10 147,000 8% 3,221,000 21.84
2005......... 17 357,000 20% 8,247,000 23.10
2006......... 20 233,000 13% 6,928,000 29.70
2007......... 14 145,000 8% 4,182,000 28.83
2008......... 8 87,000 5% 2,637,000 30.17
2009......... 5 145,000 8% 3,414,000 23.54
2010......... -- -- 0% -- --
2011......... 4 12,000 1% 602,000 48.21
2012......... 3 96,000 5% 2,562,000 26.81
No tenant in the Wellsford/Whitehall portfolio accounted for more than 6% of
rental revenues for assets classified as continuing operations by
Wellsford/Whitehall for the year ended December 31, 2002.
19
WELLSFORD CAPITAL
Wellsford Capital owned the following commercial properties at December 31,
2002; both properties are available for sale:
LEASABLE
BUILDING YEAR
SQUARE CONSTRUCTED/
PROPERTY TYPE LOCATION FEET REHABILITATED
-------- ---- -------- ---- -------------
Chestnut Street .............. Office Philadelphia, PA 49,953 1857/1983/2002
Keewaydin Drive .............. Industrial Salem, NH 125,230 1973
-------
TOTAL/AVERAGE AT DECEMBER 31,
2002 .............................................. 175,183
=======
2001 .............................................. 175,183
=======
2000 .............................................. 482,270
=======
NUMBER
OF PRINCIPAL LEASE
PROPERTY TENANTS OCCUPANCY TENANTS EXPIRATION
-------- ------- --------- ------- ----------
Chestnut Street .............. 3 69% A September 2007
Keewaydin Drive .............. 4 57% B January 2004
-- --
TOTAL/AVERAGE AT DECEMBER 31,
2002 ............. 7 60%
== ==
2001 ............. 9 62%
== ==
2000 ............. 53 74%
== ==
- ----------
(A) Kittredge Donley (14,449 square feet).
(B) Southern New Hampshire College (27,555 square feet).
WELLSFORD DEVELOPMENT
The Company owned the following multifamily properties at December 31, 2002:
YEAR EFFECTIVE RENT
PROPERTY LOCATION UNITS CONSTRUCTED OCCUPANCY PER UNIT ENCUMBRANCE
-------- -------- ----- ----------- --------- -------- -----------
Operational phases:
Blue Ridge ............... Denver, CO 456 1997 95% $ 976 $ 32,447,000 (A)
Red Canyon ............... Denver, CO 304 1998 94% 1,161 25,677,000 (A)
Green River .............. Denver, CO 424 2001 95% 1,035 37,111,000 (A)
----- ------------
Total operational phases .... 1,184 95% 1,045 95,235,000
----- ------------
Future units to be sold:
Silver Mesa (B) .......... Denver, CO 40 2000 N/A 1,689 4,318,000
----- ------------
TOTAL/AVERAGE AT DECEMBER 31,
2002 ..... 1,224 95% $1,107 $ 99,553,000
===== == ====== ============
2001 ..... 1,320 77% (C) $1,267 $109,051,000
===== == ====== ============
2000 ..... 896 93% $1,224 $ 91,724,000
===== == ====== ============
- ----------
(A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680,000 at December 31, 2002, 2001 and 2000.
The Palomino Park Bond collateral includes the Blue Ridge, Red Canyon and
Green River operational phases, as well as the undeveloped Gold Peak phase
(improved land) (See Below).
(B) The Silver Mesa phase information excludes units which are available for
sale. The occupancy and average rent per unit for the 40 future units to be
sold is excluded. At December 31, 2002, there were 71 units in available
for sale inventory. The encumbrance is on all of the unsold units,
including rentals in the phase (aggregating 111 units at December 31,
2002). As individual units are sold, they are released from the Silver Mesa
Conversion Loan collateral.
(C) Phases in lease-up (Green River during 2001) are not included in the 2001
Average Occupancy.
The average lease term of the tenants' leases range from six to fourteen months.
Security deposits are generally required for all leases.
Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known
as Gold Peak, had a cost basis of approximately $5,411,000 and $5,400,000 at
December 31, 2002 and 2001, respectively. The Company has not determined if it
will construct this phase or sell the improved land.
20
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently a defendant in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
- ------------------
The Company's common shares are traded on the American Stock Exchange under the
symbol "WRP". The high and low closing sales prices for the common shares on the
American Stock Exchange and the dividends declared for the years ended December
31, 2002 and 2001 are as follows:
COMMON SHARES
------------------------------
2002 HIGH LOW DIVIDENDS
---- ---- --- ---------
1st Quarter..... $21.75 $19.00 None
2nd Quarter..... $22.55 $20.10 None
3rd Quarter..... $20.75 $17.20 None
4th Quarter..... $18.64 $15.30 None
COMMON SHARES
------------------------------
2001 HIGH LOW DIVIDENDS
---- ---- --- ---------
1st Quarter..... $17.50 $15.50 None
2nd Quarter..... $19.35 $15.80 None
3rd Quarter..... $20.00 $17.90 None
4th Quarter..... $19.60 $18.05 None
HOLDERS
- -------
The approximate number of holders of record of the common shares and class A-1
common shares (collectively, "Common Shares" or "Common Stock") were 3,400 and
1, respectively, as of December 31, 2002.
DIVIDENDS
- ---------
The Company did not declare or distribute any dividends during 2002 or 2001. The
Company does not plan to distribute dividends for the foreseeable future, which
will permit it to accumulate, for reinvestment, cash flow from investments,
disposition of investments and other business activities.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- ------------------------------------------------------------------
The following table details information for each of the Company's compensation
plans at December 31, 2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES WEIGHTED AVERAGE COMPENSATION PLANS
TO BE ISSUED UPON EXERCISE PRICE OF (EXCLUDING SECURITIES
EXERCISE OF OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved by shareholders:
Rollover Stock Option Plan ..................... 372,874 $ 20.46 277,654
1997 Management Incentive Plan ................. 208,687 $ 21.37 633,965
1998 Management Incentive Plan ................. 190,625 $ 17.96 471,074
------- ---------
772,186 $ 20.90 1,382,693
Equity compensation plans not approved by
shareholders ................................... -- $ -- --
------- ---------
Total ............................................. 772,186 $ 20.90 1,382,693
======= =========
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements included elsewhere in this Form 10-K.
SUMMARY CONSOLIDATED STATEMENT OF
OPERATIONS DATA(A) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------- -----------------------------------------------------------
2002 2001 2000 1999 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER ---- ---- ---- ---- ----
SHARE DATA)
Revenues ............................. $ 31,718 $ 41,493 $ 25,624 $ 30,770 $ 26,316
Costs and expenses (B) ............... (34,845) (46,420) (26,181) (29,526) (17,606)
(Loss) income from joint ventures .... (208) 4,564 3,247 9,622 3,523
Gain on sales of assets, net of
impairment provision of $4,725
in 2000 ........................... -- -- 6,135 -- 139
Minority interest benefit (expense) .. 43 (283) (66) (55) (78)
--------- --------- --------- --------- ---------
(Loss) income before taxes and
Convertible Trust Preferred
Securities ........................ (3,292) (646) 8,759 10,811 12,294
Income tax benefit (expense) ......... 1,300 (699) (1,430) (1,950) (2,850)
Convertible Trust Preferred Securities
distributions, net of tax benefit
of $720, $720 and $510 ............ (1,380) (1,380) (861) -- --
--------- --------- --------- --------- ---------
Net (loss) income .................... $ (3,372) $ (2,725) $ 6,468 $ 8,861 $ 9,444
========= ========= ========= ========= =========
Net (loss) income per common share,
basic ............................. $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.95
========= ========= ========= ========= =========
Net (loss) income per common share,
diluted ........................... $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.93
========= ========= ========= ========= =========
Cash dividends declared per common
share ............................. $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding, basic ......... 6,437 7,213 8,508 10,321 9,943
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding, diluted ....... 6,437 7,213 8,516 10,329 10,190
========= ========= ========= ========= =========
SUMMARY CONSOLIDATED BALANCE
SHEET DATA FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------- -----------------------------------------------------------
2002 2001 2000 1999 1998
(AMOUNTS IN THOUSANDS) ---- ---- ---- ---- ----
Real estate, at cost ................. $ 163,400 $ 170,963 $ 167,279 $ 166,166 $ 153,030
Accumulated depreciation ............. (13,531) (9,873) (8,248) (6,584) (2,707)
Notes receivable ..................... 28,612 34,785 37,824 37,260 124,706
Cash and cash equivalents ............ 38,644 36,149 36,369 34,740 10,122
Investment in joint ventures ......... 94,181 95,807 120,969 114,390 80,776
Total assets ......................... 332,775 345,838 375,770 366,331 384,971
Mortgage notes payable ............... 112,233 121,731 104,404 119,315 120,177
Credit facility ...................... -- -- 12,000 -- 17,000
Convertible Trust Preferred Securities 25,000 25,000 25,000 -- --
Shareholders' equity ................. 176,567 178,079 215,982 229,691 231,625
Other balance sheet information:
Common shares outstanding ......... 6,451 6,405 8,350 9,611 10,375
========= ========= ========= ========= =========
Equity per share .................. $ 27.37 $ 27.80 $ 25.86 $ 23.90 $ 22.32
========= ========= ========= ========= =========
- ----------
(A) See Item 7. - Management's Discussion and Analysis of Financial Condition
and Results of Operations for significant changes in revenues and expenses
of the Company.
(B) Includes a restructuring charge of $3,527 during the year ended December
31, 2001, with no similar charges in other periods presented.
The earnings per share amounts conform with Statement of Financial Accounting
Standards ("SFAS") No. 128 "EARNINGS PER SHARE". For further discussion of
earnings per share and the impact of Statement No. 128, see the notes to the
consolidated financial statements.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
- --------
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Form 10-K.
SELECTED SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Management has selected the following accounting policies which it believes are
significant in order to understand the Company's activities, financial position
and operating results.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The
consolidated financial statements include the accounts of the Company and its
majority-owned and controlled subsidiaries. All significant inter-company
accounts and transactions among the Company and its subsidiaries have been
eliminated in consolidation.
Investments in entities where the Company does not have a controlling interest
are accounted for under the equity method of accounting. These investments are
initially recorded at cost and are subsequently adjusted for the Company's
proportionate share of the investment's income (loss), additional contributions
or distributions. Specifically, the Company's investment in Wellsford/Whitehall
is accounted for under the equity method as it is a minority owner with a 32.59%
interest and does not have unilateral control over its board. Additionally, the
Company owns an approximate 51.1% interest in Second Holding (after a special
class partner shares in 35% of net income as defined) which interest is
represented by two of eight board seats with one-quarter of the vote on any
major business decisions.
Investments in entities where the Company does not have the ability to exercise
significant influence are accounted for under the cost method. The Company
accounts for its investment in Reis under the cost method as its ownership
interest is in non-voting preferred shares and the Company's interests are
represented by one member of Reis' seven member board.
The accompanying consolidated financial statements include the assets and
liabilities contributed to and assumed by the Company from the Trust, from the
time such assets and liabilities were acquired or incurred, respectively, by the
Trust. Such financial statements have been prepared using the historical basis
of the assets and liabilities and the historical results of operations related
to the Company's assets and liabilities.
REAL ESTATE, OTHER INVESTMENTS, DEPRECIATION, AMORTIZATION AND IMPAIRMENT. Costs
directly related to the acquisition, development and improvement of real estate
are capitalized, including interest and other costs incurred during the
construction period. Costs incurred for significant repairs and maintenance that
extend the usable life of the asset or have a determinable useful life are
capitalized. Ordinary repairs and maintenance are expensed as incurred. The
Company expenses all lease turnover costs for its residential units, such as
painting, cleaning, carpet replacement and other turnover costs, as such costs
are incurred.
Tenant improvements and leasing commissions related to commercial properties are
capitalized and amortized over the terms of the related leases. Costs incurred
to acquire investments in joint ventures are capitalized and amortized over the
expected life of the related investment. Additional amortization is charged as
specified assets are sold in cases where the joint venture would cease to exist
when all assets are sold or otherwise disposed of or where impairment provisions
are recorded at the joint venture. Depreciation is computed over the expected
useful lives of depreciable property on a straight-line basis, principally 27.5
years for residential buildings and improvements, 40 years for commercial
properties and two to twelve years for furnishings and equipment.
24
The Company reviews its real estate assets, investments in joint ventures and
other investments for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
REAL ESTATE - RESIDENTIAL UNITS AVAILABLE FOR SALE. The Company's residential
units available for sale are recorded at the lower of historical cost or market
value based upon current conditions. As units are sold, the cost of each unit is
charged to cost of sales based upon its relative sales value. Sales price
concessions are recognized as a reduction in sales revenues as individual sales
are completed. Advertising costs are expensed as incurred.
MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired if,
based on current information and events, it is probable that all amounts due,
including future interest, payable under the note agreement are not collectable.
Impairment is measured based upon the fair value of the underlying collateral.
REVENUE RECOGNITION. Commercial properties are leased under operating leases.
Rental revenue from office and industrial properties is recognized on a
straight-line basis over the terms of the respective leases. Residential
communities are leased under operating leases with terms of generally six to
fourteen months and such rental revenue is recognized monthly as tenants are
billed. Interest revenue is recorded on an accrual basis over the life of the
loan. Sales of real estate assets are recognized at closing, subject to receipt
of down payments and other requirements in accordance with applicable accounting
guidelines.
INCOME TAXES. The Company accounts for income taxes under SFAS No. 109
"ACCOUNTING FOR INCOME TAXES." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and the tax basis
of assets and liabilities and are measured using the enacted tax rates and laws
that are estimated to be in effect when the differences are expected to reverse.
Valuation allowances with respect to deferred income tax assets are recorded
when deemed appropriate and adjusted based upon periodic evaluations.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001
Rental revenue increased $2,544,000. This increase is due to the commencement of
operations effective January 1, 2002 at the Green River phase at Palomino Park
in the Wellsford Development SBU ($4,466,000), offset by (i) reduced rental
revenue in 2002 from the sale of four of the VLP properties in the Wellsford
Capital SBU during 2001, including two during January 2001, one in May 2001 and
the fourth in December 2001 ($812,000), (ii) reduced rental revenue from the
Silver Mesa phase at Palomino Park from unit sales ($765,000) and (iii)
decreased economic occupancy at the Blue Ridge and Red Canyon phases at Palomino
Park ($345,000).
Revenues from the sale of Silver Mesa residential units and the associated cost
of sales from such units were $10,635,000 and $9,544,000, respectively, from 48
sales during the year ended December 31, 2002 and were $21,932,000 and
$19,364,000, respectively, from 105 sales during the corresponding 2001 period.
The reduction of 2002 sales from 2001 sales is primarily due to the backlog of
contracts which were closed after receipt of final approvals and releases in
February 2001 to begin the condominium sales process and general and local
economic conditions. The decline in gross profit per unit during the 2002 period
results primarily from sales price concessions.
Interest revenue decreased $1,079,000. This decrease is due to reduced interest
income earned on loans of $686,000 from lower average outstanding loan balances
in 2002 as compared to 2001, as well as reduced
25
interest earned on cash of $393,000 from lower interest rates during the current
period versus the comparable 2001 period.
Fee revenue increased $58,000. Such increase resulted from an increase in the
Company's management fees for its role in the Second Holding investment of
$429,000 from increased assets under management in that venture, offset by
reduced transaction fees payable by Whitehall from sales of properties by
Wellsford/Whitehall and certain asset purchases by a related entity as such fees
amounted to $388,000 for the 2001 period, with only $29,000 earned in the
corresponding 2002 period and $12,000 of loan modification fees earned in 2001
with no corresponding amount in 2002. Fee revenue will be impacted in the future
by increases in assets under management by Second Holding and the ability to
sell assets by Wellsford/Whitehall.
Property operating and maintenance expense increased $1,662,000. This increase
is the result of (i) the commencement of operations at Green River on January 1,
2002 ($1,127,000), (ii) increased property level payroll, insurance and
significant retenanting costs at all operating phases at Palomino Park (for
Silver Mesa, such increases were in excess of reductions from units sold) plus
the cessation of capitalization of certain costs at Gold Peak commencing January
1, 2002 ($797,000), offset by (iii) reduced operating expenses resulting from
the sale of the four VLP properties during 2001, net of current year
non-capitalizable maintenance expenses ($262,000).
The increase in real estate taxes of $435,000 is primarily due to the
commencement of operations at Green River ($374,000) and the cessation of cost
capitalization on the undeveloped Gold Peak land ($155,000) and increased Silver
Mesa real estate taxes for a higher tax rate from more units being assessed at a
condominium value, which is higher than the assessment for a rental unit
($14,000), offset by a decrease in real estate taxes from the sale of four VLP
properties during 2001 ($110,000).
Depreciation and amortization expense increased $167,000. This increase is
attributable to the commencement of depreciation on the Green River rental phase
($1,573,000), depreciation on the two unsold VLP properties due to a change in
accounting classification by definition, under the application of SFAS No. 144,
effective January 1, 2002, from available for sale to held for use ($210,000)
and fixed asset additions on Blue Ridge and Red Canyon ($83,000), offset by
reduced amortization of joint venture cost as only one property was sold by
Wellsford/Whitehall and one property was subject to an impairment adjustment
during the 2002 period, causing a write-off of the related unamortized warrant
balances by the Company ($758,000) whereas eleven properties were sold in the
prior year's comparable period ($1,950,000), reduced basis from the transfer of
96 units at Silver Mesa during 2002 to replenish sales inventory (as 28 units
became part of sales inventory in January 2002, 30 units in July 2002 and 38
units in October 2002) ($295,000) and reduced depreciation in 2002 of corporate
furniture, fixtures and equipment ($212,000).
Property management expenses decreased $88,000. Such decrease is due to the sale
of the four VLP properties during 2001 and the assumption of certain asset
management duties by the Company in April 2002 (which were previously performed
by an affiliate of Whitehall for the VLP properties) ($147,000), as well as
decreased rental revenues from lower economic occupancy at Blue Ridge and Red
Canyon ($36,000) and Silver Mesa sales ($26,000), partially offset by the
commencement of operations at Green River ($121,000). The Palomino Park property
management expenses were also impacted by the reduction in contractual
management fees during the fourth quarter of 2002 from a 3% annual fee of gross
receipts to a 2% annual fee.
Interest expense increased $1,495,000. This increase is attributable to the
cessation of interest and debt cost capitalization in 2002 at Palomino Park
($1,841,000 was capitalized in the 2001 period for Green River and Gold Peak)
and interest on the Green River Construction Loan ($1,295,000). Such amounts are
offset by reduced expense from a lower outstanding balance and a reduced
interest rate on the Silver Mesa Conversion Loan ($1,166,000), the expiration of
the Wellsford Finance Facility in January 2002 (which had up to $12,000,000 of
outstanding balances for portions of the 2001 period) ($294,000), reduced
interest on the Palomino Park Bonds from a lower base interest rate in 2002
($129,000) and lower interest on the Blue Ridge and Red Canyon fixed rate loans
from lower average outstanding balances due to principal amortization ($52,000).
26
General and administrative expenses decreased $1,900,000. This decrease is
primarily the result of an expense reduction program implemented by management
in 2001 which resulted in reduced salaries and related benefits and lower net
occupancy costs. An analysis of general and administrative expenses follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 (DECREASE)
---- ---- ----------
General and administrative expense per Statement of
Operations ............................................. $ 6,567,166 $ 8,466,948 $ (1,899,782)
Less: Non-cash component of general and administrative
expenses for amortization of stock generally issued into
deferred compensation plan ............................. 1,243,332 1,578,009 (334,677)
------------- ------------- -------------
Cash component of general and administrative expenses ..... $ 5,323,834 $ 6,888,939 $ (1,565,105)
============= ============= =============
Percentage (decrease) from prior year on cash component ... (22.7%)
=============
Percentage of Total Assets at each year end on cash
component .............................................. 1.60% 1.99%
============= =============
Total Assets at each year end ............................. $ 332,775,043 $ 345,838,157
============= =============
The restructuring charge in 2001 of $3,527,000 is for costs incurred pursuant to
the early retirement of the Company's former President and other personnel
changes. Such costs are comprised of severance arrangements including the
repurchase of stock options and the write-off of unamortized deferred stock
compensation. Of the expected aggregate cash payments of $3,466,000, the Company
paid approximately $2,800,000 in the first quarter of 2002 with the remaining
accrued balance expected to be paid during the first quarter of 2003.
Income from joint ventures decreased $4,773,000. An analysis of the decrease
follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
INCREASE
2002 2001 (DECREASE)
---- ---- ----------
Wellsford/Whitehall:
Operations (A) .................. $ (770,000) $ 302,000 $ (1,072,000)
(Loss) gain on sale of assets (B) (82,000) 10,215,000 (10,297,000)
Impairment provision (C) ........ (440,000) (6,150,000) 5,710,000
Second Holding (D) ................. 723,000 (163,000) 886,000
Clairborne Fordham Tower ........... 361,000 361,000 --
Other .............................. (1,000) (1,000) --
------------ ------------ ------------
(Loss) income from joint ventures .. $ (209,000) $ 4,564,000 $ (4,773,000)
============ ============ ============
- ----------
(A) Includes a write-off of unamortized leasing costs and tenant improvements
from a tenant in bankruptcy in December 2002, offset in part by lease
termination income from this tenant. Additionally, 2002 was impacted, to a
lesser extent, by the sale of properties in 2001, lower occupancy and lower
rental rates in 2002.
(B) One property was sold in 2002 where as eleven properties were sold in 2001.
(C) Impairments in 2002 relate to properties available for sale at December 31,
2002. Impairments in 2001 primarily relate to the change in intended use of
a development property, which was sold later in that year.
(D) The increase in earnings is a result of a change in the allocation of
income for the partners of the venture effective January 1, 2002, coupled
with an increase in invested assets resulting in increased income for that
venture.
Minority interest changed $326,000 from an expense of $283,000 in 2001 to a
benefit of $43,000 in 2002, primarily attributable to fewer sales of residential
units at Silver Mesa and lower economic and physical occupancy at Palomino Park,
which resulted in a loss for the Wellsford Development SBU during the 2002
period.
27
Income taxes changed from an expense in 2001 of $699,000 to a benefit in 2002 of
$1,300,000 primarily from the Company having a tax loss resulting in refundable
income taxes in the 2002 fiscal period compared to a financial statement tax
profit in the corresponding period in 2001 because of the Company reserving
certain future tax timing benefits. The 2001 period provision was reduced by a
$265,000 reversal of previously accrued state taxes as a result of net operating
loss carryforwards being available in one state. Both periods include minimum
state and local tax provisions.
The increase in a net (loss) per share, basic and diluted aggregating $(0.14)
per share is attributable to a current period loss of ($3,372,000) whereas in
the 2001 period, the Company reported a loss of ($2,725,000).
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000
Rental revenue decreased $4,913,000. This decrease is primarily due to the sale
of five properties that were in operations for substantially the full year of
2000 offset by a new operational rental phase at Palomino Park. Reductions from
the sale of one of the VLP properties in December 2000, two during January 2001
and one during May 2001 (a fifth property was sold in December 2001 but was in
operations for the full year) resulted in a reduction in rental revenue of
$4,078,000. These properties are part of the Wellsford Capital SBU. The
disposition of the Sonterra at Williams Centre property ("Sonterra") in the
Wellsford Development SBU during November 2000 accounted for a decrease of
$2,395,000. These reductions were offset by the commencement of operations of
the Silver Mesa rental units, which were included in operations for the full
year in 2001 and only three months during 2000 (an increase of $1,632,000).
Revenues from the sales of 105 Silver Mesa condominium units and the related
cost of sales from such units were $21,932,000 and $19,364,000, respectively.
Sales commenced in February 2001.
Interest revenue decreased by $1,082,000. This decrease is primarily due to
interest earned on loans outstanding for all or a portion of 2000 and repaid in
the latter part of 2000 or during 2001 ($1,279,000), lower interest revenue
earned on cash due to lower interest rates and lower average cash balances
during 2001 ($206,000) and lower interest earned on variable rate based
mortgages receivable due to the reduction of interest rates over the course of
2001 ($115,000). Such amounts are partially offset by new loans made in late
2000 and during 2001 ($528,000).
Fee revenue decreased $68,000. Of this balance, fees from Wellsford/Whitehall
related activities decreased $298,000 as the 2000 period includes $600,000 of
fees for the Company's role as managing member under the prior
Wellsford/Whitehall Operating Agreement. Under the Amendments, the Company now
earns fees payable by Whitehall from sales by Wellsford/Whitehall and certain
asset purchases by the New Venture. Such amended fees were $388,000 during 2001
and $86,000 during 2000. Additionally, the Company earned $217,000 of management
fees for its role in the Second Holding investment and $13,000 from fees earned
on the modification of the Patriot Loan, both of which are in the Wellsford
Capital SBU.
Property operating and maintenance expense decreased $559,000. This decrease is
due to the sale of Sonterra ($659,000) and four of the VLP properties as noted
above ($608,000), offset by full year operations from the Silver Mesa rental
units ($361,000), increased operating expenses at the other operational
properties principally from increased insurance costs ($263,000) and increased
period costs for the available for sale Silver Mesa units ($84,000).
Real estate taxes decreased $559,000. This decrease is due to the sale of four
VLP properties noted above ($434,000) and the sale of Sonterra ($283,000),
offset by full year operations from the Silver Mesa rental units ($90,000) and
increases at the other Palomino Park phases ($68,000).
Depreciation and amortization expense increased ($340,000). This increase is
primarily due to additional amortization of deferred costs attributable to asset
sales at Wellsford/Whitehall ($1,431,000), full year depreciation of the Silver
Mesa rental units ($518,000) and additional depreciation of corporate furniture,
fixtures and equipment ($185,000), offset by no current year depreciation
expense on the VLP properties, as they are held for
28
sale ($1,101,000), no depreciation on Sonterra in 2001 as it was sold in 2000
($556,000) and amortization in the prior period attributable to one of the two
principals leaving Creamer Vitale Wellsford to pursue other employment and the
subsequent wind-down of the venture ($145,000).
Property management expenses decreased $242,000. This decrease is primarily
attributable to the sale of the four VLP properties ($213,000) and Sonterra
($74,000), partially offset by full year operations from the Silver Mesa rental
units ($49,000).
Interest expense decreased $2,720,000. This decrease is attributable to the
repayment of the $28,000,000 loan in December 2000, which was
cross-collateralized by the VLP properties ($3,083,000), the sale of Sonterra
($982,000), reduced interest rates on other variable rate based debt ($239,000)
and declines in the Blue Ridge and Red Canyon mortgage interest from lower
outstanding debt balances ($49,000), partially offset by interest incurred on
the Silver Mesa Conversion Loan in excess of the prior year ($1,115,000),
decreased capitalized interest ($379,000) and interest on draws under the
Company's line of credit ($137,000).
General and administrative expenses increased $1,090,000. This increase is due
to additional amortization of deferred stock compensation issued during December
2000 and on December 31, 2001 ($671,000) plus increases in wages, health
insurance, incentive compensation and general insurance costs.
The restructuring charge in 2001 of $3,527,000 is for costs incurred pursuant to
the early retirement of the Company's former President and other personnel
changes. Such costs are comprised of severance arrangements including the
repurchase of stock options and the write-off of unamortized deferred stock
compensation. Of the expected aggregate cash payments of $3,466,000, the Company
anticipates payments of approximately $2,800,000 by the end of the first quarter
2002 with the remaining accrued balance expected to be paid during the first
quarter of 2003.
Gain on sale of investments in 2000 results from the sale of (i) the Sonterra
property for a gain of $3,500,000, (ii) the investment in Liberty Hampshire for
a gain of $2,492,000 and (iii) a net gain of $218,000 from the sale of one of
the VLP properties ($4,943,000) offset by the impairment recorded on certain of
the then remaining VLP assets available for sale ($4,725,000). There were no
corresponding gains recorded in the 2001 period, and no additional impairment
provision was required.
Income from joint ventures increased $1,318,000. This increase is primarily the
result of (i) net gains on the sales of properties of $4,065,000 in the current
period from Wellsford/Whitehall (the Company's share of gains of $10,321,000 is
offset by the Company's share of impairment provisions of $6,256,000) which was
in excess of gains in the prior year's period of $92,000, (ii) increased income
from the Fordham Tower construction loan of $276,000 through the Clairborne
Prudential program (the Company made this investment in the fourth quarter of
2000) and (iii) prior year net management fee expense related to the Company's
role in the Second Holding venture ($182,000). The impairment provision
adjustment is the Company's allocable share arising from the change in intended
mixed-use of the property from office space, a conference center and residential
development to an available for sale headquarters complex in June 2001 and its
ultimate sale in September 2001. These increases were partially offset by (i)
decreased operating income at Wellsford/Whitehall of $1,281,000, (ii) a current
period loss of $164,000 from Second Holding which had income in the prior period
of $1,432,000 (as a partner was admitted into the venture in the latter part of
2000 whom is entitled to a cumulative preference on earnings) and (iii) $241,000
of income in the prior period from the investment in Liberty Hampshire which the
Company sold in December 2000. The Wellsford/Whitehall investment is in the
Commercial Property Investments SBU and the other ventures are in the Debt and
Equity Investments SBU.
Minority interest expense increased $216,000, primarily attributable to income
from the sale of residential units at Silver Mesa, with no corresponding sales
during 2000.
Income tax expense decreased $731,000 because of the Company incurring a loss in
the current year. Such loss did not result in a tax benefit because the tax
benefit attributable to certain costs of the Company's deferred
29
compensation program, including a portion of the restructuring charge, has been
fully reversed because of the long-term ultimate tax deductibility of such
items. This resulted in income tax expense of $699,000 in 2001.
Accrued distributions and amortization of costs on Convertible Trust Preferred
Securities, net of income tax benefit, increased $519,000, as these securities
were issued in May 2000 and were outstanding for the entire year of 2001.
The decrease in net income per share, basic and diluted of $1.14 per share is
attributable to a current year net loss of $2,725,000 whereas in the 2000
period, the Company reported income of $6,468,000, offset by the effect of a
lower weighted average number of common shares outstanding in the current period
from the repurchase of approximately 1,319,000 shares of common stock during
2000 and 2,021,000 shares of common stock during 2001. The effect of the 2001
share repurchases resulted in a $0.05 per share increase in net loss per share,
basic and diluted, excluding the impact of lost interest income on cash used for
such repurchases.
INCOME TAXES
The Company has recorded a net deferred tax asset of $6,308,000 and $5,081,000
at December 31, 2002 and 2001, respectively, which is included in prepaid and
other assets in the accompanying consolidated balance sheets. Management has
determined that a $18,996,470 and $18,764,516 valuation allowance at December
31, 2002 and 2001, respectively, is necessary. The valuation allowance relates
to the NOL carryforwards, certain deferred compensation and severance
arrangements and alternative minimum tax credit carryforwards.
At December 31, 2002, the Company has available net operating loss carryforwards
of $61,856,000, which will expire between 2007 and 2012. The Company has
recorded a deferred tax asset of approximately $7,723,000 or 72% of the total
recorded deferred tax asset of $10,657,000 at December 31, 2002, attributable to
the tax benefit, after reserves, of a portion of such net operating loss
carryforwards. As a result of certain limitations under Section 382 of the
Internal Revenue Code, as it applies to the VLP acquisition, the Company may
only use $6,200,000 of such loss carryforwards each year. Any amounts not
utilized in a year may be carried forward to subsequent years. Approximately
$15,700,000 could be utilized in 2003 to offset Federal taxable income. The
deferred tax asset associated with the deferred compensation deductions, income
earned by the assets in the deferred compensation plan and alternative minimum
tax credit carryforwards have been fully reserved. The majority of the remaining
$2,934,000 asset is expected to be realized upon the sale of the remaining two
VLP assets, the scheduled payments of the balance of the severance accrual and
the sale or other disposal of the Company's investment in Wellsford/Whitehall.
During the year, the Company increased its valuation allowance by $232,000
principally as a result of additional deferred compensation costs and plan
taxable income and alternative minimum tax credit carryforwards, the tax
benefits of which were fully reserved, offset in part by the tax benefit from
utilization in the fiscal 2001 Federal tax return of $2,852,000 of net operating
loss carryforwards. In order to realize the recorded deferred tax asset, the
Company would have to realize approximately $29,941,000 of taxable income by
2007 and 2012 when the majority of the net operating loss carryforwards expire.
The Company expects to be able to meet these amounts based upon the expected
taxable income levels from recognition of existing deferred taxable income and
from gains on the sales of properties and other assets.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company expects to meet its short-term liquidity requirements, such as
maturing construction debt and operating expenses generally through its
available cash, sales of residential units in the Wellsford Development SBU, the
permanent financing on the Green River phase at Palomino Park (which closed
February 6, 2003) and cash provided by operations.
The Company expects to meet its long-term liquidity requirements such as
maturing mortgages, financing acquisitions and development, financing capital
improvements and joint venture loan requirements through the use of available
cash, repayments of notes receivable, sales of residential units in the
Wellsford Development
30
SBU (proceeds from such sales will increase from the current amount of
approximately 10% of net sales proceeds to 100% when the Silver Mesa Conversion
Loan, with a balance of $4,318,000 at December 31, 2002, is fully repaid), sales
of properties in the Wellsford/Whitehall SBU, refinancings and the issuance of
debt and the offering of additional debt and equity securities. The Company
considers its ability to generate cash to be adequate and expects it to continue
to be adequate to meet operating requirements both in the short and long terms.
Wellsford/Whitehall expects to meet its short and long-term liquidity
requirements, such as financing additional renovations and tenant improvements
to its properties, repayments of debt maturities and operational expenses with
available cash, operating cash flow from its properties, financing available
under the Wellsford/Whitehall GECC Facility, as well as an extension to the
period for funding of capital additions for tenant improvements and leasing
commissions, proceeds from any asset sales, refinancing of existing loans and
draws from the $10,000,000 commitment of additional financing or preferred
equity from the principal owners of Wellsford/Whitehall, if required. At
December 31, 2002, the Company and Whitehall each had completed funding their
entire respective capital commitments. The additional financing/preferred equity
commitment, of which the Company's share is $4,000,000, is fully available to
Wellsford/Whitehall until December 31, 2003. At December 31, 2002,
Wellsford/Whitehall's cash and cash equivalents balance was approximately
$16,169,000 and restricted cash available for certain capital improvements was
approximately $14,600,000.
Second Holding expects to meet its liquidity requirements for purchases of
investments with proceeds from the issuance of bonds, medium-term notes and
commercial paper. Liquidity for the repayments of bonds, medium-term notes and
commercial paper is expected to be provided from principal repayments, from
amortization of investments and upon repayment of investments at maturity.
Second Holding also has available a $400,000,000 line of credit. The nature of
Second Holding's business results in the entity being highly leveraged.
The Company's retained earnings included approximately $2,192,000 of
undistributed earnings from Second Holding at December 31, 2002 as distributions
are limited to 48.25% of earnings.
31
The following table summarizes the Company's material contractual obligations as
of December 31, 2002:
(amounts in thousands)
PAYMENTS DUE
------------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEARS ENDED DECEMBER 31,
ENDED -------------------------------- SUBSEQUENT TO
CONTRACTUAL OBLIGATIONS DECEMBER 31, 2003 2004 AND 2005 2006 AND 2007 JANUARY 1, 2008 AGGREGATE
----------------------- ----------------- ------------- ------------- --------------- ---------
Recorded on balance sheet:
Principal payments for long-
term debt:
Blue Ridge Mortgage ....... $ 503 $ 1,115 $ 30,829 $ -- $ 32,447
Red Canyon Mortgage ....... 383 847 967 23,480 25,677
Green River Mortgage (A) . 374 1,092 1,226 37,308 40,000
Silver Mesa Conversion Loan
(B) .................... 4,318 -- -- -- 4,318
Palomino Park Bonds (C) ... -- 12,680 -- -- 12,680
-------- -------- -------- -------- --------
Total long-term debt ... 5,578 15,734 33,022 60,788 115,122
Convertible Trust Preferred
Securities ................ -- -- -- 25,000 25,000
Restructuring payments ....... 699 -- -- -- 699
-------- -------- -------- -------- --------
Contractual obligations
recorded on balance sheet . 6,277 15,734 33,022 85,788 140,821
-------- -------- -------- -------- --------
Other contractual obligations:
Interest expense on long-term
debt ...................... 6,142 12,691 11,584 11,719 42,136
Distributions for Convertible
Trust Preferred Securities
(D) ...................... 2,063 4,125 4,125 29,585 39,898
Employment contractual
obligations ............... 1,578 840 -- -- 2,418
Operating lease for office ... 753 1,630 1,630 679 4,692
Wellsford/Whitehall
Preferred Equity/Loan ..... 4,000 -- -- -- 4,000
Reis (E) ..................... 420 -- -- -- 420
-------- -------- -------- -------- --------
Total other contractual
obligations ............ 14,956 19,286 17,339 41,983 93,564
-------- -------- -------- -------- --------
Total contractual obligations $ 21,233 $ 35,020 $ 50,361 $127,771 $234,385
======== ======== ======== ======== ========
- ----------
(A) On February 6, 2003, the Company obtained a $40,000 permanent loan,
proceeds from which were used to repay the maturing $37,111 Green River
Construction Loan. The above table reflects the obligation for the new
financing as if it occurred on December 31, 2002.
(B) The Silver Mesa Conversion Loan can be extended through June 2004.
(C) Reflects the expiration of the letter of credit arrangements on the
Palomino Park Bonds. In order to avoid the call of the Palomino Park Bonds
in 2005, the Company would need to either replace the letter of credit
arrangements or negotiate some other arrangement.
(D) EQR can require redemption on or after May 30, 2012; however, the Company
can extend the maturity for two five-year extension periods to May 2022.
The table above assumes payments through that date. The Company can redeem
in whole or in part on or after May 30, 2002 and can elect to make
distributions for 12 quarters through the issuance of additional
Convertible Trust Preferred Securities. The Convertible Trust Preferred
Securities are convertible into 1,123,696 common shares at $22.248 per
share.
(E) The Company does not expect that such additional contribution will be
required before the expiration of the commitment at December 31, 2003.
RECURRING AND NON-RECURRING CAPITAL EXPENDITURES
WELLSFORD DEVELOPMENT
Regarding the Company's Blue Ridge, Red Canyon, Silver Mesa and Green River
rental phases, the Company expects to incur approximately $219 per unit in
apartment preparation costs from turnover of tenant leases during the year
ending December 31, 2003, which will be charged to property operating and
maintenance expense in the consolidated statements of operations.
32
Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known
as Gold Peak, had a cost basis of approximately $5,411,000 and $5,400,000 at
December 31, 2002 and 2001, respectively. The Company has not determined if it
will construct this phase or sell the improved land.
WELLSFORD CAPITAL
The Company expects to incur approximately $875,000 of total capital
expenditures with respect to the two remaining VLP properties during 2003. Of
this amount $560,000 is for required base building work at both properties.
Tenant improvement costs and leasing commissions for 2003 are anticipated to be:
PER
AMOUNT SQUARE FOOT*
------ ------------
Tenant improvements ..... $185,000 $ 8.11
Leasing commissions ..... 130,000 5.67
--------
$315,000
========
- ----------
* Per square foot amount represents applicable cost by category for expected
square footage to be leased during the year.
WELLSFORD/WHITEHALL
Wellsford/Whitehall expects to incur approximately $23,863,000 of total capital
expenditures during the year ending December 31, 2003. Of this amount,
Wellsford/Whitehall expects to incur approximately $12,423,000 for asset
repositioning through significant upgrades to the base building and amenities
and the conversion of three single-tenant structures to multi-tenant use
properties. Tenant improvement costs and leasing commissions for 2003 are
anticipated to be:
PER
AMOUNT SQUARE FOOT*
------ ------------
Tenant improvements ..... $ 7,736,000 $ 19.88
Leasing commissions ..... 3,704,000 8.45
-----------
$11,440,000
===========
- ----------
* Per square foot amount represents applicable cost by category for expected
square footage to be leased during 2003.
To the extent that available cash, cash flows from operations, sales and
borrowings from financial institutions are not available to finance such capital
projects, the Company and Whitehall will be required to provide up to $4,000,000
and $6,000,000, respectively, under the existing agreement.
OTHER ITEMS IMPACTING THE COMPANY'S LIQUIDITY AND RESOURCES
WELLSFORD/WHITEHALL BUY/SELL AGREEMENT
The Amendments included a Buy/Sell Agreement of equity interests between the
Company and Whitehall effective after December 31, 2003 with respect to the
venture. The net book equity of Wellsford/Whitehall at December 31, 2002 was
approximately $178,445,000. The Company has a 32.59% interest in
Wellsford/Whitehall and the aggregate Whitehall interest is 59.96%. The terms of
the Wellsford/Whitehall GECC Facility allow for a continuance of such debt as
long as the Company or Whitehall has ultimate decision making authority over the
management and operations of Wellsford/Whitehall.
33
SECOND HOLDING INVESTMENTS
Second Holding has been organized to purchase investment and non-investment
grade rated real estate debt instruments and investment grade rated other
asset-backed securities. These other asset-backed securities that Second Holding
may purchase may be secured by, but not limited to, leases on aircraft, truck or
car fleets, bank deposits, leases on equipment, fuel/oil receivables, consumer
receivables, pools of corporate bonds and loans and sovereign debt. It is Second
Holding's intent to hold all securities to maturity. Many of these securities
were obtained through private placements and current public market pricing is
not available. There is a risk that these investments could be downgraded by a
rating agency and that the underlying collateral could permanently decline in
value and result in losses by Second Holding, which, in turn, would result in
losses to the Company. The ability for Second Holding to continue to increase
invested assets is dependent upon the availability of suitable investments which
meet an investment criteria as established by the partners of Second Holding and
the ability to obtain appropriate financing for such needs. The nature of Second
Holding's business results in the entity being highly leveraged.
The following table details the allocation of investments at December 31, 2002
and 2001 for Second Holding:
DECEMBER 31,
--------------------------------------------------
2002 2001
--------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
SECURITY FOR INVESTMENTS (A)
- ----------------------------
Real estate ................. $ 587,358,000 33% $ 334,601,000 36%
Corporate debt .............. 462,041,000 26% 135,686,000 15%
Consumer/trade receivables .. 125,000,000 7% 33,500,000 3%
Sovereign debt .............. 100,960,000 6% 73,000,000 8%
Bank deposits ............... 105,000,000 6% 70,000,000 8%
Aircraft loans and leases ... 80,000,000 4% 70,000,000 8%
Fuel/oil receivables ........ 35,000,000 2% 35,000,000 3%
Other asset-backed securities 290,399,000 16% 174,666,000 19%
-------------- --- -------------- ---
Total (B) ................... $1,785,758,000 100% $ 926,453,000 100%
============== === ============== ===
STANDARD & POOR'S
RATINGS OF INVESTMENTS
----------------------
AAA ......................... $1,267,616,000 71% $ 759,241,000 82%
AA+ ......................... 35,000,000 2% -- 0%
AA .......................... 163,581,000 9% 42,750,000 5%
AA- ......................... 164,223,000 9% 28,000,000 3%
A+ .......................... 24,922,000 1% -- 0%
A ........................... 97,092,000 6% 60,210,000 7%
A- .......................... 33,324,000 2% 34,441,000 3%
Other ....................... -- 0% 1,811,000 0%
-------------- --- -------------- ---
Total (B) ................... $1,785,758,000 100% $ 926,453,000 100%
============== === ============== ===
- ----------
(A) Investments may be secured by the assets or interests in such assets or
their respective economic benefit.
(B) Investments are variable rate based at a weighted average annual interest
rate of 2.21% and 2.58% at December 31, 2002 and 2001, respectively.
Second Holding utilizes funds from the issuance of bonds, medium term notes and
commercial paper to make investments. Second Holding had total debt, including
$150,000,000 of junior subordinated bonds due in April 2010, of approximately
$1,722,933,000 and $962,465,000 at December 31, 2002 and 2001 with a weighted
average annual interest rate of 1.69% and 2.15%, respectively, after the effect
of swaps on fixed rate debt to a floating rate. One of the partners of Second
Holding has provided credit enhancement, through the issuance of an insurance
policy by one of its affiliates, for the payment of principal and interest of
the junior subordinated bonds through maturity in 2010. The parent company of
this partner has announced that its subsidiary (the partner of Second Holding)
will no longer write new credit enhancement business, while it will continue to
34
support its existing book of credit enhancement business. The Company does not
believe that this decision will impact the business and operations of Second
Holding.
World Trade Center Debt Investment
In August 2001, Second Holding purchased an aggregate of $24,825,000 in two
classes of Mortgage Pass-Through Certificates, Series 2001--WTC. The WTC
Certificates, rated AA and A at issuance, were part of a total bond offering of
$563,000,000 which was used to finance the acquisition of the leasehold
interests in towers 1 and 2 and in the office components of buildings 4 and 5 of
the World Trade Center in New York City. Subsequent to the events of September
11, 2001 which resulted in the destruction of these buildings, the Company has
been informed by GMAC Commercial Mortgage Corporation, the master and special
servicer, that the WTC Certificates are not in default. The property casualty
and business interruption insurance obtained in connection with the WTC
Certificates does not exclude acts of terrorism; such insurance is from a
consortium of 22 insurers. The policies of three of the insurance companies have
been found by the United States District Court, Southern District of New York,
to define the events of September 11, 2001 as a single occurrence. The owner of
the leasehold interests is appealing this decision. The remaining insurance
companies and the owner of the leasehold interests are in litigation to
determine whether the events of September 11, 2001 constitute a single
occurrence or a double occurrence. A single occurrence entitles the beneficiary
of the policies to a payment equal to the face amount of the insurance policies,
while a double occurrence entitles the beneficiary to a payment equal to twice
the face amount.
As of December 31, 2002, the rating agencies have not changed their ratings on
the WTC Certificates and all payments of principal and interest were current.
The Company and Second Holding management believe that the insurance coverage,
whether the courts determine that the destruction of the towers was a single or
double occurrence, will be sufficient to cover Second Holding's investment and
that an impairment reserve is not required. Both Second Holding and the Company
will continue to evaluate the ultimate collectibility of the principal and
interest.
SECOND HOLDING BUY/SELL AGREEMENT
The terms of the operating agreement of Second Holding provide for a buy/sell
agreement between the Company and one of the venture partners, which could be
exercised after September 30, 2004 for a specified period of time.
PALOMINO PARK
In January 2003, the Company's board of directors approved a plan for the
Company to seek institutional investors to purchase an interest in the
residential rental phases at Palomino Park. There can be no assurance that the
Company will be able to find suitable investors or that such a transaction will
be completed.
RESTRUCTURING CHARGE
The Company recorded a non-recurring change of approximately $3,527,000 during
the fourth quarter of 2001 related to the retirement of the Company's former
President and Chief Executive Officer and other personnel changes. The Company
made payments of approximately $2,767,000 during the year ended December 31,
2002, reducing the accrual balance from $3,466,000 at December 31, 2001 to
approximately $699,000 at December 31, 2002; such remaining amount is payable
during the first quarter of 2003. The Company utilized available cash for
payments made in 2002 and will utilize available cash to make the 2003 payment.
35
CAPITAL COMMITMENTS
At December 31, 2002, the Company had capital commitments to certain joint
venture investments. The Company may make additional equity investments subject
to board approval if deemed prudent to do so to protect or enhance its existing
investment. At December 31, 2002, capital commitments are as follows:
COMMITMENT AMOUNT EXPIRATION
---------- ------ ----------
Wellsford/Whitehall (A)....... $ 4,000,000 December 31, 2003
Reis (B)...................... 420,000 December 31, 2003
- ----------
(A) Pursuant to the Agreement, the Company would provide for 40% of a
$10,000,000 loan to, or preferred equity in, the venture with its joint
venture partner. Whitehall committed to fund the remaining $6,000,000.
(B) In June 2002, the Company provided $210,000 to Reis, resulting in a
remaining commitment of $420,000. This funding was the Company's share of
an additional $667,000 capital subscription to Reis from the group of
investors who also contributed capital in April 2000. The other investors
have a remaining aggregate commitment of $913,000.
TAX INDEMNITIES
Wellsford/Whitehall has agreed to maintain certain tax indemnities, primarily
through 2007, for a family group who are partners of the joint venture, relating
to assets acquired from those partners in 1998. This indemnity was preserved
during 2002 and 2001 as the acquisitions of six properties related to the
completion of the purchase requirements with respect to properties sold in
February and April 2001 as part of tax-free exchanges. The Company will continue
to make inquiries of Wellsford/Whitehall management as to their monitoring of
asset sales and debt levels with respect to these tax indemnities.
STOCK REPURCHASE PROGRAM
In April 2000, the Company's Board of Directors authorized the repurchase of up
to 1,000,000 additional shares of its outstanding common stock. The Company
intends to repurchase shares, from time to time by means of open market
purchases depending on availability of shares, the Company's cash position, the
price per share and other corporate matters including, but not limited to, a
minimum shareholders' equity covenant as required by Commerzbank AG's letter of
credit agreement for the Palomino Park Bonds. No minimum number or value of
shares to be repurchased has been fixed. Pursuant to this program, 29,837 shares
have been repurchased as of December 31, 2002; none during the year ended
December 31, 2002. In addition, during June 2001, the Board of Directors
authorized the repurchase of 2,020,784 shares of the Company's common stock at
$18.10 per share (aggregating approximately $36,576,000) from an institutional
shareholder. Cash used to repurchase such shares came from available working
capital.
CREDIT FACILITY
In the past, the Company had a $20,000,000 loan facility available for its
corporate needs. In the future, the Company may seek to obtain a new facility
based upon future liquidity requirements.
RESOURCES
PALOMINO PARK BONDS
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to
fund construction at Palomino Park. Initially, all five phases of Palomino Park
were collateral for the Palomino Park Bonds. The Palomino Park Bonds have an
outstanding balance of $12,680,000 at December 31, 2002 and 2001 and are
36
currently collateralized by four phases at Palomino Park, as Silver Mesa was
released from the collateral in November 2000. In June 2000, the Company
obtained a five-year AA rated letter of credit from Commerzbank AG to secure the
Palomino Park Bonds. This letter of credit, which expires in 2005, replaced an
expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank AG's
letter of credit; such guarantee also expires in 2005. During October 2001, the
Company and Commerzbank AG amended the letter of credit agreement to include the
$25,000,000 of Convertible Trust Preferred Securities in shareholders' equity in
the determination of the minimum shareholders' equity covenant. As of December
31, 2002, the Company was in compliance with the covenants under the letter of
credit agreement.
SILVER MESA
In December 2000, the Company obtained a $32,000,000 loan from KeyBank National
Association which bears interest at LIBOR + 2.00% per annum (3.38% at December
31, 2002), is collateralized by the unsold Silver Mesa units, matures in
December 2003 and provides for one six-month extension at the Company's option.
Generally, 90% of net sales proceeds per unit is applied to principal repayments
until the loan is paid in full. The balance of the Silver Mesa Conversion Loan
was $4,318,000 and $13,352,000 at December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, the Company sold 48 Silver Mesa units
and received net proceeds of approximately $761,000 after the repayment of
principal on the Silver Mesa Conversion Loan of approximately $9,034,000 and
selling costs. Net proceeds received by the Company from the above sales are
available for working capital purposes. Proceeds will increase from the current
amount of approximately 10% of net sales proceeds to 100% after the balance of
the Silver Mesa Conversion Loan is repaid in full.
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, future rental
revenues and corresponding operating expenses will diminish.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Rental revenue........... $ 1,462,000 $ 2,224,000 $ 592,000
Net operating income (A). 884,000 1,488,000 379,000
- ----------
(A) Net operating income is defined as rental revenue, less property
operating and maintenance expenses, real estate taxes and property
management fees.
GREEN RIVER
In December 2001, Phase IV, the 424 unit phase known as Green River, was
completed at a cost of approximately $56,400,000. Effective December 31, 2001,
the Company (i) became obligated for the construction loan, (ii) released the
developer of the economic risks it bore during construction and initial lease-up
as the developer carried the construction loan and a significant portion of the
costs incurred on its balance sheet and (iii) the developer no longer
participated in any positive operating income generated during the period. The
construction loan balance was $37,111,000 and $36,747,000 at December 31, 2002
and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at
December 31, 2002). Principal payments of approximately $22,000 per month
commenced October 1, 2002.
On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured
by a first mortgage on Green River. The Green River mortgage matures in March
2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments
are based on a 30-year amortization schedule. Proceeds were used to repay the
Green River Construction Loan and excess proceeds are generally available for
working capital purposes.
37
CASH FLOWS
- ----------
2002 CASH FLOWS
Cash flow provided by operating activities of $6,519,000 consists of (i) a net
decrease in residential units available for sale of $7,763,000, (ii)
depreciation and amortization of $5,512,000, (iii) amortization of deferred
compensation of $1,243,000, (iv) distributions received in excess of joint
venture income of $924,000; (v) shares issued for director compensation of
$92,000, offset by (vi) a net loss of $3,372,000, (vii) a decrease in accrued
expenses and other liabilities of $1,993,000, (viii) an increase in restricted
cash and investments of $1,991,000, (ix) an increase in prepaid and other assets
of $1,616,000, primarily a result of refundable income taxes and (x) minority
interest benefit of $43,000.
Cash flow provided by investing activities of $4,813,000 consists of repayments
of notes receivable of $6,173,000, offset by additional investments in real
estate assets of $1,150,000 and a capital contribution to Reis of $210,000.
Cash flow used in financing activities of $8,837,000 consists of principal
payments of mortgage notes payable of $9,929,000 (including $9,034,000 for the
Silver Mesa Conversion Loan) and distributions of minority interests of $15,000,
offset by proceeds received upon the exercise of options of $676,000 and
interest funded by a construction loan of $431,000.
2001 CASH FLOWS
Cash flow provided by operating activities of $26,602,000 consists of (i) the
recovery of $16,449,000 of costs from the sales of residential units, (ii)
depreciation and amortization of $5,126,000, (iii) a decrease in restricted cash
of $2,368,000, (iv) an increase in accrued expenses and other liabilities of
$2,363,000, (v) amortization of deferred compensation of $1,578,000, (vi) a
decrease in prepaid and other assets of $855,000, (vii) undistributed minority
interest of $283,000, (viii) distributions received in excess of joint venture
income of $164,000, (ix) shares issued for director compensation of $80,000 and
(x) non-cash charges included in the restructuring charge of $61,000, offset by
a net loss of $2,725,000.
Cash flow provided by investing activities of $4,647,000 consists of returns of
capital from joint venture investments of $31,617,000, proceeds from the sale of
real estate assets of $18,553,000 and repayments of notes receivables of
$3,589,000, partially offset by investments in real estate assets of
$40,047,000, capital contributions to joint ventures of $8,566,000 and
investments in notes receivable of $500,000.
Cash flow used in financing activities of $31,469,000 consists of (i) the
repurchase of common shares from an institutional investor of $36,576,000, (ii)
repayments of the Wellsford Finance Facility of $24,000,000, (iii) principal
payments of mortgage notes payable of $19,421,000 (including $18,648,000 for the
Silver Mesa Conversion Loan), (iv) registration statement costs of $123,000, (v)
costs incurred to repurchase warrants of $80,000 and (vi) distribution to
minority interests of $16,000, partially offset by borrowings from mortgage
notes payable of $36,747,000 and the Wellsford Finance Facility of $12,000,000.
2000 CASH FLOWS
Cash flow provided by operating activities of $10,023,000 primarily consists of
net income of $6,468,000 plus (i) depreciation and amortization of $4,980,000,
(ii) an increase in accrued expenses and other liabilities of $2,662,000, (iii)
distributions received in excess of joint venture income of $1,493,000, (iv)
amortization of deferred compensation of $907,000 and (v) decreases in
restricted cash of $506,000, partially offset by the gain on sale of assets (net
of impairment provision of $4,725,000) of $6,135,000 and increases in prepaid
and other assets of $1,003,000.
38
Cash flow used in investing activities of $22,778,000 consists of (i)
investments in real estate assets of $39,026,000, (ii) investments in notes
receivable of $28,833,000 and (iii) capital contributions to joint venture
investments of $12,895,000 partially offset by repayments of notes receivables
of $32,408,000, $21,650,000 of proceeds from the sales of real estate assets,
returns of capital from joint venture investments of $2,886,000 and proceeds
from the sale of joint venture interests of $1,032,000.
Cash flow provided by financing activities of $14,383,000 primarily consists of
(i) proceeds from the Silver Mesa Conversion Loan of $32,000,000, (ii) proceeds
from the issuance of Convertible Trust Preferred Securities of $25,000,000 and
(iii) proceeds from draws on the Company's credit facility of $12,000,000,
partially offset by the repayment of mortgage notes payable of $30,940,000,
repurchases of the Company's common stock of $21,119,000, the establishment of
an interest reserve for the Silver Mesa Conversion Loan of $1,960,000 and
deferred financing costs principally associated with the issuance of the
Convertible Trust Preferred Securities of $544,000.
ENVIRONMENTAL
- -------------
In December 2001, the Company submitted a report to the New Hampshire Department
of Environmental Services ("NHDES") that summarized the findings of an
environmental consultant engaged by the Company with respect to groundwater and
surface water monitoring and testing which took place during 2001 on one of its
owned properties. In January 2002 the NHDES indicated concerns about surface
water contamination, volatile organic chemical ("VOC") migration off of the
property and air quality, and mandated further testing. Further test results and
a "Scope of Work" plan for the required tests were submitted to the NHDES in
February 2002. In June 2002, the NHDES renewed the Groundwater Monitoring Permit
with certain stipulations and again expressed concerns related to indoor air
quality, contaminant migration offsite and surface water contamination. It
mandated further testing and the submission of a "Scope of Work" plan related
thereto by August 1, 2002. The Company complied with the NHDES request and
received approval in October 2002 to commence the additional testing which
included testing on an adjacent property for VOC migration and air quality
testing. These tests were conducted during the fourth quarter of 2002 and the
results show no migration of the VOCs and, on a preliminary basis, no
environmental problems with the indoor air quality. At this time, it is too
early to conclude the form of remediation that will be required, if any, or the
cost thereof, but in all likelihood, if remediation is required, it will be a
more aggressive and costly one than natural attenuation. During 2002 and 2001,
the Company incurred approximately $96,000 and $48,000, respectively, of costs
principally for its environmental testing firm, with respect to this matter.
TERRORISM INSURANCE
- -------------------
In November 2002, Congress passed the Terrorism Risk Insurance Act of 2002,
which was enacted to help companies obtain terrorism insurance at reasonable
rates. As a result, the Company's primary and excess liability carriers have
made such insurance available from November 26, 2002 until the current
underlying policies expire at June 30, 2003. The Company was previously covered
under its all risk property insurance policies for acts of terrorism on its
consolidated real estate assets through June 30, 2002. Terrorism coverage was
available to the Wellsford/Whitehall portfolio at December 31, 2002. The Company
and Wellsford/Whitehall expect that similar coverage will be available in
connection with an all risk policy and will need to make an assessment of the
cost benefit of obtaining terrorism insurance in the future. The underwriting
procedures utilized by the Company and Second Holding evaluate the impact of the
lack of an appropriate amount of terrorism insurance, or inability to obtain
terrorism insurance by property owners on single assets or small collateral
pools for its debt investments.
INFLATION/DECLINING PRICES
- --------------------------
Substantially all of Wellsford Capital's and Wellsford/Whitehall's leases with
their tenants provide for separate escalations of real estate taxes and
operating expenses over a base amount. In addition, many of the office leases
provide for fixed base rent increases or indexed escalations (based on the CPI
or other measures). The
39
Company believes that inflationary increases in expenses will generally be
offset by the expense reimbursements and contractual rent increases described
above.
A substantial majority of the leases at the Company's multifamily properties are
for a term of one year or less which may enable the Company to seek increased
rents upon renewal or re-letting of apartment units during an inflationary
period. Such short-term leases generally minimize the risk to the Company of the
adverse effects of inflation. Conversely, in a period of declining economics,
short-term leases pose an increasing risk to the Company of reduced rental
revenue and decreased cash flow from lower rents in conjunction with concessions
to new and renewal tenants. This is currently being experienced by the Company's
Palomino Park operating properties.
Assets in the Wellsford/Whitehall portfolio are currently subject to similar
risks regarding declining economics which may result in reduced rental revenue
and decreased cash flow from lower rents and greater concessions to new and
renewal tenants.
TRENDS
- ------
The markets in which the Company owns and operates its assets (or has
investments in entities which own and operate assets) are subjected to general
and local economic business conditions. Based upon the current economic
environment, these conditions may negatively impact the occupancy levels, rents
and the amount of concessions at properties in the Wellsford Development and
Wellsford Capital SBUs or negatively impact 2003 property sales in the Wellsford
Capital SBU and the sale of residential units at Silver Mesa in the Wellsford
Development SBU. Wellsford/Whitehall would be similarly impacted by such
conditions.
Rising insurance premium costs or availability of certain insurance coverages
may negatively impact the operating results and cash flows of the Company's
assets and SBUs. Energy costs may continue to increase as a result of the threat
of war, also negatively impacting operating results and cash flows. The
availability and cost of other natural resources, such as the lack of water
supply caused by severe drought conditions in the Denver market, could
negatively impact operating results and cash flows as well.
40
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS.
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following,
which are discussed in greater detail in the "Risk Factors" section of the
Company's registration statement on Form S-3 (file No. 333-73874) filed with the
Securities and Exchange Commission ("SEC") on December 14, 2001, as may be
amended, which is incorporated herein by reference: general and local economic
and business conditions, which will, among other things, affect demand for
commercial and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability and cost of financing;
ability to find suitable investments; competition; risks of real estate
acquisition, development, construction and renovation including construction
delays and cost overruns; ability to comply with zoning and other laws;
vacancies at commercial and multifamily properties; dependence on rental income
from real property; the risk of inflation in operating expenses, including, but
not limited to energy, water and insurance; the availability of insurance
coverages; adverse consequences of debt financing including, without limitation,
the necessity of future financings to repay maturing debt obligations; inability
to meet financial and valuation covenants contained in loan agreements;
inability to repay financings; risks of investments in debt instruments,
including possible payment defaults and reductions in the value of collateral;
uncertainties pertaining to debt investments, including, but not limited to the
WTC Certificates, including scheduled interest payments, the ultimate repayment
of principal, adequate insurance coverages, the ability of insurers to pay
claims and effects of changes in ratings from rating agencies; risks of
subordinate loans; risks of leverage; risks associated with equity investments
in and with third parties; availability and cost of financing; interest rate
risks; demand by prospective buyers of condominium and commercial properties;
inability to realize gains from the real estate assets held for sale; lower than
anticipated sales prices; inability to close on sales of properties under
contract; illiquidity of real estate investments; environmental risks; and other
risks listed from time to time in the Company's reports filed with the SEC.
Therefore, actual results could differ materially from those projected in such
statements.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in interest rates. The
Company manages this risk by offsetting its investments and financing exposures
as well as by strategically timing and structuring its transactions. The
following table presents the effect of a 1.00% increase in the base rates on all
variable rate notes receivable and debt and its impact on annual net income:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EFFECT OF 1% EFFECT OF 1%
BALANCE AT INCREASE IN BASE BALANCE AT INCREASE IN BASE
DECEMBER 31, RATE ON INCOM DECEMBER 31, RATE ON INCOME
2002 (EXPENSE) 2001 (EXPENSE)
---- --------- ---- ---------
Consolidated assets and liabilities:
Notes receivable:
Variable rate .......................... $ -- $ -- $ 4,973 $ 50
Fixed rate ............................. 28,612 -- 29,812 --
--------- --------- --------- ---------
$ 28,612 -- $ 34,785 50
========= --------- ========= ---------
Mortgage notes payable:
Variable rate .......................... $ 54,109 (541) $ 62,780 (628)
Fixed rate ............................. 58,124 -- 58,951 --
--------- --------- --------- ---------
$ 112,233 (541) $ 121,731 (628)
========= --------- ========= ---------
Convertible Trust Preferred Securities:
Fixed rate ............................. $ 25,000 -- $ 25,000 --
========= --------- ========= ---------
Proportionate share of assets and liabilities
from investments in joint ventures:
Second Holding:
Investments:
Variable rate ....................... $ 912,705 9,127 $ 486,174 4,862
Fixed rate .......................... -- -- -- --
--------- --------- --------- ---------
$ 912,705 9,127 $ 486,174 4,862
========= =========
Debt:
Variable rate ....................... $ 871,100 (8,711) $ 487,335 (4,873)
========= --------- ========= ---------
Net effect from Second Holding ............ 416 (11)
--------- ---------
Wellsford/Whitehall:
Debt:
Variable rate ....................... $ -- -- $ -- --
Variable rate, with LIBOR cap (A) ... 90,977 (910) 91,162 (912)
Fixed rate .......................... 29,071 -- 29,424 --
--------- --------- --------- ---------
$ 120,048 $ 120,586
========= =========
Effect from Wellsford/Whitehall ........... (910) (912)
--------- ---------
Net decrease in annual income, before minority
interest and income tax benefit ........... (1,035) (1,501)
Minority interest ............................ 77 89
Income tax benefit ........................... 383 565
--------- ---------
Net decrease in annual net income ............ $ (575) $ (847)
========= =========
Per share, basic and diluted ................. $ (0.09) $ (0.12)
========= =========
- ----------
(A) In July 2001, Wellsford/Whitehall entered into an interest rate protection
contract for a notional amount of $285,000, which limits
Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and 6.83% for
the following year to June 2004. The above calculation assumes exposure of
1.00% on the Company's proportionate share of debt based upon 30-day LIBOR
of 1.38% and 1.88% at December 31, 2002 and 2001, respectively.
42
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is included as a separate section of this annual
report on Form 10-K (see page F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, their ages and their
positions are as follows:
NAME AGE POSITIONS AND OFFICES HELD
---- --- --------------------------
Jeffrey H. Lynford...... 55 Chairman of the Board, Chief Executive Officer,
President and Director***
James J. Burns.......... 63 Senior Vice President, Chief Financial Officer
and Secretary
Willliam H. Darrow II... 55 Vice President
David M. Strong......... 44 Vice President for Development
Mark P. Cantaluppi...... 32 Vice President, Chief Accounting Officer
Martin Bernstein........ 65 Director*
Douglas Crocker II...... 62 Director***
Rodney F. Du Bois....... 67 Director**
Richard S. Frary........ 55 Director*
Meyer S. Frucher........ 56 Director*
Mark S. Germain......... 52 Director***
Edward Lowenthal........ 58 Director**
- ----------
* Term expires 2003.
** Term expires 2004.
*** Term expires 2005.
The information contained in the sections captioned "Nominees for Election as
Directors", "Other Directors", "Executive Officers", and "Key Employees" of the
Company's definitive proxy statement for the 2003 annual meeting of shareholders
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the sections captioned "Executive Compensation",
"Compensation of Directors", "Board Committees", "Employment Agreements", and
"Management Incentive Plans" of the Company's definitive proxy statement for the
2003 annual meeting of shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" of the Company's definitive proxy
statement for the 2003 annual meeting of shareholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the section captioned "Certain Transactions" of the
Company's definitive proxy statement for the 2003 annual meeting of shareholders
is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's chief executive officer and chief financial
officer concluded that the disclosure controls and procedures are
44
effective in timely alerting them to material information required to be
included in the Company's periodic reports filed with the Securities and
Exchange Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its last evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS
The following consolidated financial information is included as a
separate section of this annual report on Form 10-K:
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements
and Notes.
(2) FINANCIAL STATEMENT SCHEDULES
III. Real Estate and Accumulated Depreciation
All other schedules have been omitted because the required
information of such other schedules is not present, is not
present in amounts sufficient to require submission of the
schedule or is included in the consolidated financial statements.
(3) EXHIBITS
(A) EXHIBIT NO. DESCRIPTION!!!
----------- -----------
3.1 Articles of Amendment and Restatement of the Company. ****
3.2 Articles Supplementary Classifying 350,000 Shares of Common
Stock as Class A Common Stock. ****
3.3 Articles Supplementary Classifying 2,000,000 Shares of
Common Stock as Series A 8% Convertible Redeemable Preferred
Stock. ****
3.4 Bylaws of the Company. ****
4.1 Specimen certificate for Common Stock. ***
4.2 Specimen certificate for Class A Common Stock. ****
4.3 Specimen certificate for Series A 8% Convertible Redeemable
Preferred Stock. ****
45
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
4.4 Warrant Sale Agreement, dated as of December 21, 2000,
between Wellsford and W/W Group Holdings, L.L.C. ("Holding
Co.") relating to the transfer to Wellsford of warrants
issued by Wellsford to Holding Co. pursuant to that certain
Warrant Agreement dated as of May 28, 1999, by and between
Wellsford and United States Trust Company of New York (the
"Warrant Agent"). !!!!!!
4.5 Warrant Sale Agreement, dated as of December 21, 2000,
between Wellsford and Holding Co. relating to the transfer
to Wellsford of warrants issued by Wellsford to Holding Co.
pursuant to that certain Warrant Agreement dated as of
August 28, 1997, by and between Wellsford and the Warrant
Agent, as amended on July 16, 1998, and as further amended
on May 28, 1999. !!!!!!
4.6 Agreement, dated as of December 21, 2000, terminating the
Registration Rights Agreement between Wellsford and Holding
Co., dated as of May 28, 1999. !!!!!!
10.1 Operating Agreement of Red Canyon at Palomino Park LLC
between Wellsford Park Highlands Corp. and Al Feld, dated as
of April 17, 1996, relating to Red Canyon. *
10.2 First Amendment to Operating Agreement of Red Canyon at
Palomino Park LLC between Wellsford Park Highlands Corp. and
Al Feld, dated as of May 19, 1997, relating to Red Canyon.
****
10.3 Second Amendment to Operating Agreement of Red Canyon at
Palomino Park LLC between Wellsford Park Highlands Corp. and
Al Feld, dated as of November 16, 1998. +++++
10.4 Second Amended and Restated Vacant Land Purchase and Sale
Agreement between Mission Viejo Company and The Feld Company
dated March 23, 1995, as amended by First Amendment, dated
May 1, 1996, relating to the land underlying Palomino Park.
*
10.5 Trust Indenture, dated as of December 1, 1995, between
Palomino Park Public Improvements Corporation ("PPPIC") and
United States Trust Company of New York, as trustee,
securing Wellsford Residential Property Trust's Assessment
Lien Revenue Bonds Series 1995 - $14,755,000. **
10.6 Amendment to Wellsford Reimbursement Agreement by and
between PPPIC, Wellsford Residential Property Trust and the
Company, dated as of May 30, 1997. ****
10.7 Assignment and Assumption Agreement by and between Wellsford
Residential Property Trust and the Company, dated as of May
30, 1997. ****
10.8 Credit Enhancement Agreement by and between the Company and
ERP Operating Limited Partnership, dated as of May 30, 1997,
relating to Palomino Park. ****
10.9 Reimbursement and Indemnification Agreement by and between
the Company and ERP Operating Limited Partnership, dated as
of May 30, 1997, relating to Palomino Park. ***
10.10 Common Stock and Preferred Stock Purchase Agreement by and
between the Company and ERP Operating Limited Partnership
dated as of May 30, 1997. ****
10.11 Registration Rights Agreement by and between the Company
and ERP Operating Limited Partnership dated as of May 30,
1997. ****
46
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
10.12 Credit Agreement, dated as of April 25, 1997, by and among
Park Avenue Financing Company LLC, PAMC Co-Manager Inc.,
PAFC Management, Inc., Stanley Stahl, The First National
Bank of Boston, the Company, other banks that may become
parties to the Agreement and The First National Bank of
Boston, as Agent, relating to 277 Park Avenue. **
10.13 Assignment of Member's Interest, dated as of April 25,
1997, by PAFC Management, Inc. and Stanley Stahl to The
First National Bank of Boston, relating to 277 Park Avenue
(relating to interests in the Park Avenue Financing Company,
LLC). **
10.14 Assignment of Member's Interest, dated as of April 25,
1997, by PAMC Co-Manager Inc. and Park Avenue Financing, LLC
to The First National Bank of Boston, relating to 277 Park
Avenue (relating to interests in 277 Park Avenue, LLC). **
10.15 Stock Pledge Agreement, dated as of April 25, 1997, by
Stanley Stahl to The First National Bank of Boston, relating
to 277 Park Avenue (relating to stock in Park Avenue
Management Corporation). **
10.16 Stock Pledge Agreement, dated as of April 25, 1997, by
Stanley Stahl to The First National Bank of Boston, relating
to 277 Park Avenue (relating to stock in PAMC Co-Manager
Inc.). **
10.17 Stock Pledge Agreement, dated as of April 25, 1997, by
Stanley Stahl to The First National Bank of Boston, relating
to 277 Park Avenue (relating to stock in PAFC Management,
Inc.). **
10.18 Conditional Guaranty of Payment and Performance, dated as
of April 25, 1997, by Stanley Stahl, relating to 277 Park
Avenue. **
10.19 Cash Collateral Account Security, Pledge and Assignment
Agreement, dated as of April 25, 1997, by and among 277 Park
Avenue, LLC, Park Avenue Management Corporation, Park Avenue
Financing Company LLC, PAMC Co-Manager Inc., Stanley Stahl
and The First National Bank of Boston, relating to 277 Park
Avenue. **
10.20 Recognition Agreement, dated as of April 25, 1997, by and
among The First National Bank of Boston, the Company, Column
Financial, Inc., Park Avenue Financing Company LLC, PAMC
Co-Manager, Inc. and 277 Park Avenue, LLC, relating to 277
Park Avenue. **
10.21 Intercreditor Agreement, dated as of April 25, 1997,
between the Company and The First National Bank of Boston,
as Agent, relating to 277 Park Avenue. **
10.22 Assignment and Acceptance Agreement, dated June 19, 1997,
between BankBoston, N.A. (formerly known as The First
National Bank of Boston) ("BankBoston") and the Company,
relating to 277 Park Avenue. ****
10.23 Revolving Credit Agreement by and among the Company,
BankBoston, Morgan Guaranty Trust Company of New York
("Morgan Guaranty"), other banks which may become parties
and BankBoston, as agent, and Morgan Guaranty, as co-agent
dated as of May 30, 1997. ****
10.24 Agreement Regarding Common Stock and Preferred Stock
Purchase Agreement, dated as of May 30, 1997, among ERP
Operating Limited Partnership, the Company and BankBoston,
as agent. ****
10.25 Assignment of Common Stock Agreements, dated as of May 30,
1997, between the Company and BankBoston, as agent. ****
10.26 Collateral Assignment of Documents, Rights and Claims
(including Collateral Assignment of Deed of Trust,
Assignment of Leases and Rents, Security Agreement and
Fixture Filing), made as of May 30, 1997, by the Company to
BankBoston, as agent. ****
47
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
10.27 Nomura Conditional Guaranty of Payment under the Mezzanine
Loan Agreement, dated as of July 16, 1998, by Wellsford
Commercial Properties Trust, WHWEL Real Estate Limited
Partnership, the Company, Whitehall Street Real Estate
Limited Partnership V, Whitehall Street Real Estate Limited
Partnership VI, Whitehall Street Real Estate Limited
Partnership VII and Whitehall Street Real Estate Limited
Partnership VIII in favor of BankBoston and Goldman Sachs
Mortgage Company. ++
10.28 Contribution Agreement, dated as of February 12, 1998,
among Saracen Properties, Inc., Saraceno Holding Trust
General Partnership, Dominic J. Saraceno, 150 Wells Avenue
Realty Trust, River Park Realty Trust, Seventy Wells Avenue
LLC, Newton Acquisition LLC I, Saracen Portland L.L.C., KSA
Newton Acquisition Limited Partnership II and KSA Newton
Limited Partnership I, as Contributor, and
Wellsford/Whitehall Properties, L.L.C., as Contributee. !!!!
10.29 Limited Liability Company Operating Agreement of
Wellsford/Whitehall Group, L.L.C., dated as of May 28, 1999.
+++
10.30 First Amendment to the Limited Liability Company Operating
Agreement of WWG, dated as of December 21, 2000, among WHWEL
Real Estate Limited Partnership, Wellsford Commercial
Properties Trust, WXI/WWG Realty, L.L.C., Holding Co. and WP
Commercial, L.L.C., dated as of May 28, 1999 (excluding
exhibits and schedules). !!!!!!
10.31 Program Agreement for Clairborne Investors Mortgage Program
between Creamer Realty Consultants and The Prudential
Investment Corporation, dated as of December 10, 1997. +
10.32 $34,500,000 Multifamily Note, dated December 24, 1997,
payable to the order of GMAC Commercial Mortgage Corporation
by Park at Highlands L.L.C. +
10.33 Multifamily Deed of Trust, Assignment of Rents and Security
Agreement, dated December 24, 1997, by Park at Highlands
L.L.C. in favor of GMAC Commercial Mortgage Corporation. +
10.34 1998 Management Incentive Plan of the Company. ++
10.35 1997 Management Incentive Plan of the Company. **
10.36 Rollover Stock Option Plan of the Company. **
10.37 Amended and Restated Employment Agreement dated as of
December 7, 2001 by and between Wellsford Real Properties,
Inc. and Jeffrey H. Lynford. ^^^
10.38 Employment Separation Agreement dated as of December 7,
2001 by and between Wellsford Real Properties, Inc. and
Edward Lowenthal. ^^^
10.39 Employment Agreement between the Company and David M.
Strong. ^^^^^
10.40 Employment Agreement between the Company and William H.
Darrow II
10.41 Employment Agreement between the Company and James J.
Burns. +++++
10.42 Employment Agreement between the Company and Mark P.
Cantaluppi. +++++
10.43 Certificate of Trust of WRP Convertible Trust I, as filed
with the Secretary of State of the State of Delaware on May
5, 2000. !!!!!
10.44 Declaration of Trust of WRP Convertible Trust I, dated as
of May 5, 2000, by and among Rodney F. Du Bois and James J.
Burns as Regular Trustees, Wilmington Trust Company as both
Delaware Trustee and Institutional Trustee and Wellsford
Real Properties, Inc., as Sponsor. !!!!!
10.45 Indenture for 8.25% Convertible Junior Subordinated
Debentures, dated as of May 5, 2000, by and between
Wellsford Real Properties, Inc. and Wilmington Trust
Company, as Trustee. !!!!!
48
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
10.46 Preferred Securities Purchase Agreement, dated as of May 5,
2000, by and among Wellsford Real Properties, Inc., WRP
Convertible Trust I and ERP Operating Limited Partnership.
!!!!!
10.47 Preferred Securities Guarantee, dated as of May 5, 2000, by
and between Wellsford Real Properties, Inc. and Wilmington
Trust Company, as Trustee. !!!!!!
10.48 Common Securities Guarantee, dated as of May 5, 2000, by
Wellsford Real Properties, Inc. !!!!!
10.49 Amendment to Registration Rights Agreement, dated as of May
5, 2000, by and between Wellsford Real Properties, Inc. and
ERP Operating Limited Partnership. !!!!!
10.50 Articles Supplementary reclassifying and designating
350,000 shares of unissued Common Stock as Class A-1 Common
Stock, dated as of May 5, 2000. !!!!!
10.51 Bond Pledge and Security Agreement, dated June 16, 2000,
among Palomino Park Public Improvements Corporation, as Bond
Issuer, Wellsford Real Properties, Inc., together with Bond
Issuer, as Pledgor, Commerzbank AG, as Bank, and United
States Trust Company of New York, as Bond Trustee. #
10.52 Letter of Credit Reimbursement Agreement, dated June 16,
2000, among Palomino Park Public Improvements Corporation,
as Bond Issuer, Wellsford Real Properties, Inc., together
with Bond Issuer, as Account Parties, and Commerzbank AG, as
Bank. #
10.53 Promissory Note, dated June 16, 2000, between Wellsford
Real Properties, Inc. and Commerzbank AG. #
10.54 Letter Agreement dated September 30, 2000, between
Wellsford Real Properties, Inc. and Creamer Vitale Wellsford
L.L.C. relating to the sale and subsequent assignment of SX
Advisors, LLC's interest in Creamer Vitale Wellsford L.L.C.
to Wellsford Real Properties, Inc. ##
10.55 Assignment of Membership Interest, dated as of October 1,
2000, between SX Advisors, LLC and Wellsford Fordham Tower,
L.L.C., whereby SX Advisors, LLC assigned its interest in
Creamer Vitale Wellsford L.L.C. to Wellsford Real
Properties, Inc. ##
10.56 Memorandum of Understanding, dated October 25, 2000, among
Wellsford Real Properties, Inc., Wellsford Commercial
Properties Trust, WHWEL Real Estate Limited Partnership,
WXI/WWG Realty, L.L.C. and W/W Group Holdings, L.L.C.,
relating to Wellsford/Whitehall Group, L.L.C. ##
10.57 Operating Agreement of Silver Mesa at Palomino Park LLC
between Wellsford Park Highlands Corp. and Al Feld, dated as
of December 10, 1998. +++++
10.58 First Amendment to the Operating Agreement of Silver Mesa
at Palomino Park LLC between Wellsford Park Highlands Corp.
and Al Feld, dated as of December 19, 2000. +++++
10.59 Loan Agreement dated as of December 20, 2000, between
Silver Mesa at Palomino Park LLC and KeyBank National
Association. ++++
10.60 $32,000,000 Promissory Note dated as of December 20, 2000,
payable to KeyBank National Association by Silver Mesa at
Palomino Park LLC. ++++
10.61 Guaranty dated December 20, 2000, by Wellsford Capital for
the benefit of KeyBank National Association. ++++
10.62 Sale-Purchase Agreement dated as of December 4, 2000,
between Wellsford Capital Properties, L.L.C. and CRC
Communities, Inc. for the sale of 501 Hoes Lane, Piscataway,
New Jersey. ++++
49
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
10.63 Sale-Purchase Agreement dated as of November 27, 2000,
between Wellsford Capital Properties, L.L.C. and Windswept
Development, LLC for the sale of the Bradford Plaza Shopping
Center, West Chester, Pennsylvania. ++++
10.64 Sale-Purchase Agreement dated as of December 5, 2000
between Wellsford Capital Properties, L.L.C. and Keystone
Real Estate Management, Inc. for the sale of Two Executive
Campus, Cherry Hill, New Jersey. ###
10.65 Letter Agreement, dated as of June 7, 2001 between
Wellsford Real Properties, Inc. and Mutual Beacon Fund,
Mutual Qualified Fund and Mutual Beacon Fund (Canada). ####
10.66 Loan Agreement (including Joinder Agreement signed by the
Company), dated as of June 25, 2001, between General
Electric Capital Corporation and Wellsford/Whitehall
Holdings, L.L.C. ^
10.661 First Amendment to Loan Agreement and Other Loan
Documents, dated October 1, 2002, between
Wellsford/Whitehall Holdings, L.L.C. and General Electric
Capital Corporation.
10.67 Promissory Note, dated June 25, 2001, between General
Electric Capital Corporation and Wellsford/Whitehall
Holdings, L.L.C. ^
10.68 Guaranty, dated as of June 25, 2001, made by WWG 401 North
Washington LLC in favor of General Electric Capital
Corporation. ^
10.69 Hazardous Substances Indemnity Agreement, dated as of June
25, 2001, by Wellsford/Whitehall Holdings, L.L.C., WWG 401
North Washington LLC, Wellsford/Whitehall Group, L.L.C. and
Wellsford/Whitehall Properties II, L.L.C. for the benefit of
General Electric Capital Corporation. ^
10.70 Indemnification Agreement, dated as of June 25, 2001,
between Whitehall Street Real Estate Limited Partnership V,
Whitehall Street Real Estate Limited Partnership VI,
Whitehall Street Real Estate Limited Partnership VII,
Whitehall Street Real Estate Limited Partnership VIII,
Whitehall Street Real Estate Limited Partnership XI,
Whitehall Street Real Estate Limited Partnership XII and
Wellsford Real Properties, Inc. in favor of General Electric
Capital Corporation. ^
10.71 Indemnity Regarding Guaranty Obligations, dated as of June
25, 2001, between Wellsford/Whitehall Holdings, L.L.C. and
WWG 401 North Washington LLC. ^
10.72 October 2001 Amendment to the Letter of Credit
Reimbursement Agreement, dated October 26, 2001 among PPPIC,
Wellsford Real Properties, Inc. and Commerzbank AG. ^^
10.73 Sale-Purchase Agreement dated as of November 5, 2001
between Wellsford Capital Properties, L.L.C. and The Judge
Rotenberg Educational Center, Inc. for the sale of 250
Turnpike Street, Canton, Massachusetts. +++++
10.74 Indemnity Agreement dated as of December 31, 2001 by and
between Wellsford Park Highlands Corp., Wellsford Real
Properties, Inc. and Al Feld for the Green River
Construction Loan. +++++
10.75 Operating Agreement of Green River at Palomino Park LLC
between Wellsford Park Highlands Corp. and Al Feld, dated as
of January 5, 2000. +++++
10.76 First Amendment to the Operating Agreement of Green River
at Palomino Park LLC between Wellsford Park Highlands Corp.
and Al Feld, dated as of February 11, 2002. +++++
10.77 $27,000,000 Multifamily Note, dated November 20, 1998,
payable to the order of GMAC Commercial Mortgage Corporation
by Red Canyon at Palomino Park LLC. +++++
50
EXHIBIT NO. DESCRIPTION!!! (CONTINUED)
----------- -----------
10.78 Multifamily Deed of Trust, Assignment of Rents and Security
Agreement, dated November 20, 1998, by Red Canyon at
Palomino Park LLC in favor of GMAC Commercial Mortgage
Corporation. +++++
10.79 Operating Agreement of Park at Highlands L.L.C. between
Wellsford Park Highlands Corp. and Al Feld, dated as of
April 27, 1995. ^^^^
10.80 First Amendment to Operating Agreement of Park at Highlands
L.L.C. between Wellsford Park Highlands Corp. and Al Feld,
dated as of December 29, 1995. ^^^^
10.81 Second Amendment to Operating Agreement of Park at
Highlands L.L.C. between Wellsford Park Highlands Corp. and
Al Feld, dated as of December 31, 1997. ^^^^
10.82 Wellsford Real Properties, Inc. Code of Business Conduct
and Ethics for Directors, Senior Financial Officers, Other
Officers and All Other Employees.
10.83 Deed of Trust, Security Agreement and Fixture Filing for
Green River at Palomino Park LLC, as grantor to The Public
Trustee of Douglas Count, as trustee for the benefit of AUSA
Life Insurance Company, Inc. dated February 6, 2003.
10.84 $40,000,000 Secured Promissory Note, dated February 6,
2003, payable to the order of AUSA Life Insurance Company,
Inc. by Green River at Palomino Park LLC.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
99.1 Chief Executive Officer and Chief Financial Officer
Certificates pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- ----------
* Previously filed as an exhibit to the Form 10 filed on April 23, 1997.
** Previously filed as an exhibit to the Form 10/A Amendment No. 1 filed on
May 21, 1997.
*** Previously filed as an exhibit to the Form 10/A Amendment No. 2 filed on
May 28, 1997.
**** Previously filed as an exhibit to the Form S-11 filed on July 30, 1997.
***** Previously filed as an exhibit to Amendment No. 1 to Form S-11 filed on
November 14, 1997.
! Previously filed as an exhibit to the Form 8-K filed on September 11, 1997.
!! Previously filed as an exhibit to the Form 8-K filed on September 23, 1997.
!!! Wellsford acquired its interest in a number of these documents by
assignment.
!!!! Previously filed as an exhibit to the Form 8-K filed on April 28, 1998.
!!!!! Previously filed as an exhibit to the Form 8-K filed on May 11, 2000.
!!!!!! Previously filed as an exhibit to the Form 8-K filed on January 11, 2001.
+ Previously filed as an exhibit to the Form 10-K filed on March 31, 1998.
++ Previously filed as an exhibit to the Form 10-K filed on March 31, 1999.
+++ Previously filed as an exhibit to the Form 10-K filed on March 29, 2000.
++++ Previously filed as an exhibit to the Form 10-K filed on March 22, 2001.
+++++ Previously filed as an exhibit to the Form 10-K filed on March 22, 2002.
# Previously filed as an exhibit to the Form 10-Q filed on August 2, 2000.
## Previously filed as an exhibit to the Form 10-Q filed on November 3, 2000.
### Previously filed as an exhibit to the Form 10-Q filed on May 4, 2001.
#### Previously filed as an exhibit to the Form 8-K filed on June 14, 2001.
^ Previously filed as an exhibit to the Form 10-Q filed on August 10, 2001.
^^ Previously filed as an exhibit to the Form 10-Q filed on November 6, 2001.
^^^ Previously filed as an exhibit to the Form 8-K filed on December 10, 2001.
^^^^ Previously filed as an exhibit to the Form 10-Q filed on May 10, 2002.
^^^^^ Previously filed as an exhibit to the Form 10-Q filed on August 12, 2002.
51
(b) During the last quarter of the period covered by this report, the Company
filed the following reports on Form 8-K:
None.
(c) The following exhibits are filed as exhibits to this Form 10-K: See Item 15
(a) (3) above.
(d) The following documents are filed as a part of this report:
None.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WELLSFORD REAL PROPERTIES, INC.
By: /s/ James J. Burns
-------------------------------------------------
James J. Burns
Senior Vice President, Chief Financial Officer
and Secretary
By: /s/ Mark P. Cantaluppi
-------------------------------------------------
Mark P. Cantaluppi
Vice President, Chief Accounting Officer
Dated: March 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ---------------------- ---------------------------------------------- --------------
/s/ Jeffrey H. Lynford Chairman of the Board, Chief Executive Officer, March 17, 2003
- ---------------------- President and Director
Jeffrey H. Lynford
/s/ Martin Bernstein Director March 17, 2003
- ----------------------
Martin Bernstein
/s/ Douglas Crocker II Director March 17, 2003
- ----------------------
Douglas Crocker II
Director March 17, 2003
- ----------------------
Rodney F. Du Bois
/s/ Richard S. Frary Director March 17, 2003
- ----------------------
Richard S. Frary
/s/ Meyer S. Frucher Director March 17, 2003
- ----------------------
Meyer S. Frucher
/s/ Mark S. Germain Director March 17, 2003
- ----------------------
Mark S. Germain
/s/ Edward Lowenthal Director March 17, 2003
- ----------------------
Edward Lowenthal
53
CERTIFICATION
I, Jeffrey H. Lynford, certify that:
1. I have reviewed this annual report on Form 10-K of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Jeffrey H. Lynford
----------------------
Jeffrey H. Lynford
Chief Executive Officer
54
CERTIFICATION
I, James J. Burns, certify that:
1. I have reviewed this annual report on Form 10-K of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ James J. Burns
----------------------
James J. Burns
Chief Financial Officer
55
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the registrant with the respective
state of organization as of December 31, 2002:
SUBSIDIARY STATE
- ----------------------------------------------- --------
Wellsford Real Properties, Inc................. Maryland
Wellsford Capital.............................. Maryland
Wellsford Capital Properties, L.L.C............ Delaware
Wellsford Finance, L.L.C....................... Delaware
Second Holding Company, LLC.................... Delaware
Belford Capital Management, L.L.C.............. Delaware
Belford ZMTN Company, L.L.C.................... Delaware
Wellsford CRC Holding Corp..................... Maryland
Clairborne Fordham Tower, LLC.................. Delaware
Creamer Vitale Wellsford L.L.C................. Delaware
Wellsford Fordham Tower, L.L.C................. Delaware
Wellsford Park Highlands Corp.................. Colorado
Park at Highlands L.L.C........................ Colorado
Red Canyon at Palomino Park L.L.C.............. Colorado
Silver Mesa at Palomino Park L.L.C............. Colorado
Green River at Palomino Park L.L.C............. Colorado
Gold Peak at Palomino Park L.L.C............... Colorado
Palomino Park Telecom L.L.C.................... Colorado
Parkside Cafe at Palomino Park, Inc............ Colorado
Palomino Park Owners Association................ Colorado
Palomino Park Public Improvements Corp.......... Colorado
Silver Mesa Homeowners Association.............. Colorado
Wellsford Commercial Properties Trust........... Maryland
Wellsford/Whitehall Group, L.L.C............... Delaware
Wellsford Ventures, Inc........................ Maryland
WRP Convertible Trust I........................ Delaware
56
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-73874) of Wellsford Real Properties, Inc. and in the related
Prospectus of our report dated March 17, 2003, with respect to the consolidated
financial statements and schedule of Wellsford Real Properties, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 2002.
/s/ ERNST & YOUNG LLP
New York, New York
March 25, 2003
57
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Wellsford Real Properties, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-3, No. 333-73874, of Wellsford Real Properties, Inc., of our report dated
February 21, 2003, with respect to the consolidated balance sheets of Second
Holding Company, LLC and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, members' equity and cash flows for
each of the years in the three-year period ended December 31, 2002, which report
appears in the December 31, 2002 annual report on Form 10-K of Wellsford Real
Properties, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 20, 2003
58
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Wellsford Real Properties, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), we,
Jeffrey H. Lynford, Chief Executive Officer of the Company and James J. Burns,
Chief Financial Officer of the Company, certify, to the best of our knowledge,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Jeffrey H. Lynford
-------------------------------
Jeffrey H. Lynford
Chief Executive Officer
Wellsford Real Properties, Inc.
/s/ James J. Burns
-------------------------------
James J. Burns
Chief Financial Officer
Wellsford Real Properties, Inc.
March 26, 2003
A signed original of this written statement required by Section 906 has been
provided to Wellsford Real Properties, Inc. and will be retained by Wellsford
Real Properties, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
59
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. IN
FORM 10-K
---------
Report of Independent Auditors........................................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001..........F-4
Consolidated Statements of Operations
for the Years Ended December 31, 2002, 2001 and 2000.........F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000.........F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2002, 2001 and 2000.........F-7
Notes to Consolidated Financial Statements............................F-9
Wellsford/Whitehall Group, L.L.C.
Consolidated Financial Statements and Notes. ...............F-51
FINANCIAL STATEMENT SCHEDULES
III - Real Estate and Accumulated Depreciation........................S-1
All other schedules have been omitted because the required information for such
other schedules is not present, is not present in amounts sufficient to require
submission of the schedule or because the required information is included in
the consolidated financial statements.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Wellsford Real Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Wellsford Real
Properties, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of Second Holding Company,
LLC, a 51% owned joint venture of the Company, for which the Company's net
investment is $28,228,810 and $27,862,508 as of December 31, 2002 and 2001,
respectively, and equity in earnings (loss) of $723,430, $(162,933) and
$1,431,835, respectively, for the three years in the period ended December 31,
2002. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Second Holding Company, LLC, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Wellsford Real Properties, Inc. and
subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 17, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Second Holding Company, LLC:
We have audited the consolidated balance sheets of Second Holding Company, LLC
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income, members' equity and cash flows for each of the years in
the three-year period ended December 31, 2002 (not presented separately herein).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Second Holding
Company, LLC and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
February 21, 2003
F-3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2002 2001
---- ----
ASSETS
Real estate assets, at cost:
Land ............................................................. $ 20,437,840 $ 23,113,670
Buildings and improvements ....................................... 125,184,726 139,223,965
------------- -------------
145,622,566 162,337,635
Less:
Accumulated depreciation ...................................... (13,530,908) (9,873,232)
Impairment reserve ............................................ (2,174,853) (2,174,853)
------------- -------------
129,916,805 150,289,550
Residential units available for sale ............................. 14,541,634 5,400,951
Construction in progress ......................................... 5,410,831 5,399,631
------------- -------------
149,869,270 161,090,132
Notes receivable .................................................... 28,612,000 34,784,727
Investment in joint ventures ........................................ 94,180,991 95,806,509
------------- -------------
Total real estate and investments ................................... 272,662,261 291,681,368
Cash and cash equivalents ........................................... 38,644,315 36,148,529
Restricted cash and investments ..................................... 9,543,934 7,553,159
Prepaid and other assets ............................................ 11,924,533 10,455,101
------------- -------------
Total assets ........................................................ $ 332,775,043 $ 345,838,157
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................... $ 112,232,830 $ 121,730,604
Accrued expenses and other liabilities, including the liability
for deferred compensation of $8,933,607 and $6,604,106 ........ 15,536,789 17,532,211
------------- -------------
Total liabilities ................................................... 127,769,619 139,262,815
------------- -------------
Company-obligated, mandatorily redeemable, convertible preferred
securities of WRP Convertible Trust I, holding solely 8.25%
junior subordinated debentures of Wellsford Real Properties,
Inc. ("Convertible Trust Preferred Securities") ............... 25,000,000 25,000,000
Minority interest ................................................... 3,438,127 3,496,640
Commitments and contingencies
Shareholders' equity:
Series A 8% convertible redeemable preferred stock, $.01 par
value per share, 2,000,000 shares authorized, no shares
issued and outstanding ........................................ -- --
Common stock, 98,825,000 shares authorized, $.02 par value per
share - 6,280,683 and 6,235,338 shares issued and outstanding .... 125,614 124,707
Class A-1 common stock, 175,000 shares authorized, $.02 par value
per share - 169,903 shares issued and outstanding ................ 3,398 3,398
Paid in capital in excess of par value ........................... 162,801,498 162,083,959
Retained earnings ................................................ 20,617,085 23,989,504
Accumulated other comprehensive income (loss); share of unrealized
loss on interest rate protection contract purchased by joint
venture investment, net of income tax benefit ................. (253,500) (102,736)
Deferred compensation ............................................ (277,664) (1,520,996)
Treasury stock, 311,624 and 317,997 shares ....................... (6,449,134) (6,499,134)
------------- -------------
Total shareholders' equity .......................................... 176,567,297 178,078,702
------------- -------------
Total liabilities and shareholders' equity .......................... $ 332,775,043 $ 345,838,157
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---- ---- ----
REVENUES
Rental revenue .......................................... $ 16,311,929 $ 13,768,411 $ 18,681,250
Revenue from sales of residential units ................. 10,635,188 21,932,050 --
Interest revenue ........................................ 4,096,374 5,175,162 6,256,739
Fee revenue ............................................. 674,975 617,376 685,800
------------ ------------ ------------
Total revenues ....................................... 31,718,466 41,492,999 25,623,789
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales of residential units ...................... 9,543,905 19,363,647 --
Property operating and maintenance ...................... 5,453,647 3,791,740 4,351,150
Real estate taxes ....................................... 1,486,365 1,051,060 1,609,649
Depreciation and amortization ........................... 5,474,665 5,307,394 4,967,821
Property management ..................................... 469,133 557,255 798,761
Interest ................................................ 5,850,719 4,355,864 7,076,122
General and administrative .............................. 6,567,166 8,466,948 7,377,168
Restructuring charge .................................... -- 3,526,772 --
------------ ------------ ------------
Total costs and expenses ............................. 34,845,600 46,420,680 26,180,671
Gain on sale of assets, net of impairment provision of
$4,725,000 in 2000 ...................................... -- -- 6,134,851
(Loss) income from joint ventures .......................... (208,751) 4,564,406 3,246,758
------------ ------------ ------------
(Loss) income before minority interest, income taxes and
accrued distributions and amortization of costs on
Convertible Trust Preferred Securities .................. (3,335,885) (363,275) 8,824,727
Minority interest benefit (expense) ........................ 43,281 (282,526) (66,221)
------------ ------------ ------------
(Loss) income before income taxes and accrued distributions
and amortization of costs on Convertible Trust
Preferred Securities .................................... (3,292,604) (645,801) 8,758,506
Income tax (benefit) expense ............................... (1,300,000) 699,000 1,430,000
------------ ------------ ------------
(Loss) income before accrued distributions and
amortization of costs on Convertible Trust
Preferred Securities .................................... (1,992,604) (1,344,801) 7,328,506
Accrued distributions and amortization of costs on
Convertible Trust Preferred Securities, net of
income tax benefit of $720,000, $720,000 and $510,000 ... 1,379,815 1,379,815 860,461
------------ ------------ ------------
Net (loss) income .......................................... $ (3,372,419) $ (2,724,616) $ 6,468,045
============ ============ ============
Net (loss) income per common share, basic .................. $ (0.52) $ (0.38) $ 0.76
============ ============ ============
Net (loss) income per common share, diluted ................ $ (0.52) $ (0.38) $ 0.76
============ ============ ============
Weighted average number of common shares outstanding,
basic ................................................... 6,436,755 7,213,029 8,507,631
============ ============ ============
Weighted average number of common shares outstanding,
diluted ................................................. 6,436,755 7,213,029 8,516,321
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON SHARES*
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL** EARNINGS
------ ------ --------- --------
BALANCE, JANUARY 1, 2000 ............ 9,611,150 $ 192,223 $ 211,114,592 $ 20,246,075
Director and employee share grants .. 57,960 1,159 911,841 --
Amortization of deferred
compensation ..................... -- -- -- --
Shares repurchased and cancelled .... (1,318,732) (26,374) (21,137,207) --
Net income .......................... -- -- -- 6,468,045
--------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 .......... 8,350,378 167,008 190,889,226 26,714,120
Director and employee share grants .. 75,647 1,513 1,434,487 --
Amortization of deferred
compensation*** .................. -- -- -- --
Shares repurchased and cancelled .... (2,020,784) (40,416) (36,535,776) --
Registration costs .................. -- -- (123,112) --
Warrants repurchased and cancelled .. -- -- (80,000) --
Share of unrealized loss on interest
rate protection contract purchased
by joint venture investment, net
of income tax benefit of $68,491 . -- -- -- --
Net (loss) .......................... -- -- -- (2,724,616)
--------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 .......... 6,405,241 128,105 155,584,825 23,989,504
Director and employee share grants .. 4,760 95 91,905 --
Stock option exercises .............. 40,585 812 675,634 --
Amortization of deferred
compensation ..................... -- -- -- --
Share of unrealized loss on interest
rate protection contract purchased
by joint venture investment, net
of income tax benefit of $100,509 -- -- -- --
Net (loss) .......................... -- -- -- (3,372,419)
--------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 .......... 6,450,586 $ 129,012 $ 156,352,364 $ 20,617,085
========= ============= ============= =============
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE DEFERRED SHAREHOLDERS' COMPREHENSIVE
INCOME (LOSS) COMPENSATION EQUITY INCOME (LOSS)
------------- ------------ ------ -------------
BALANCE, JANUARY 1, 2000 ............ $ -- $ (1,861,677) $ 229,691,213
Director and employee share grants .. -- (833,000) 80,000 $ --
Amortization of deferred
compensation ..................... -- 906,672 906,672 --
Shares repurchased and cancelled .... -- -- (21,163,581) --
Net income .......................... -- -- 6,468,045 6,468,045
------------- -------- ------------- -------------
BALANCE, DECEMBER 31, 2000 .......... -- (1,788,005) 215,982,349 $ 6,468,045
=============
Director and employee share grants .. -- (1,356,000) 80,000 $ --
Amortization of deferred
compensation*** .................. -- 1,623,009 1,623,009 --
Shares repurchased and cancelled .... -- -- (36,576,192) --
Registration costs .................. -- -- (123,112) --
Warrants repurchased and cancelled .. -- -- (80,000) --
Share of unrealized loss on interest
rate protection contract purchased
by joint venture investment, net
of income tax benefit of $68,491 . (102,736) -- (102,736) (102,736)
Net (loss) .......................... -- -- (2,724,616) (2,724,616)
------------- -------- ------------- -------------
BALANCE, DECEMBER 31, 2001 .......... (102,736) (1,520,996) 178,078,702 $ (2,827,352)
=============
Director and employee share grants .. -- -- 92,000 $ --
Stock option exercises .............. -- -- 676,446 --
Amortization of deferred
compensation ..................... -- 1,243,332 1,243,332 --
Share of unrealized loss on interest
rate protection contract purchased
by joint venture investment, net
of income tax benefit of $100,509 (150,764) -- (150,764) (150,764)
Net (loss) .......................... -- -- (3,372,419) (3,372,419)
------------- --------- ------------- -------------
BALANCE, DECEMBER 31, 2002 .......... $ (253,500) $ (277,664) $ 176,567,297 $ (3,523,183)
============= ========== ============= =============
- ----------
* Includes 169,903 class A-1 common shares.
** Net of treasury stock.
*** Includes $45,000 charged to the restructuring charge related to early
retirement.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ......................................... $ (3,372,419) $ (2,724,616) $ 6,468,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 5,511,980 5,126,018 4,979,927
Amortization of deferred compensation ............... 1,243,332 1,578,009 906,672
Non-cash charges in restructuring charge ............ -- 61,081 --
Distributions received in excess of joint venture
income ........................................... 923,875 163,695 1,493,056
Minority interest (in excess of) less than amounts
distributed ...................................... (43,281) 282,526 66,221
Shares issued for director compensation ............. 92,000 80,000 80,000
Gain on sale of assets, net of impairment
provision of $4,725,000 in 2000 .................. -- -- (6,134,851)
Changes in assets and liabilities:
Restricted cash and investments .................. (1,990,775) 2,368,347 506,338
Residential units available for sale ............. 7,763,125 16,448,630 --
Prepaid and other assets ......................... (1,616,072) 855,258 (1,003,471)
Accrued expenses and other liabilities ........... (1,992,351) 2,362,890 2,661,548
------------ ------------ ------------
Net cash provided by operating activities ........... 6,519,414 26,601,838 10,023,485
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets ......................... (1,149,995) (40,046,696) (39,026,039)
Investments in joint ventures:
Capital contributions ................................ (209,800) (8,565,877) (12,895,201)
Returns of capital ................................... -- 31,616,900 2,886,017
Investments in notes receivable ........................... -- (500,000) (28,833,000)
Repayments of notes receivable ............................ 6,172,727 3,589,255 32,408,296
Proceeds from sale of joint venture investment ............ -- -- 1,032,000
Proceeds from sale of real estate assets .................. -- 18,553,458 21,650,257
------------ ------------ ------------
Net cash provided by (used in) investing activities .. 4,812,932 4,647,040 (22,777,670)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Convertible Trust Preferred Securities ........ -- -- 25,000,000
Deferred financing costs .................................. -- -- (544,360)
Borrowings from credit facility ........................... -- 12,000,000 12,000,000
Repayment of credit facility .............................. -- (24,000,000) --
Borrowings from mortgage notes payable .................... -- 36,747,451 32,000,000
Interest funded by construction loan ...................... 431,120 -- --
Interest reserve from mortgage note proceeds .............. -- -- (1,960,752)
Repayment of mortgage notes payable ....................... (9,928,894) (19,420,817) (30,939,713)
Proceeds from option exercises ............................ 676,446 -- --
Distributions to minority interest ........................ (15,232) (16,385) (8,569)
Costs incurred for reverse stock split .................... -- -- (44,364)
Costs to repurchase warrants .............................. -- (80,000) --
Registration costs ........................................ -- (123,112) --
Repurchase of common shares ............................... -- (36,576,192) (21,119,217)
------------ ------------ ------------
Net cash (used in) provided by financing
activities ....................................... (8,836,560) (31,469,055) 14,383,025
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ......... 2,495,786 (220,177) 1,628,840
Cash and cash equivalents, beginning of year ................. 36,148,529 36,368,706 34,739,866
------------ ------------ ------------
Cash and cash equivalents, end of year ....................... $ 38,644,315 $ 36,148,529 $ 36,368,706
============ ============ ============
F-7
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---- ---- ----
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest, including
amounts capitalized of $1,610,359 and
$2,347,000 in 2001 and 2000, respectively ........... $ 5,763,774 $ 5,849,094 $ 9,044,373
============ ============ ============
Cash paid during the year for income taxes, net
of (tax refunds) .................................... $ 107 $ 1,154,461 $ (107,095)
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note received upon sale of joint venture interest ......... $ 4,128,000
============
Mortgage note payable assumed upon sale of real estate
asset ............................................... $ 15,971,245
============
Other comprehensive loss; share of unrealized loss on
interest rate protection contract purchased by
joint venture investment, net of tax benefit ........ $ 150,764 $ 102,736
============ ============
Release of shares held in deferred compensation plan ...... $ 50,000
============
Net reclassification of 96 Silver Mesa units from land,
building and improvements and accumulated
depreciation to residential units available for sale $ 16,903,808
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Wellsford Real Properties, Inc. (and subsidiaries, collectively the
"Company") was formed as a Maryland corporation on January 8, 1997, as a
corporate subsidiary of Wellsford Residential Property Trust (the "Trust").
On May 30, 1997, the Trust merged (the "Merger") with Equity Residential
Properties Trust ("EQR"). Immediately prior to the Merger, the Trust
contributed certain of its assets to the Company and the Company assumed
certain liabilities of the Trust. Immediately after the contribution of
assets to the Company and immediately prior to the Merger, the Trust
distributed to its common shareholders all the outstanding shares of the
Company owned by the Trust (the "Spin-off"). On June 2, 1997, the Company
sold 6,000,000 shares of its common stock in a private placement (the
"Private Placement") to a group of institutional investors at $20.60 per
share, the Company's then book value per share.
The Company is a real estate merchant banking firm headquartered in New
York City which acquires, develops, finances and operates real properties
and organizes and invests in private and public real estate companies. The
Company has established three strategic business units ("SBUs") within
which it executes its business plan: (i) commercial property operations
which are held in the Company's subsidiary, Wellsford Commercial Properties
Trust, through its ownership interest in Wellsford/Whitehall Group, L.L.C.
("Wellsford/Whitehall"); (ii) debt and equity activities through the
Wellsford Capital SBU; and (iii) property development and land operations
through the Wellsford Development SBU.
In December 2000, the Company and various entities affiliated with the
Whitehall Funds ("Whitehall"), private real estate funds sponsored by The
Goldman Sachs Group, Inc. ("Goldman Sachs"), executed definitive agreements
modifying the terms of the Wellsford/Whitehall joint venture effective
January 1, 2001 (the "Amendments"). The key features of the Amendments
provide for the Company to retain its economic interest in
Wellsford/Whitehall, while an affiliate of Whitehall will become
responsible for day-to-day operations. The Company will maintain its
current membership on Wellsford/Whitehall's management committee and must
agree to specified "Major Decisions." Also, as part of the Amendments,
warrants to purchase 2,128,099 of the Company's stock, which had previously
been issued to Whitehall, were returned and cancelled. Whitehall has also
agreed to pay the Company certain specified fees when Wellsford/Whitehall
assets are sold as well as when certain new assets are acquired by
Whitehall affiliates in a newly formed entity.
See Note 12 for additional information regarding the Company's industry
segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The
accompanying consolidated financial statements include the accounts of the
Company and its majority-owned and controlled subsidiaries. Investments in
entities where the Company does not have a controlling interest are
accounted for under the equity method of accounting. These investments are
initially recorded at cost and are subsequently adjusted for the Company's
proportionate share of the investment's income (loss), additional
contributions or distributions. Investments in entities where the Company
does not have the ability to exercise significant influence are accounted
for under the cost method. All significant inter-company accounts and
transactions among the Company and its subsidiaries have been eliminated in
consolidation.
The accompanying consolidated financial statements include the assets and
liabilities contributed to and assumed by the Company from the Trust, from
the time such assets and liabilities were acquired or incurred,
respectively, by the Trust. Such financial statements have been prepared
using the historical basis of the assets and liabilities and the historical
results of operations related to the Company's assets and liabilities.
F-9
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS. The Company considers all demand and money
market accounts and short term investments in government funds with an
original maturity of three months or less at the date of purchase to be
cash and cash equivalents.
REAL ESTATE, OTHER INVESTMENTS, DEPRECIATION, AMORTIZATION AND IMPAIRMENT.
Costs directly related to the acquisition, development and improvement of
real estate are capitalized, including interest and other costs incurred
during the construction period. Costs incurred for significant repairs and
maintenance that extend the usable life of the asset or have a determinable
useful life are capitalized. Ordinary repairs and maintenance are expensed
as incurred. The Company expenses all lease turnover costs for its
residential units, such as painting, cleaning, carpet replacement and other
turnover costs, as such costs are incurred.
Tenant improvements and leasing commissions related to commercial
properties are capitalized and amortized over the terms of the related
leases. Costs incurred to acquire investments in joint ventures are
capitalized and amortized over the expected life of the related investment.
Additional amortization is charged as specified assets are sold in cases
where the joint venture would cease to exist when all assets are sold or
otherwise disposed of or where impairment provisions are recorded at the
joint venture. Depreciation is computed over the expected useful lives of
depreciable property on a straight-line basis, principally 27.5 years for
residential buildings and improvements, 40 years for commercial properties
and two to twelve years for furnishings and equipment.
Depreciation and amortization expense was approximately $5,475,000,
$5,307,000 and $4,968,000 in 2002, 2001 and 2000, respectively, and
included approximately $758,000, $1,950,000 and $664,000 of amortization in
2002, 2001 and 2000, respectively, of certain costs capitalized to the
Company's Investment in Joint Ventures.
The Company reviews its real estate assets, investments in joint ventures
and other investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. During the fourth quarter of 2000, the Company made the
strategic decision to sell the seven assets in the Wellsford Capital SBU
which were originally acquired as part of the 1998 merger with Value
Property Trust ("VLP"). The Company sold one property in December 2000 and
four other properties during 2001 for aggregate sales of approximately
$34,217,000. The Company determined that the aggregate carrying amount of
certain of the assets was less than the amounts expected to be ultimately
realized upon sale, less selling expenses. Accordingly, the Company
recorded an impairment provision in the fourth quarter of 2000 of
$4,725,000 which is reflected in the accompanying consolidated statements
of operations as an offset to the gain on the property sold in December
2000 of approximately $4,943,000. The net book value after a remaining
impairment reserve of $2,175,000 for the two unsold properties was
approximately $6,027,000 and $5,560,000 at December 31, 2002 and 2001,
respectively. The Company determined that no additional impairment
provision is required at December 31, 2002 and 2001.
F-10
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the year ended December 31, 1999, the Company determined that one of
its joint venture investments, Creamer Vitale Wellsford, L.L.C. ("CVW") was
impaired due to lower than expected operating results and accordingly wrote
the asset down by approximately $912,000 to its then estimated fair value
by recording additional depreciation and amortization expense in the
accompanying consolidated financial statements. Fair value was based on
estimated future cash flows to be generated by the long-lived asset,
discounted at a market rate. In September 2000, the Company recorded
additional depreciation and amortization expense of $145,000 as one of the
two principals left CVW to pursue other employment and the venture was
terminated.
In August 2001, Statement of Financial Accounting Standard ("SFAS") No. 144
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" was
issued. SFAS No. 144 supersedes SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." The
provisions of SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 by the Company on January 1, 2002, did not have a material effect
on its results of operations or financial position. Adoption of the
standard requires a change in display of operating results as the
operations of properties which are classified as held for sale or are sold
subsequent to January 1, 2002 will be included as discontinued operations.
Even though the Company is pursuing a sale of the remaining two operating
properties in the Wellsford Capital SBU (five of the seven properties have
been sold during 2000 and 2001), the Company could not definitively
determine that the assets would likely be sold within the one year time
frame as required by SFAS No. 144. The operations of these two properties
have not been classified as discontinued operations but treated as held for
use and accordingly the Company recorded depreciation expense for the years
ended December 31, 2002 and 2000. No depreciation was recorded in 2001 for
these two properties.
REAL ESTATE - RESIDENTIAL UNITS AVAILABLE FOR SALE. The Company's
residential units available for sale are recorded at the lower of
historical cost or market value based upon current conditions. As units are
sold, the cost of each unit is charged to cost of sales based upon its
relative sales value. Sales price concessions are recognized as a reduction
in sales revenues as individual sales are completed. Advertising costs are
expensed as incurred.
DEFERRED FINANCING COSTS. Deferred financing costs consist of costs
incurred to obtain financing or financing commitments, including the
issuance of the Convertible Trust Preferred Securities. Such costs are
amortized over the expected term of the respective agreements.
MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired
if, based on current information and events, it is probable that all
amounts due, including future interest, payable under the note agreement
are not collectable. Impairment is measured based upon the fair value of
the underlying collateral. No impairment has been recorded during the years
ended December 31, 2002, 2001 and 2000.
REVENUE RECOGNITION. Commercial properties are leased under operating
leases. Rental revenue from office and industrial properties is recognized
on a straight-line basis over the terms of the respective leases.
Residential communities are leased under operating leases with terms of
generally six to fourteen months and such rental revenue is recognized
monthly as tenants are billed. Interest revenue is recorded on an accrual
basis over the life of the loan. Sales of real estate assets are recognized
at closing, subject to receipt of down payments and other requirements in
accordance with applicable accounting guidelines.
F-11
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE BASED COMPENSATION. SFAS No. 123 "ACCOUNTING FOR STOCK-BASED
COMPENSATION" establishes a fair value based method of accounting for share
based compensation plans, including share options. However, registrants may
elect to continue accounting for share option plans under Accounting
Principles Board Opinion ("APB") No. 25, but are required to provide pro
forma net income and earnings per share information "as if" the new fair
value approach had been adopted. Because the Company has elected to
continue to account for its share based compensation plans under APB No.
25, there has been no impact on the Company's consolidated financial
statements resulting from SFAS No. 123.
Shares issued pursuant to the Company's deferred compensation plan are
recorded at the market price on the date of issuance and amortized over the
respective vesting periods.
INCOME TAXES. The Company accounts for income taxes under SFAS No. 109
"ACCOUNTING FOR INCOME TAXES." Deferred income tax assets and liabilities
are determined based upon differences between financial reporting and tax
basis of assets and liabilities and are measured using the enacted tax
rates and laws that are estimated to be in effect when the differences are
expected to reverse. Valuation allowances with respect to deferred income
tax assets are recorded when deemed appropriate and adjusted based upon
periodic evaluations.
DERIVATIVE AND HEDGING ACTIVITIES. In June 1998, SFAS No. 133 "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" was issued. The Company
and its joint venture investments have adopted SFAS No. 133 effective
January 1, 2001. SFAS No. 133 requires the Company and its joint venture
investments to recognize all derivatives on the balance sheet at fair
value. The Company's derivative investments are currently made by its joint
venture investments and are primarily interest rate hedges where changes in
the fair value of the derivative are offset against the changes in the fair
value of the hedged debt or a cash flow hedge which limits the base rate of
variable rate debt. For a cash flow hedge, the ineffective portion of a
derivative's change in fair value is immediately recognized in earnings, if
applicable and the effective portion of the fair value difference of the
derivative is reflected separately in shareholders' equity as accumulated
other comprehensive income (loss), net of income tax benefit (cost).
PER SHARE DATA. Basic earnings per common share are computed based upon the
weighted average number of common shares outstanding during the period,
including class A-1 common shares. Diluted earnings per common share are
based upon the increased number of common shares that would be outstanding
assuming the exercise of dilutive common share options, warrants and
Convertible Trust Preferred Securities.
F-12
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table details the computation of earnings per share, basic
and diluted:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Numerator for net (loss) income per common share, basic and
diluted ................................................ $(3,372,419) $(2,724,616) $ 6,468,045
=========== =========== ===========
Denominator:
Denominator for net income per common share, basic--
Weighted average common shares .................... 6,436,755 7,213,029 8,507,631
Effect of dilutive securities:
Employee stock options ............................ -- -- 8,690
Convertible Trust Preferred Securities ............ -- -- --
Warrants .......................................... -- -- --
----------- ----------- -----------
Denominator for net income per common share, diluted--
Weighted average common shares .................... 6,436,755 7,213,029 8,516,321
=========== =========== ===========
Net (loss) income per common share, basic ................. $ (0.52) $ (0.38) $ 0.76
=========== =========== ===========
Net (loss) income per common share, diluted ............... $ (0.52) $ (0.38) $ 0.76
=========== =========== ===========
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
materially from those estimates.
RECENTLY ISSUED PRONOUNCEMENTS NOT YET ADOPTED. In January 2003, the
Financial Accounting Standards Board issued Interpretation No. 46
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46"). The provisions of
FIN 46 are effective immediately for variable interest entities formed or
acquired after January 31, 2002 and in the fiscal year beginning after June
15, 2003 for variable interest entities in which the Company holds such an
interest before February 1, 2003. The Company does not anticipate that the
adoption of FIN 46 will result in a change in its accounting for its
interests in currently existing variable interest entities.
In December 2002, SFAS No. 148 "ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION AND DISCLOSURE," was issued as an amendment to
SFAS No. 123. The provisions of SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
not yet determined which alternative method of transition will be used to
account for stock-based compensation on a fair value basis in the future.
RECLASSIFICATION. Amounts in certain accounts have been reclassified to
conform to the current year presentation. Fees of $600,000 received from
Wellsford/Whitehall in 2000 have been reflected as revenues compared to the
previous treatment as an offset to general and administrative expenses in
the accompanying Consolidated Statements of Operations.
F-13
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments primarily consists of deferred compensation
arrangement deposits and debt service and construction reserve balances. At
December 31, 2002 and 2001, deferred compensation arrangement deposits
amounted to approximately $8,934,000 and $6,604,000, respectively, and
reserve balances amounted to approximately $610,000 and $949,000,
respectively. Deferred compensation arrangement deposits, are made in cash,
but can be directed to be used to purchase other investments including
equity securities, bonds and partnership interests.
4. NOTES RECEIVABLE
At December 31, 2002 and 2001, notes receivable consisted of the following:
INTEREST BALANCE AT DECEMBER 31,
STATED RATE IN PAYMENT -----------------------
NOTES RECEIVABLE (A) INTEREST RATE EFFECT (B) MATURITY DATE TERMS 2002 2001
- -------------------- ------------- ---------- ------------- ----- ---- ----
277 Park Loan ...... 12.00% 12.00% May 2007 Interest only $25,000,000 $25,000,000
Patriot Loan ....... LIBOR + 4.75% --% (C) (C) -- 4,972,727
Guggenheim ......... 8.25% 8.25% December 2005 (D) 3,612,000 3,612,000
Other .............. Various --% Various Various (E) -- 1,200,000
----------- -----------
$28,612,000 $34,784,727
=========== ===========
- ----------
(A) For additional information regarding notes receivable, see Footnote 12,
"Segment Information, Debt and Equity Investments."
(B) At December 31, 2002 based upon then in effect fixed rates and LIBOR
contracts.
(C) The Patriot Loan was repaid in full in May 2002. Principal amortization
commenced August 2001 based on a 25-year amortization schedule. Prior to
August 2001, payments were interest only.
(D) Provides for annual principal paydowns and interest from the sale of equity
interests in The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire").
On January 2, 2003, the Company received a principal payment of $516,000
relating to 2002.
(E) In January 2002, the $1,200,000 balance was repaid in full.
5. DEBT
At December 31, 2002 and 2001, the Company's debt consisted of the
following:
BALANCE AT DECEMBER 31,
INITIAL STATED INTEREST -----------------------
DEBT/PROJECT MATURITY DATE RATE 2002 2001
------------ ------------- ---- ---- ----
Mortgage notes payable:
Palomino Park Bonds (A) .......... May 2005 Variable (B) $ 12,680,000 $ 12,680,000
Blue Ridge Mortgage .............. December 2007 6.92% (C) 32,447,478 32,916,492
Red Canyon Mortgage .............. December 2008 6.68% (C) 25,676,576 26,034,695
Silver Mesa Conversion Loan ...... December 2003 LIBOR + 2.00% (D) 4,317,501 13,351,966
Green River Construction Loan .... January 2003 LIBOR + 1.75% (E) 37,111,275 36,747,451
------------ ------------
Total mortgage notes payable ........ $112,232,830 $121,730,604
============ ============
Carrying amount of real estate assets
collateralizing mortgage notes
payable .......................... $143,842,011 $155,530,004
============ ============
- ----------
(A) Tax-exempt bonds are secured by liens on four of the five phases of
Palomino Park.
(B) Rate approximates the Standard & Poor's / J.J. Kenney index for short-term
high grade tax-exempt bonds (average annual rates were approximately 1.68%
and 2.72% for 2002 and 2001, respectively).
(C) Principal payments are made based on a 30-year amortization schedule.
(D) Effective interest rates were approximately 3.38% and 4.14% at December 31,
2002 and 2001, respectively. Principal payments are based on approximately
90% of net sales proceeds from condominium sales. The Silver Mesa
Converstion Loan is extendable for six months for a 0.25% extension fee.
(E) Effective interest rates were approximately 3.17% and 3.76% at December 31,
2002 and 2001, respectively. The Green River Construction Loan was repaid
on February 6, 2003.
F-14
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DEBT (CONTINUED)
On February 6, 2003, the Company obtained a $40,000,000 permanent loan
secured by a first mortgage on Green River (the "Green River Mortgage").
The Green River Mortgage matures in March 2013 and bears interest at a
fixed rate of 5.45% per annum. Principal payments are based on a 30-year
amortization schedule. Proceeds were used to repay the Green River
Construction Loan and excess proceeds are generally available for working
capital purposes.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt
bonds to fund construction at Palomino Park (the "Palomino Park Bonds").
Initially, all five phases of Palomino Park were collateral for the
Palomino Park Bonds. In June 2000, the Company obtained a five-year AA
rated letter of credit from Commerzbank AG to secure the Palomino Park
Bonds. This letter of credit replaced an expiring letter of credit. The
Company will incur an annual fee of approximately $142,000 related to this
enhancement and paid an origination fee of approximately $158,000 upon
closing. The letter of credit agreement, which expires in 2005, provides
for the Company to meet certain financial operating and balance sheet
covenants, which were met at December 31, 2002. The agreement requires the
Company to maintain minimum shareholders' equity of $180,000,000, as
defined. During October 2001, the Company and Commerzbank AG amended the
letter of credit agreement to include the $25,000,000 of Convertible Trust
Preferred Securities in shareholders' equity in the determination of the
minimum shareholders' equity covenant. A subsidiary of EQR has guaranteed
Commerzbank AG's letter of credit; such guarantee also expires in 2005. The
Company incurred aggregate fees of $231,000, $230,000 and $395,000 for the
years ended December 31, 2002, 2001 and 2000, respectively, related to all
of the credit enhancements for the Palomino Park Bonds.
In November 2000, in conjunction with the conversion of the Silver Mesa
phase to a condominium project, the Company made a repayment of $2,075,000
of bond principal and this phase was released from the collateral.
The Company had a $20,000,000 loan facility from a predecessor of Fleet
National Bank which was secured by a $25,000,000 note receivable, bore
interest at LIBOR + 2.75% per annum and expired in January 2002 (the
"Wellsford Finance Facility"). Interest expense, including unused facility
fees was approximately $7,000, $300,000 and $93,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. There was no outstanding
balance on the Wellsford Finance Facility at December 31, 2001. In the
future, the Company may seek to obtain a new facility based upon future
liquidity requirements.
F-15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DEBT (CONTINUED)
The Company's long-term mandatory maturities of debt for the next five
years and thereafter are as follows:
SILVER MESA PALOMINO
FOR THE YEARS ENDED CONVERSION PARK
DECEMBER 31, MORTGAGES (A) LOAN (B) BONDS TOTAL
------------ ------------- -------- ----- -----
2003................... $ 1,260,000 $4,318,000 $ -- $ 5,578,000
2004................... 1,476,000 -- -- 1,476,000
2005................... 1,578,000 -- 12,680,000 14,258,000
2006................... 1,681,000 -- -- 1,681,000
2007................... 31,341,000 -- -- 31,341,000
Thereafter............. 60,788,000 -- -- 60,788,000
- ----------
(A) On February 6, 2003, the Company repaid the Green River Construction Loan
with proceeds from the Green River Mortgage. Amortization requirements of
the Green River Mortgage is included for each period presented in the
amounts shown in the table.
(B) Approximately 90% of net sales proceeds per unit goes toward principal
repayments. The Silver Mesa Conversion Loan is extendable for six months
though June 2004.
The Company capitalizes interest related to buildings and condominiums
under construction and renovation to the extent such assets qualify for
capitalization. Total interest capitalized on consolidated assets during
the years ended December 31, 2001 and 2000 was approximately $1,610,000 and
$2,347,000, respectively. No interest was capitalized during the year ended
December 31, 2002.
6. CONVERTIBLE TRUST PREFERRED SECURITIES
In May 2000, the Company privately placed with a subsidiary of EQR
1,000,000 8.25% Convertible Trust Preferred Securities, representing
beneficial interests in the assets of WRP Convertible Trust I, a Delaware
statutory business trust which is a consolidated subsidiary of the Company
("WRP Trust I"), with an aggregate liquidation amount of $25,000,000 (the
"Convertible Trust Preferred Securities"). WRP Trust I also issued 31,000
8.25% Convertible Trust Common Securities to the Company, representing
beneficial interests in the assets of WRP Trust I, with an aggregate
liquidation amount of $775,000. The proceeds from both transactions were
used by WRP Trust I to purchase $25,775,000 of the Company's 8.25%
Convertible Junior Subordinated Debentures, which mature on May 4, 2022.
The transactions between WRP Trust I and the Company are eliminated in the
consolidated financial statements of the Company. The Company incurred
approximately $450,000 of costs in connection with the issuance of the
securities which are being amortized through May 2012.
The Convertible Trust Preferred Securities are convertible into 1,123,696
common shares at $22.248 per share and are redeemable in whole or in part
by the Company on or after May 30, 2002. EQR can require redemption on or
after May 30, 2012 unless the Company exercises one of its two five-year
extensions (subject to an interest adjustment to the then prevailing market
rates if higher than 8.25% per annum). The redemption rights are subject to
certain other terms and conditions contained in the related agreements.
F-16
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. INCOME TAXES
The components of the income tax (benefit) provision are as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----
Current federal tax (A) .... $ (375,000) $ (633,000) $ 3,005,000
Current state and local tax 300,000 (171,000) 905,000
Deferred federal tax ....... (850,000) 1,353,000 (1,820,000)
Deferred state and local tax (375,000) 150,000 (660,000)
----------- ----------- -----------
$(1,300,000) $ 699,000 $ 1,430,000
=========== =========== ===========
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax (benefit) at U.S. statutory
rate (A) .......................... $(1,152,000) (35.00%) $ (226,000) (35.00%) $ 3,065,000 35.00%
State taxes, net of federal benefit .. 195,000 5.93% 150,000 23.23% 335,000 3.82%
State and local tax operating loss
carryforwards, net of federal
taxes ............................. -- -- (171,000) (26.47%) (175,000) (1.99%)
Change in valuation allowance, net ... (313,000) (9.51%) 806,000 124.81% (1,742,000) (19.89%)
Non-deductible/non-taxable items,
net ............................... (63,000) (1.90%) 131,000 20.28% 35,000 0.39%
Effect of difference in tax rate ..... 33,000 1.00% 9,000 1.39% (88,000) (1.00%)
----------- ------ ----------- ------ ----------- -----
$(1,300,000) (39.48%) $ 699,000 108.24% $ 1,430,000 16.33%
=========== ====== =========== ====== =========== =====
- ----------
(A) The aforementioned income tax expense (benefit) for 2002, 2001 and 2000 is
prior to the tax benefit aggregating $720,000, $720,000 and $510,000,
respectively, attributable to the Convertible Trust Preferred Securities
distributions and amortization.
The Company has net operating loss ("NOL") carryforwards, for Federal
income tax purposes, resulting from the Company's merger with VLP in 1998.
The NOLs aggregate $61,856,000 at December 31, 2002, expire in the years
2007 through 2012 and are subject to an annual and aggregate limit on
utilization of NOLs after an ownership change, pursuant to Section 382 of
the Internal Revenue Code. Any annual amounts not used in one year may be
carried forward to subsequent years. Approximately $15,700,000 could be
utilized in 2003 to offset Federal taxable income.
F-17
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
-----------------------
2002 2001
---- ----
DEFERRED TAX ASSETS
-------------------
Net operating loss ............................... $ 21,031,195 $ 22,000,950
Deferred compensation and severance arrangements . 5,329,393 5,176,437
Wellsford/Whitehall asset basis differences ...... 1,044,469 --
Value Property Trust asset basis differences ..... 1,279,590 1,235,355
AMT credit carryforwards ......................... 547,564 --
Other ............................................ 421,374 437,121
------------ ------------
29,653,585 28,849,863
Valuation allowance .............................. (18,996,470) (18,764,516)
------------ ------------
Total deferred tax assets ........................ 10,657,115 10,085,347
------------ ------------
DEFERRED TAX LIABILITIES
------------------------
Palomino Park asset basis differences ............ (3,019,961) (2,402,269)
Wellsford/Whitehall asset basis differences ...... -- (1,525,303)
Deferred gain on sale of Liberty Hampshire ....... (1,303,194) (1,040,342)
Other ............................................ (25,543) (36,211)
------------ ------------
Total deferred tax liabilities ................... (4,348,698) (5,004,125)
------------ ------------
Net deferred tax asset ........................... $ 6,308,417 $ 5,081,222
============ ============
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Accordingly, management has determined that a $18,996,470 and $18,764,516
valuation allowance at December 31, 2002 and 2001, respectively, is
necessary. The valuation allowance relates to the NOL carryforwards,
certain deferred compensation and severance arrangements and alternative
minimum tax credit carryforwards. The Company's net deferred tax asset is
included in prepaid and other assets in the accompanying consolidated
balance sheets.
F-18
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. TRANSACTIONS WITH AFFILIATES
The following table details revenues and costs for transactions with
affiliates for the years ended December 31, 2002, 2001 and 2000:
(amounts in thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Revenues
Wellsford/Whitehall:
Interest revenue ........................ $ -- $ -- $ 703
Management fee revenue .................. -- -- 600
WP Commercial:
Asset acquisition fee revenue ........... 22 23 86
Asset disposition fee revenue ........... 7 365 --
Second Holding fees, net of fees paid to
Reis of $120, $180 and $180, respectively 646 217 (182)
------- ------- -------
$ 675 $ 605 $ 1,207
======= ======= =======
Costs (A)
Whitehall affiliates:
Management fees for VLP properties (B) .. $ 20 $ 142 $ 242
EQR:
Credit enhancement ...................... 81 81 92
------- ------- -------
$ 101 $ 223 $ 334
======= ======= =======
- ----------
(A) The term cost is used as certain items are expensed directly to operations
such as the management fees and portions of the other items may be
capitalized into the basis of development projects.
(B) This arrangement was terminated during the second quarter of 2002.
The Company has an approximate 51.1% non-controlling interest in a joint
venture special purpose finance company, Second Holding Company, LLC, which
was organized to purchase investment and non-investment grade rated real
estate debt instruments and investment grade rated other asset-backed
securities ("Second Holding"). An affiliate of a significant shareholder of
the Company (the Caroline Hunt Trust Estate, which owns 405,500 shares of
common stock of the Company at December 31, 2002 ("Hunt Trust")) who,
together with other entities, own an approximate 39% interest in Second
Holding.
The Company has direct and indirect investments in a real estate
information and database company, Reis, Inc. ("Reis"), a leading provider
of real estate market information to institutional investors. At December
31, 2002 and 2001, the Company's aggregate investment in Reis, which is
accounted for under the cost method, was approximately $6,792,000 and
$6,583,000, respectively, or approximately 21.4% of Reis' equity on an as
converted basis. The president and primary common shareholder of Reis is
the brother of Mr. Lynford, the Chairman, President and Chief Executive
Officer of the Company. Mr. Lowenthal, the Company's former President and
Chief Executive Officer, who currently serves on the Company's Board of
Directors, has served on the board of directors of Reis since the third
quarter of 2000. Messrs. Lynford, Lowenthal and certain directors of the
Company whom have invested directly in Reis, have and will continue to
recuse themselves from any investment decisions made by the Company
pertaining to Reis.
A portion of the Reis investment is held directly by the Company and the
remainder is held by Reis Capital Holdings, LLC ("Reis Capital"), a company
which was organized to hold this investment. The Hunt Trust who, together
with other entities, own an approximate 39% interest in Reis Capital.
F-19
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TRANSACTIONS WITH AFFILIATES (CONTINUED)
Messrs. Lynford and Lowenthal have been members of the EQR board of
directors from the date of the Merger through their expected retirements
from the EQR board in May 2003. In addition, the former president and
current vice-chairman of EQR is a member of the Company's Board of
Directors. EQR has a 14.15% interest in the Company's residential project
in Denver, Colorado at December 31, 2002 and 2001, respectively and
provides credit enhancement for the Palomino Park Bonds. A subsidiary of
EQR is the holder of the Convertible Trust Preferred Securities and the
class A-1 common stock of the Company.
See Note 12 for additional related party information.
9. SHAREHOLDERS' EQUITY
On June 9, 2000, shareholders of the Company approved a reverse stock split
whereby every two outstanding shares of common stock and class A-1 common
stock were converted into one share of outstanding common stock and class
A-1 common stock. The par value of both classes of stock increased from
$0.01 per share to $0.02 per share and the number of authorized shares was
halved from 197,650,000 to 98,825,000 for common shares and from 350,000 to
175,000 for class A-1 common shares. The reverse split was effective for
trading beginning June 12, 2000. Resulting fractional shares were redeemed
for cash.
All share and per share amounts in the financial statements and the notes
thereto have been adjusted for the impact of the split, for all periods
presented.
The Company may repurchase shares from time to time by means of open market
purchases depending on availability of shares, the Company's cash position,
the price per share and other corporate matters including, but not limited
to, a minimum shareholder's equity covenant as required by Commerzbank AG's
letter of credit agreement. No minimum number or value of shares to be
repurchased has been fixed.
F-20
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the stock repurchase activity by the Company
and approvals thereof by the Company's Board of Directors during the years
ended December 31, 2001, 2000 and 1999; there was no activity during 2002:
PURCHASE AGGREGATE
REPURCHASES ACTUAL NUMBER OF PRICE PER PURCHASE
PURCHASED FROM APPROVED REPURCHASES TRANSACTIONS SHARE PRICE(A)
-------------- -------- ----------- ------------ ----- --------
2001
June .......... Institutional shareholder 2,020,784 2,020,784 1 $ 18.10 $ 36,576,000
--------- --------- ------------
2000
January ....... Open market -- 2,079 Various 17.74 37,000
February ...... Institutional shareholder 1,286,816 1,286,816 1 16.00 20,589,000
April ......... 1,000,000 -- -- -- --
Various ....... Open market purchases -- 29,837 Various 16.28 486,000
--------- --------- ------------
2,286,816 1,318,732 16.01 21,112,000
--------- --------- ------------
1999
November ...... 1,000,000 -- -- -- --
November/ Open market/
December .... Odd-lot holders(B) -- 738,247 Various 16.44 12,134,000
--------- --------- ------------
1,000,000 738,247 12,134,000
--------- --------- ------------
TOTAL ....................................... 5,307,600 4,077,763 $ 17.12 $ 69,822,000
========= ========= ======== ============
- ----------
(A) Excluding expenses.
(B) The odd-lot share program approved in 1999 offered identified eligible
shareholders owning fewer than 50 shares the opportunity to sell all of
their shares back to the Company.
The Company has issued shares to executive officers and other employees through
periodic annual bonus and/or deferred compensation awards, as well as certain
shares issued at the date of the Merger, pursuant to the Company's non-qualified
deferred compensation plan. At December 31, 2002, an aggregate of 311,624 shares
(which had an aggregate market value of approximately $4,911,000 based on the
Company's December 31, 2002 closing stock price of $15.76 per share), have been
classified as Treasury Stock in the Company's consolidated financial statements.
Such shares are generally held in a Rabbi Trust and are accounted for pursuant
to existing accounting literature. The bonus awards vest immediately and the
deferred compensation awards vest over various periods ranging from two to five
years or sooner based upon certain change in control provisions, as long as the
officer or employee is still employed by the Company. A summary of activity for
the three years ended December 31, 2002 follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001 2000
--------------------- ----------------------- ----------------------
NUMBER VALUE AT NUMBER VALUE AT NUMBER VALUE AT
OF DATE OF OF DATE OF OF DATE OF
SHARES ISSUANCE SHARES ISSUANCE SHARES ISSUANCE
------ -------- ------ -------- ------ --------
Shares issued pursuant to plan,
January 1 ................. 317,997 257,935 208,380
Shares issued as deferred
compensation awards ....... -- 71,087 $19.08 53,305 $ 15.69
Shares released under terms of
agreements ................ (6,373) $ 15.69 (11,025) $20.00/$15.69 (3,750) $ 20.00
------- ------- -------
Balance at December 31 ........ 311,624 317,997 257,935
======= ======= =======
Shares vested at December 31 .. 270,226 231,297 155,084
======= ======= =======
F-21
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SHAREHOLDERS' EQUITY (CONTINUED)
All remaining shares will vest during the year ended December 31, 2003.
During the years ended December 31, 2002, 2001 and 2000, the Company
recorded costs approximating $1,243,000, $1,578,000 and $907,000,
respectively, pursuant to the issuances under the deferred compensation
arrangements. Such amounts are included in General and Administrative
expenses in the Company's consolidated financial statements.
The Company issued an aggregate of 4,760 and 4,560 common shares during
2002 and 2001, as part of the non-cash compensation arrangements to the
non-employee members of the Company's Board of Directors, which were valued
in the aggregate at $92,000 and $80,000 during 2002 and 2001, respectively.
In prior years, the Company had issued a total of 2,202,099 warrants
(including 61,984 issued during 1999), to purchase shares of common stock
to certain joint venture partners, including 2,128,099 to Whitehall and
74,000 to its partners in CVW. Pursuant to the December 2000 Amendments,
the Whitehall Warrants were returned and cancelled. The warrants issued to
the CVW partners were repurchased in July 2001 for $80,000 and cancelled.
In May 2000, the Company exchanged the 169,903 shares of class A common
stock held by EQR for a like number of shares of the Company's class A-1
common stock. The class A-1 common stock's par value is $0.02 per share and
has rights substantially similar to the class A common stock.
The Company's retained earnings included approximately $2,192,000 of
undistributed retained earnings at December 31, 2002 from Second Holding as
distributions are limited to 48.25% of earnings.
The Company did not declare or distribute any dividends during 2002, 2001
or 2000.
10. SHARE OPTION PLANS
The Company has adopted certain incentive plans (the "Incentive Plans") for
the purpose of attracting and retaining the Company's directors, officers
and employees under which it has reserved 2,538,118 common shares for
issuance. Options granted under the Incentive Plans expire ten years from
the date of grant, vest over periods ranging generally from immediate
vesting to up to five years, and generally contain the right to receive
reload options under certain conditions.
F-22
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SHARE OPTION PLANS (CONTINUED)
The following table presents the changes in options outstanding by year, as
well as other plan data:
2002 2001 2000
------------------------- ------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at January 1 ............. 1,140,624 $ 21.52 1,761,655 $ 24.20 1,794,680 $ 24.16
Granted .............................. 15,000 15.80 12,500 19.25 19,250 16.15
Exercised ............................ (40,585) (16.67) -- -- -- --
Forfeited/cancelled (A) .............. (342,853) (25.06) (633,531) (28.92) (52,275) (21.00)
Expired .............................. -- -- -- -- -- --
---------- ---------- ----------
Outstanding at December 31 ........... 772,186 20.09 1,140,624 21.52 1,761,655 24.20
========== ========== ==========
Options exercisable at December 31 .. 739,236 $ 20.21 922,261 $ 21.48 1,234,096 $ 23.51
========== ========= ========== ========= ========== =========
Weighted average fair value of options
granted (per option) ............ $ 7.92 $ 10.72 $ 9.57
========== ========== ==========
Weighted average remaining
contractual life at December 31 .. 4.3 years 6.0 years 6.9 years
- ----------
(A) Amounts primarily include 284,551 options during 2002 and 284,551 options
during 2001 which were repurchased and cancelled in connection with Mr.
Lowenthal's separation arrangements from the Company and 290,000 options
cancelled during 2001 pursuant to Mr. Lynford's amended employment
agreement.
The following table presents additional option details at December 31,
2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------
WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
------ ----------- ------------ ----- ------- -----
$13.34 to $16.13 40,733 7.4 $ 15.53 38,733 $ 15.49
$16.30 44,625 5.6 16.30 31,075 16.30
$17.82 28,000 5.3 17.82 23,000 17.82
$18.38 to $19.25 38,000 7.5 18.67 27,800 18.78
$19.75 to $20.25 55,500 4.2 20.13 53,300 20.13
$20.60 547,828 3.7 20.60 547,828 20.60
$29.75 to $31.50 17,500 4.2 31.00 17,500 31.00
------- -------
772,186 4.3 20.09 739,236 20.21
======= =======
F-23
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SHARE OPTION PLANS (CONTINUED)
Pursuant to SFAS No. 123, described in Note 2, the pro forma net (loss)
income available to common shareholders as if the fair value approach to
accounting for share-based compensation had been applied (as well as the
assumptions to calculate fair value using the Black-Scholes option pricing
model) is as follows:
(amounts in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
---- ---- ----
Net (loss) income - as reported ...................... $(3,372) $(2,725) $ 6,468
Expense .............................................. 717 1,677 2,045
------- ------- -------
Net (loss) income - pro forma ........................ $(4,089) $(4,402) $ 4,423
======= ======= =======
Net (loss) income per common share, basic and diluted:
As reported ...................................... $ (0.52) $ (0.38) $ 0.76
======= ======= =======
Pro forma ........................................ $ (0.64) $ (0.61) $ 0.52
======= ======= =======
Assumptions:
Expected volatility ranges ....................... 32% 34% 37% to 38%
Expected life .................................... 10 years 10 years 10 years
Risk-free interest rate ranges ................... 3.83% 5.17% 5.45% to 6.24%
Expected dividend yield .......................... -- -- --
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected share price
volatility. Because the Company's employee share options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee share options.
11. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with six of its officers
and employees. Such agreements are for terms which expire during 2003 and
2004 and provide for aggregate minimum annual fixed payments of
approximately $1,578,000 and $840,000 in 2003 and 2004, respectively.
In connection with his retirement, Mr. Lowenthal and the Company entered
into an employment separation agreement which, among other benefits,
provides for (a) a severance payment to him on March 31, 2002 of
$1,650,000, (b) the Company's repurchase of 284,551 of his stock options
during 2002 at $2.3827 per option, or an aggregate of $678,000 and (c) the
Company's repurchase, at Mr. Lowenthal's option, of his remaining 284,551
stock options on or after January 2, 2003, for the same repurchase amount
per option. Upon entering the employment separation agreement, the 569,102
options had an average remaining term of six years and a Black-Scholes
valuation of approximately $3,300,000. For the consulting services to be
performed by Mr. Lowenthal after his retirement, he will receive payments
at the rate of $100,000 per annum through December 31, 2004 and a
continuation of health and other benefits.
F-24
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with these arrangements and other personnel changes, the
Company recorded a non-recurring charge of approximately $3,527,000 during
the fourth quarter of 2001. The Company made payments of approximately
$2,767,000 during the year ended December 31, 2002, reducing the accrual
balance from $3,466,000 at December 31, 2001 to approximately $699,000 at
December 31, 2002; such remaining amount is payable during the first
quarter of 2003. The Company utilized available cash for payments made
during 2002 and will utilize available cash to make the 2003 payment.
Mr. Lynford's employment arrangement has been modified pursuant to an
Amended and Restated Employment Agreement (the "Restated Agreement") and
provides, among other items, for the maintenance of his current base salary
of $318,000 per year and an annual minimum bonus of $325,000 throughout the
term of the agreement through December 31, 2004. In addition, Mr. Lynford
will be entitled to receive a severance payment of $1,929,000 in the event
(a) he terminates his employment by reason of a change in control of the
Company (as defined in the Restated Agreement), (b) the Company terminates
his employment other than for proper cause (as defined in the Restated
Agreement) or (c) his employment is terminated by reason of his death or
disability. The provisions in the prior employment agreement providing for
the reimbursement to Mr. Lynford of excise and certain income taxes with
respect to the severance payments have been eliminated. Mr. Lynford also
agreed to the cancellation of 290,000 of the 569,102 options to acquire the
Company's common stock then held by him. The 290,000 options had a
Black-Scholes valuation of approximately $1,400,000 at the date of
cancellation. The Restated Agreement provided for the Company to issue
$1,356,000 of restricted shares of common stock (which equates to 71,087
shares at $19.075 per share), one third of which vested on each of December
31, 2001, June 30, 2002 and January 1, 2003.
In December 2001, the Company submitted a report to the New Hampshire
Department of Environmental Services ("NHDES") that summarized the findings
of an environmental consultant engaged by the Company with respect to
groundwater and surface water monitoring and testing which took place
during 2001 on one of its owned properties. In January 2002 the NHDES
indicated concerns about surface water contamination, volatile organic
chemical ("VOC") migration off of the property and air quality, and
mandated further testing. Further test results and a "Scope of Work" plan
for the required tests were submitted to the NHDES in February 2002. In
June 2002, the NHDES renewed the Groundwater Monitoring Permit with certain
stipulations and again expressed concerns related to indoor air quality,
contaminant migration offsite and surface water contamination. It mandated
further testing and the submission of a "Scope of Work" plan related
thereto by August 1, 2002. The Company complied with the NHDES request and
received approval in October 2002 to commence the additional testing which
included testing on an adjacent property for VOC migration and air quality
testing. The tests were conducted during the fourth quarter of 2002 and the
results show no migration of the VOCs and, on a preliminary basis, no
environmental problems with the indoor air quality. At this time, it is too
early to conclude the form of remediation that will be required, if any, or
the cost thereof, but in all likelihood, if remediation is required, it
will be a more aggressive and costly one than natural attenuation. During
2002 and 2001, the Company incurred approximately $96,000 and $48,000,
respectively, of costs principally for its environmental testing firm, with
respect to this matter.
From time-to-time, legal actions may be brought against the Company in the
ordinary course of business. There can be no assurance that such matters
will not have a material effect on the Company's financial condition,
results of operations or cash flows.
F-25
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 1997, the Company adopted a defined contribution savings plan pursuant
to Section 401 of the Internal Revenue Code. Under such a plan there are no
prior service costs. All employees are eligible to participate in the plan
after three months of service. Employer contributions, if any, are made
based on a discretionary amount determined by the Company's management.
During the years ended December 31, 2002, 2001 and 2000, the Company made
contributions of approximately $38,000, $43,000 and $35,000, respectively.
The Company is a tenant under an operating lease for its New York office
through October 2008. Rent expense was approximately $851,000, $866,000 and
$853,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, which includes base rent plus other charges including, but
not limited to, real estate taxes and maintenance costs in excess of base
year amounts. Future minimum lease payments under the operating lease at
December 31, 2002 are as follows:
FOR THE YEARS ENDED DECEMBER 31, AMOUNT
-------------------------------- ------
2003............................ $ 753,000
2004............................ 815,000
2005............................ 815,000
2006............................ 815,000
2007............................ 815,000
2008............................ 679,000
At December 31, 2002, the Company had capital commitments to certain joint
venture investments. The Company may make additional equity investments,
subject to board approval if deemed prudent to do so to protect or enhance
its existing investment. At December 31, 2002, capital commitments are as
follows:
COMMITMENT AMOUNT EXPIRATION
---------- ------ ----------
Wellsford/Whitehall (A).. $ 4,000,000 December 31, 2003
Reis (B)................. 420,000 December 31, 2003
----------
(A) Pursuant to the Agreement, the Company would provide for 40% of a
$10,000,000 loan to, or preferred equity in, the venture with its joint
venture partner. Whitehall committed to fund the remaining $6,000,000.
(B) In June 2002, the Company provided $210,000 to Reis, resulting in a
remaining commitment of $420,000. This funding was the Company's share of
an additional $667,000 capital subscription to Reis from the group of
investors who also contributed capital in April 2000. The other investors
have a remaining aggregate commitment of $913,000.
Wellsford/Whitehall has agreed to maintain certain tax indemnities,
primarily through 2007, for a family group who are partners of the joint
venture, relating to assets acquired from those partners in 1998. This
indemnity was preserved during 2002 and 2001 as the acquisitions of six
properties related to the completion of the purchase requirements with
respect to properties sold in February and April 2001 as part of tax-free
exchanges. The Company will continue to make inquiries of
Wellsford/Whitehall management as to their monitoring of asset sales and
debt levels with respect to these tax indemnities.
See Note 12 for additional commitments and contingencies.
F-26
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. SEGMENT INFORMATION
The Company's operations are organized into three SBUs. The following table
presents condensed balance sheet and operating data for these SBUs for
2002, 2001 and 2000:
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
DECEMBER 31, 2002
-----------------
Investment properties:
Real estate held for investment,
net ............................... $ -- $ -- $ 129,300 $ -- $ 129,300
Real estate held for sale** .......... -- 6,027 -- -- 6,027
Residential units available for
sale .............................. -- -- 14,542 -- 14,542
--------- --------- --------- --------- ---------
Real estate, net ........................ -- 6,027 143,842 -- 149,869
Notes receivable ........................ -- 28,612 -- -- 28,612
Investment in joint ventures ............ 55,592 38,589 -- -- 94,181
Cash and cash equivalents ............... -- 6,220 166 32,258 38,644
Restricted cash and investments ......... -- -- 610 8,934 9,544
Other assets ............................ -- 9,125 1,669 1,131 11,925
--------- --------- --------- --------- ---------
Total assets ............................ $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775
========= ========= ========= ========= =========
Mortgage notes payable .................. $ -- $ -- $ 112,233 $ -- $ 112,233
Accrued expenses and other liabilities .. -- 3,602 2,637 9,298 15,537
Convertible Trust Preferred Securities .. -- -- -- 25,000 25,000
Minority interest ....................... 6 -- 3,432 -- 3,438
Equity .................................. 55,586 84,971 27,985 8,025 176,567
--------- --------- --------- --------- ---------
Total liabilities and equity ............ $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775
========= ========= ========= ========= =========
FOR THE YEAR
ENDED DECEMBER 31, 2002
-----------------------
Rental revenue .......................... $ -- $ 1,206 $ 15,106 $ -- $ 16,312
Revenue from sales of residential
units ................................ -- -- 10,635 -- 10,635
Interest revenue ........................ -- 3,496 -- 600 4,096
Fee revenue ............................. -- 700 (54) 29 675
--------- --------- --------- --------- ---------
Total revenues .......................... -- 5,402 25,687 629 31,718
--------- --------- --------- --------- ---------
Cost of sales of residential units ...... -- -- 9,544 -- 9,544
Operating expenses ...................... -- 884 6,525 -- 7,409
Depreciation and amortization ........... 755 217 4,427 75 5,474
Interest ................................ -- 7 5,677 167 5,851
General and administrative .............. -- 41 -- 6,526 6,567
--------- --------- --------- --------- ---------
Total costs and expenses ................ 755 1,149 26,173 6,768 34,845
--------- --------- --------- --------- ---------
(Loss) income from joint ventures ....... (1,292) 1,083 -- -- (209)
Minority interest benefit ............... -- -- 43 -- 43
--------- --------- --------- --------- ---------
Income (loss) before taxes and accrued
distributions and amortization of
costs on Convertible Trust Preferred
Securities ........................... $ (2,047) $ 5,336 $ (443) $ (6,139) $ (3,293)
========= ========= ========= ========= =========
- ----------
* Includes corporate cash, restricted cash and investments, other assets,
accrued expenses and other liabilities, general and administrative
expenses, restructuring charge, interest income and interest expense that
has not been allocated to the operating segments.
** Real estate held for sale in the Debt and Equity Investments SBU is net of
the remaining impairment reserve of $2,175.
F-27
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
DECEMBER 31, 2001
-----------------
Investment properties:
Real estate held for investment,
net ............................... $ -- $ -- $ 150,129 $ -- $ 150,129
Real estate held for sale** .......... -- 5,560 -- -- 5,560
Residential units available for
sale .............................. -- -- 5,401 -- 5,401
--------- --------- --------- --------- ---------
Real estate, net ........................ -- 5,560 155,530 -- 161,090
Notes receivable ........................ -- 34,785 -- -- 34,785
Investment in joint ventures ............ 57,790 38,017 -- -- 95,807
Cash and cash equivalents ............... 11 8,217 442 27,479 36,149
Restricted cash and investments ......... -- -- 949 6,604 7,553
Other assets ............................ -- 9,331 2,066 (943) 10,454
--------- --------- --------- --------- ---------
Total assets ............................ $ 57,801 $ 95,910 $ 158,987 $ 33,140 $ 345,838
========= ========= ========= ========= =========
Mortgage notes payable .................. $ -- $ -- $ 121,731 $ -- $ 121,731
Credit facility ......................... -- -- -- -- --
Accrued expenses and other liabilities .. -- 3,641 3,942 9,949 17,532
Convertible Trust Preferred Securities .. -- -- -- 25,000 25,000
Minority interest expense ............... 21 -- 3,475 -- 3,496
Equity .................................. 57,780 92,269 29,839 (1,809) 178,079
--------- --------- --------- --------- ---------
Total liabilities and equity ............ $ 57,801 $ 95,910 $ 158,987 $ 33,140 $ 345,838
========= ========= ========= ========= =========
FOR THE YEAR
ENDED DECEMBER 31, 2001
-----------------------
Rental revenue .......................... $ -- $ 2,019 $ 11,750 $ -- $ 13,769
Revenue from sales of residential units . -- -- 21,932 -- 21,932
Interest revenue ........................ -- 4,166 -- 1,009 5,175
Fee revenue ............................. -- 283 (54) 388 617
--------- --------- --------- --------- ---------
Total revenues .......................... -- 6,468 33,628 1,397 41,493
--------- --------- --------- --------- ---------
Cost of sales of residential units ...... -- -- 19,364 -- 19,364
Operating expenses ...................... -- 1,403 3,997 -- 5,400
Depreciation and amortization ........... 1,947 7 3,066 287 5,307
Interest ................................ -- 300 4,027 29 4,356
General and administrative .............. -- 65 -- 8,402 8,467
Restructuring charge .................... -- -- -- 3,527 3,527
--------- --------- --------- --------- ---------
Total costs and expenses ................ 1,947 1,775 30,454 12,245 46,421
--------- --------- --------- --------- ---------
Income from joint ventures .............. 4,367 197 -- -- 4,564
Minority interest expense ............... -- -- (282) -- (282)
--------- --------- --------- --------- ---------
Income (loss) before taxes and accrued
distributions and amortization of
costs on Convertible Trust
Preferred Securities ................. $ 2,420 $ 4,890 $ 2,892 $ (10,848) $ (646)
========= ========= ========= ========= =========
- ----------
* Includes corporate cash, restricted cash and investments, other assets,
accrued expenses and other liabilities, general and administrative
expenses, restructuring charge, interest income and interest expense that
has not been allocated to the operating segments.
** Real estate held for sale in the Debt and Equity Investments SBU is net of
the remaining impairment reserve of $2,175.
F-28
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
DECEMBER 31, 2000
-----------------
Investment properties:
Real estate held for investment, net.. $ -- $ -- $ 113,598 $ -- $ 113,598
Real estate held for sale, at expected
net sales value** ................. -- 23,583 -- -- 23,583
Residential units available for sale.. -- -- 21,850 -- 21,850
--------- --------- --------- --------- ---------
Real estate, net ........................ -- 23,583 135,448 -- 159,031
Notes receivable ........................ -- 37,824 -- -- 37,824
Investment in joint ventures............. 82,820 38,149 -- -- 120,969
Cash and cash equivalents ............... 93 9,830 168 26,278 36,369
Restricted cash and investments ......... -- 445 2,468 7,009 9,922
Other assets ............................ -- 10,437 1,109 109 11,655
--------- --------- --------- --------- ---------
Total assets ............................ $ 82,913 $ 120,268 $ 139,193 $ 33,396 $ 375,770
========= ========= ========= ========= =========
Mortgage notes payable .................. $ -- $ -- $ 104,404 $ -- $ 104,404
Credit facilities ....................... -- 12,000 -- -- 12,000
Accrued expenses and other liabilities .. -- 4,380 2,124 8,649 15,153
Convertible Trust Preferred Securities .. -- -- -- 25,000 25,000
Minority interest ....................... 37 -- 3,193 -- 3,230
Equity .................................. 82,876 103,888 29,472 (253) 215,983
--------- --------- --------- --------- ---------
Total liabilities and equity ............ $ 82,913 $ 120,268 $ 139,193 $ 33,396 $ 375,770
========= ========= ========= ========= =========
FOR THE YEAR
ENDED DECEMBER 31, 2000
-----------------------
Rental revenue .......................... $ -- $ 6,096 $ 12,585 $ -- $ 18,681
Interest revenue ........................ -- 4,436 -- 1,821 6,257
Fee revenue ............................. -- -- -- 686 686
--------- --------- --------- --------- ---------
Total revenues .......................... -- 10,532 12,585 2,507 25,624
--------- --------- --------- --------- ---------
Operating expenses ...................... -- 2,658 4,102 -- 6,760
Depreciation and amortization ........... 409 1,355 3,097 107 4,968
Interest ................................ -- 3,118 4,858 (900) 7,076
General and administrative .............. -- 171 -- 7,206 7,377
--------- --------- --------- --------- ---------
Total expenses .......................... 409 7,302 12,057 6,413 26,181
--------- --------- --------- --------- ---------
Gain on sale of assets, net of
impairment provision of $4,725*** .... -- 2,710 3,425 -- 6,135
Income from joint ventures .............. 1,674 1,573 -- -- 3,247
Minority interest expense................ -- -- (66) -- (66)
--------- --------- --------- --------- ---------
Income (loss) before taxes and accrued
distributions and amortization of
costs on Convertible Trust
Preferred Securities ................. $ 1,265 $ 7,513 $ 3,887 $ (3,906) $ 8,759
========= ========= ========= ========= =========
- ----------
* Includes corporate cash, restricted cash and investments, other assets,
accrued expenses and other liabilities, general and administrative
expenses, interest income and interest expense that has not been allocated
to the operating segments.
** Real estate held for sale in the Debt and Equity Investments SBU is net of
a $4,725 impairment reserve.
*** Impairment provision pertains to assets in the Debt and Equity Investments
SBU.
F-29
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL
----------------------------------------------------
The Company's commercial property operations currently consist solely of
its interest in Wellsford/Whitehall, a joint venture by and among the
Company, various entities affiliated with Whitehall, private real estate
funds sponsored by Goldman Sachs, as well as a family based in New England.
The Company had a 32.59% interest in Wellsford/Whitehall as of December 31,
2002. The manager of the joint venture is a Whitehall affiliate. At
December 31, 2002, Wellsford/Whitehall owned and operated 34 properties,
including ten properties held for sale (substantially all office
properties) totaling approximately 3,874,000 square feet (including
approximately 546,000 square feet under renovation), primarily located in
New Jersey, Massachusetts and Maryland. Subsequent to February 28, 2003,
after the completion of certain sales, Wellsford/Whitehall owned 27
properties totaling approximately 2,908,000 square feet.
Wellsford/Whitehall leases and re-leases space, performs construction for
tenant improvements, expands buildings, re-develops properties and based on
general and local economic conditions and specific conditions in the real
estate industry, may from time to time sell properties for an appropriate
price. It is not expected that Wellsford/Whitehall will purchase any new
assets in the future.
The Company's investment in Wellsford/Whitehall, which is accounted for on
the equity method, was approximately $55,592,000 and $57,790,000 at
December 31, 2002 and 2001, respectively. The following table details the
changes in the Company's investment in Wellsford/Whitehall during the three
years ended December 31, 2002:
(amounts in thousands)
2002 2001 2000
---- ---- ----
Investment balance at January 1, ............. $ 57,790 $ 82,820 $ 79,688
Contributions ............................. -- 8,468 3,763
Distributions ............................. -- (35,984) (1,897)
Share of:
(Loss) income from operations .......... (770) 302 1,583
(Loss) gains from asset sales .......... (82) 10,321 92
Impairment provisions .................. (440) (6,256) --
Accumulated other comprehensive income . (151) (103) --
Amortization .............................. (755) (1,778) (409)
-------- -------- --------
Investment balance at December 31, ........... $ 55,592 $ 57,790 $ 82,820
======== ======== ========
Wellsford/Whitehall was formed in August 1997 as a private real estate
operating company. The Company contributed six properties and Whitehall
contributed four properties upon formation of Wellsford/Whitehall. Initial
capital aggregating $150,000,000 was committed by the partners including
the net amount of contributed properties, net of assumed debt. Prior to
December 31, 2000, the Company managed Wellsford/Whitehall on a day-to-day
basis.
In June 1999, the capital commitment requirements of Wellsford/Whitehall
were modified from an aggregate of $150,000,000 ($75,000,000 by each
partner) to an aggregate of $250,000,000. The Company's total portion of
$85,000,000 and Whitehall's total portion of $165,000,000 were fully funded
as of December 31, 2001.
F-30
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In December 2000, the Company and Whitehall executed definitive agreements
modifying the terms of the joint venture, effective January 1, 2001. The
Amendments, which, among other items, provided for the Company and
Whitehall to extend their existing capital commitments to
Wellsford/Whitehall for one year to December 31, 2001 and to provide an
aggregate of $10,000,000 of additional financing or preferred equity to
Wellsford/Whitehall through December 2003, if required.
As a result of the Amendments, an affiliate of Whitehall replaced the
Company as the managing member of Wellsford/Whitehall. All employees
working on Wellsford/Whitehall business were transferred from the Company
to WP Commercial, L.L.C. ("WP Commercial"), the new management company,
which is owned by affiliates of Whitehall and senior management of WP
Commercial. WP Commercial provides management, construction, development
and leasing services to Wellsford/Whitehall based upon an agreed fee
schedule. WP Commercial also provides similar services to a new venture
formed by Whitehall (the "New Venture") as well as other affiliates of
Whitehall and to third parties, including tenants of Wellsford/Whitehall
and new owners of properties sold by Wellsford/Whitehall.
WP Commercial receives an administrative management fee of 93 basis points
on a predetermined value for each asset owned at the time of the
Amendments. As Wellsford/Whitehall sells assets, the basis used to
determine the fee is reduced by the respective asset's predetermined value
six months after the completion of such sales. During the years ended
December 31, 2002 and 2001, respectively, Wellsford/Whitehall paid the
following fees to WP Commercial, including amounts reflected in
discontinued operations of Wellsford/Whitehall:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2002 2001
---- ----
Administrative management ............ $5,826,000 $6,422,000
========== ==========
Construction, construction management,
development and leasing ........... $ 905,000 $1,787,000
========== ==========
WP Commercial leases space at three buildings owned by Wellsford/Whitehall
in each of its geographic regions for management and administration,
including one building sold in November 2001. Aggregate rent received
during the years ended December 31, 2002 and 2001 by Wellsford/Whitehall
amounted to $197,000 and $542,000, respectively.
Wellsford/Whitehall, pursuant to the terms of the Amendments, discontinued
payment of a $600,000 annual administrative fee to the Company as of
December 31, 2000; however, Whitehall has agreed to pay the Company fees
with respect to assets disposed of by Wellsford/Whitehall equal to 25 basis
points of the sales proceeds and up to 60 basis points (30 basis points are
deferred pending certain return on investment hurdles being reached) for
each acquisition of real estate made by certain other affiliates of
Whitehall, until such acquisitions aggregate $400,000,000. The following
table presents fees earned by the Company related to this provision:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001
---- ----
Asset disposition fees ......... $ 7,000 $365,000
Asset acquisition fees ......... 22,000 23,000
-------- --------
Total fees ..................... $ 29,000 $388,000
======== ========
F-31
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
Also, as part of the Amendments, warrants to purchase 2,128,099 of the
Company's common stock, which had previously been issued to Whitehall, were
returned and cancelled. The Amendments included a buy/sell agreement of
equity interests between the Company and Whitehall effective after December
31, 2003 with respect to the venture.
As a condition to the formation of Wellsford/Whitehall in 1997, the Company
had agreed with Whitehall to conduct its business and activities relating
to office properties (but not other types of commercial properties) located
in North America solely through its interest in Wellsford/Whitehall.
Whitehall has agreed to waive this condition in connection with the
Amendments.
F-32
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table presents a condensed balance sheet and operating data
for the Wellsford/Whitehall segment:
(amounts in thousands)
DECEMBER 31,
------------------------
CONDENSED BALANCE SHEET DATA 2002 2001 (A)
---------------------------- ---- --------
Real estate, net ............................ $ 351,997 $ 347,187
Cash and cash equivalents ................... 16,169 32,148
Assets held for sale ........................ 164,696 170,875
Other assets (B) ............................ 24,457 21,901
Total assets ................................ 557,319 572,111
Mortgages payable ........................... 96,826 104,452
Credit facility ............................. 132,349 126,855
Liabilities attributable to properties held
for sale ................................. 140,825 142,590
Preferred equity (C) ........................ -- --
Common equity ............................... 179,742 183,815
Other comprehensive loss .................... (1,297) (526)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
CONDENSED OPERATING DATA 2002 2001 (D) 2000 (D)
------------------------ ---- -------- --------
Rental revenue (E) .......................... $ 46,636 $ 56,916 $ 59,010
Interest and other income (F) ............... 2,366 4,987 5,290
--------- --------- ---------
Total revenues .............................. 49,002 61,903 64,300
--------- --------- ---------
Operating expenses .......................... 23,705 27,489 22,240
Depreciation and amortization ............... 15,026 12,448 9,386
Interest .................................... 13,068 17,724 18,351
General and administrative .................. 727 922 6,869
--------- --------- ---------
Total expenses .............................. 52,526 58,583 56,846
(Loss) gain on sale of assets ............... (259) 10,791 239
--------- --------- ---------
(Loss) income before preferred equity
distributions and discontinued operations (3,783) 14,111 7,693
(Loss) from discontinued operations (G) ..... (196) (1,365) (2,585)
--------- --------- ---------
Net (loss) income before preferred equity
distributions ............................ $ (3,979) $ 12,746 $ 5,108
========= ========= =========
- ----------
(A) Reclassified for assets and liabilities held for sale at December 31, 2002.
(B) Includes the marked to market value of an interest rate protection contract
of $13 and $1,089 at December 31, 2002 and 2001, respectively.
(C) Preferred equity converted to common equity in September 2001.
(D) Operations reclassified for assets held for sale at December 31, 2002.
(E) Reflects (including amounts in discontinued operations) an increase in
income of $1,042, a reduction in income of $262 and an increase in income
of $1,271 from the straight-lining of tenant rents for the years ended
December 31, 2002, 2001 and 2000, respectively.
(F) Reflects (including amounts in discontinued operations) lease cancellation
income of $3,624, $4,012 and $4,037 for the years ended December 31, 2002,
2001 and 2000, respectively. Capitalized costs written off in connection
with lease cancellation income are included in depreciation and
amortization expense in the corresponding periods.
(G) Includes an aggregate impairment provision of $1,351 attributable to three
properties held for sale at December 31, 2002.
F-33
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table presents property information summarized by geographic
region:
NUMBER OF PROPERTIES
---------------------------------- TOTAL
LAND PORTFOLIO UNDEPRECIATED
TOTAL PARCELS OFFICE RETAIL SQUARE FEET COST BASIS
----- ------- ------ ------ ----------- ----------
AS OF DECEMBER 31, 2002
New Jersey .................. 17 2 13 2 2,140,000 $277,502,000
Boston, MA .................. 10 -- 10 -- 1,205,000 225,560,000
Maryland/Washington, D.C .... 4 -- 3 1 499,000 66,250,000
Other ....................... 3 -- -- 3 30,000 8,236,000
-- -- -- -- --------- ------------
34 2 26 6 3,874,000 $577,548,000
== == == == ========= ============
Pro forma for completed sales
from January 1, 2003 to
February 28, 2003 ........ 27 2 20 5 2,908,000 $435,533,000
== == == == ========= ============
AS OF DECEMBER 31, 2001
New Jersey .................. 17 2 13 2 2,140,000 $272,851,000
Boston, MA .................. 10 -- 10 -- 1,204,000 209,551,000
Maryland/Washington, D.C .... 5 -- 4 1 531,000 65,578,000
Other ....................... 3 -- -- 3 30,000 8,219,000
-- -- -- -- --------- ------------
35 2 27 6 3,905,000 $556,199,000
== == == == ========= ============
No tenant in the Wellsford/Whitehall portfolio accounted for more than 6%
of rental revenues for assets classified as continuing operations by
Wellsford/Whitehall for the year ended December 31, 2002.
F-34
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
During the years ended December 31, 2002, 2001 and 2000,
Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts)
2002 ACTIVITY
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
June ......... Owings Mills, MD 31,732 1 $ 2.9 $ 91.39 $ (0.3)
====== = ======== ========== ========
2001 ACTIVITY
Purchases (1):
Gross Leasable Purchase Price per
Square Number of Purchase Square
Month Location Feet Properties Price Foot Occupancy
----- -------- ---- ---------- ----- ---- ---------
April ........ Various 54,000 5 $ 18.7 $ 342.20 100%
October ...... Decatur, GA 10,000 1 2.3 231.51 100%
------ - --------
64,000 6 $ 21.0 324.91 100%
====== = ========
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
February ..... Newton, MA 102,000 5 $ 18.0 $ 176.47 $ 3.5
April ........ Portland, ME 24,000 1 1.6 66.67 --
May .......... Parsippany, NJ 257,000 1 61.5 239.30 17.9
August ....... Andover, MA 63,000 1 9.2 146.03 1.5
September .... Wayne, NJ (Pointview) 564,000 1 35.5 62.94 -- (2)
November ..... Wayne, NJ 56,000 1 8.2 146.43 2.4
November ..... Chatham, NJ 63,000 1 12.0 190.48 2.0
--------- -- -------- --------
1,129,000 11 $ 146.0 129.32 $ 27.3
========= == ======== ========
- ----------
(1) Acquisitions of these six properties completed the purchase requirements
with respect to properties sold in February and April 2001 as part of a
tax-free exchange pursuant to the rules of the Internal Revenue Code.
(2) Loss reflected as part of impairment provision (see below).
2000 ACTIVITY
Purchases:
Purchases that were made during the year ended December 31, 2000, were
transferred to the New Venture, pursuant to the Amendments.
Sale:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
August ....... Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2
====== = ======== ========== ========
F-35
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In February 2003, Wellsford/Whitehall completed the sales of a portfolio of
six properties to one purchaser for an aggregate of $136,800,000 and
realized aggregate net gains of approximately $10,554,000 before income
taxes. The Company's pre-tax income to be realized during the first quarter
of 2003 from these transactions was approximately $2,700,000. The Company
will not receive a distribution related to the sale of these properties as
almost all of the proceeds were used to paydown $129,557,000 of
Wellsford/Whitehall debt. In a separate transaction, Wellsford/Whitehall
sold an unencumbered property in January 2003 for which the Company
received a distribution of approximately $738,000 on January 31, 2003. The
following table details the assets sold:
GROSS SALES PRICE
LEASABLE PER
PROPERTY LOCATION SQUARE FEET SALES PRICE SQUARE FOOT GAIN (LOSS)
-------- -------- ----------- ----------- ----------- -----------
Portfolio sale:
Mountain Heights Center #1 .. Berkeley Hts, NJ 183,000
Mountain Heights Center #2 .. Berkeley Hts, NJ 123,000
Greenbrook Corporate Center . Fairfield, NJ 201,000
180/188 Mt. Airy Road ....... Basking Ridge, NJ 104,000
One Mall North .............. Columbia, MD 97,000
Gateway Tower ............... Rockville, MD 248,000
-------
Total portfolio sale ........... 956,000 $136,800,000 $ 143 $ 10,554,000
Decatur ........................ Decatur, GA 10,000 2,370,000 234 --
------- ------------ ------------
966,000 $139,170,000 144 $ 10,554,000
======= ============ ============
In anticipation of the sales of the Decatur, GA and two other properties in
Boston, MA, Wellsford/Whitehall recorded impairment provisions aggregating
approximately $1,351,000 at December 31, 2002 as the expected sale prices
net of selling expenses were less than the carrying amount of the
properties. The Company's share of these impairments was approximately
$440,000 before a write-off by the Company in 2002 of related unamortized
warrant costs of $284,000.
During July 2001, Wellsford/Whitehall entered into a contract to sell the
Pointview property, a 194 acre complex with two buildings totaling
approximately 564,000 square feet, located in Wayne, New Jersey. This
property, which was a major development project of Wellsford/Whitehall, had
been unoccupied since its purchase in 1997. In anticipation of the
consummation of the sale, Wellsford/Whitehall recorded a $15,561,000
impairment provision at June 30, 2001, of which the Company's allocable
share was approximately $5,908,000. This impairment arose from the change
in the intended mixed-use of the property from office space, a conference
center and residential development to an available for sale headquarters
complex. The sale was completed in September 2001. As a result of a sales
price adjustment and cost savings during the third and fourth quarters of
2001, Wellsford/Whitehall recorded an additional net impairment provision
of $178,000, of which the Company's share was $64,000. Aggregate impairment
provisions recorded during 2001, including the Pointview provision noted
above, was $16,545,000, of which the Company's share was $6,256,000.
F-36
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000
revolving credit facility from General Electric Capital Corporation with an
initial funding of approximately $273,000,000 before transaction costs. The
remaining balance will be available to be drawn to fund certain capital
expenditures and upon achieving certain operating results from six
properties through June 2003, which results are not expected to be achieved
by that time. Accordingly, Wellsford/Whitehall is in the process of
negotiating with GECC for an extension of the June 30, 2003 expiration. The
facility bears interest at LIBOR + 2.90% per annum (4.28% at December 31,
2002) and matures in June 2004 with two 12-month extension options, subject
to meeting certain operating and valuation covenants. Upon the initial
funding, the facility was secured by interests in twenty-four commercial
office properties in the Wellsford/Whitehall portfolio. The
Wellsford/Whitehall GECC Facility replaced the previously existing facility
which was due to mature in December 2001. The outstanding balance of the
Wellsford/Whitehall GECC Facility was $264,160,000 and $258,060,000 at
December 31, 2002 and 2001, respectively. Details of the changes to the
Wellsford/Whitehall GECC Facility balance are as follows:
NUMBER OF
SECURING
BALANCE PROPERTIES
------- ----------
June 2001 ................................... $ 272,912,000 24
2001 asset sales ............................ (14,852,000) (2)
------------- --
Balance at December 31, 2001 ................ 258,060,000 22
2002 asset sales ............................ -- --
Additional asset encumbered by the facility . 6,100,000 1
------------- --
Balance at December 31, 2002, including
$131,811,000 reflected in liabilities held
for sale ................................. $ 264,160,000 23
============= ==
Balance at December 31, 2002, adjusted for
completed sales from January 1, 2003 to
February 28, 2003 ........................ $ 141,976,000 18
============= ==
This financing was arranged by Goldman Sachs, to whom Wellsford/Whitehall
paid a fee of approximately $2,644,500.
In July 2001, Wellsford/Whitehall entered into an interest rate protection
contract at a cost of $1,780,000 (the "Cap"), which limits
Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and 6.83% for
the following year to June 2004 on $285,000,000 of debt. The market value
of the Cap was approximately $13,000 and $1,089,000 at December 31, 2002
and 2001, respectively. This Cap was purchased from Goldman Sachs based
upon the results of a competitive bidding process.
F-37
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table summarizes the long-term debt at Wellsford/Whitehall:
BALANCE AT DECEMBER 31,
INITIAL MATURITY STATED INTEREST -----------------------
DEBT/PROJECT DATE RATE 2002 2001
------------ ---- ---- ---- ----
Wellsford/Whitehall GECC Facility....... June 2004 LIBOR + 2.90% $264,160,000 $258,060,000
Nomura Loan (A)......................... February 2027 8.03% 65,458,000 66,189,000
Oakland Ridge Loan (B).................. March 2003 LIBOR + 2.00% 6,959,000 4,649,000
Retail properties (C)................... January 2024 7.28% 16,371,000 16,600,000
Other loans on office properties........ (D) Various 15,410,000 24,511,000
------------ ------------
$368,358,000 $370,009,000
============ ============
- ----------
(A) In connection with a 1998 transaction, Wellsford/Whitehall assumed a
mortgage loan held by Nomura Asset Capital Corporation with an initial
principal balance of approximately $68,300,000.
(B) The non-recourse loan is secured by the leasehold interest in the Oakland
Ridge office park in Columbia, Maryland. The loan has a twelve-month
extension at Wellsford/Whitehall's option.
(C) Comprised of five mortgages secured by the leasehold interest in five
retail properties.
(D) Includes a property collateralizing the aggregate loan balances outstanding
of $7,373,000 at December 31, 2002, which was sold in February 2003. The
loans were repaid from sales proceeds.
The Company made temporary advances to Wellsford/Whitehall during 2000
which bore interest at LIBOR + 5.00% per annum. The balance of the advances
was repaid in full by December 31, 2000. The Company earned approximately
$703,000 of interest income during 2000 from such advances.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank
Facility with a predecessor of Fleet National Bank ("Wellsford/Whitehall
Fleet Facility"). Under the terms, $300,000,000 represented a senior
secured credit facility which bore interest at LIBOR + 1.65% per annum and
$75,000,000 represented a second mezzanine facility which bore interest at
LIBOR + 3.20% per annum. In June 2001, the Wellsford/Whitehall Fleet
Facility was repaid in full, terminated and replaced with the
Wellsford/Whitehall GECC Facility.
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL
---------------------------------------------
At December 31, 2002, the Company had the following investments: (i)
approximately $28,612,000 of direct debt investments which bore interest at
a weighted average annual yield of approximately 11.69% during 2002 and had
an average remaining term to maturity of approximately 4.2 years; (ii)
approximately $31,797,000 of equity investments in companies which were
organized to invest in debt instruments, including $28,166,000 in Second
Holding, a company which was organized to purchase investment and
non-investment grade rated real estate debt instruments and investment
grade rated other asset-backed securities; and (iii) approximately
$6,792,000 invested in Reis, a real estate information and database
company. In addition, the Company owned and operated two commercial
properties with a net book value of approximately $6,027,000, totaling
approximately 175,000 square feet located in Salem, New Hampshire and
Philadelphia, Pennsylvania at December 31, 2002.
F-38
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
DEBT INVESTMENTS
277 PARK LOAN
In April 1997, the Company and a predecessor of Fleet National Bank
originated an $80,000,000 loan (the "277 Park Loan") to entities which own
substantially all of the equity interests (the "Equity Interests") in the
entity which owns a 1,750,000 square foot office building located in New
York City (the "277 Park Property"). The Company advanced $25,000,000
pursuant to the 277 Park Loan. The 277 Park Loan is secured primarily by a
pledge of the Equity Interests owned by the borrowers and thus is junior to
a 10-year $345,000,000 first mortgage loan (amortized balance of
$314,485,000 at December 31, 2002) (the "REMIC Loan") on the 277 Park
Property.
The 277 Park Loan bears interest at the rate of 12.00% per annum for the
first nine years of its term and at a floating rate during the tenth year
equal to LIBOR + 5.15% per annum or the Fleet National Bank base rate plus
5.15% per annum, as elected by the borrowers. The principal amount of the
277 Park Loan and all accrued interest will be payable in May 2007; the
REMIC Loan is also due in May 2007. The Company earned approximately
$3,042,000, $3,042,000 and $3,050,000 per year of interest revenue from the
277 Park Loan during 2002, 2001 and 2000, respectively, or 9.6%, 7.3% and
11.9% of total non-joint venture revenues during such periods.
PATRIOT LOAN
In September 1999, the Company and Fleet National Bank originated a
$10,000,000 second mortgage loan, of which the Company advanced $5,000,000
(its 50% share) (the "Patriot Loan"). The Patriot Loan was subordinate to a
$75,000,000 first mortgage loan made by Fleet National Bank. During May
2002, the Patriot Loan was paid in full and the Company received its loan
balance of approximately $4,951,000. The loan bore interest at LIBOR +
4.75% per annum with payments of interest only from origination through
August 2001 and, thereafter, principal and interest based on a 25-year
amortization. The Patriot Loan was secured by a second mortgage lien on a
608,000 square foot mixed-use property in Boston, Massachusetts. The loan
balance due to the Company on December 31, 2001 was approximately
$4,973,000. The Company earned approximately $129,000, $449,000 and
$564,000 of interest revenue from the Patriot Loan during 2002, 2001 and
2000, respectively, or 0.4%, 1.1% and 2.2% of total non-joint venture
revenues during such periods.
THE ABBEY COMPANY CREDIT FACILITY
In August 1997, the Company and a predecessor of J.P. Morgan Chase ("JPMC")
originated a $70,000,000 credit facility secured by first mortgages (the
"Abbey Credit Facility") to affiliates of The Abbey Company, Inc.
("Abbey"). In May 1998, the Company and JPMC expanded the Abbey Credit
Facility to $120,000,000. In December 1998, Abbey repaid $20,000,000,
thereby reducing the total available balance to $100,000,000. In September
1999, an additional $83,500,000 was repaid, thereby reducing the total
available balance to $16,500,000. Advances under the Abbey Credit Facility
were made for up to 75% of the value of the borrowing base collateral which
consisted of office, industrial and retail properties, all cross
collateralized, totaling approximately 250,000 square feet. The Company's
portion of the outstanding balance of approximately $4,300,000 was repaid
in August 2000 and the Abbey Credit Facility was terminated.
F-39
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The Company was entitled to interest on its advances under the Abbey Credit
Facility at LIBOR + 4.00% per annum. The Company earned approximately
$295,000 of interest revenue from the Abbey Credit Facility during 2000, or
1.2% of total non-joint venture revenues during such period.
SAFEGUARD CREDIT FACILITY
In December 1998, the Company and JPMC originated a $90,000,000 credit
facility cross-collateralized by nine self storage properties (the
"Safeguard Credit Facility") to Safeguard Capital Fund, L.P. ("Safeguard").
The Safeguard Credit Facility, which was made available to Safeguard until
April 2001, was terminated on January 30, 2001 when the outstanding balance
of $2,900,000 was repaid. Advances under the facility were made for up to
75% of the value of the borrowing base collateral which consisted of nine
self-storage properties totaling approximately 608,000 square feet. The
Company was entitled to interest on its advances under the Safeguard Credit
Facility at LIBOR + 4.00% per annum.
Approximately $5,900,000 had been advanced by the Company under the
Safeguard Credit Facility at December 31, 1998, with additional advances
made of approximately $2,200,000 through March 1999, at which time, the
loan with a balance of $8,100,000 was contributed to the Company's joint
venture investment, Second Holding. This venture also assumed the first
$25,000,000 of the Company's commitment to fund additional advances under
the Safeguard Credit Facility (including amounts advanced through December
31, 1999). The Company retained the remaining $20,000,000 commitment, of
which $2,900,000 was advanced to Safeguard in September 1999 and was
outstanding at December 31, 2000 and 1999, respectively. The Safeguard
Credit Facility was repaid in full in January 2001. The Company earned
approximately $25,000 and $306,000 of interest revenue from the Safeguard
Credit Facility during 2001 and 2000, respectively, or 0.1% and 1.2% of
total non-joint venture revenues during such periods.
LIBERTY HAMPSHIRE
In July and August 1998, the Company invested a total of approximately
$2,100,000 for an approximate 4.20% equity interest in Liberty Hampshire, a
venture which structures, establishes and provides management and services
for special purpose finance companies formed to invest in financial assets.
In December 2000, the Company sold this interest to the majority owner of
Liberty Hampshire for $5,160,000 and recorded a gain of approximately
$2,500,000. The Company received $1,032,000 of cash and a note for the
remaining balance of $4,128,000 which bears interest at 8.25% per annum, is
due in December 2005 and has scheduled annual principal and interest
payments (the "Guggenheim Loan"). The balance of the Guggenheim Loan was
$3,612,000 at December 31, 2002 and 2001. The Company earned approximately
$302,000 and $345,000 of interest revenue from the Guggenheim Loan during
2002 and 2001, respectively, or 0.9% and 0.8% of total non-joint venture
revenues during the period. On January 2, 2003, the Company received a
payment of approximately $818,000, which included the 2002 interest payment
and the 2002 principal paydown of $516,000.
F-40
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table summarizes interest revenue and its share of
consolidated non-joint venture revenue during such periods for the
Wellsford Capital SBU:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- ---------------------
INTEREST INTEREST INTEREST
REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE
------- ---------- ------- ---------- ------- ----------
277 Park Loan ............. $ 3,042,000 9.6% $ 3,042,000 7.3% $ 3,050,000 11.9%
Patriot Loan .............. 129,000 0.4% 449,000 1.1% 564,000 2.2%
Abbey Credit Facility ..... -- 0.0% -- 0.0% 295,000 1.2%
Safeguard Credit Facility . -- 0.0% 25,000 0.1% 306,000 1.2%
Guggenheim Loan ........... 302,000 0.9% 345,000 0.8% -- 0.0%
Other ..................... 18,000 0.1% 233,000 0.6% 151,000 0.5%
----------- ---- ----------- ---- ----------- ----
Interest revenue from loans 3,491,000 11.0% 4,094,000 9.9% 4,366,000 17.0%
Interest revenue from cash
and cash equivalents ... 5,000 0.0% 72,000 0.2% 70,000 0.3%
----------- ---- ----------- ---- ----------- ----
Total interest revenue .... $ 3,496,000 11.0% $ 4,166,000 10.1% $ 4,436,000 17.3%
=========== ==== =========== ==== =========== ====
Consolidated non-joint
venture revenue (base
from which percentage
is calculated) ......... $31,718,466 $41,492,999 $25,623,789
=========== =========== ===========
SECOND HOLDING
Second Holding, a joint venture special purpose finance company, has been
organized to purchase investment and non-investment grade rated real estate
debt instruments and investment grade other asset-backed securities. These
other asset-backed securities that Second Holding may purchase may be
secured by, but not limited to, leases on aircraft, truck or car fleets,
bank deposits, leases on equipment, fuel/oil receivables, consumer
receivables, pools of corporate bonds and loans and sovereign debt. It is
Second Holding's intent to hold all securities to maturity. Many of these
securities were obtained through private placements and current public
market pricing is not available.
The Company contributed approximately $24,200,000 and $4,900,000 in 1999
and 1998, respectively, to obtain an approximate 51.1% non-controlling
interest in Second Holding, with Liberty Hampshire owning 10% and an
affiliate of a significant shareholder of the Company (the Hunt Trust,
which owns 405,500 shares of the Company at December 31, 2002) who,
together with other entities, own the remaining approximate 39%. The
Company's 1999 contribution was comprised of two of the Company's debt
investments totaling $25,700,000, net of $1,500,000 of cash received back
from Second Holding. The other partners contributed their respective shares
of their capital contributions in cash.
During the latter part of 2000, an additional partner was admitted to the
venture, who received a share of income, as defined, pursuant to a
cumulative preference on earnings in return for providing an insurance
policy for payment of the long-term debt issued by Second Holding.
Effective January 1, 2002, the partners of Second Holding modified the
terms of the agreement with the additional partner, which eliminated the
additional partner's cumulative preference on earnings. The additional
partner is entitled to 35% of net income, as defined by the agreement,
while the other partners, including the Company, share in the remaining
65%. The Company's allocation of income is approximately 51.1% of the
remaining 65%.
F-41
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The Company accounts for its investment in Second Holding on the equity
method of accounting as its interests are represented by two of eight
board seats with one-quarter of the vote on any major business
decisions. The Company's investment was approximately $28,166,000 and
$27,803,000 at December 31, 2002 and 2001, respectively. The Company's
share of income (loss) from Second Holding was approximately $723,000,
$(163,000) and $1,432,000 for the years ended December 31, 2002, 2001
and 2000, respectively. The Company also earns management fees for its
role in analyzing real estate-related investments for Second Holding.
The net fees earned by the Company, which are based upon the total
assets of Second Holding, amounted to approximately $646,000, $217,000
and $(182,000) for the years ended December 31, 2002, 2001 and 2000,
respectively.
The following table presents a condensed balance sheet and operating data
for Second Holding:
(amounts in thousands)
DECEMBER 31,
------------
CONDENSED BALANCE SHEET DATA 2002 2001
---------------------------- ---- ----
Cash and cash equivalents ............ $ 16,876 $ 76,487
Investments .......................... 1,785,758 926,453
Other assets (A) ..................... 37,462 19,943
Total assets ......................... 1,840,096 1,022,883
Commercial paper ..................... -- 58,770
Medium-term notes (B) ................ 1,552,945 742,475
Long-term debt (C) (D) ............... 169,988 161,220
Total equity ......................... 55,910 54,581
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
CONDENSED OPERATING DATA 2002 2001 2000
------------------------ ---- ---- ----
Interest ............................. $ 41,802 $ 30,528 $ 7,383
Interest from Reis ................... -- -- 169
---------- ---------- ----------
Total revenue ........................ 41,802 30,528 7,552
---------- ---------- ----------
Interest expense ..................... 35,594 28,017 3,665
Fees and other ....................... 3,894 2,422 1,084
---------- ---------- ----------
Total expenses ....................... 39,488 30,439 4,749
---------- ---------- ----------
Net income attributable to members (D) $ 2,314 $ 89 $ 2,803
========== ========== ==========
- ----------
(A) Other assets includes an interest rate swap asset with a fair value of
$22,638 and $13,531 at December 31, 2002 and 2001, respectively.
(B) The face amount of medium-term notes were $1,555,000 at December 31, 2002,
and includes a fair value adjustment for swapped debt of $513, offset by
unamortized discounts and debt issuance costs of $2,568.
(C) Long-term debt outstanding is a privately placed ten-year $150,000 junior
subordinated bond-issue maturing April 2010, issued at a fixed rate of
7.96% per annum. The effect of fair value adjustments for the long-term
debt was $22,125 and $13,531 at December 31, 2002 and 2001, respectively,
net of unamortized debt issuance costs.
(D) The partner which was admitted in the latter part of 2000 (who is committed
to provide an insurance policy, through one of its affiliates, for the
payment of principal and interest through April 2010 for the $150,000
junior subordinated bond-issue) was entitled to a cumulative preference on
earnings; accordingly all fiscal 2001 income is allocable to this partner.
F-42
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
REIS
The Company has direct and indirect investments in a real estate
information and database company, Reis, a leading provider of real estate
market information to institutional investors. The Company accounts for its
investment in Reis under the cost method as its ownership interest is in
non-voting preferred shares and the Company's interests are represented by
one member of Reis' seven member board. At December 31, 2002 and 2001 the
Company's aggregate investment in Reis was $6,792,000 and $6,583,000,
respectively. A portion of the investment is held directly by the Hunt
Trust who, together with other entities, own an approximate 39% interest in
Reis Capital.
A summary of the Company's direct and indirect investments in Reis follows:
AMOUNTS
COMPANY INVESTED BY TOTAL
OWNERSHIP OTHER PARTNERS INVESTMENT
--------- -------------- ----------
INDIRECT OWNERSHIP BY THE COMPANY
Notes purchased through Reis Capital during 1999
converted to Series A Preferred shares in April 2000 (A) $2,555,000 $2,445,000 $5,000,000
Notes purchased through Reis Capital during 1999
converted to Series B Preferred shares in April 2000 (B) 766,000 734,000 1,500,000
Accrued interest on above notes converted to Series C
Preferred shares in April 2000 (C) ..................... 466,000 447,000 913,000
Series C Preferred shares purchased through Reis Capital
in April 2000 (D) ...................................... 766,000 734,000 1,500,000
---------- ---------- ----------
Total indirect ownership .................................. 4,553,000 $4,360,000 $8,913,000
---------- ========== ==========
DIRECT OWNERSHIP BY THE COMPANY
Series C Preferred shares purchased directly in April
2000 (E) ............................................... 2,022,000
Series D Preferred shares purchased directly in
June 2002 (F) .......................................... 210,000
Other ..................................................... 7,000
----------
Total direct ownership .................................... 2,239,000
----------
Total investment .......................................... $6,792,000
==========
- ----------
Note: All preferred series have an 8% cumulative dividend; no dividends have
been declared or paid since issuance.
(A) Issued 50,000 shares at $100 per share; convertible into common shares at
$1.76 per share.
(B) Issued 15,000 shares at $100 per share; convertible into common shares at
$3.00 per share.
(C) Issued 9,120 shares at $100 per share; convertible into common shares at
$3.968 per share.
(D) Issued 15,000 shares at $100 per share; convertible into common shares at
$3.968 per share.
(E) Issued 20,220 shares at $100 per share; convertible into common shares at
$3.968 per share.
(F) Issued 2,098 shares at $100 per share; convertible into common shares at
$3.22 per share, liquidation preference at $200 per share.
F-43
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The Company's Chairman, President and Chief Executive Officer (Mr. Lynford)
is the brother of the president of Reis. The Company's former President and
Chief Executive Officer, who currently serves on the Company's Board of
Directors (Mr. Lowenthal), has served on the board of directors of Reis
since the third quarter of 2000. At the time of the April 2000 investments
noted above, the management of Reis offered certain persons the opportunity
to make an individual investment in Reis, including, but not limited to,
certain directors and officers of the Company who purchased an aggregate of
$410,000 of Series C Preferred shares. During the year ending December 31,
2002, the Company committed to invest an aggregate of $629,000 in Reis
Series D Preferred shares of which $209,800 was invested in June 2002, and
the balance of $419,600 is subject to call by Reis in two separate equal
tranches through December 31, 2003. These tranches have a liquidation
preference of 250% and 300%, respectively. Other Preferred shareholders
invested $456,800 directly at the time of the Company's fiscal 2002
investment and committed to invest an additional $913,600. Two of these
Preferred shareholders, including the Hunt Trust who, together with other
entities, own the remaining interests in Reis Capital and certain other
Series D Preferred share investors are Company officers and directors. The
aggregate committed capital is $2,000,000, including amounts already
funded.
At December 31, 2002, the Company's investment in Reis, through direct
ownership and its pro rata share of its investment in Reis Capital,
amounted to approximately 21.4% of Reis' equity on an as converted basis.
The pro rata converted interests in Reis owned by the other partners of
Reis Capital, either directly or indirectly through Reis Capital aggregate
18.36%. The investments of the Company's officers and directors together
with shares of common stock previously held by Mr. Lynford represent
approximately 3.2% of Reis' equity, on an as converted basis. Additionally,
a company controlled by the Chairman of EQR owns Series C and Series D
Preferred shares with an aggregate 4.5% converted interest. The
vice-chairman of EQR is a director of the Company. Messrs. Lynford,
Lowenthal and certain directors of the Company whom have invested directly
in Reis, have and will continue to recuse themselves from any investment
decisions made by the Company pertaining to Reis.
The aggregate amounts raised have been utilized by Reis to carry out its
business plan to expand the number of real estate markets covered by its
services, move to an internet-based delivery system to its customers, to
increase marketing of its products to expand its customer base, to
accelerate the introduction of its new product line, develop a new product
related to its existing business and for general corporate purposes as well
as future working capital.
Information provided by Reis is used by Second Holding for due diligence
procedures on certain real estate-related investment opportunities. Second
Holding incurred fees of $240,000, $360,000 and $360,000 in connection with
such services for each of the years ended December 31, 2002, 2001 and 2000,
respectively. The Company's share of such fees was $120,000, $180,000 and
$180,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS
In January 1998, the Company formed CVW in which it had a 49% interest and
acquired the same percentage interest in a related real estate advisory and
consulting firm. CVW, together with Prudential Real Estate Investors
("PREI"), an affiliate of Prudential Life Insurance Company, established
the Clairborne Investors Mortgage Investment Program ("Clairborne") to make
opportunistic investments and to provide liquidity to lenders and
participants in mortgage loan transactions. The parties agreed to
contribute up to $150,000,000 to fund acquisitions approved by the parties,
of which PREI would fund 90% and a subsidiary of the Company would fund
10%. CVW was to originate, co-invest and manage the investments of the
program.
F-44
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The Company's original investment in the CVW entities was $1,250,000 of
cash and 74,000 five-year warrants to purchase the Company's common shares
at $30.35 per share, valued at approximately $750,000 at that time. In
September 2000, one of the two principals of CVW left CVW to pursue other
employment, the venture was terminated and the investment balance was
written off. In July 2001, warrants issued to the CVW partners were
repurchased for $80,000 and cancelled.
FORDHAM TOWER LOAN
In October 2000, the Company and PREI organized a new venture which
provided an aggregate of $34,000,000 of mezzanine financing for the
construction of Fordham Tower, a 50-story, 244 unit, luxury condominium
apartment project to be built on Chicago's near northside ("Fordham
Tower"). The Company fully funded its share of the loan of $3,400,000. The
loan, which matures in October 2003, bears interest at a fixed rate of
10.50% per annum with provisions for additional interest to PREI and the
Company and fees to the Company and the two former principals of CVW, based
upon certain levels of returns on the project and is secured by a lien on
equity interests in the property. Such additional interest and fees have
not been earned or accrued by the Company. The Company's investment in the
Fordham Tower venture is accounted for on the equity method. The Company's
share of income from Fordham Tower was approximately $361,000, $361,000 and
$85,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Construction is nearing completion and delivery of certain units commenced
in December 2002. As of December 31, 2002, approximately 93% of the units
were under contract and 23 unit sales had closed for gross proceeds of
approximately $11,300,000.
OTHER INVESTMENTS
VALUE PROPERTY TRUST
In February 1998, the Company completed the merger with VLP for total
consideration of approximately $169,000,000, which was accounted for as a
purchase. Thirteen of the twenty VLP properties were under contract and
subsequently sold to an affiliate of Whitehall for an aggregate of
approximately $64,000,000. The Company retained seven of the VLP
properties, with an allocated value upon purchase of approximately
$38,300,000 aggregating approximately 597,000 square feet with one property
located in California and the remaining six properties located in the
northeastern United States. VLP had cash of $60,800,000 and other net
assets of $5,900,000 at the close of the transaction. In October 1998, the
Company obtained a $28,000,000 loan, which was cross-collateralized by the
seven retained VLP properties, bore interest at LIBOR + 2.75% per annum and
was scheduled to mature in October 2001.
F-45
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
During the fourth quarter of 2000, the Company made the strategic decision
to sell the seven VLP properties. One of the properties was sold in
December 2000 and four other properties were sold during 2001 for aggregate
sales of approximately $34,217,000. Two unencumbered properties remain
unsold at December 31, 2002. The Company recorded a gain of approximately
$4,943,000 on the December 2000 transaction which was offset by a provision
for impairment of $4,725,000, also recorded in 2000, attributable to
expected sales proceeds being less than the respective carrying amounts on
four of the remaining six unsold VLP properties at December 31, 2000. The
Company repaid in full the $28,000,000 loan in December 2000 and expensed
all of the remaining unamortized deferred loan costs associated with the
financing. The net book value after a remaining impairment reserve of
$2,175,000 for the two unsold properties was approximately $6,027,000 and
$5,560,000 at December 31, 2002 and 2001, respectively. The Company
determined that no additional impairment provision was required at December
31, 2002 and 2001.
PROPERTY DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT
---------------------------------------------------------------
PALOMINO PARK
Presently, the Company's Wellsford Development activities consist solely of
an interest in a five-phase 1,800 unit class A multifamily development
("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado.
At December 31, 2002 and 2001, the Company had an 85.85% interest as the
managing owner in this project and a subsidiary of EQR had the remaining
14.15% interest.
In January 2003, the Company's board of directors approved a plan for the
Company to seek institutional investors to purchase an interest in the
residential rental phases at Palomino Park. There can be no assurance that
the Company will be able to find suitable investors or that such a
transaction will be completed.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt
bonds to fund construction at Palomino Park. Initially, all five phases of
Palomino Park were collateral for the Palomino Park Bonds. In June 2000,
the Company obtained a five-year AA rated letter of credit from Commerzbank
AG to provide additional collateral for the Palomino Park Bonds. This
letter of credit, which expires in 2005, replaced an expiring letter of
credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of
credit; such guarantee also expires in 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was
completed at a cost of approximately $41,500,000. At that time, the Company
obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured
by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in
December 2007 and bears interest at a fixed rate of 6.92% per annum.
Principal payments are based on a 30-year amortization schedule.
In November 1998, Phase II, the 304 unit phase known as Red Canyon, was
completed at a cost of approximately $33,900,000. At that time, the Company
acquired the Red Canyon improvements and the related construction loan was
repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon
Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon
Mortgage matures in December 2008 and bears interest at a fixed rate of
6.68% per annum. Principal payments are based on a 30-year amortization
schedule.
F-46
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In October 2000, Phase III, the 264 unit phase known as Silver Mesa was
completed at a cost of approximately $44,200,000. The Company made the
strategic decision to convert Silver Mesa into condominium units and sell
them to individual buyers. In conjunction with this decision, the Company
prepared certain units to be sold and continued to rent certain of the
remaining unsold units during the sellout period until the inventory
available for sale has been significantly reduced and additional units are
required to be prepared for sale. In conjunction with this decision, the
Company made a payment of $2,075,000 to reduce the outstanding balance on
the tax-exempt bonds in order to obtain the release of the Silver Mesa
phase from the Palomino Park Bond collateral. In December 2000, the Company
obtained a $32,000,000 loan from KeyBank National Association (the "Silver
Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum
(3.38% at December 31, 2002), is collateralized by the unsold Silver Mesa
units, matures in December 2003 and provides for one six-month extension at
the Company's option. Generally 90% of net sales proceeds per unit is
applied to principal repayments until the loan is paid in full. The balance
of the Silver Mesa Conversion Loan was $4,318,000 and $13,352,000 at
December 31, 2002 and 2001, respectively.
Sales of condominium units at the Silver Mesa phase of Palomino Park
commenced in February 2001 and 153 units have been sold through December
31, 2002. The following table provides information regarding sales of
Silver Mesa units:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------- PROJECT
2002 2001 TOTALS
---- ---- ------
Number of units sold ........... 48 105 153
Gross proceeds ................. $10,635,000 $21,932,000 $32,567,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 9,034,000 $18,648,000 $27,682,000
The following table details operating information related to the Silver
Mesa units being rented. As the Company continues to sell units, future
rental revenues and corresponding operating expenses will diminish.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---- ---- ----
Rental revenue ......... $1,462,000 $2,224,000 $ 592,000
Net operating income (A) $ 884,000 $1,488,000 $ 379,000
- ----------
(A) Net operating income is defined as rental revenue, less property operating
and maintenance expenses, real estate taxes and property management fees.
In December 2001, Phase IV, the 424 unit phase known as Green River, was
completed at a cost of approximately $56,400,000. Effective December 31,
2001, the Company (i) became obligated for the construction loan, (ii)
released the developer of the economic risks it bore during construction
and initial lease-up as the developer carried the construction loan and a
significant portion of the costs incurred on its balance sheet and (iii)
the developer no longer participated in any positive operating income
generated during the period. The construction loan balance was $37,111,000
and $36,747,000 at December 31, 2002 and 2001, respectively and bore
interest at LIBOR + 1.75% per annum (3.17% at December 31, 2002).
F-47
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION (CONTINUED)
On February 6, 2003, the Company obtained a $40,000,000 permanent loan
secured by a first mortgage on Green River. The Green River Mortgage
matures in March 2013 and bears interest at a fixed rate of 5.45% per
annum. Principal payments are based on a 30-year amortization schedule.
Proceeds were used to repay the Green River Construction Loan and excess
proceeds generally are available for working capital purposes.
Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units,
known as Gold Peak, had a cost basis of approximately $5,411,000 and
$5,400,000 at December 31, 2002 and 2001, respectively. The Company has not
determined if it will construct this phase or sell the improved land.
SONTERRA AT WILLIAMS CENTRE ("SONTERRA")
From the time of the Spin-off through January 1998, the Company held a
$17,800,000 mortgage on, and option to purchase, a 344-unit class A
residential apartment complex located in Tucson, Arizona. In January 1998,
the Company exercised its option and acquired Sonterra for approximately
$20,500,000, including satisfaction of the mortgage. In February 1998, the
Company closed on $16,400,000 of first mortgage financing (the "Sonterra
Mortgage") on this property, bearing interest at 6.87% and maturing in
March 2008. Principal payments were based on a 30-year amortization
schedule.
In November 2000, the Company sold the Sonterra property for $22,550,000
and recorded a pre-income tax gain of approximately $3,500,000. The buyer
assumed the Sonterra Mortgage which had an unamortized balance of
approximately $15,971,000 and paid the balance of the purchase price in
cash.
F-48
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the historical cost and fair value of the
Company's consolidated financial instruments at December 31, 2002 and 2001:
(AMOUNTS IN THOUSANDS)
HISTORICAL COST AT DECEMBER 31, FAIR VALUE AT DECEMBER 31,
------------------------------- --------------------------
NOTES RECEIVABLE (A) 2002 2001 2002 2001
-------------------- ---- ---- ---- ----
Fixed rate:
277 Park Loan .................. $ 25,000 $ 25,000 $ 27,771 (C) $ 25,900 (C)
Guggenheim ..................... 3,612 3,612 3,782 (C) 3,692 (C)
Other .......................... -- 1,200 -- 1,200 (D)
-------- -------- -------- --------
Total fixed rate notes ............ 28,612 29,812 31,553 30,792
-------- -------- -------- --------
Floating rate:
Patriot Loan ................... -- 4,973 -- 4,973 (E)
-------- -------- -------- --------
Total floating rate notes ......... -- 4,973 -- 4,973
-------- -------- -------- --------
Total notes receivable ............ $ 28,612 $ 34,785 $ 31,553 $ 35,765
======== ======== ======== ========
DEBT (B)
--------
Floating rate:
Palomino Park Bonds ............ $ 12,680 $ 12,680 $ 12,680 (F) $ 12,680 (F)
Silver Mesa Conversion Loan .... 4,318 13,352 4,318 (F) 13,352 (F)
Green River Construction Loan .. 37,111 36,748 37,111 (F) 36,748 (F)
-------- -------- -------- --------
Total floating rate debt .......... 54,109 62,780 54,109 62,780
-------- -------- -------- --------
Fixed rate:
Blue Ridge Mortgage ............ 32,447 32,916 35,472 (G) 33,648 (G)
Red Canyon Mortgage ............ 25,677 26,035 27,845 (G) 26,143 (G)
-------- -------- -------- --------
Total fixed rate debt ............. 58,124 58,951 63,317 59,791
-------- -------- -------- --------
Total debt ........................ $112,233 $121,731 $117,426 $122,571
======== ======== ======== ========
- ----------
(A) For more information regarding the Company's note receivables, see Footnote
4.
(B) For more information regarding the Company's debt, see Footnote 5.
(C) The fair value of the Company's fixed rate investments was determined by
reference to various market data.
(D) This $1,200 loan was paid in full on January 18, 2002. The Company
considered the fair value of this repaid loan at its face value.
(E) The fair value of the Company's floating rate investments is considered to
be their carrying amounts.
(F) The fair value of the Company's floating rate debt is considered to be
their carrying amounts.
(G) The fair value of the Company's fixed rate debt was determined by reference
to various market data.
F-49
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
Summarized consolidated quarterly financial information for the years ended
December 31, 2002 and 2001 is as follows:
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------
2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------ -------- ------- ------------ -----------
Revenues ....................................... $ 6,990,948 $ 7,442,491 $ 8,342,920 $ 8,942,107
Costs and expenses.............................. 8,140,081 8,255,483 9,179,849 9,270,187
Income (loss) from joint ventures .............. 420,203 329,582 505,283 (1,463,819)
Minority interest benefit (expense) ............ 45,470 25,977 13,206 (41,372)
------------ ------------ ------------ ------------
(Loss) before taxes and accrued distributions
and amortization of costs on Convertible Trust
Preferred Securities ......................... (683,460) (457,433) (318,440) (1,833,271)
Income tax (benefit) expense (A) ............... (27,000) 16,000 60,000 (1,349,000)
Accrued distributions and amortization of costs
on Convertible Trust Preferred Securities, net
of income tax benefit (A) .................... 419,954 419,953 419,954 119,954
------------ ------------ ------------ ------------
Net (loss) ..................................... $ (1,076,414) $ (893,386) $ (798,394) $ (604,225)
============ ============ ============ ============
Net (loss) per common share, basic** ........... $ (0.17) $ (0.14) $ (0.12) $ (0.09)
============ ============ ============ ============
Net (loss) per common share, diluted** ......... $ (0.17) $ (0.14) $ (0.12) $ (0.09)
============ ============ ============ ============
Weighted average number of common shares
outstanding, basic .......................... 6,409,248 6,437,390 6,449,206 6,450,586
============ ============ ============ ============
Weighted average number of common shares
outstanding, diluted ........................ 6,409,248 6,437,390 6,449,206 6,450,586
============ ============ ============ ============
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------ -------- ------- ------------ -----------
Revenues ....................................... $ 11,900,234 $ 13,131,882 $ 8,606,792 $ 7,854,091
Costs and expenses* ............................ 11,276,217 13,468,374 9,057,870 12,618,219
Income (loss) from joint ventures .............. 1,946,058 758,816 (763,377) 2,622,909
Minority interest .............................. (91,639) (93,662) (44,570) (52,655)
------------ ------------ ------------ ------------
Income (loss) before income taxes and accrued
distributions and amortization of costs on
Convertible Trust Preferred Securities ....... 2,478,436 328,662 (1,259,025) (2,193,874)
Income tax expense (benefit) ................... 465,000 (193,000) 122,000 305,000
Accrued distributions and amortization of costs
on Convertible Trust Preferred Securities, net
of income tax benefit ........................ 349,954 342,953 346,954 339,954
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 1,663,482 $ 178,709 $ (1,727,979) $ (2,838,828)
============ ============ ============ ============
Net income (loss) per common share, basic** .... $ 0.20 $ 0.02 $ (0.27) $ (0.45)
============ ============ ============ ============
Net income (loss) per common share, diluted** . $ 0.20 $ 0.02 $ (0.27) $ (0.45)
============ ============ ============ ============
Weighted average number of common shares
outstanding, basic .......................... 8,351,623 7,864,302 6,333,094 6,334,927
============ ============ ============ ============
Weighted average number of common shares
outstanding, diluted ........................ 8,356,001 7,873,327 6,333,094 6,334,927
============ ============ ============ ============
- ----------
* Costs and expenses for the three months ended December 31, 2001 includes a
restructuring charge of $3,527,000 in connection with arrangements with the
Company's former President for his early retirement and other personnel
changes.
** Aggregate quarterly earnings per share amounts may not equal annual amounts
presented elsewhere in these consolidated financial statements due to
rounding differences.
(A) The fourth quarter income tax benefit and tax benefit of accrued
distributions and amortization of costs of Convertible Trust Preferred
Securities results primarily from the Company's year end assessment of the
total available tax loss carrybacks to 1997 and 1998. The tax benefit
attributable to the Convertible Trust Preferred Securities amounted to
$105,000 in each of the first three quarters and $405,000 in the fourth
quarter of fiscal 2002.
F-50
Wellsford/Whitehall Group, L.L.C. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001 WITH REPORT OF INDEPENDENT AUDITORS
F-51
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
PAGE NO.
--------
Report of Independent Auditors.............................................F-53
Consolidated Balance Sheets................................................F-54
Consolidated Statements of Operations......................................F-55
Consolidated Statements of Changes in Members' Equity......................F-56
Consolidated Statements of Cash Flows......................................F-57
Notes to Consolidated Financial Statements.................................F-59
F-52
REPORT OF INDEPENDENT AUDITORS
To the Members of
Wellsford/Whitehall Group, L.L.C. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Wellsford/Whitehall Group, L.L.C. and subsidiaries (the "Company") as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, changes in members' equity and cash flows for the years ended
December 31, 2002, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Wellsford/Whitehall Group, L.L.C. and subsidiaries at December 31, 2002 and
2001, and the consolidated results of their operations and their cash flows for
the years ended December 31, 2002, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 8 to the consolidated financial statements, in 2002, the
Company adopted the provisions of Statement of Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets".
/s/ Ernst & Young LLP
New York, New York
February 14, 2003
F-53
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
Real estate assets, at cost:
Land .......................................... $ 41,727,134 $ 47,440,830
Buildings and improvements .................... 300,642,477 325,972,924
------------- -------------
342,369,611 373,413,754
Less accumulated depreciation .............. (46,036,554) (31,949,782)
------------- -------------
296,333,057 341,463,972
Construction in progress ...................... 55,664,016 5,723,067
------------- -------------
351,997,073 347,187,039
Assets held for sale ............................. 164,695,820 170,874,955
Cash and cash equivalents ........................ 16,169,437 32,147,561
Restricted cash .................................. 17,587,502 9,845,420
Deferred costs, less accumulated amortization .... 2,561,149 5,094,552
Receivables, prepaids and other assets, net ...... 4,307,741 6,961,009
------------- -------------
Total assets ..................................... $ 557,318,722 $ 572,110,536
============= =============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Liabilities attributable to properties held for
sale ........................................ $ 140,825,065 $ 142,590,319
Mortgages payable ............................. 96,825,748 104,451,545
Portfolio loan ................................ 132,349,245 126,854,606
Accrued expenses and other liabilities ........ 7,762,485 9,578,212
Distributions payable ......................... -- 4,221,364
Ground lease obligation ....................... 1,111,239 1,124,981
------------- -------------
Total liabilities ................................ 378,873,782 388,821,027
------------- -------------
Commitments and contingencies
Members' equity:
Membership units, $.01 par value per unit ..... 192,583 192,662
Paid in capital ............................... 275,657,412 275,752,333
Other comprehensive loss ...................... (1,296,573) (525,560)
Series A convertible preferred membership units -- --
Excess of distribution over earnings .......... (96,108,482) (92,129,926)
------------- -------------
Total members' equity ............................ 178,444,940 183,289,509
------------- -------------
Total liabilities and members' equity ............ $ 557,318,722 $ 572,110,536
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-54
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
---- ---- ----
Revenues:
Rental income ........................................ $ 46,636,386 $ 56,915,572 $ 59,010,207
Interest and other income ............................ 2,365,516 4,987,034 5,290,142
------------ ------------ ------------
Total revenues .................................... 49,001,902 61,902,606 64,300,349
------------ ------------ ------------
Expenses:
Property operations and maintenance .................. 12,842,551 15,273,712 14,915,152
Real estate taxes .................................... 5,768,902 6,348,414 6,162,127
Depreciation and amortization ........................ 15,025,575 12,448,133 9,386,113
Property and asset management ........................ 5,093,689 5,866,084 1,162,271
Interest ............................................. 13,067,548 17,724,169 18,350,715
General and administrative ........................... 727,580 922,159 6,869,410
------------ ------------ ------------
Total expenses .................................... 52,525,845 58,582,671 56,845,788
------------ ------------ ------------
(Loss)/income available before gains on dispositions,
loss from discontinued operations and preferred
distributions ........................................ (3,523,943) 3,319,935 7,454,561
(Loss)/gains on dispositions, net of losses on impairment (258,711) 10,790,576 238,829
------------ ------------ ------------
(Loss)/gain available before discontinued operations and
preferred distributions .............................. (3,782,654) 14,110,511 7,693,390
------------ ------------ ------------
Discontinued Operations:
Operating income/(loss) from discontinued operations .... 1,154,736 (1,364,627) (2,585,362)
Loss on impairment ...................................... (1,350,638) -- --
------------ ------------ ------------
Loss from discontinued operations ....................... (195,902) (1,364,627) (2,585,362)
------------ ------------ ------------
Net (loss)/income available for members before
preferred distributions .............................. (3,978,556) 12,745,884 5,108,028
Preferred distributions ................................. -- (757,541) (1,099,353)
------------ ------------ ------------
Net (loss)/income available for members ................. $ (3,978,556) $ 11,988,343 $ 4,008,675
============ ============ ============
Net (loss)/income per membership unit, basic ............ $ (0.21) $ 0.77 $ 0.30
============ ============ ============
Net (loss)/income per membership unit, diluted .......... $ (0.21) $ 0.77 $ 0.30
============ ============ ============
Net loss from discontinued operations per membership
unit, basic .......................................... $ (0.01) $ (0.09) $ (0.19)
============ ============ ============
Weighted average number of membership units outstanding,
basic ................................................ 19,262,875 15,527,652 13,457,410
============ ============ ============
Weighted average number of membership units outstanding,
diluted .............................................. 19,262,875 16,200,451 14,439,499
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-55
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SERIES A
CONVERTIBLE
MEMBERSHIP UNITS PREFERRED
---------------- PAID-IN MEMBERSHIP
UNITS AMOUNT CAPITAL UNITS
----- ------ ------- -----
December 31, 1999 .............. 13,211,081 $132,111 $181,841,448 $ 19,000,000
Additional equity contributions,
net ......................... 1,109,108 11,091 19,898,466 --
Redemption of equity ........... (16,717) (167) (72,383) (677,450)
Net income ..................... -- -- -- 1,099,353
Distributions .................. -- -- -- (1,099,353)
---------- -------- ------------ ------------
December 31, 2000 .............. 14,303,472 143,035 201,667,531 18,322,550
Additional equity contributions,
net ......................... 3,980,435 39,804 55,772,075 --
Conversion of equity ........... 982,286 9,823 18,312,727 (18,322,550)
Net income ..................... -- -- -- 757,541
Other comprehensive loss ....... -- -- -- --
Distributions .................. -- -- -- (757,541)
---------- -------- ------------ ------------
December 31, 2001 .............. 19,266,193 192,662 275,752,333 --
Redemption of units ............ (7,865) (79) (94,921) --
Net loss ....................... -- -- -- --
Other comprehensive loss ....... -- -- -- --
---------- -------- ------------ ------------
December 31, 2002 .............. 19,258,328 $192,583 $275,657,412 $ --
========== ======== ============ ============
EXCESS OF
DISTRIBUTIONS OTHER TOTAL
OVER COMPREHENSIVE MEMBERS'
EARNINGS LOSS EQUITY
-------- ---- ------
December 31, 1999 .............. $ (233,964) $ -- $ 200,739,595
Additional equity contributions,
net ......................... -- -- 19,909,557
Redemption of equity ........... -- -- (750,000)
Net income ..................... 4,008,675 -- 5,108,028
Distributions .................. (4,540,835) -- (5,640,188)
------------- ----------- -------------
December 31, 2000 .............. (766,124) -- 219,366,992
Additional equity contributions,
net ......................... -- -- 55,811,879
Conversion of equity ........... -- -- --
Net income ..................... 11,988,343 -- 12,745,884
Other comprehensive loss ....... -- (525,560) (525,560)
Distributions .................. (103,352,145) -- (104,109,686)
------------- ----------- -------------
December 31, 2001 .............. (92,129,926) (525,560) 183,289,509
Redemption of units ............ -- -- (95,000)
Net loss ....................... (3,978,556) -- (3,978,556)
Other comprehensive loss ....... -- (771,013) (771,013)
------------- ----------- -------------
December 31, 2002 .............. $ (96,108,482) $(1,296,573) $ 178,444,940
============= =========== =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-56
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss)/income from continuing operations ............... $ (3,782,654) $ 14,110,511 $ 7,693,390
Adjustments to (loss)/income from continuing operations
to net cash provided by operating activities:
Loss/(gains) on disposition of real estate assets . 258,711 (27,335,636) (238,829)
Depreciation and amortization ..................... 15,025,575 12,448,133 9,386,113
Loss on impairment of real estate assets .......... -- 16,545,060 --
Amortization of deferred financing costs .......... 2,090,024 1,845,868 1,414,338
Deferred rental revenue ........................... (714,108) 27,869 (487,918)
Decrease/(increase) in assets:
Receivables, prepaids and other assets ......... 517,374 (2,748,236) (1,114,179)
Increase/(decrease) in liabilities:
Accrued expenses and other liabilities ......... 890,398 (4,355,710) 1,893,991
Security deposits .............................. (82,020) (150,789) 37,054
------------- ------------- -------------
Net cash provided by operating activities ......... 14,203,300 10,387,070 18,583,960
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets ..................... -- (18,209,956) --
Acquisitions of and improvements to real estate assets
held for transfer to New Venture .................... -- -- (15,145,322)
Cash received for transfer of real estate assets to New
Venture ............................................. -- 5,277,002 11,250,000
Cash transferred with assets transferred to New Venture -- (306,791) --
Prepaid acquisition costs paid ......................... (209,621) -- (608,832)
Disposal of real estate assets, net of selling expenses 4,230,617 139,305,312 4,562,255
Improvements to real estate assets ..................... (23,937,160) (30,774,591) (38,801,637)
------------- ------------- -------------
Net cash (used in)/provided by investing activities (19,916,164) 95,290,976 (38,743,536)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage loans ........................... 2,309,968 16,877,798 4,371,095
Proceeds from secured senior credit facility ........... -- -- 3,210,826
Proceeds from secured mezzanine credit facility ........ -- -- 1,000,441
Proceeds from Portfolio loan ........................... 5,494,639 141,706,172 --
Repayment of mortgage loans ............................ (9,935,765) (805,157) (606,541)
Repayment of secured senior credit facility ............ -- (137,165,693) (1,424,173)
Repayment of secured mezzanine credit facility ......... -- (48,193,351) (500,385)
Repayment of Portfolio loan ............................ -- (14,851,566) --
Increase in restricted cash ............................ (7,742,082) (4,095,286) (1,463,303)
Deferred financing costs ............................... (293,635) (6,058,167) (1,315,996)
Preferred distributions ................................ -- (757,541) (1,113,093)
Member distributions ................................... (4,221,364) (101,646,062) (7,610,848)
Equity contributions, net .............................. -- 55,811,879 19,909,557
Redemption of equity ................................... (95,000) -- (750,000)
------------- ------------- -------------
Net cash (used in)/provided by financing activities .... (14,483,239) (99,176,974) 13,707,580
------------- ------------- -------------
Net cash provided by discontinued operations ........... 4,711,382 21,752,974 5,455,448
------------- ------------- -------------
(Decrease)/increase in cash and cash equivalents ....... (15,484,721) 28,254,046 (996,548)
Cash and cash equivalents, beginning of year ........... 32,147,561 4,469,216 7,157,318
------------- ------------- -------------
16,662,840 32,723,262 6,160,770
Less: cash of discontinued operations .................. (493,403) (575,701) (1,691,554)
------------- ------------- -------------
Cash and cash equivalents, end of year ................. $ 16,169,437 $ 32,147,561 $ 4,469,216
============= ============= =============
F-57
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest ................................. $ 20,471,820 $ 28,276,227 $ 34,362,662
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Seller financing - real estate held for transfer to New
Venture ............................................. $ 4,000,000
=============
Conversion of Series A convertible preferred membership
units ............................................... $ 18,322,550
=============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-58
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1. ORGANIZATION AND BUSINESS
Wellsford/Whitehall Group, L.L.C. and subsidiaries (the "Company") was
formed in May 1999 by the then members of Wellsford/Whitehall Properties
II, L.L.C. ("Properties"). Properties was a joint venture between Wellsford
Commercial Properties Trust ("WCPT"), a subsidiary of Wellsford Real
Properties, Inc. ("WRP"), WHWEL Real Estate Limited Partnership ("WHWEL"),
an affiliate of The Goldman Sachs Group Inc. (the "Whitehall Members"), and
the Saracen Members (collectively, the "Properties' Members"). Properties
(formerly Wellsford/Whitehall Properties, L.L.C.) was formed on August 28,
1997 as a private real estate investment company. WCPT intends to qualify
as a real estate investment trust ("REIT").
On May 28, 1999, the Properties' Members assigned their interests in
Properties to the Company and two affiliates of WHWEL contributed two
office buildings, located in Warren, NJ with an aggregate value of
approximately $7.9 million in exchange for membership units. No other
changes occurred in the operations of the owned properties at that time.
On December 21, 2000, the Company's Members agreed to a number of
modifications to the existing operating agreement, and WRP and the
Whitehall Members entered into several other agreements. Among other items,
WRP and the Whitehall Members agreed to extend their capital commitments to
the Company for one year to December 31, 2001 and to provide an aggregate
of $10 million of additional financing or preferred equity to the Company
through December 2003, if required. All employees working on Company
business were transferred from WRP to WP Commercial, L.L.C. ("WP"), the new
management company, which is owned by affiliates of the Whitehall Members
and senior management of WP. Effective January 1, 2001, WP replaced WCPT as
the Manager of the Company on a day-to-day basis; certain major and
operational decisions require the consent of the Members. At the same time,
WHWEL transferred part of its interests in the Company to WP. WP also
provides management, construction, development and leasing services to the
Company as well as to third parties, including tenants of the Company,
based upon an agreed upon fee schedule and also provides such services to a
new venture organized by certain of the Whitehall Members ("New Venture").
The Company no longer paid a $600,000 annual administrative fee to WRP
after December 31, 2000. However, the Whitehall Members have agreed to
separately pay WRP fees for assets sold by the Company equal to 25 basis
points of the sales proceeds and up to 60 basis points (30 basis points are
deferred pending certain hurdles being reached) for each purchase of real
estate made by the New Venture until such purchases aggregate $400 million.
The Whitehall Members also returned to WRP approximately 2.1 million
warrants to purchase common shares of WRP.
Under the terms of the agreements, it is expected that the Company will not
purchase any new real estate assets, except in limited cases, to replace
certain assets being sold or assets that compliment presently owned real
estate assets. The Members have agreed to an orderly disposal of the
Company's assets over time and WCPT and the Whitehall Members agreed to a
buy/sell agreement effective after December 31, 2003 with respect to any
remaining assets. In connection with the agreements, the Company
transferred to the New Venture three previously acquired assets at costs
plus interest. These assets were held solely for the benefit of the New
Venture and were acquired for a total of $15.2 million, net of $4.0 million
seller financing on one asset. The assets are shown, net of aggregate
deposits of $11.3 million received by the Company in December 2000, on the
accompanying Consolidated Balance Sheets as real estate held for transfer
to New Venture. The transfer occurred on January 4, 2001 at an aggregate
amount of $16.5 million.
F-59
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ORGANIZATION AND BUSINESS (CONTINUED)
On May 15, 1998, thirteen office buildings located in suburban Boston with
an aggregate value of approximately $148.7 million were contributed to
Properties for a combination of cash, Series A convertible preferred
membership units and membership units (the "Saracen Transaction"). In
connection with this transaction, several shareholders of the Saracen
Companies (the "Saracen Members") were issued both Series A convertible
preferred membership units and membership units and Properties assumed a
mortgage loan on six of the properties aggregating approximately $68.3
million. On September 7, 2001, all of the holders of the Series A
convertible preferred membership units exercised their conversion rights
and were issued membership units.
The Company will terminate on December 31, 2045, unless sooner by the
written consent of WHWEL, WXI/WWG Realty, L.L.C., W/W Group Holdings,
L.L.C., WP and WCPT or by the triggering of the aforementioned buy/sell
agreement.
At December 31, 2002, the Company owned 17 office properties, excluding
properties held for sale, totaling approximately 2,697,000 square feet
(unaudited), five drugstores totaling approximately 54,675 square feet
(unaudited), and approximately 34 acres of land (unaudited) under
development. The office properties are located in Northern New Jersey (9),
Downtown and Suburban Boston (7) and Suburban Baltimore and Washington, DC
(1). The drugstores are located in the Middle Atlantic (3) and Southern (2)
regions of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries and Properties and its wholly owned subsidiaries for their
respective periods of ownership. All significant inter-company accounts and
transactions among the Company and Properties and their subsidiaries have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS. The Company considers all demand and money
market accounts and short-term investments in government funds with an
original maturity of three months or less when purchased to be cash and
cash equivalents.
RESTRICTED CASH. Restricted cash primarily consists of debt service reserve
balances.
REAL ESTATE AND DEPRECIATION. Real estate assets are stated at cost. Costs
directly related to the acquisition and improvement of real estate are
capitalized, including the purchase price, legal fees, acquisition costs,
interest, property taxes and other operational costs during the period of
development and until the lease up of the acquired development properties.
Ordinary repairs and maintenance items are expensed as incurred.
Replacements and betterments are capitalized and depreciated over their
estimated useful lives. Tenant improvements and leasing commissions are
capitalized and amortized over the terms of the related leases.
Depreciation is computed over the expected useful lives of the depreciable
property on a straight-line basis, principally 40 years for commercial
properties and five to 12 years for furnishings and equipment. In October
2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets", which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS No. 144, retains the fundamental provisions
of SFAS No. 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived
assets to be disposed of by sale. SFAS No. 144 requires that long-lived
assets to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Write downs as a result of impairments have been shown
as an adjustment to gains on dispositions in the accompanying consolidated
financial statements.
F-60
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS. Deferred costs consist primarily of costs incurred to
obtain financing. Such deferred financing costs are amortized over the
expected term of the respective agreements; such amortization is included
in interest expense in the accompanying Consolidated Statements of
Operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
consist of cash and cash equivalents and long-term debt. The Company
believes that the carrying amount of cash and cash equivalents approximates
fair value due to the short maturity of this item. In addition, the Company
believes that the carrying values of its portfolio loan and certain
mortgages approximate fair values because such debt consists of variable
rate debt that reprices frequently. The Company believes that the fair
values of the remainder of the mortgage loans is in excess of their
carrying values, based upon various market data analysis.
PROFIT AND REVENUE RECOGNITION. Sales of real estate assets are recognized
at closing, subject to the receipt of down payments and other requirements
in accordance with applicable accounting guidelines. Commercial properties
are leased under operating leases. Rental revenue is recognized on a
straight-line basis over the terms of the respective leases.
DISCONTINUED OPERATIONS. SFAS No. 144 superceded the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" and broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. The statement is
effective for fiscal years beginning after December 15, 2001. Consistent
with SFAS No. 144, the results of operations of properties held for sale
are reported separately as discontinued operations for the years ended
December 31, 2002, 2001 and 2000. Assets and liabilities attributable to
properties held for sale have been classified separately in the Company's
consolidated balance sheets at December 31, 2002 and December 31, 2001 and
the consolidated financial statements issued for 2001 and 2000 have been
reclassified to reflect this presentation.
INCOME TAXES. The Company is a limited liability company as were the
predecessor companies. In accordance with the tax law regarding such
entities, each of the Company's membership unit holders is responsible for
reporting their share of the Company's taxable income or loss on their
separate tax returns. Accordingly, the Company has recorded no provision
for Federal, state or local income taxes.
PER UNIT DATA. Net income per membership unit is computed based upon the
weighted average number of membership units outstanding during the period.
There were no Series A convertible preferred membership units outstanding
during 2002. The assumed conversion of the Series A convertible preferred
membership units is anti-dilutive in 2001 and 2000.
ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
DERIVATIVE AND HEDGING ACTIVITIES. In June 1998, SFAS No. 133--Accounting
for Derivative Instruments and Hedging Activities was issued. In June 1999,
SFAS No. 137--Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 (an
amendment of FASB Statement No. 133) was issued. SFAS No. 137 extended the
required date of adoption of SFAS No. 133 to the fiscal year beginning June
15, 2000. The Company adopted SFAS No. 133 effective January 1, 2001. SFAS
No. 133 requires the Company to recognize all derivatives on the balance
sheet at fair market value. The Company's derivative investments are
primarily interest rate protection agreements which limit the base rate of
variable rate debt. The ineffective portion of a
F-61
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
derivative's change in fair market value is immediately recognized in
earnings, if applicable. The effective portion of the fair market value
difference of the derivative is reflected separately in members' equity as
other comprehensive loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 2002, the FASB issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS No. 146"). SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3 and requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is
incurred. This statement also establishes that fair value is the objective
for initial measurement of the liability. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
impact of the adoption of SFAS No. 146 is not expected to have a material
impact on the Company's financial position or results of operations.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' presentations to conform to the current year.
3. COMMERCIAL PROPERTIES
The Company owns the following properties from continuing operations at
December 31, 2002 and 2001:
(amounts in thousands, except square foot amounts)
Properties Collateralizing Portfolio Loan at December 31, 2002*
---------------------------------------------------------------
YEAR
SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT
---------------------- REHABILITATED --------------------
PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001
-------- -------- ---- ---- ----------- ---- ----
300 Atrium Drive .............. Somerset, NJ 147,000 147,000 1983 $ 19,551 $ 19,551
400 Atrium Drive .............. Somerset, NJ 355,000 355,000 1985 37,191 36,136
500 Atrium Drive .............. Somerset, NJ 169,000 169,000 1984 21,108 21,108
700 Atrium Drive .............. Somerset, NJ 181,000 181,000 1985 18,839 18,735
Garden State Exhibit Center ... Somerset, NJ 82,000 82,000 1968/1989 6,190 6,134
Cutler Lake Corporate Center .. Needham, MA 210,000 210,000 1963/2000 36,030 35,789
377/379 Campus Drive .......... Franklin Twp, NJ 199,000 199,000 1984 23,792 23,309
Samsung/105 Challenger Road ... Ridgefield Park, NJ 147,000 147,000 1992 21,286 21,269
150 Mount Bethel .............. Warren, NJ 129,000 129,000 1981 9,787 9,059
--------- --------- --------- ---------
1,619,000 1,619,000 193,774 191,090
--------- --------- --------- ---------
Properties Collateralizing the Nomura Loan at December 31, 2002*
----------------------------------------------------------------
YEAR
SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT
---------------------- REHABILITATED --------------------
PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001
-------- -------- ---- ---- ----------- ---- ----
333 Elm Street ................ Dedham, MA 48,000 48,000 1983 6,193 5,974
Dedham Place .................. Dedham, MA 160,000 160,000 1987/2002 31,064 28,302
Stony Brook Corporate Park .... Waltham, MA 218,000 218,000 1986 48,810 37,302
201 University Avenue ......... Westwood, MA 82,000 82,000 1982 10,363 10,363
7/57 Wells Avenue ............. Newton, MA 88,000 88,000 1982 12,744 12,651
75/85/95 Wells Avenue ......... Newton, MA 242,000 242,000 1976/1986 41,856 41,663
--------- --------- --------- ---------
838,000 838,000 151,030 136,255
--------- --------- --------- ---------
F-62
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMERCIAL PROPERTIES (CONTINUED)
Properties Collateralizing Other Mortgages or Unencumbered at December 31, 2002
-------------------------------------------------------------------------------
YEAR
SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT
---------------------- REHABILITATED --------------------
PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001
-------- -------- ---- ---- ----------- ---- ----
600 Atrium Drive (land)** ..... Somerset, NJ N/A N/A N/A 2,885 2,695
74 Turner Street (land)** ..... Waltham, MA N/A N/A N/A 1,001 1,001
McDonough Crossroads .......... Owings Mills, MD -- 32,000 1988 -- 3,842
Airport Executive Park ........ Hanover Twp, NJ 96,000 96,000 1979/2002 14,034 13,637
Airport Executive Park-Land** . Hanover Twp, NJ N/A N/A N/A 3,969 3,028
Columbia Technology Center .... Columbia, MD 144,000 144,000 1972/2002 12,631 8,879
CVS ........................... Essex, MD 10,125 10,125 2000 4,776 4,776
CVS ........................... Pennsauken, NJ 12,150 12,150 2001 3,925 3,925
CVS ........................... Runnemede, NJ 12,150 12,150 2001 4,134 4,134
CVS ........................... Wetumpka, AL 10,125 10,125 2000 2,681 2,681
CVS ........................... Richmond, VA 10,125 10,125 2001 3,194 3,194
--------- --------- --------- ---------
294,675 326,675 53,230 51,792
--------- --------- --------- ---------
Total Commercial Properties ... 2,751,675 2,783,675 $ 398,034 $ 379,137
- --------------------------- ========= ========= ========= =========
* - The properties encumbered by the Nomura Loan will also be encumbered by
the Portfolio Loan once certain operating results are achieved and initial
proceeds are drawn from the Portfolio Loan related to these properties.
** - Unencumbered.
Revenues from one single tenant, a large financial services provider,
aggregated approximately 6% and 11% of rental revenue from continuing
operations in 2002 and 2001, respectively. In 2000, one telecommunications
company aggregated 13% of revenue from continuing operations. This tenant's
lease was terminated in 2001 and the Company received approximately $3.7
million in lease termination fees. This amount is included in interest and
other income on the accompanying consolidated statements of operations.
The Company capitalizes interest related to buildings under renovation to
the extent such assets qualify for capitalization. Total interest incurred
and capitalized was $13,464,472 and $2,486,948, $18,462,098 and $2,583,797
and $24,242,401 and $7,306,024, respectively for the years ended December
31, 2002, 2001 and 2000.
The Company sold the following buildings and properties:
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Number of buildings ............ 1 11 1
============ ============ ============
Net sales proceeds (approximate) $ 4,231,000 $139,305,000 $ 4,562,000
============ ============ ============
(Loss)/gains on sales .......... $ (258,711) $ 27,335,636 $ 238,829
============ ============ ============
The Company recorded a $1,350,638 and $16,545,060 impairment provision
during the years ended December 31, 2002 and 2001. The 2002 impairment
provision relates to two assets; 24 Federal St. and CVS Decatur. Both of
these assets are classified as assets held for sale as of December 31,
2002. CVS Decatur was sold in January 2003 (see Note 11). The 2001
impairment provision relates to three assets: the Pointview Corporate
Center, 2331 Congress St. and McDonough Crossroads. These properties were
sold in September 2001, May 2001 and June 2002, respectively.
F-63
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LEASES
Office space in the properties is generally leased to tenants under lease
terms which provide for the tenants to pay base rents plus increases in
operating expenses in excess of specified amounts.
Non-cancelable operating leases with tenants expire on various dates
through 2024. The future minimum lease payments from continuing operations
to be received under leases existing as of December 31, 2002, are as
follows:
(amounts in thousands)
PROPERTIES COLLATERALIZING
-----------------------------------
PORTFOLIO NOMURA
FOR THE YEARS ENDED DECEMBER 31, TOTAL LOAN LOAN OTHER
- -------------------------------- ----- ---- ---- -----
2003............................ $ 36,756 $ 19,500 $ 11,501 $ 5,755
2004............................ 26,729 10,040 11,125 5,564
2005............................ 21,014 7,117 8,401 5,496
2006............................ 13,808 3,437 5,803 4,568
2007............................ 8,992 1,348 3,089 4,555
Thereafter...................... 37,729 983 4,937 31,809
-------- -------- -------- --------
Total........................... $145,028 $ 42,425 $ 44,856 $ 57,747
======== ======== ======== ========
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses which amounted to
approximately $4,418,051, $5,565,160, and $6,345,495 for the years ended
December 31, 2002, 2001 and 2000. These amounts have been included in
rental income in the accompanying consolidated statements of operations.
5. GROUND LEASES
The leasehold interests in two buildings totaling 291,000 square feet and
15.22 acres of developable land are subject to ground leases. At December
31, 2002, aggregate future minimum rental payments under the leases which
expire in October 2066, April 2077 and January 2084, are as follows:
(amounts in thousands)
YEARS ENDED DECEMBER 31, AMOUNT
------------------------ ------
2003.................... $ 218
2004.................... 231
2005.................... 233
2006.................... 234
2007.................... 235
Thereafter.............. 27,624
-------
Total................... $28,775
=======
F-64
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. LONG TERM DEBT
The Company's long-term debt from continuing operations (see Note 8)
consisted of the following:
(amounts in thousands)
DECEMBER 31,
-----------------
DEBT MATURITY DATE 2002 2001
- --------------------------- ------------- ---- ----
Portfolio Loan............ June 2004 $132,349 $126,855
Nomura Loan............... February 2027 65,458 66,189
Other Mortgage Loans...... December 2003 - January 2024 31,368 38,262
-------- --------
$229,175 $231,306
======== ========
In June 2001, the Company obtained a loan with General Electric Capital
Real Estate for up to $353 million (the "Portfolio Loan"). The loan bears
interest at a rate of LIBOR + 2.90% and has an initial term of three years.
The loan also provides for two 12-month extension options, subject to
meeting certain operating and valuation covenants. The loan had an initial
funding of $273 million, before transaction costs, and the remaining
balance is available to be drawn to fund certain capital expenditures and
upon achieving certain operating results from six properties. The net
proceeds were used to repay amounts due under a previous bank facility and
two mortgages; the remainder was distributed to the Members. Interest
expense on the Portfolio Loan was $6,084,768 and $4,222,189 in 2002 and
2001, respectively.
The 30-day LIBOR rate was 1.38%, 1.88% and 6.57% respectively, on December
31, 2002, 2001 and 2000. The average 30-day LIBOR rate was 1.76%, 3.72% and
6.43% respectively, for the years ended December 31, 2002, 2001 and 2000.
In connection with the Saracen transaction, the Company assumed a mortgage
loan held by Nomura Asset Capital Corporation in the original amount of
approximately $68.3 million (the "Nomura Loan"). The loan bears interest at
a rate of 8.03% and requires monthly payments of principal and interest
until maturity in February 2027.
In April 2001, the Company obtained mortgages on five of its owned
drugstores (the "Drugstore Mortgages"). The interest rate on the Drugstore
Mortgages is 7.28%, and matures in January 2024.
During 2000 and 1999, the Company obtained four mortgages to acquire and
improve four properties including one second mortgage provided by the
seller on one property (collectively, with the Drugstore Mortgages, the
"Other Mortgage Loans"). The interest rates on the Other Mortgage Loans
range from LIBOR + 2.00% to 2.95% and the original maturity dates range
from March 2003 to January 2024. One of the Other Mortgage Loans matured in
2002 and was refinanced into the Portfolio Loan described above. In
connection with a sale of one of the properties, the Company also repaid
one of the Other Mortgage Loans in 2002. The Company has exercised its
extension option on one of the two mortgage loans maturing in 2003 and
expects to refinance the other.
As of December 31, 2002 and 2001, the Company was in compliance with the
terms of covenants under all loan agreements.
Based upon various market analysis, the fair market value of the Company's
long term debt is approximately $261,474,000 and $256,939,000 at December
31, 2002 and 2001, respectively.
F-65
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
LONG TERM DEBT (CONTINUED)
The aggregate maturities for the Company's long-term debt obligations for
each of the next five years and thereafter are as follows:
(amounts in thousands)
PORTFOLIO NOMURA OTHER MORTGAGE
YEARS ENDED DECEMBER 31, TOTAL LOAN LOAN LOANS
- ------------------------ ----- ---- ---- -----
2003 ................... $ 16,056 $ -- $ 793 $ 15,263
2004 ................... 133,481 132,349 844 288
2005 ................... 1,240 -- 931 309
2006 ................... 1,343 -- 1,010 333
2007 ................... 1,452 -- 1,095 357
Thereafter.............. 75,603 -- 60,785 14,818
-------- -------- -------- --------
Total .................. $229,175 $132,349 $ 65,458 $ 31,368
======== ======== ======== ========
In July 2001, the Company entered into an interest rate protection
agreement (the "Cap") at a cost of $1,780,000, which limits LIBOR exposure
to 5.83% until June 2003 and 6.83% for the following year to June 2004 on
$285,000,000 of debt. At December 31, 2002 and 2001, the fair market value
of the Cap was approximately $13,000 and $1,089,000, respectively. The
ineffective portion of the Cap's change in fair market value was recorded
as an adjustment to interest expense of $79,724 in 2002 and $17,347 in
2001, respectively. The effective portion of the Cap's change in fair
market value, which was recorded as an adjustment to other comprehensive
loss during 2002 and 2001, is $771,013 and $525,560. An affiliate of the
Whitehall Members is the counterparty under the Cap. Prior to December 31,
2000, the Company entered into another interest rate protection agreement
(the "Prior Cap"), which capped LIBOR at 7.50% for up to $300 million
through March 15, 2001 and for up to $200 million through May 15, 2001. The
cost of the Prior Cap was amortized over its life.
7. TRANSACTIONS WITH AFFILIATES
As discussed in Note 1, WP performs management, development and leasing
services to the Company. The Company pays WP an administrative cost and
expense management fee equal to 0.93% of an agreed upon initial aggregate
asset value of $700 million of the Company's real estate assets. The fee
will be reduced six months after any asset is sold pursuant to an agreed
upon formula. The Company incurred an aggregate of $4,144,301 in 2002 and
$4,761,282 in 2001, respectively, related to these fees. Pursuant to the
agreements discussed in Note 1, the Company also pays WP for construction
management, development and leasing based upon a schedule of rates in which
each geographic area the Company operates. The Company incurred an
aggregate of $816,966 in 2002 and $897,730 in 2001, respectively, related
to these services. All amounts have been capitalized as part of real estate
assets.
Pursuant to the agreements discussed in Note 1, WP currently leases space
at two buildings owned by the Company and at one building previously owned
by the Company, which was sold in November 2001. The buildings owned by the
Company are shown on the accompanying consolidated balance sheets as assets
held for sale. Rental income under those leases was approximately $0 and
$219,684 for the years ended December 31, 2002 and 2001, respectively.
In connection with the formation of the Company in 1997 and the new capital
commitment from Whitehall in 1999, WRP issued warrants to Whitehall to
purchase a total of 2,128,098 shares of WRP's common stock at an exercise
price of $24.20 per share, payable in cash or in exchange for membership
units of the Company. These warrants were not exercised and were
surrendered on December 21, 2000, pursuant to the agreements discussed in
Note 1.
F-66
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TRANSACTIONS WITH AFFILIATES (CONTINUED)
Affiliates of the Whitehall Members provide debt placement, environmental
and insurance services for the Company. The Company incurred $849,583 in
2002, $3,182,139 in 2001 and $464,411 in 2000, respectively for these
services. In addition, an affiliate of the Whitehall Members is the
counter-party of the Cap discussed in Note 6.
Affiliates of the Saracen Members perform property management services for
the Company, which amounted to approximately $267,000, $337,000 and
$528,000, respectively for the years ended December 31, 2002, 2001 and
2000. Pursuant to an asset management agreement that was terminated in
January 1999, the Company agreed to pay $1 million in 2004, plus quarterly
interest at 10% per annum paid currently.
At December 31, 2002 and 2001 the Company has approximately $735,000 and
$742,000, respectively payable to its Members or their affiliates. These
amounts are in included accrued expenses and other liabilities on the
accompanying consolidated balance sheets.
Affiliates of the Saracen Members lease space at 7/57 Wells Avenue. Revenue
related to these leases for the years ended December 31, 2002, 2001 and
2000, amounted to $46,895, $47,258 and $44,826, respectively.
See Notes 1, 6, 9 and 10 for additional related party interest information.
8. DISCONTINUED OPERATIONS ("ASSETS AND LIABILITIES ATTRIBUTABLE TO PROPERTIES
HELD FOR SALE")
As of December 31, 2002 the Company has ten properties totaling 1,121,125
square foot (unaudited) which are being held for sale (collectively, the
"Properties Held for Sale"). Consistent with SFAS No. 144, the results of
operations of the Properties Held for Sale are reported separately as
discontinued operations for the years ended December 31, 2002, 2001, and
2000. Assets and liabilities attributable to the Properties Held for Sale
have been classified separately in the Company's consolidated balance
sheets at December 31, 2002 and December 31, 2001 and are summarized in the
following table:
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
Net real estate ............................. $159,265,358 $164,460,647
Cash and cash equivalents ................... 493,403 575,701
Restricted cash ............................. -- --
Deferred costs, less accumulated amortization 4,309 5,264
Receivables, prepaids and other assets ...... 4,932,750 5,833,343
------------ ------------
Total assets ................................ $164,695,820 $170,874,955
============ ============
LIABILITES AND MEMBERS' EQUITY
Mortgages payable ........................... $ 7,372,678 $ 7,497,117
Senior Secured facility ..................... -- --
Secured Mezzanine facility .................. -- --
Portfolio loan .............................. 131,811,189 131,205,828
Accrued expenses and other liabilities ...... 1,641,198 3,887,374
------------ ------------
Total liabilities ........................... 140,825,065 142,590,319
------------ ------------
Net assets of discontinued operations ....... $ 23,870,755 $ 28,284,636
============ ============
Revenues attributable to Properties Held for Sale for the years ended
December 31, 2002, 2001 and 2000 were $27,063,377, $21,607,439 and
$18,150,355, respectively.
Loss from discontinued operations as reflected in the accompanying
consolidated statements of operations for the year ended December 31, 2002
is after an impairment provision aggregating $1,350,638 attributable to two
properties held for sale.
F-67
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. MEMBERS' EQUITY
WRP, through WCPT, and WP are entitled to receive incentive compensation,
payable out of distributions, made by the Company to WCPT and the Whitehall
Members (the "Promote") after return of capital and minimum annual returns
of at least 15% to 17.5% on such capital balances to WCPT and Whitehall (as
defined in the Company's Operating Agreement). To date, neither WRP nor WP
have earned or received any distribution of the Promote.
At December 31, 2001, all capital commitments were fully funded. WCPT or
WRP and the Whitehall Members have also agreed to contribute an aggregate
of $10 million on a revolving, as needed basis ("Revolving Equity") through
December 31, 2003. This Revolving Equity accrues dividends at a rate of
LIBOR + 5.00% and is senior to the membership units. At December 31, 2002
none of the Revolving Equity has been drawn.
At the formation of the Company, 2,505,000 membership units were issued to
WCPT, representing its 50.1% interest, and 2,495,000 units were issued to
Whitehall, representing its 49.9% interest. Subsequently, an additional
3,771,780 and 9,052,422 units were issued to WCPT and Whitehall,
respectively, in connection with net additional capital contributions used
to fund acquisitions and renovations.
In connection with the Saracen Transaction, 468,557 membership units and
760,000 Series A convertible preferred membership units were issued to the
Saracen Members. The membership units were issued at a price of $16.22 per
membership unit. The Series A convertible preferred membership units were
convertible into membership units at a price of $18.65 per membership unit.
These units also provided for cumulative dividend payments of the greater
of (a) 6% or (b) the dividend payable to membership unit holders,
calculated on an as converted basis, payable quarterly in arrears, and had
a liquidation preference of $25.00 per Series A convertible preferred
membership unit plus accrued and unpaid distributions. In February 2000,
the Company redeemed the 16,717 membership units and 27,098 Series A
convertible preferred membership units held by one of the Saracen Members
for an aggregate amount of $750,000.
In September 2001, the holders of the Series A convertible preferred
membership units exercised their conversion option; 982,286 membership
units were issued in connection with the conversion.
The number of membership units issued and outstanding are as follows:
DECEMBER 31,
----------------------------------------
2002 2001 2000
---- ---- ----
WCPT .......... 6,276,780 6,276,780 5,673,012
Whitehall ..... 11,547,422 11,555,287 8,178,620
Saracen Members 1,434,126 1,434,126 451,840
---------- ---------- ----------
Total ......... 19,258,328 19,266,193 14,303,472
========== ========== ==========
During 2002, 2001 and 2000, distributions of $0, $103,352,145 and
$4,540,835, respectively, were declared, of which $0, $4,221,364 and
$2,253,520 remained unpaid at December 31, 2002, 2001 and 2000
respectively.
F-68
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Under the terms of the Company's joint venture agreement, Whitehall may
require the Company to sell any and all of its properties to an independent
third party purchaser, subject to certain significant restrictions.
Subsequent to December 31, 2003, either Whitehall or WCPT may trigger a
buy/sell of the other party's membership units in the Company or of the
remaining assets to the other member, subject to certain conditions.
As of December 31, 2002, the Company has an obligation to perform certain
repair and maintenance items at the Pointview property pursuant to the
terms of the sale of the property, which occurred in September 2001. These
items are estimated to be approximately $518,000 in the aggregate, and are
shown in accrued expenses and other liabilities in the accompanying
consolidated balance sheets.
As a commercial real estate owner, the Company is subject to potential
environmental costs. At December 31, 2002, management of the Company is not
aware of any environmental concerns that would have a material adverse
effect on the Company's consolidated financial condition, consolidated
results of operations or consolidated cash flows.
From time to time, legal actions are brought against the Company in the
ordinary course of business. There can be no assurances that such matters
will not have a material effect on the Company's consolidated financial
condition, consolidated results of operations or consolidated cash flows in
the future.
The Company has management agreements with unaffiliated property management
companies to manage the operations of the properties. Management fees are
generally based on 2% to 3% per annum of gross rentals collected and are
generally terminable on 30 days notice.
See Notes 1, 6, 7, 8 and 9 for additional commitments and contingencies.
11. SUBSEQUENT EVENTS
In January 2003, the Company sold one of its drugstores for $2.4 million.
In February 2003, the Company sold four office properties located in
Northern New Jersey and two office properties located in Suburban Baltimore
totaling 956,000 square feet for $136.8 million. These sales resulted in an
aggregate net gain of approximately $10.5 million. In March 2003, the
company sold one 16,000 square foot office property located in Waltham, MA
for $1.3 million. As discussed in Note 8, the assets and liabilities of all
eight properties are included in assets held for sale and liabilities
attributable to properties held for sale in the accompanying consolidated
balance sheets.
The Company is currently negotiating two contracts to sell two office
properties, located in Downtown Boston, MA, for an aggregate of
approximately $33.5 million (unaudited). Such transactions are expected to
close during the second quarter 2003 and should result in a net gain of
approximately $75,000 (unaudited). The assets and liabilities of these two
properties are included in assets held for sale and liabilities
attributable to properties held for sale in the accompanying consolidated
balance sheets. There can be no assurances that such sales will be
completed at all, or if completed will be at the terms being contemplated.
F-69
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(amounts in thousands, except square footage and units)
INITIAL COST COST
------------------------------------ CAPITALIZED
UNITS/ SUBSEQUENT
DATE YEAR SQUARE DEPRECIABLE BUILDING AND TO
DESCRIPTION ACQUIRED BUILT FEET LIFE LAND IMPROVEMENTS TOTAL ACQUISITION
----------- -------- ----- ---- ---- ---- ------------ ----- -----------
RESIDENTIAL
Blue Ridge - Dec-
Denver, CO .... 1997 1997 456 27.5 yrs $ 5,225 $ 36,339 $ 41,564 $ 419
Red Canyon - Nov-
Denver, CO .... 1998 1998 304 27.5 yrs 5,060 28,844 33,904 39
Silver Mesa - Dec-
Denver, CO (B). 2000 2000 40 27.5 yrs 3,343 18,959 22,302 (17,852)
Green River - Dec-
Denver, CO .... 2001 2001 424 27.5 yrs 8,451 47,889 56,340 7
------- --------- --------- --------- ---------
TOTAL
RESIDENTIAL ... 1,224 22,079 132,031 154,110 (17,387)
======= --------- --------- --------- ---------
OFFICE AND
INDUSTRIAL
Two properties-
Office/Industrial Feb-1998 Var. 175,183 40 yrs 1,035 5,865 6,900 2,000
======= --------- --------- --------- ---------
TOTAL ........... $ 23,114 $ 137,896 $ 161,010 $ (15,387)
========= ========= ========= =========
TOTAL COST
----------------------------------- PROVISION
BUILDING AND FOR ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL IMPAIRMENT NET DEPRECIATION ENCUMBRANCE
----------- ---- ------------ ----- ---------- --- ------------ -----------
RESIDENTIAL
Blue Ridge -
Denver, CO .... $ 5,225 $ 36,758 $ 41,983 $ -- $ 41,983 $ 6,694 $32,447 (A)
Red Canyon -
Denver, CO .... 5,060 28,883 33,943 -- 33,943 4,268 25,677 (A)
Silver Mesa -
Denver, CO (B). 667 3,783 4,450 -- 4,450 310 4,318 (C)
Green River -
Denver, CO .... 8,451 47,896 56,347 -- 56,347 1,562 37,111 (A)
--------- --------- --------- --------- --------- --------- -------
TOTAL
RESIDENTIAL ... 19,403 117,320 136,723 -- 136,723 12,834 99,553
--------- --------- --------- --------- --------- --------- -------
OFFICE AND
INDUSTRIAL
Two properties-
Office/Industrial 1,035 7,865 8,900 (2,175) (D) 6,725 697 -- (E)
--------- --------- --------- --------- --------- --------- -------
TOTAL ........... $ 20,438 $ 125,185 $ 145,623 $ (2,175) $ 143,448 $ 13,531 $99,553
========= ========= ========= ========= ========= ========= =======
- ----------
(A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680 at December 31, 2002. The Palomino Park
Bond collateral includes Blue Ridge, Red Canyon and Green River operational
phases, as well as the undeveloped Gold Peak phase (improved land).
(B) During the year ended December 31, 2002, the Company reclassified costs of
$17,854 and accumulated depreciation of $950 on 96 units to inventory
available for sale.
(C) Debt is also collateralized by the condominium portion of the project with
a carrying amount of approximately $14,542; individual units are currently
held for sale.
(D) Provision for impairment relates to excess of carrying amounts over
estimated individual net sale prices of assets held for sale.
(E) These properties are unencumbered at December 31, 2002.
S-1
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a reconciliation of real estate assets and accumulated
depreciation:
(amounts in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----
REAL ESTATE
Balance at beginning of period .... $ 160,163 $ 123,201 $ 135,418
Additions:
Acquisitions and transfers from
construction in progress .... -- 56,340 22,302
Recovery of impairment reserve . -- 2,550 --
Capital improvements ........... 1,139 537 1,993
--------- --------- ---------
161,302 182,628 159,713
Less:
Reclassified costs to available
for sale inventory .......... (17,854) -- --
Provision for impairment ....... -- -- (4,725)
Cost of real estate sold ....... -- (22,465) (31,787)
--------- --------- ---------
Balance at end of period .......... $ 143,448 (A) $ 160,163 $ 123,201
========= ========= =========
ACCUMULATED DEPRECIATION
Balance at beginning of period .... $ 9,873 $ 8,248 $ 6,584
Additions:
Charged to operating expense ... 4,608 3,066 4,198
--------- --------- ---------
14,481 11,314 10,782
Less:
Accumulated depreciation on real
estate costs reclassified to
available for sale inventory. (950) -- --
Accumulated depreciation on real
estate sold ................. -- (1,441) (2,534)
--------- --------- ---------
Balance at end of period ......... $ 13,531 (A) $ 9,873 $ 8,248
========= ========= =========
- ----------
(A) The aggregate depreciated cost for federal income tax purposes was
approximately $5,000 less at December 31, 2002.
S-2