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UNITED STATES
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, 2003 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
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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
535 Madison Avenue, New York, NY 10022
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(Address of Principal Executive Offices) (Zip Code)
(212) 838-3400
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock $0.02 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 and non-voting common equity held by
non-affiliates of the Registrant was approximately $99,500,000 based on the
closing price on the American Stock Exchange for such shares on June 30, 2003.
The number of the Registrant's shares of Common Stock outstanding was 6,456,850
as of March 9, 2004 (including 169,903 shares of Class A-1 Common Stock).
Documents Incorporated By Reference
Portions of the Definitive Proxy Statement for the 2004 Annual Shareholders'
Meeting 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.
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TABLE OF CONTENTS
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Item Page
No. No.
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PART I
1. Business..................................................................3
2. Properties...............................................................15
3. Legal Proceedings........................................................19
4. Submission of Matters to a Vote of Security Holders......................19
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......................19
6. Selected Financial Data..................................................21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................23
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
9a. Controls and Procedures..................................................43
PART III
10. Directors and Executive Officers of the Registrant.......................43
11. Executive Compensation...................................................44
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................................44
13. Certain Relationships and Related Transactions...........................44
14. Principal Accountant Fees and Services...................................44
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........44
FINANCIAL STATEMENTS
15a. Consolidated Balance Sheets as of December 31, 2003 and 2002............F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001......................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001..........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001......................................F-6
Notes to Consolidated Financial Statements..............................F-8
Wellsford/Whitehall Group, L.L.C. Consolidated Financial
Statements and Notes.................................................F-47
Second Holding Company, LLC Consolidated Financial
Statements and Notes.................................................F-64
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 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, 2003 includes:
Commercial Property Operations-Wellsford/Whitehall Group, L.L.C. A 32.59%
interest in a private joint venture that owns and operates 25
properties (including 17 office properties, five net-leased retail
properties and three land parcels) as of December 31, 2003 totaling
approximately 2,808,000 square feet of improvements, primarily located
in New Jersey and Massachusetts. The Company's investment in
Wellsford/Whitehall was approximately $14,616,000 at December 31,
2003.
Debt and Equity Activities-Wellsford Capital
o Direct debt investment of $3,096,000 which bore interest at 8.25% per
annum during 2003 and had a remaining term to maturity of two years at
December 31, 2003;
o Approximately $32,353,000 of equity investments in companies which
were organized to invest in debt instruments including (i)
approximately $29,167,000 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 (ii) approximately
$3,186,000 in Clairborne Fordham Tower, L.L.C. ("Clairborne Fordham"),
a company initially organized to provide $34,000,000 of mezzanine
financing for a highrise condominium project in Chicago;
o Approximately $6,790,000 invested in Reis, Inc. ("Reis"), a real
estate information and database company;
o A 49,000 square foot commercial property located in Philadelphia,
Pennsylvania with a net book value of approximately $1,973,000; and
o A $330,000 loan to a venture organized to purchase land parcels for
rezoning, subdivision and creation of environmental mitigation
credits.
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 rental property. A 264 unit fourth
phase has been converted into condominiums. Sales commenced in
February 2001 and through December 31, 2003, the Company has sold 209
units. The land for the remaining fifth phase is being held for
possible future development. The Company's equity in Palomino Park is
approximately $16,919,000 at December 31, 2003.
See the accompanying consolidated financial statements for certain financial
information regarding the Company's industry segments.
3
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 16
employees as of December 31, 2003.
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, 2003 and 2002.
The manager of the joint venture is a Goldman Sachs and Whitehall affiliate. At
December 31, 2003, Wellsford/Whitehall owns and operates 25 properties
(including 17 office properties, five net-leased retail properties and three
land parcels), totaling approximately 2,808,000 square feet of improvements,
primarily located in New Jersey and Massachusetts.
Wellsford/Whitehall is a private real estate operating company organized to
lease and re-lease space, perform construction for tenant improvements, expand
buildings, re-develop 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 near future.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $14,616,000 and $55,592,000 at December 31,
2003 and 2002, respectively. The Company's share of (loss) income from
Wellsford/Whitehall was approximately $(36,473,000), $(1,292,000) and $4,367,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
Upon formation of Wellsford/Whitehall in August 1997, $150,000,000 was committed
by the partners ($75,000,000 each), including the amount of contributed
properties, net of assumed debt. The capital requirements were modified in June
1999 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 provide an aggregate of $10,000,000 of additional
financing or preferred equity to Wellsford/Whitehall if required. No amounts
were advanced by either partner prior to the expiration of this commitment at
December 31, 2003. Additionally, WP Commercial, L.L.C. ("WP Commercial"),
replaced the Company as the managing member of Wellsford/Whitehall. WP
Commercial is owned by affiliates of Goldman Sachs and 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 disposed of by Wellsford/Whitehall.
The Amendments included a buy/sell agreement of equity interests between the
Company and Whitehall which can be exercised by either party after December 31,
2003 with respect to the Wellsford/Whitehall venture (the "Buy/Sell Agreement").
The nature of the Buy/Sell Agreement allows for either the Whitehall funds as a
group or the Company to provide notice that it intends to purchase the
non-initiating partner's interest at a specific price. The non-initiating party
may either accept that offer or instead may reject that offer and become the
purchaser at the initially offered price. The terms of the Wellsford/Whitehall
GECC Facility allow for the continuance of such debt as long as the Company or
Whitehall has ultimate decision-making authority over the management and
operations of Wellsford/Whitehall. As of the date of this report, neither party
has exercised its buy/sell right under the Buy/Sell Agreement.
4
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.
During the years ended December 31, 2003, 2002 and 2001, Wellsford/Whitehall
completed the following purchase and sale transactions:
(amounts in millions, except square feet and per square foot amounts)
2003 Activity
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
- ----------- ------------------------------- ------------------- ------------ ------------ --------------
January Decatur - CVS.................. Decatur, GA 10,000 $ 2.4 $ 234
------------ ------------
February Portfolio sale (A):
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..... 956,000 136.8 143
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March 60 Turner Street............... Waltham, MA 16,000 1.3 81
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May 79 Milk Street (B)............. Boston, MA 65,000
24 Federal Street (B).......... Boston, MA 75,000
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140,000 33.0 236
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June Greenbrook land................ Fairfield, NJ -- 0.8 --
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1,122,000 $ 174.3
============ ============
2002 Activity
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
- ----------- ------------------------------- ------------------- ------------ ------------ --------------
June McDonough Crossroads........... Owings Mills, MD 31,732 $ 2.9 $ 91
============ ============ =============
2001 Activity
Purchases (C):
Gross Purchase
Leasable Purchase Price per
Month Property Location Square Feet Price Square Foot
- ----------- ------------------------------- ------------------- ------------ ------------ --------------
April Five CVS locations............. Various 54,000 $ 18.7 $ 342
October Decatur - CVS.................. Decatur, GA 10,000 2.3 232
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64,000 $ 21.0
============ ============
5
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
- ----------- ------------------------------- ------------------- ------------ ------------ --------------
February Portfolio sale (D):
70 Wells Avenue............. Newton, MA 29,000
100 Wells Avenue............ Newton, MA 21,000
150 Wells Avenue............ Newton, MA 11,000
160 Wells Avenue............ Newton, MA 19,000
72 River Park............... Newton, MA 22,000
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Total portfolio sale..... 102,000 $ 18.0 $ 176
April 2331 Congress Street........... Portland, ME 24,000 1.6 67
May Morris Technology
Center...................... Parsippany, NJ 257,000 61.5 239
August Shattuck Office Center......... Andover, MA 63,000 9.2 146
September Pointview...................... Wayne, NJ 564,000 35.5 63
November 1800 Valley Road............... Wayne, NJ 56,000 8.2 146
November Chatham Executive
Center...................... Chatham, NJ 63,000 12.0 190
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1,129,000 $ 146.0
============ ============
_____________________________________
(A) The portfolio sale of assets in February 2003 was to a single
purchaser.
(B) This sale was to a single purchaser. Wellsford/Whitehall recorded an
impairment provision of $1.3 in the fourth quarter of fiscal 2002
related to this sale.
(C) 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.
(D) The sale of five properties in February 2001 was to a single
purchaser.
Annually, after the preparation of budgets for the following year and as part of
the financial statement closing process, Wellsford/Whitehall performs
evaluations for impairment on all of its real estate assets. As part of this
evaluation, Wellsford/Whitehall recorded an impairment charge of approximately
$114,700,000 related to 12 assets in the portfolio during the fourth quarter of
2003. The provision is not the result of a change in intended use of such
assets, however, it is the result of several factors including, but not limited
to, a continued deterioration of and outlook for the suburban office submarkets
where Wellsford/Whitehall's properties are situated. Specifically, these include
decreasing market rents, slower absorption trends and greater tenant concession
costs. The Company's share of this impairment charge was approximately
$37,377,000 in 2003 and as a result, the Company wrote-off related unamortized
warrant costs on the Company's books of approximately $2,644,000.
At December 31, 2002, in anticipation of the sales of the Decatur, GA and
Boston, MA properties, Wellsford/Whitehall recorded impairment provisions
aggregating approximately $1,351,000 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 in 2002 and as a result,
the Company wrote-off related unamortized warrant costs on the Company's books
of approximately $284,000.
The aggregate impairment provisions recorded during 2001 (primarily relating to
the Pointview property, a 194 acre complex with two buildings totaling
approximately 564,000 square feet, located in Wayne, New Jersey) were
$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 ("GECC
Facility") with an initial funding of approximately $273,000,000 before
transaction costs. The facility bore interest at LIBOR + 2.90% per annum (4.02%
at December 31, 2003) and was set to initially mature in June 2004 with two
12-month extension options, subject to meeting certain operating and valuation
covenants. Prior to June 30, 2003 the GECC Facility provided for additional
financing
6
to fund certain capital expenditures related to its properties if certain
operating ratios were met; such ability expired at June 30, 2003 with no funds
being advanced. This financing was arranged by Goldman Sachs, to whom
Wellsford/Whitehall paid a fee of approximately $2,644,500 during 2001.
Wellsford/Whitehall executed a letter agreement with GECC effective January 20,
2004 relating to the modification of the GECC Facility. The modification is
subject to the execution of the final amended agreement documents. The amended
agreement provides for an extension of the loan maturity to December 31, 2006,
interest at LIBOR plus 3.25% per annum, a principal paydown of $1,000,000 and a
$17,000,000 line of credit to fund certain capital improvements through December
31, 2005. Excess cash flow, as defined, from the properties collateralizing the
GECC Facility can only be used for capital expenditures for such properties.
Wellsford/Whitehall is required to establish lock box arrangements for the
deposit of all rent receipts relating to each of the properties collateralizing
the GECC Facility.
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 at December 31, 2002 and had no fair value at December 31, 2003. This
Cap was purchased from Goldman Sachs based upon the results of a competitive
bidding process. The amended GECC Facility requires that a similar cap be
purchased through December 31, 2006.
The following table summarizes the long-term debt at Wellsford/Whitehall:
Stated Balance at December 31,
Initial Maturity Interest -------------------------------------
Debt/Project Date Rate 2003 2002
- ---------------------------------------- ---------------- ------------- ---------------- ----------------
Wellsford/Whitehall GECC Facility....... December 2006 LIBOR + 3.25% $ 106,078,000 $ 264,160,000
Nomura Loan (A)......................... February 2027 8.03% 64,666,000 65,458,000
Oakland Ridge Loan (B).................. March 2004 LIBOR + 2.00% 6,905,000 6,959,000
Retail properties (C)................... January 2024 7.28% 16,104,000 16,371,000
Airport Park Loan....................... March 2004 LIBOR + 2.05% 7,906,000 8,037,000
Other loans on office properties sold... Various Various -- 7,373,000
---------------- ----------------
$ 201,659,000 $ 368,358,000
================ ================
- -------------------------------------------
(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 (the "Nomura Loan").
(B) The non-recourse loan is secured by the leasehold interest in the Oakland
Ridge office park in Columbia, Maryland. The loan was extended by
Wellsford/Whitehall in March 2003 for one year. This asset is held for sale
at December 31, 2003.
(C) Comprised of five mortgages secured by the leasehold interest in five
net-leased retail properties.
During February 2004, Whitehall requested a dialogue with the special servicer
of the Nomura Loan to discuss various forms of debt relief under the terms of
the Nomura Loan. The Nomura Loan is collateralized by six of the Boston area
properties in the Wellsford/Whitehall portfolio. There can be no assurance as to
the outcome of these discussions.
The Company and Whitehall have agreed to provide up to $8,000,000 to
Wellsford/Whitehall through March 31, 2005 (of which the Company's share is
35%), however, there can be no assurance that this amount will be sufficient.
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 $4,604,000, $5,826,000 and $6,422,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
Pursuant to the terms of the Amendments, 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
7
basis points are deferred pending certain return on investment thresholds 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,
---------------------------------------
2003 2002 2001
-------- ------- --------
Asset disposition fees.......... $430,000 $ 7,000 $365,000
Asset acquisition fees.......... -- 22,000 23,000
-------- ------- --------
Total fees...................... $430,000 $29,000 $388,000
======== ======= ========
Debt and Equity Activities - Wellsford Capital
- ----------------------------------------------
The Company, through the Debt and Equity Activities-Wellsford Capital SBU,
primarily 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 the expertise of both the Company
and its joint venture partners to analyze the underlying assets and thereby
effectively minimizing risk.
At December 31, 2003, the Company had the following investments: (i) a direct
debt investment of $3,096,000 which bore interest at 8.25% per annum during 2003
and had a remaining term to maturity of two years; (ii) approximately
$32,353,000 of equity investments in companies which were organized to invest in
debt instruments, including approximately $29,167,000 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 approximately $3,186,000 in Clairborne Fordham, a company
initially organized to provide $34,000,000 of mezzanine financing for a highrise
condominium project in Chicago; (iii) approximately $6,790,000 invested in Reis,
a real estate information and database company; (iv) a 49,000 square foot
commercial property located in Philadelphia, Pennsylvania with a net book value
of approximately $1,973,000; and (v) a $330,000 loan to a venture organized to
purchase land parcels for rezoning, subdivision and creation of environmental
mitigation credits.
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.
During September 2003, the 277 Park Loan was prepaid by the borrowers and
pursuant to the terms of the loan, WRP received a yield maintenance penalty of
$4,368,000 which is included in interest revenue for the year ended December 31,
2003. This note would have provided for $767,000 of interest revenue in the
fourth quarter
8
of 2003 and $3,042,000 for future annual periods to May 2006 for both the
Wellsford Capital SBU and the Company's consolidated statement of operations.
The 277 Park Loan bore interest at 12.00% per annum with a stated maturity of
May 2007. The 277 Park Loan was secured primarily by a pledge of the Equity
Interests owned by the borrowers and thus was junior to a first mortgage loan on
the 277 Park Property.
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, including Second Holding (see below). 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 $3,096,000 and $3,612,000 at December 31,
2003 and 2002, respectively. On January 5, 2004, the Company received a payment
which included the 2003 principal paydown of $1,032,000 and the 2003 interest.
The following table summarizes interest revenue and its share of consolidated
revenue from continuing operations during such periods for the Wellsford Capital
SBU:
For the Years Ended December 31,
---------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ------------------------- --------------------------
Interest Interest Interest
Revenue Percent Revenue Percent Revenue Percent
-------------- -------- -------------- --------- --------------- ---------
277 Park Loan (A)............... $ 6,643,000 18.7% $ 3,042,000 10.0% $ 3,042,000 7.6%
Guggenheim Loan................. 259,000 0.7% 302,000 1.0% 345,000 0.8%
Other........................... 3,000 0.0% 147,000 0.5% 707,000 1.8%
-------------- -------- -------------- --------- --------------- ---------
Interest revenue from loans..... 6,905,000 19.4% 3,491,000 11.5% 4,094,000 10.2%
Interest revenue from cash and
cash equivalents in the SBU.. 22,000 0.1% 5,000 0.0% 72,000 0.2%
-------------- -------- -------------- --------- --------------- ---------
Total interest revenue.......... $ 6,927,000 19.5% $ 3,496,000 11.5% $ 4,166,000 10.4%
============== ======== ============== ========= =============== =========
Consolidated revenue from
continuing operations (base
from which percentage is
calculated).................. $ 35,602,432 $ 30,512,089 $ 40,165,820
============== ============== ===============
_________________________
(A) Includes the yield maintenance penalty of $4,368,000 during 2003.
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's net contribution to Second Holding was approximately $24,600,000
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
9
Company at December 31, 2003 and 2002 ("Hunt Trust")) who, together with other
Hunt Trust related entities, own the remaining approximate 39%.
During the latter part of 2000, an additional partner was admitted to the
venture. This partner is committed through April 2010 to provide 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
bond issue of $150,000,000 initially, which was reduced to $100,000,000 during
January 2003. The parent company of this partner announced during 2003 that its
subsidiary (the partner of Second Holding) will no longer write new credit
enhancement business, however, it will continue to support its existing book of
credit enhancement business. The Company does not believe that this decision
will have a material adverse impact on the business and operations of Second
Holding as a result of that partner's existing commitment to the venture. This
partner is entitled to 35% of net income as defined by 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%.
The Company's investment in Second Holding, which is accounted for on the equity
method, was approximately $29,167,000 and $28,166,000 at December 31, 2003 and
2002, respectively. The Company's share of income (loss) from Second Holding was
approximately $1,640,000, $723,000 and $(163,000) for the years ended December
31, 2003, 2002 and 2001, 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 $930,000, $646,000 and $217,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003 and 2002, Second Holding had total assets of approximately
$1,903,919,000 and $1,840,096,000, respectively, including real estate debt and
other asset-backed securities investments of approximately $1,744,282,000 and
$1,785,758,000, respectively. The investment-grade assets are variable rate
based and have a weighted average annual interest rate of 1.78% and 2.21% at
December 31, 2003 and 2002, respectively. Approximately 94% of these investments
were rated AAA or AA by Standard & Poor's at December 31, 2003.
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 $1,837,701,000 and $1,722,933,000 at December 31, 2003 and 2002,
respectively with a weighted average annual interest rate of 1.22% and 1.69%,
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. As a result of the
events of September 11, 2001, these structures were destroyed. During December
2003, the entire bond offering, including the WTC Certificates, was repaid in
full by the borrower.
Reis, Inc.
The Company has direct and indirect equity investments in a real estate
information and database company, Reis, a leading provider of real estate market
information to institutional investors. At December 31, 2003 and 2002, the
Company's aggregate investment in Reis, which is accounted for under the cost
method, was approximately $6,790,000 or approximately 21.8% 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 and Lowenthal have and will continue to recuse themselves from
any investment decisions made by the Company pertaining to Reis.
10
Reis' business plan includes expanding the number of real estate markets covered
by its services, moving to an internet-based delivery system to its customers,
increasing marketing of its products to expand its customer base, accelerating
the introduction of its new product line and developing a new product related to
its existing business.
Clairborne Fordham
In October 2000, the Company and Prudential Real Estate Investors ("PREI"), an
affiliate of Prudential Life Insurance Company, organized Clairborne Fordham
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, which has a 10% interest in Clairborne Fordham, fully funded its
$3,400,000 share of the loan. The loan, which matured in October 2003, bore
interest at a fixed rate of 10.50% per annum with provisions for additional
interest to PREI and the Company and was secured by a lien on the equity
interests of the owner of Fordham Tower. The Company may earn fees from PREI's
additional interest based upon certain levels of returns on the project. Such
additional interest and fees had not been accrued by the Company or Clairborne
Fordham through the maturity of the loan. The Company's investment in the
Clairborne Fordham venture is accounted for on the equity method. The Company's
share of income from Clairborne Fordham through the initial maturity of the loan
in October 2003 was approximately $270,000, $361,000 and $361,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Construction is complete and delivery of certain units commenced in December
2002. As of December 31, 2003, no units were under contract and 220 units
(including nine penthouses and 211 standard units) had closed for gross proceeds
of approximately $143,800,000. The remaining unsold units consist of five
standard units, 13 penthouses and six townhouses. One penthouse unit was sold in
February 2004 with another penthouse unit and a standard unit under contract. In
addition, the owner of Fordham Tower is seeking to sell the 12,000 square feet
of retail space and a 200 space commercial parking facility, both of which are
part of the project.
The loan was not repaid at maturity and as of October 2003 an amended loan
agreement was executed extending the loan to December 31, 2004. The amended
terms provided for the placement of a first mortgage lien on the project, no
interest to be accrued after September 30, 2003 and for the borrower to add to
the existing principal amount the additional interest due Clairborne Fordham at
September 30, 2003 of approximately $19,240,000. In lieu of interest after
September 30, 2003 Clairborne Fordham will also participate in certain
additional cash flows, as defined, if earned from net sales proceeds of the
Fordham Tower project.
The amended agreement provided for a $3,000,000 additional capital contribution
by the borrower and use of an existing cash collateral account to pay off the
existing construction loan, any unpaid construction costs and to make a
principal payment to Clairborne Fordham in October 2003 of approximately
$4,600,000, of which the Company's share was approximately $460,000. An
additional payment of approximately $554,000 was received by Clairborne Fordham
in December 2003 of which the Company's share was approximately $55,000. The
agreement provides for all proceeds after project costs to be first applied to
payment in full of the loan and the additional interest to Clairborne Fordham
before any sharing of project cash flow with the borrower. An additional
principal payment of approximately $1,277,000 was made in February 2004 (of
which the Company's share was $128,000) as a result of the sale of the penthouse
unit.
The Company and Clairborne Fordham have (i) concluded that their respective
investment and loan balances are not impaired at December 31, 2003 and (ii)
determined to recognize a portion of the additional interest over the expected
remaining life of the loan. The Company's share of additional interest earned
for the year ended December 31, 2003 was approximately $136,000. The Company did
not recognize any additional interest during 2002 and 2001. The Company's equity
investment, after the effect of the above activity, was $3,186,000 and
$3,631,000 at December 31, 2003 and 2002, respectively.
11
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.
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 properties were sold during 2001 for aggregate sales of approximately
$34,217,000. 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. There were no additional gains or losses
recorded by the Company as a result of the four property sales during 2001.
In July 2003, the Company sold the Salem, New Hampshire property for a net sales
price of approximately $4,200,000 and the Company utilized $22,000 of the
impairment reserve. The Company is actively marketing the remaining VLP
property, a 49,000 square foot office building located in Philadelphia,
Pennsylvania. The net book value for the unsold properties at December 31, 2003
and 2002 was approximately $1,973,000 and $6,027,000, respectively, after
considering the remaining impairment reserve of $2,153,000 and $2,175,000 at
December 31, 2003 and 2002, respectively.
West Deptford Venture
During November 2003, the Company made a $330,000 loan to a venture organized to
purchase land parcels for rezoning, subdivision and creation of environmental
mitigation credits (the "West Deptford Venture"). At December 31, 2003, the West
Deptford Venture had a leasehold interest in a 154 acre parcel in West Deptford,
New Jersey which included at least 64.5 acres of wetlands and a maximum of 71
acres of developable land. The Company consolidated the West Deptford Venture
during 2003 and its investment is primarily included in land held for
development on the consolidated balance sheet at December 31, 2003. The Company
has committed $366,000 of capital in addition to the loan to the West Deptford
Venture.
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
The Company owns a five-phase 1,800 unit class A multifamily development
("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. At
December 31, 2003 and 2002, 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. As a result of weakness in the
Denver, Colorado economy, fluctuating occupancy, significant concessions and
high leverage ratios (a deterrent
12
to institutional investors), the Company has determined that it would no longer
continue to search for such an investor at this time.
With respect to EQR's 14.15% interest in the corporation that owns Palomino
Park, there exists a put/call option between the Company and EQR related to
one-half of such interest (7.075%) for $1,900,000. A transaction for the
remaining interest would be subject to negotiation between the Company and EQR.
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. The
Palomino Park Bonds have an outstanding balance of $12,680,000 at December 31,
2003 and 2002 and are 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 provide additional collateral for the Palomino Park Bonds. This letter of
credit, which expires in May 2005, replaced an expiring letter of credit. A
subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such
guarantee also expires in May 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed
at a cost of approximately $41,600,000. 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 bore interest at LIBOR +
2.00% per annum, was collateralized by the unsold Silver Mesa units, matured in
December 2003 and provided for one six-month extension at the Company's option.
Generally, 90% of net sales proceeds per unit were applied to principal
repayments. During May 2003, the Company repaid the remaining unpaid principal
balance of the Silver Mesa Conversion Loan with proceeds from Silver Mesa unit
sales and available cash.
Sales of condominium units at the Silver Mesa phase of Palomino Park commenced
in February 2001 and 209 units have been sold through December 31, 2003. The
following table provides information regarding sales of Silver Mesa units:
For the Years Ended December 31,
--------------------------------------------- Project
2003 2002 2001 Totals
------------ ------------ ------------ ---------------
Number of units sold......................... 56 48 105 209
Gross proceeds............................... $ 12,535,000 $ 10,635,000 $ 21,932,000 $ 45,102,000
Principal paydown on Silver Mesa
Conversion Loan........................... $ 4,318,000 $ 9,034,000 $ 18,648,000 $ 32,000,000
13
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, rental revenue, the
corresponding operating expenses and cash flow from this activity will diminish.
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
-------- ---------- ----------
Rental revenue.............. $702,000 $1,462,000 $2,224,000
Net operating income (A).... $431,000 $ 884,000 $1,488,000
- -------------------------------
(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 $56,300,000. 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 at December 31, 2002 and bore interest
at LIBOR + 1.75% per annum (3.17% at December 31, 2002).
In February 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. The
proceeds of the Green River Mortgage were used to repay the Green River
Construction Loan, with excess proceeds available for working capital purposes.
Phase V, the improved 29.8 acre parcel of land known as Gold Peak, had a cost
basis of approximately $5,439,000 and $5,411,000 at December 31, 2003 and 2002,
respectively. The Company is holding this land for possible future development.
East Lyme
On March 2, 2004, the Company entered into a contract to acquire a 144 acre
parcel of land in East Lyme, Connecticut. The purchase price for the land is
approximately $6,200,000, including a $200,000 refundable deposit made by the
Company upon entering into the contract. The closing is conditioned upon
obtaining building permits for 100 single family homes. The Company is in the
process of negotiating an agreement with a home builder who would construct
and sell these homes.
Segment Financial Information
See Note 13 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 debt and 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.
14
Item 2. Properties.
The following property information is presented by SBU.
Wellsford/Whitehall
As of December 31, 2003, Wellsford/Whitehall owned and operated 25 properties,
including 17 office properties, five net-leased retail properties and three land
parcels, totaling approximately 2,808,000 square feet of improvements. The
following table sets forth certain information related to all of these
properties at December 31, 2003:
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 49%
500 Atrium Drive.... Office Somerset, NJ 169,000 1984 4 95%
700 Atrium Drive.... Office Somerset, NJ 181,000 1985 2 100%
Garden State Exhibit
Center........... Flex Somerset, NJ 82,000 1968/1989 N/A N/A
150 Mt. Bethel Road. Office/Flex Warren, NJ 129,000 1981 3 43%
379/399 Campus Drive Office Franklin Twp, NJ 199,000 1984 1 10%
333 Elm Street...... Office Dedham, MA 48,000 1983 7 55%
Dedham Place........ Office Dedham, MA 160,000 1987/2002 4 29%
201 University Avenue Office Westwood, MA 82,000 1982 1 100%
7/57 Wells Avenue... Office Newton, MA 89,000 1982 16 95%
75/85/95 Wells Avenue Office Newton, MA 242,000 1976/1986 6 79%
105 Challenger Road. Office Ridgefield 147,000 1992 3 100%
Park, NJ
117 Kendrick Street. Office Needham, MA 212,000 1963/2000 4 60%
Airport Park........ Office Hanover Twp, NJ 97,000 1979/2002 10 83%
--------- ----- ----
Subtotal - Operating Properties - Office 2,339,000 68 65%
--------- ----- ----
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 2,393,000 73 66%
--------- ----- ----
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 (E) March 2004 $ 20.83 $ 23.68 $ 18.50 (A)
400 Atrium Drive.... Merrill Lynch (F) December 2003 20.21 21.53 19.50 (A)
500 Atrium Drive.... AT&T (G) December 2003 18.46 22.70 18.75 (A)
700 Atrium Drive.... Merck June 2005 17.39 20.85 18.50 (A)
Garden State Exhibit
Center........... N/A N/A N/A N/A N/A (A)
150 Mt. Bethel Road. GMAC March 2008 20.18 22.25 21.50 (A)
379/399 Campus Drive Royal Consumer Products September 2009 23.65 25.17 18.25 (A)
333 Elm Street...... RNK, Inc. June 2006 28.34 30.75 18.00 (B)
Dedham Place........ Washington Mutual January 2007 32.06 42.58 20.00 (B)
201 University Avenue RCN Corp. December 2009 18.00 20.56 11.00 (B)
7/57 Wells Avenue... GEO Centers November 2004 25.65 27.60 22.00 (B)
75/85/95 Wells Avenue Wonderware Corp. April 2005 31.71 33.60 22.00 (B)
105 Challenger Road. Samsung America, Inc. June 2010 23.43 27.37 26.50 (A)
117 Kendrick Street. MCK Communication March 2007 20.64 22.66 22.00 (A)
Airport Park........ CapGemini January 2006 20.62 25.00 19.75 (C)
-------- -------- --------
Subtotal - Operating Properties-Office 22.28 25.28 20.14
-------- -------- --------
Operating Properties-Retail
Essex............... CVS January 2024 39.25 39.25 39.25 (C)
Pennsauken.......... CVS January 2024 26.50 26.50 26.50 (C)
Runnemeade.......... CVS January 2024 27.75 27.75 27.75 (C)
Wetumpa............. CVS January 2024 21.75 21.75 21.75 (C)
Richmond............ CVS January 2024 26.25 26.25 26.25 (C)
-------- -------- --------
Subtotal - Operating Properties-Retail 28.21 28.21 28.21
-------- -------- --------
Subtotal - Operating Properties 22.49 25.39 20.42
-------- -------- --------
15
Wellsford/Whitehall: Property Table - continued
Leasable
Building Year Number
Square Constructed/ of
Property Type Location Feet Rehabilitated Tenants Occupancy
- --------------------- ----------- ------------- ---------- ------------- ------- ---------
Land and Properties Under Renovation
600 Atrium Drive..... Land (H) Somerset, NJ N/A N/A N/A N/A
Airport Park......... Land (H) Hanover Twp, NJ N/A N/A N/A N/A
74 Turner Street..... Land (H) Waltham, MA N/A N/A N/A N/A
128 Technology
Center**............. Office Waltham, MA N/A 1986 2 6%
---------- ------- ---------
Subtotal-Land and Properties Under Renovation 270,000 2 6%
---------- ------- ---------
Properties Held for Sale - Office
Oakland Ridge....... Flex Columbia, MD 145,000 1972/2002 5 75%
---------- ------- ---------
Subtotal-Properties Held for Sale 145,000 5 75%
---------- ------- ---------
Total/Portfolio Average at December 31, 2003 2,808,000 80 62%
========== ======= =========
Principal Tenants Base Escalated Market
----------------------------------- Rent per Rent per Rent per
Lease Square Square Square
Property Name Expiration Foot Foot Foot* Encumbrance
- --------------------- --------------------- ---------- -------- -------- -------- -----------
Land and Properties Under Renovation
600 Atrium Drive..... -- -- -- -- -- (D)
Airport Park......... -- -- -- -- -- (D)
74 Turner Street..... -- -- -- -- -- (D)
128 Technology
Center**............. Wachovia Securities November 2013 26.00 26.00 24.35 (B)
-------- -------- --------
Subtotal-Land and Properties Under Renovation 26.00 26.00 24.35
-------- -------- --------
Properties Held for Sale-Office
Oakland Ridge....... Wells Fargo May 2012 15.55 16.33 15.00 (C)
-------- -------- --------
Subtotal-Properties Held for Sale 15.55 16.33 15.00
-------- -------- --------
Total/Portfolio Average at December 31, 2003 $ 22.08 $ 24.81 $ 20.11
======== ======== ========
- ----------------------
(A) Encumbered by the Wellsford/Whitehall GECC Facility.
(B) Encumbered by a $64,666,000 mortgage.
(C) Encumbered by other mortgages.
(D) Unencumbered.
(E) Tenant is expected to vacate at lease expiration lowering occupancy to
49% for the property.
(F) Lease expired on December 31, 2003 and the tenant vacated lowering
occupancy to 13% for the property.
(G) AT&T space partially leased to a new tenant on January 1, 2004,
Computer Science Corporation, through December 31, 2008.
(H) Land zoned for office development.
* Represents the judgment of WP Commercial, the managing member, as to
specific property market rent per square foot as of December 31, 2003.
** Wellsford/Whitehall is in the process of converting building from
single to multi-tenant.
16
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
- --------------------- -------------- --------------- -------------- ------------
2003.................. 2,808,000 62% 2,393,000 66%
2002.................. 3,874,000 68% 3,328,000 76%
2001.................. 3,905,000 70% 3,307,000 69%
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, 2003 lease expirations for each of the next ten years, assuming
tenants do not exercise any renewal options:
Leasable Square Annual Base Rent of Expiring Leases
Number of Feet Percentage of -----------------------------------
Expiring of Expiring Total Leased Per Square
Year Leases Leases Square Feet Total Foot
- -------------- ---------- ------------- ------------- -------------- -------------
2004......... 21 253,000 16% $ 5,106,000 $ 20.20
2005......... 14 358,000 23% 7,939,000 22.20
2006......... 10 181,000 12% 5,086,000 28.03
2007......... 10 113,000 7% 2,952,000 26.04
2008......... 12 172,000 11% 3,697,000 21.53
2009......... 5 104,000 7% 2,462,000 23.62
2010......... 2 122,000 8% 3,319,000 27.10
2011......... 1 6,000 0% 145,000 25.00
2012......... 1 16,000 1% 395,000 24.00
2013......... 2 98,000 6% 1,771,000 18.05
One tenant in the Wellsford/Whitehall portfolio accounted for 12% of rental
revenues of Wellsford/Whitehall for the year ended December 31, 2003. No other
tenant accounted for more than 9% of rental revenues during that year.
17
Wellsford Capital
Wellsford Capital owned the following commercial office property which is held
for sale at December 31, 2003:
Leasable
Building Year
Square Constructed/ Number of Principal Lease
Property Location Feet Rehabilitated Tenants Occupancy Tenants Expiration
- ----------------- ---------------------- --------- ------------- ---------- --------- --------- --------------
421 Chestnut St.. Philadelphia, PA 49,117 1857/1983/2002 2 48% (A) September 2007
-------- ---- -----
Total/Average at December 31,
2003(B)....... 49,117 2 48%
======== ==== =====
2002.......... 175,183 7 60%
======== ==== =====
2001.......... 175,183 9 62%
======== ==== =====
-----------------------------------------
(A) Kittredge Donley (approximately 14,000 square feet).
(B) Decrease in square feet due to the sale of one property in July 2003.
The Company, through its investment in the West Deptford Venture, has a
leasehold interest in a 154 acre parcel in West Deptford, New Jersey. The
Company's capital investment in this venture was $330,000 at December 31, 2003.
Wellsford Development
The Company owned the following multifamily properties at December 31, 2003:
Monthly
Effective Rent
Property Location Units Year Constructed Occupancy per Unit (A) Encumbrance
- ------------------------ --------------- -------- ---------------- --------- -------------- --------------------
Blue Ridge.............. Denver, CO 456 1997 86% $ 941 $ 31,945,000 (B)
Red Canyon.............. Denver, CO 304 1998 91% 1,109 25,294,000 (B)
Green River............. Denver, CO 424 2001 88% 989 39,586,000 (B)
------- ----- ----------- -----------
Total/Average at December 31,
2003......... 1,184 88% $ 1,001 $ 96,825,000
======= ===== =========== ============
2002......... 1,224 95% $ 1,107 $ 95,234,000
======= ===== =========== ============
2001......... 1,320 77% (C) $ 1,267 $109,051,000
======= ===== =========== ============
- -----------------------------------------
(A) As of December 31, 2003.
(B) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680,000 at December 31, 2003, 2002 and 2001.
The Palomino Park Bond collateral includes the Blue Ridge, Red Canyon and
Green River operational phases, as well as the undeveloped Gold Peak land
(see below).
(C) The Green River phase was in lease-up and not included in the 2001
occupancy, but the amount includes the Silver Mesa phase which was 60%
occupied at December 31, 2001. Occupancy for the Blue Ridge and Red Canyon
phases aggregated 81% at December 31, 2001.
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 known as Gold Peak, had a cost
basis of approximately $5,439,000 and $5,411,000 at December 31, 2003 and 2002,
respectively. The Company is holding this land for possible future development.
18
Item 3. Legal Proceedings.
The Company is not presently a party in any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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, 2003 and 2002 are as follows:
Common Shares
------------------------------------------
2003 High Low Dividends
- ----------------------------- ------- ------- ---------
1st Quarter.................. $16.40 $14.52 None
2nd Quarter.................. $16.65 $14.63 None
3rd Quarter.................. $17.31 $15.15 None
4th Quarter.................. $18.69 $17.25 None
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
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 3,100 and
1, respectively, as of December 31, 2003.
Dividends
- ---------
The Company did not declare or distribute any dividends during 2003 or 2002. 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.
19
Securities Authorized for Issuance Under Equity Compensation Plans
- ------------------------------------------------------------------
The following table details information for each of the Company's compensation
plans at December 31, 2003:
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.................... 334,360 $ 20.45 316,168
1997 Management Incentive Plan................ 207,187 $ 21.37 635,465
1998 Management Incentive Plan................ 124,125 $ 17.34 537,574
-------------------- ------------------------
665,672 $ 20.16 1,489,207
Equity compensation plans not approved by
shareholders.................................. -- $ -- --
-------------------- ------------------------
Total............................................ 665,672 $ 20.16 1,489,207
==================== ========================
Issuer Purchases of Equity Securities
- -------------------------------------
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, 2003; none during the year ended
December 31, 2003.
20
Item 6. Selected Financial Data.
The following tables set 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.
(amounts in thousands, except per share data (A))
Summary Consolidated Statement of
Operations Data (B) For the Years Ended December 31,
- --------------------------------------- ----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- ------------- ------------- ------------- --------------
Revenues............................... $ 35,602 $ 30,512 $ 40,166 $ 24,220 $ 29,585
Costs and expenses (C)................. (37,903) (33,750) (45,559) (24,819) (28,393)
(Loss) income from joint ventures(D)... (34,429) (209) 4,564 3,247 9,622
Gain on sales of assets, net of
impairment provision of $3,600 in 2000. -- -- -- 7,260 --
Minority interest benefit (expense).... 85 43 (283) (66) (55)
-------------- ------------- ------------- ------------- --------------
(Loss) income before income taxes,
Convertible Trust Preferred Securities
and discontinued operations......... (36,645) (3,404) (1,112) 9,842 10,759
Income tax (expense) benefit(D)....... (7,135) 1,322 (513) (997) (1,929)
Convertible Trust Preferred Securities
distributions, net of tax benefit of $720,
$720 and $510 in 2002, 2001 and 2000,
respectively........................ (2,099) (1,380) (1,380) (861) --
-------------- ------------- ------------- ------------- --------------
(Loss) income from continuing
operations........................... (45,879) (3,462) (3,005) 7,984 8,830
Income (loss) from discontinued
operations, net of impairment
provision of $1,125 in 2000
and net of taxes (E)................. 20 90 280 (1,516) 31
-------------- ------------- ------------- ------------- --------------
Net (loss) income ..................... $ (45,859) $ (3,372) $ (2,725) $ 6,468 $ 8,861
============== ============= ============= ============= ==============
Per share amounts, basic and diluted:
(Loss) income from continuing
operations....................... $ (7.11) $ (0.53) $ (0.42) $ 0.94 $ 0.86
Income (loss) from discontinued
operations (E)................... -- 0.01 0.04 (0.18) --
-------------- ------------- ------------- ------------- --------------
Net (loss) income................... $ (7.11) $ (0.52) $ (0.38) $ 0.76 $ 0.86
============== ============= ============= ============= ==============
Cash dividends declared per common
share............................... $ -- $ -- $ -- $ -- $ --
============== ============= ============= ============= ==============
Weighted average number of common
shares outstanding, basic........... 6,454 6,437 7,213 8,508 10,321
============== ============= ============= ============= ==============
Weighted average number of common
shares outstanding, diluted......... 6,454 6,437 7,213 8,516 10,329
============== ============= ============= ============= ==============
21
Selected Financial Data (continued)
Summary Consolidated Balance
Sheet Data December 31,
- --------------------------------------- ----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------ ------------ ------------ ------------
Real estate assets, at cost............ $ 147,357 $ 156,676 $ 164,916 $ 160,583 $ 158,812
Accumulated depreciation............... (16,775) (12,834) (9,386) (7,761) (6,307)
Notes receivable....................... 3,096 28,612 34,785 37,824 37,260
Assets held for sale (E)............... 2,335 6,256 5,844 6,444 7,670
Investment in joint ventures........... 53,760 94,181 95,807 120,969 114,390
Cash and cash equivalents.............. 55,378 38,582 36,092 36,245 34,333
Investments in U.S. Government
securities.......................... 27,516 -- -- -- --
Total assets........................... 285,827 332,775 345,838 375,770 366,331
Mortgage notes payable................. 109,505 112,233 121,731 104,404 114,895
Credit facility........................ -- -- -- 12,000 --
Convertible Trust Preferred Securities. 25,000 25,000 25,000 25,000 --
Shareholders' equity................... 131,274 176,567 178,079 215,982 229,691
Other balance sheet information:
Common shares outstanding........... 6,456 6,451 6,405 8,350 9,611
============= ============ ============ ============ ============
Equity per share................... $ 20.33 $ 27.37 $ 27.80 $ 25.86 $ 23.90
============= ============ ============ ============ ============
- -----------------------------------------
(A) All share and per share amounts have been adjusted for all periods
presented in this table for the impact of the June 9, 2000 stockholder
approved two for one reverse stock split.
(B) 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.
(C) Includes a restructuring charge of $3,527 during the year ended December
31, 2001, with no similar charges in other periods presented.
(D) During the fourth quarter of 2003, Wellsford/Whitehall recorded an
impairment charge of approximately $114,700 related to 12 assets in the
portfolio. The Company's share of this impairment charge was approximately
$37,377 in 2003 and as a result, the Company wrote-off related unamortized
warrant costs on the Company's books of approximately $2,644 related to
Wellsford/Whitehall and determined that it was not appropriate to carry the
balance of the net deferred tax asset attributable to NOL carryforwards and
recorded a valuation allowance of $6,680 in the fourth quarter of 2003.
(E) Relates to the classification of two properties in the Wellsford Capital
SBU as a discontinued operation effective as of June 30, 2003.
22
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.
A Variable Interest Entity ("VIE") is created when (i) the equity investment at
risk is not sufficient to permit the entity from financing its activities
without additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make decisions
about the entity, (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the entity
if they occur. If an entity is deemed to be a VIE, an enterprise that absorbs a
majority of the expected losses of the VIE or receives a majority of the
residual returns is considered the primary beneficiary and must consolidate the
VIE. The Company has two variable interest entities, Reis, which is not being
consolidated, and the West Deptford Venture, which is consolidated at December
31, 2003. In addition, based on the provisions of FIN 46, the Company will be
required to deconsolidate the entity which issued the Convertible Trust
Preferred Securities during the quarter ending March 31, 2004. The Company is
currently assessing the impact to the display changes for the financial
statements, but believes that there will be no material impact to financial
position, results of operations or cash flows upon adoption.
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.
Investment in U.S. Government Securities. Investments in U.S. Government
securities are classified as held-to-maturity and are carried at amortized cost.
23
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.
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 Company records cost
of sales based upon relative sales values. Sales price concessions are
recognized as a reduction in sales revenues as individual units are sold.
Advertising costs are expensed as incurred.
Revenue Recognition. Commercial properties are leased under operating leases.
Rental revenue from office properties is recognized on a straight-line basis
over the terms of the respective leases. Residential units 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. Prepayment penalties on
mortgages receivable are recorded as interest revenue in the period that such
fees are earned. Fee revenues are recorded in the period earned, based upon
formulas as defined by agreement for management services or upon asset sales and
purchases by certain joint venture investments. 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.
24
Results of Operations
- ---------------------
Comparison of the year ended December 31, 2003 to the year ended December 31,
2002
The change in net loss per share, basic and diluted of $6.59 per share from a
loss in 2002 of $(0.52) per share to a loss in 2003 of $(7.11) per share, is
attributable to a current period loss of $(45,859,000), whereas in the 2002
period, the loss was $(3,372,000). The 2003 loss includes charges aggregating
$(46,701,000) attributable to an impairment provision by the Wellsford/Whitehall
venture and related charges during the fourth quarter of 2003. Annually, after
the preparation of budgets for the following year and as part of the financial
statement closing process, Wellsford/Whitehall performs evaluations for
impairment on all of its real estate assets. As part of this evaluation,
Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000
related to 12 assets in the portfolio during the fourth quarter of 2003. The
provision is not the result of a change in intended use of such assets, however,
it is the result of several factors including, but not limited to, a continued
deterioration of and outlook for the suburban office submarkets where
Wellsford/Whitehall's properties are situated. Specifically, these include
decreasing market rents, slower absorption trends and greater tenant concession
costs. The Company's share of this impairment charge was approximately
$37,377,000 in 2003. Additionally, as a result of the Wellsford/Whitehall
charge, the Company wrote-off the balance of unamortized warrant costs of
$2,644,000 related to Wellsford/Whitehall and determined that it was not
appropriate to carry the balance of the net deferred tax asset attributable to
net operating loss ("NOL") carryforwards and recorded a valuation allowance of
$6,680,000 in the fourth quarter of 2003.
Rental revenue decreased $849,000. This decrease is due to the impact of rent
concessions in excess of the 2002 period at all phases of Palomino Park in the
Wellsford Development SBU ($1,510,000) and reduced rental operations at the
Silver Mesa phase resulting from unit sales and fewer units being rented in the
2003 period as compared to the 2002 period ($762,000), offset by commenced
operations at the Green River phase at Palomino Park effective January 1, 2002
as such revenues in the fiscal 2003 period are in excess of the 2002 period
($975,000) and increased average physical occupancy and other tenant fee
increases at the Blue Ridge and Red Canyon phases at Palomino Park ($448,000).
Revenues from sales of residential units and the associated cost of sales from
such units were $12,535,000 and $10,708,000, respectively, from 56 sales during
2003 and were $10,635,000 and $9,544,000, respectively, from 48 sales during the
2002 period. The average pre-tax income from 2003 unit sales was approximately
$9,900 greater per unit than in the corresponding 2002 period as a result of
sales of higher priced and larger units, a reduced commission rate on the units
sold and declining interest costs included in cost of sales as the average
outstanding debt balance was being reduced over the periods until its ultimate
repayment in May 2003.
Interest revenue increased $3,355,000. This increase is due to the receipt of a
yield maintenance penalty of $4,368,000 from the prepayment of the 277 Park Loan
at September 30, 2003, offset by reduced interest of $948,000 earned on loans
from lower average outstanding loan balances in the 2003 period as compared to
the 2002 period (including $767,000 related to the loss of revenue during the
fourth quarter of 2003 from the 277 Park Loan), as well as reduced interest
earned on cash and securities of $65,000 from the net effect of lower base
interest rates and a higher average outstanding investable cash and securities
balance during the current period versus the comparable 2002 period.
Fee revenue increased $684,000. Asset disposition fees payable by Whitehall
derived from Wellsford/Whitehall sales amounted to $430,000 during 2003, with
only $29,000 earned in the 2002 period. Additionally, the Company's management
fees for its role in the Second Holding investment increased $283,000 from the
growth of assets under management in that venture. 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 decreased $80,000. This decrease is
primarily the result of refunds for water charges by the municipality for
Palomino Park coupled with the Company absorbing lower utility costs in 2003
because of a 90% average physical occupancy compared to 86% in the 2002 period
and payroll
25
reductions from a smaller property operating staff, offset in part by additional
tenant replacement and advertising costs and rising insurance premiums.
The increase in real estate taxes of $6,000 is primarily attributable to higher
assessments and rates in the 2003 period as compared to the 2002 period for the
Blue Ridge, Red Canyon and Green River phases at Palomino Park ($73,000), offset
by reduced taxes on the Gold Peak land from a lower 2003 assessment ($44,000)
and reduced taxes from the sale of Silver Mesa units ($23,000).
Depreciation and amortization expense increased $3,273,000. This increase is
attributable to the Company expensing $4,021,000 of unamortized warrant costs in
2003, including the write-off of the remaining $2,644,000 balance relating to
the Wellsford/Whitehall venture as a result of an impairment charge taken by
Wellsford/Whitehall during the fourth quarter of 2003, whereas in 2002 the
expense was $758,000 including an impairment related adjustment of $284,000 in
that period, additional Green River depreciation as the final sections of this
phase were put in service during the 2002 period ($194,000) and fixed asset
additions for the other Palomino Park phases and corporate office assets
($101,000), offset by a declining depreciation basis resulting from the transfer
of Silver Mesa units from operations to residential units available for sale
during both periods ($285,000).
Property management expenses decreased $127,000. Such decrease is primarily due
to the reduction in contractual management fees beginning October 1, 2002 from a
3% annual fee of gross receipts to a 2% annual fee for the Palomino Park
operational phases, in addition to a decrease in net rental revenues in the 2003
period (see above rental revenue discussion). If the fee had remained at 3% for
the comparable 2003 period, the decrease would have been $109,000 less.
Interest expense increased $733,000. This increase is primarily attributable to
the Green River phase as the 2003 period includes interest at a higher fixed
rate from February 2003 on permanent financing, whereas in the 2002 period, the
variable interest rate and the average outstanding balance on the construction
financing were both lower than the 2003 amounts ($855,000). In addition there
was a higher average base interest rate on the Palomino Park Bonds in the 2003
period as compared to the 2002 period ($14,000). These increases were partially
offset by reduced interest expense from a lower average outstanding principal
balance and a lower base interest rate on the Silver Mesa Conversion Loan, which
was fully repaid in May 2003 ($71,000) and lower average outstanding principal
balances with respect to the other Palomino Park phases ($56,000).
General and administrative expenses decreased $976,000 as described below:
For the Years Ended December 31,
--------------------------------------------------
Increase
2003 2002 (Decrease)
-------------- ------------ --------------
General and administrative expense per Statement of
Operations................................................. $ 5,590,971 $ 6,567,166 $ (976,195)
Less non-cash component of general and administrative
expenses for:
Amortization of stock generally issued into deferred
compensation plan ................................... 277,664 1,243,332 (965,668)
Expensing of stock options.............................. 93,600 -- 93,600
-------------- ------------ --------------
Total non-cash component of general and administrative
expenses................................................... 371,264 1,243,332 (872,068)
-------------- ------------ --------------
Cash component of general and administrative expenses......... $ 5,219,707 $ 5,323,834 $ (104,127)
============== ============ ==============
Percentage (decrease) from prior year for cash component (A).. (2.0%) (22.7%)
============== ============
Percentage of Total Assets at each year end for cash
component.................................................. 1.83% 1.60%
============== ============
Total Assets at each year end................................. $ 285,827,126 $332,775,043
============== ============
_____________________________________________
(A) The principal reason for the decline in the cash component of general and
administrative expenses is lower payroll and payroll related costs.
26
The Company realized a loss aggregating $(34,429,000) in 2003 from its joint
venture investments as compared to a loss of $(209,000) in 2002. An analysis of
the decrease follows:
For the Year Ended December 31,
-------------------------------------------------
Increase
2003 2002 (Decrease)
------------- -------------- --------------
Wellsford/Whitehall:
(Loss) from continuing operations (A)....... $ (1,203,000) $ (959,000) $ (244,000)
Impairment charges (B)...................... (37,377,000) (440,000) (36,937,000)
Net gain (loss) from assets sold (C)........ 3,030,000 (82,000) 3,112,000
Write-off of deferred debt costs and
prepayment penalties from debt pay-offs
and interest expense on assets sold (C)... (1,584,000) (2,849,000) 1,265,000
Income from discontinued operations (A)..... 661,000 3,038,000 (2,377,000)
------------- -------------- --------------
(Loss) from Wellsford/Whitehall......... (36,473,000) (1,292,000) (35,181,000)
Second Holding (D)............................. 1,640,000 723,000 917,000
Clairborne Fordham............................. 405,000 361,000 44,000
Other.......................................... (1,000) (1,000) --
------------- -------------- --------------
(Loss) from joint ventures..................... $ (34,429,000) $ (209,000) $ (34,220,000)
============= ============== ==============
_________________________
(A) The 2003 period was impacted by the sale of properties during 2003, lower
occupancy and lower rental rates than the corresponding 2002 period.
(B) As previously noted, Wellsford/Whitehall recorded an impairment charge
related to 12 assets in the portfolio during the fourth quarter of 2003.
The 2002 impairment charge was attributable to two properties held for sale
at December 31, 2002 which were sold during 2003.
(C) One property was classified as held for sale at December 31, 2003. Ten
properties and one land parcel were sold during the 2003 period with one
sale in the corresponding 2002 period. The write-off of deferred debt costs
relates to the properties held for sale or sold which were encumbered.
(D) The increase in earnings is a result of an increase in average invested
assets generating increased income for that venture in 2003 as compared to
2002.
Minority interest changed $42,000 from a benefit of $43,000 in the 2002 period
to a benefit of $85,000 in the 2003 period, primarily attributable to a larger
loss in the Wellsford Development SBU in 2003 as compared to the 2002 period.
Income taxes changed from a benefit of $1,322,000 in 2002 to a provision of
$7,135,000 in 2003 primarily from the Company increasing the valuation allowance
to reflect the portion of the deferred tax asset relating to the benefit of net
operating loss carry forwards that the Company determined would not be
realizable in the next three years as a result of the significant loss reported
by the Wellsford/Whitehall venture and a loss in 2002 in which the tax benefit
from an estimated carry back of losses was partially offset by minimum state and
local taxes.
The change in after tax cost of the Convertible Trust Preferred Securities
results from not having available any tax benefit in 2003 whereas there was a
34% tax benefit in 2002.
Income from discontinued operations after taxes reflects the reclassification of
the revenue and expenses from the two VLP properties in the Wellsford Capital
SBU as a result of the change in classification to held for sale at June 30,
2003. The net reclassified amounts were $20,000 and $90,000 for the years ended
December 31, 2003 and 2002, respectively. The decrease is primarily attributable
to the sale of one of the two properties held for sale in July 2003.
27
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental revenue increased $2,664,000. 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 reduced rental revenue
from the Silver Mesa phase at Palomino Park from unit sales ($765,000), revenues
from the four VLP assets earned in the period prior to their respective sales
during 2001 ($692,000) and 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 of approximately $1,700 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 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 $1,578,000. 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 in part by expenses from the four VLP assets incurred
in the period prior to their respective sales during 2001 ($346,000).
The increase in real estate taxes of $427,000 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), partially offset by taxes from the four VLP assets for the period
prior to their respective sales during 2001 ($116,000).
Depreciation and amortization expense decreased $43,000. This decrease is
attributable to the 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). These decreases were
offset by the commencement of depreciation on the Green River rental phase
($1,573,000) and fixed asset additions on Blue Ridge and Red Canyon ($83,000).
28
Property management expenses decreased $20,000. Such decrease is due to the sale
of the four VLP properties during 2001 and the assumption of certain management
duties by the Company in April 2002 (which were previously performed by an
affiliate of Whitehall for the VLP properties)($79,000), 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).
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 for cash
component.............................................. (22.7%)
==============
Percentage of Total Assets at each year end for 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 paid during the first quarter of 2003.
29
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:
Continuing and discontinued operations (A).. $ (770,000) $ 302,000 $ (1,072,000)
(Loss) gain on sale of assets (B)........... (82,000) 10,321,000 (10,403,000)
Impairment charges (C)...................... (440,000) (6,256,000) 5,816,000
Second Holding (D)............................. 723,000 (163,000) 886,000
Clairborne Fordham............................. 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 two 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.
Income taxes changed from an expense in 2001 of $513,000 to a benefit in 2002 of
$1,322,000 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.
Income from discontinued operations after taxes reflects the reclassification of
the revenue and expenses from the two VLP properties in the Wellsford Capital
SBU as a result of the change in classification to held for sale at June 30,
2003. The net reclassified amounts were $90,000 and $280,000 for the years
ended December 31, 2002 and 2001, respectively. The decrease is primarily
attributable to an increase in vacancy in one of the two properties held for
sale and higher 2002 non-capitalized maintenance expenses.
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).
Income Taxes
The Company has recorded a net deferred tax liability of approximately $548,000
at December 31, 2003 which is included in accrued expenses and other liabilities
in the accompanying consolidated balance sheet. This compares to a net deferred
tax asset of $6,308,000 at December 31, 2002, which is included in prepaid and
other assets in the accompanying consolidated balance sheet. The primary reason
for the reduction in the asset results from the Company recording its 32.59%
share of the approximate $114,700,000 impairment provision recorded
30
by the Wellsford/Whitehall venture in the fourth quarter of 2003. The Company's
share of the impairment provision was approximately $37,377,000 and in
connection therewith, the Company wrote-off the remaining balance of related
unamortized warrant costs of $2,644,000. As a result of the magnitude of such
amounts, the Company determined that it was not appropriate to continue to carry
the balance of the net deferred tax asset attributable to NOL carryforwards
which amounted to $6,680,000 after valuation allowances at September 30, 2003.
Management has determined that valuation allowances of approximately $41,953,000
and $18,996,000 at December 31, 2003 and 2002, respectively are necessary. The
increase in the valuation allowance is primarily attributable to the
Wellsford/Whitehall impairment charge and the adjustment to the NOL carryforward
previously described. The valuation allowance at December 31, 2003 relates to
fully reserving the NOL carryforwards, the impact of deferred compensation and
severance arrangements and alternative minimum tax credit carryforwards and
substantially all of the differences in the basis of the Company's investment in
Wellsford/Whitehall. The Company expects to realize its remaining deferred tax
asset of approximately $4,047,000 at December 31, 2003 primarily through the
recognition of existing deferred taxable income.
At December 31, 2003, the Company has available net operating loss carryforwards
of approximately $56,500,000 which will expire between 2007 and 2012. 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
NOL carryforwards in each year. Any amount not utilized in a year may be carried
forward to subsequent years. Approximately $16,500,000 could be utilized in 2004
to offset Federal taxable income.
Liquidity and Capital Resources
- -------------------------------
The Company expects to meet its short-term liquidity requirements, such as
operating expenses, debt service on mortgage notes payable, Convertible Trust
Preferred Securities distributions and the share of any financing requirements
of its Wellsford/Whitehall venture, generally through its available cash, sales
of residential units in the Wellsford Development SBU, the sale of the remaining
VLP asset in the Wellsford Capital SBU, distributions from investments in joint
ventures and cash provided by operations.
The Company expects to meet its long-term liquidity requirements such as
maturing mortgages, credit enhancement expirations, financing acquisitions, new
investments and development, financing capital improvements, minority interest
distributions, joint venture financing requirements including the share of any
financing requirements of its Wellsford/Whitehall venture and Convertible Trust
Preferred Securities distributions through the use of available cash, maturing
investments in U.S. Government treasury obligations, receipt of payments related
to notes receivable, sales of residential units in the Wellsford Development
SBU, sale of the remaining VLP asset in the Wellsford Capital SBU, distributions
from investments in joint ventures, refinancings and the issuance of debt and
the offering of additional debt and equity securities. The Company considers its
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, tenant improvements and
leasing costs of its properties, repayments of debt maturities and operating
expenses with available cash, operating cash flow from its properties,
refinancing of existing loans and additional financing or preferred equity, as
described below, from the principal owners of Wellsford/Whitehall, if required.
At December 31, 2001, the Company and Whitehall each had completed funding their
entire respective equity commitments as of that date. The additional
financing/preferred equity commitment, of which the Company's share was
$4,000,000, expired at December 31, 2003. Prior to June 30, 2003 the GECC
Facility provided for additional financing to fund certain capital expenditures
related to its properties if certain operating ratios were met; such ability
expired at June 30, 2003 with no funds being advanced. Wellsford/Whitehall
executed a letter agreement with GECC effective January 20, 2004, relating to
the modification of the GECC Facility. The modification is subject to the
execution of the final amended agreement documents. The amended agreement
provides for an extension of the loan maturity to December 31, 2006, interest at
LIBOR plus 3.25% per annum, a principal paydown of $1,000,000 and a $17,000,000
line of
31
credit to fund certain capital improvements through December 31, 2005.
Excess cash flow, as defined, from the properties collateralizing the GECC
Facility can only be used for capital expenditures for such properties.
Wellsford/Whitehall is required to establish lock box arrangements for the
deposit of all rent receipts relating to each of the properties collateralizing
the GECC Facility. During February 2004, Whitehall requested a dialogue with the
special servicer of the Nomura Loan to discuss various forms of debt relief
under the terms of the Nomura Loan. The Nomura Loan is collateralized by six of
the Boston area properties in the Wellsford/Whitehall portfolio. There can be no
assurance as to the outcome of these discussions. The Company and Whitehall have
agreed to provide up to $8,000,000 to Wellsford/Whitehall through March 31, 2005
(of which the Company's share is 35%), however, there can be no assurance that
this amount will be sufficient. At December 31, 2003, Wellsford/Whitehall's cash
and cash equivalents balance was approximately $11,607,000 and restricted cash
available for certain capital improvements was approximately $7,400,000.
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 $375,000,000 available on its line of credit at December
31, 2003; there were no borrowings on this line of credit at December 31, 2003.
The nature of Second Holding's business results in the entity being highly
leveraged.
The Company's retained earnings included approximately $3,205,000 of
undistributed earnings from Second Holding at December 31, 2003 as distributions
are limited to approximately 48% of earnings.
The following table summarizes the Company's material contractual obligations as
of December 31, 2003:
(amounts in thousands)
Payments Due
----------------------------------------------------------------------------------------------
For the Years Ended December 31,
For the Year Ended ---------------------------------- Subsequent to
Contractual Obligations December 31, 2004 2005 and 2006 2007 and 2008 January 1, 2009 Aggregate
- ------------------------------- ----------------- -------------- ------------- --------------- -------------
Recorded on balance sheet:
Principal payments for long-
term debt:
Blue Ridge Mortgage....... $ 539 $ 1,195 $ 30,211 $ -- $ 31,945
Red Canyon Mortgage....... 409 905 23,980 -- 25,294
Green River Mortgage...... 488 1,160 1,290 36,648 39,586
Palomino Park Bonds (A)... -- 12,680 -- -- 12,680
---------------- ----------- ----------- ---------- -----------
Total long-term debt... 1,436 15,940 55,481 36,648 109,505
Convertible Trust Preferred
Securities(B)............. -- -- -- 25,000 25,000
---------------- ----------- ----------- ---------- -----------
Contractual obligations
recorded on balance sheet... 1,436 15,940 55,481 61,648 134,505
---------------- ----------- ----------- ---------- -----------
Other contractual obligations:
Interest expense on long-term
debt...................... 6,570 12,013 9,212 8,243 36,038
Distributions for Convertible
Trust Preferred Securities
(B)....................... 2,063 4,125 4,125 27,671 37,984
Employment and consulting
contractual obligations... 1,772 590 -- -- 2,362
Operating lease for office... 815 1,630 1,495 -- 3,940
Commitments to investments... 366 -- -- -- 366
Wellsford/Whitehall
commitments............... 2,800 -- -- -- 2,800
---------------- ----------- ----------- ---------- -----------
Total other contractual
obligations............... 14,386 18,358 14,832 35,914 83,490
---------------- ----------- ----------- ---------- -----------
Total contractual obligations $ 15,822 $ 34,298 $ 70,313 $ 97,562 $ 217,995
================ =========== =========== ========== ===========
- --------------------------------
(A) 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.
32
(B) 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.
Recurring and Non-Recurring Capital Expenditures
Wellsford Development
Regarding the Company's Blue Ridge, Red Canyon and Green River rental phase, the
Company expects to incur approximately $500 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.
The Company is completing the conversion of units at the Silver Mesa phase from
rental to available for sale condominiums and expects to incur approximately
$300,000 related to the completion of such work during 2004.
The Company is holding the improved 29.8 acre parcel of land known as Gold Peak
for possible future development and expects to incur approximately $400,000
during 2004 related to pre-development activities.
Wellsford/Whitehall
Wellsford/Whitehall expects to incur approximately $20,600,000 of total capital
expenditures during the year ending December 31, 2004. Of this amount,
Wellsford/Whitehall expects to incur approximately $8,700,000 for upgrades to
certain of the base buildings and other amenities. The aggregate amount includes
tenant related costs of $11,900,000 for budgeted lease signings in 2004
including approximately $9,700,000 and $2,200,000 for tenant improvements and
leasing commissions, respectively.
Other Items Impacting the Company's Liquidity and Resources
Wellsford/Whitehall Buy/Sell Agreement
A Buy/Sell Agreement of equity interests between the Company and Whitehall can
be exercised by either party after December 31, 2003 with respect to the
Wellsford/Whitehall venture. The nature of the Buy/Sell Agreement allows for
either the Whitehall funds as a group or the Company to provide notice that it
intends to purchase the non-initiating partner's interest at a specific price.
The non-initiating party may either accept that offer or instead may reject that
offer and become the purchaser at the initially offered price. The net book
equity of Wellsford/Whitehall at December 31, 2003 was approximately
$65,561,000. 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 the continuance of such debt as long as the Company or
Whitehall has ultimate decision-making authority over the management and
operations of Wellsford/Whitehall. As of the date of this report, neither party
has exercised its buy/sell right under the Buy/Sell Agreement.
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.
33
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, 2003
and 2002 for Second Holding:
December 31,
----------------------------------------------------------------------
2003 2002
-------------------------------- -----------------------------------
Amount Percent Amount Percent
--------------- ------------- ---------------- --------------
Security for Investments (A)
- -----------------------------------------
Real estate.............................. $ 562,196,000 32% $ 587,358,000 33%
Corporate debt........................... 446,210,000 26% 462,041,000 26%
Consumer/trade receivables............... 125,000,000 7% 125,000,000 7%
Bank deposits............................ 105,000,000 6% 105,000,000 6%
Aircraft loans and leases................ 54,247,000 3% 80,000,000 4%
Sovereign debt........................... 73,000,000 4% 100,960,000 6%
Fuel/oil receivables..................... 35,000,000 2% 35,000,000 2%
Other asset-backed securities............ 343,629,000 20% 290,399,000 16%
--------------- -------------- ---------------- --------------
Total investments (B).................... $ 1,744,282,000 100% $ 1,785,758,000 100%
=============== ============== ================ ==============
Total assets (C)....................... $ 1,903,919,000 $ 1,840,096,000
=============== ================
Standard & Poor's
Ratings of Investments
- -----------------------------------------
AAA....................................... $ 1,239,233,000 71% $ 1,267,616,000 71%
AA+....................................... 65,176,000 4% 35,000,000 2%
AA........................................ 202,780,000 12% 163,581,000 9%
AA-....................................... 116,002,000 7% 164,223,000 9%
A+........................................ 24,922,000 1% 24,922,000 1%
A......................................... 59,169,000 3% 97,092,000 6%
A-........................................ 37,000,000 2% 33,324,000 2%
--------------- -------------- ---------------- --------------
Total investments (B) (D)................. $ 1,744,282,000 100% $ 1,785,758,000 100%
=============== ============== ================ ==============
_______________________________
(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 1.78% and 2.21% at December 31, 2003 and 2002, respectively.
(C) Includes $133,389,000 of cash and cash equivalents and $26,248,000 of other
assets at December 31, 2003. The December 31, 2002 amount includes
$16,876,000 of cash and cash equivalents and $37,462,000 of other assets.
(D) Subsequent to December 31, 2003, the rating on $30,000,000 of air craft
loans and leases was downgraded from A- to BBB+ by Standard & Poor's.
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 $1,837,701,000 and $1,722,933,000 at December 31, 2003 and 2002,
respectively, including junior subordinated bonds due in April 2010 of
$100,000,000 and $150,000,000 at December 31, 2003 and 2002, respectively.
Second Holding debt had a weighted average annual interest rate of 1.22% and
1.69% at December 31, 2003 and 2002, respectively, after the effect of swaps on
fixed rate debt to a floating rate.
During the latter part of 2000, an additional partner was admitted to the
venture. This partner is committed through April 2010 to provide 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
bond issue of $150,000,000 initially, which was reduced to $100,000,000 during
January 2003. The parent company of this partner announced during 2003 that its
subsidiary (the partner of Second Holding) will no longer write new credit
enhancement business, however it will continue to support its existing book of
credit enhancement business. The Company does not believe that this decision
will have a material adverse impact on the business and operations of Second
Holding as a result of that partner's existing commitment to the venture. This
partner is
34
entitled to 35% of net income as defined by 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%.
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. As a result of the events of September
11, 2001, these structures were destroyed. During December 2003, the entire bond
offering, including the WTC Certificates, was repaid in full by the borrower.
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 during the period September 23, 2004 through October 2, 2004. At this
time, no determination can be made by the Company with regards to the outcome of
this agreement.
Clairborne Fordham
In October 2000, the Company and PREI, an affiliate of Prudential Life Insurance
Company, organized Clairborne Fordham 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. The Company, which has a 10% interest in Clairborne Fordham, fully
funded its $3,400,000 share of the loan. The loan, which matured in October
2003, bore interest at a fixed rate of 10.50% per annum with provisions for
additional interest to PREI and the Company and was secured by a lien on the
equity interests of the owner of Fordham Tower. The Company may earn fees from
PREI's additional interest based upon certain levels of returns on the project.
Such additional interest and fees had not been accrued by the Company or
Clairborne Fordham through the maturity of the loan.
Construction is complete and delivery of certain units commenced in December
2002. As of December 31, 2003, no units were under contract and 220 units
(including nine penthouses and 211 standard units) had closed for gross proceeds
of approximately $143,800,000. The remaining unsold units consist of five
standard units, 13 penthouses and six townhouses. One penthouse unit was sold in
February 2004 with another penthouse unit and a standard unit under contract. In
addition, the owner of Fordham Tower is seeking to sell the 12,000 square feet
of retail space and a 200 space commercial parking facility, both of which are
part of the project.
The loan was not repaid at maturity and as of October 2003 an amended loan
agreement was executed extending the loan to December 31, 2004. The amended
terms provided for the placement of a first mortgage lien on the project, no
interest to be accrued after September 30, 2003 and for the borrower to add to
the existing principal amount the additional interest due Clairborne Fordham at
September 30, 2003 of approximately $19,240,000. In lieu of interest after
September 30, 2003 Clairborne Fordham will also participate in certain
additional cash flows, as defined, if earned from net sales proceeds of the
Fordham Tower project.
The amended agreement provided for a $3,000,000 additional capital contribution
by the borrower and use of an existing cash collateral account to pay off the
existing construction loan, any unpaid construction costs and to make a
principal payment to Clairborne Fordham in October 2003 of approximately
$4,600,000, of which the Company's share was approximately $460,000. An
additional payment of approximately $554,000 was received by Clairborne Fordham
in December 2003 of which the Company's share was approximately $55,000. The
agreement provides for all proceeds after project costs to be first applied to
payment in full of the loan and the additional interest to Clairborne Fordham
before any sharing of project cash flow with the borrower. An additional
principal payment of approximately $1,277,000 was made in February 2004 (of
which the Company's share was $128,000) as a result of the sale of the penthouse
unit.
35
The Company and Clairborne Fordham have (i) concluded that their respective
investment and loan balances are not impaired at December 31, 2003 and (ii)
determined to recognize a portion of the additional interest over the expected
remaining life of the loan.
277 Park Loan
During September 2003, the 277 Park Loan was prepaid by the borrower. The
Company's share of the loan was $25,000,000 and bore interest at 12.00% per
annum with a stated maturity of May 2007. Pursuant to the terms of the loan, WRP
received a yield maintenance penalty of $4,368,000 which is included in interest
revenue for the year ended December 31, 2003.
This note would have provided for $767,000 of interest revenue in the fourth
quarter of 2003 and $3,042,000 for future annual periods to May 2006 for both
the Wellsford Capital SBU and the Company's consolidated statement of
operations.
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. As a result of weakness in the
Denver, Colorado economy, fluctuating occupancy, significant concessions and
high leverage ratios (a deterrent to institutional investors), the Company has
determined that it would no longer continue to search for such an investor at
this time.
With respect to EQR's 14.15% interest in the corporation that owns Palomino
Park, there exists a put/call option between the Company and EQR related to
one-half of such interest (7.075%) for $1,900,000. A transaction for the
remaining interest would be subject to negotiation between the Company and EQR.
Palomino Park Bonds and Related Covenants
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, 2003 and 2002 and are
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 May 2005, replaced
an expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank
AG's letter of credit; such guarantee also expires in May 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. In the fourth quarter 2003, after the prepayment of the 277 Park Loan
and with no expected near-term replacement of that investment's revenue and
income impact, it was anticipated that the Company would not meet the existing
debt service ratio requirements under the terms of the agreement with
Commerzbank AG for the Palomino Park Bonds during one of the quarterly tests in
2004. In December 2003, the letter of credit was amended to include the effect
of offsetting the loss of income from the 277 Park Loan for the six fiscal
quarters beginning with the December 31, 2003 quarter.
At December 31, 2003 Wellsford/Whitehall recorded an impairment charge of
approximately $114,700,000 related to 12 assets in the portfolio of which the
Company's share was approximately $37,377,000, before a related charge to
write-off the remaining unamortized warrant costs on the Company's books of
approximately $2,644,000. As a result, the Company notified Commerzbank AG in
January 2004 that it would not meet the minimum shareholders' equity covenant at
December 31, 2003. The Company received a modification to the terms of the
letter of credit to reduce the minimum net worth requirement to $120,000,000,
which amount
36
includes the $25,000,000 of Convertible Trust Preferred Securities as equity. As
a result of this modification, the Company is in compliance with the letter of
credit agreement covenants.
Silver Mesa
During the year ended December 31, 2003, the Company sold 56 Silver Mesa units
and received proceeds, net of selling costs, of approximately $9,692,000. All
net proceeds received by the Company from sales of units after the repayment of
the Silver Mesa Conversion Loan in May 2003 are available for working capital
purposes. As of December 31, 2003, the Company has sold 209 of the 264 units in
this phase.
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, rental revenue, the
corresponding operating expenses and cash flow from this activity will diminish.
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
-------------- ------------- --------------
Rental revenue.............. $ 702,000 $ 1,462,000 $ 2,224,000
Net operating income (A).... $ 431,000 $ 884,000 $ 1,488,000
- -------------------------------
(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 February 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. The proceeds of the Green River
Mortgage were used to repay the Green River Construction Loan of approximately
$37,111,000 with excess proceeds available for working capital purposes.
East Lyme
On March 2, 2004, the Company entered into a contract to acquire a 144 acre
parcel of land in East Lyme, Connecticut. The purchase price for the land is
approximately $6,200,000, including a $200,000 refundable deposit made by the
Company upon entering into the contract. The closing is conditioned upon
obtaining building permits for 100 single family homes. The Company is in the
process of negotiating an agreement with a home builder who would construct
and sell these homes.
Capital Commitments
At December 31, 2003, the Company had capital commitments of $366,000 relating
to one of its investments. The Company and Whitehall have agreed to provide up
to $8,000,000 to Wellsford/Whitehall through March 31, 2005 (of which the
Company's share is 35%), however, there can be no assurance that this amount
will be sufficient.
The Company may make additional equity investments subject to board approval if
deemed prudent to do so to protect or enhance its existing investment.
Tax Indemnities
Wellsford/Whitehall has agreed to maintain certain tax indemnities through 2007,
for a family group who are partners of the joint venture, relating to assets
acquired from those partners in 1998. The Company believes that this indemnity
was maintained during 2003 by Wellsford/Whitehall. The tax indemnity is not an
obligation of
37
the Company and 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. Accordingly, future sales of
Wellsford/Whitehall properties may be limited in order to preserve this tax
indemnity.
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, 2003; none during the year ended
December 31, 2003.
Credit Facility
In the past, the Company had loan facilities available for its corporate needs.
In the future, the Company may seek to obtain a new facility based upon future
liquidity requirements. If necessary, the Company expects that it could readily
borrow against the $27,500,000 of U.S. Government treasury obligations in its
investment portfolio.
Cash Flows
- ----------
2003 Cash Flows
Cash flow provided by operating activities of $17,551,000 consists of the
following adjustments to the current year net loss of $(45,859,000): (i) the
Company's share of the impairment charge at the Wellsford/Whitehall venture of
$37,377,000, (ii) a net decrease in residential units available for sale from
the sale of Silver Mesa units of $9,343,000, (iii) depreciation and amortization
of $8,686,000, (iv) deferred tax provision of $6,842,000, (v) a decrease in the
balance of prepaid and other assets of $2,126,000, (vi) an increase in the
balance of accrued expenses and other liabilities of $877,000, (vii)
amortization of the value of stock in the deferred compensation plan of
$278,000, (viii) the value of expensed options granted to directors in 2003 of
$93,000, (ix) an increase in the balance of liabilities attributable to assets
held for sale of $93,000 and (x) the value of stock issued for director
compensation of $85,000, offset by (xi) distributions less than joint venture
income of $1,283,000, (xii) an increase in restricted cash and investments of
$666,000, (xiii) an increase in the balance of assets held for sale of $356,000
and (xiv) undistributed minority interest benefit of $85,000.
Cash flow provided by investing activities of $2,295,000 is the net result of
(i) repayments of $25,516,000 of notes receivable (primarily the prepayment of
the $25,000,000 277 Park Loan), (ii) proceeds from the sale of one of the VLP
assets held for sale in the Wellsford Capital SBU of $4,165,000 and (iii)
returns of capital of $510,000 from the Clairborne Fordham venture, offset by
cash used to purchase investments in U.S. Government securities of $27,516,000
and additions to real estate and the acquisition of an interest in a land parcel
of $380,000.
Cash used in financing activities of $3,050,000 is the result of repayments of
mortgage notes payable of $42,728,000 (including $37,111,000 for a maturing
construction loan on the Green River property and $4,318,000 for the Silver Mesa
Conversion Loan), deferred financing costs of $317,000 on the new Green River
Mortgage and $5,000 of distributions to minority interest holders, offset by
borrowings of $40,000,000 under the Green River Mortgage.
2002 Cash Flows
Cash flow provided by operating activities of $5,836,000 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
38
compensation of $1,243,000, (iv) distributions received in excess of joint
venture income of $924,000 and (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 $1,986,000, (viii) an increase in restricted
cash and investments of $1,991,000, (ix) a deferred tax credit of $1,225,000,
(x) an increase in assets held for sale of $745,000, (xi) an increase in prepaid
and other assets of $330,000, (xii) minority interest benefit of $43,000 and
(xiii) a decrease in liabilities attributable to assets held for sale of $6,000.
Cash flow provided by investing activities of $5,490,000 consists of repayments
of notes receivable of $6,173,000, offset by additional investments in real
estate assets of $473,000 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 $26,269,000 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) an increase in accrued
expenses and other liabilities of $2,433,000, (iv) a decrease in restricted cash
of $2,368,000, (v) amortization of deferred compensation of $1,578,000, (vi) the
increase in the deferred tax provision of $1,503,000, (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, an increase in prepaid and other
assets of $764,000, an increase in assets held for sale of $217,000 and a
decrease in liabilities attributable to assets held for sale of $70,000.
Cash flow provided by investing activities of $5,048,000 consists of returns of
capital from joint venture investments of $31,617,000, proceeds from the sale of
real estate assets of $18,554,000 and repayments of notes receivables of
$3,589,000, partially offset by investments in real estate assets of
$39,646,000, 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.
Environmental
- -------------
During July 2003, the Company sold the Keewaydin, New Hampshire property. This
property had been subject to ground water and surface water monitoring and
testing as well as possible surface water contamination, volatile organic
chemical migration off of the property and air quality issues. As conditions to
the sale, the Company is obligated to pay certain agreed upon expenses for
testing and other environmental related costs up to a maximum liability of
$250,000 which will expire on July 2, 2004. The Company reserved all of this
liability at the time of closing and placed $250,000 into escrow. The balance of
this reserve has been reduced to approximately $219,000 by December 31, 2003.
The Company has no further obligations to the buyer after the $250,000 has been
exhausted or if any amount is unused by the July 2004 expiration date. Any
unused escrow is released back to the Company at the expiration date. For the
period prior to the sale of the property in 2003 and for the years ended
December 31, 2002 and 2001, the Company incurred approximately $27,000, $96,000
and $48,000, respectively, of costs principally for its environmental testing
firm with respect to this matter.
39
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, many of the Company's liability insurance carriers including
the primary and excess liability carriers, have made such insurance available to
the Company. The Company is covered under its current policies which expire at
June 30, 2004 and had such insurance for all of 2003. Assets in the
Wellsford/Whitehall portfolio were covered under terrorism insurance policies
for the year ended December 31, 2003. 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 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 and the sale of residential units at Silver Mesa in the
Wellsford Development SBU and Fordham Tower residential units in the Wellsford
Capital SBU. Wellsford/Whitehall would be similarly impacted by such economic
conditions in connection with leasing properties and the ability to sell
properties in the portfolio.
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 world
and domestic events, 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.
The Company's sales of residential units at Silver Mesa have a seasonal trend
where sales are generally higher in the summer and fall months than during the
winter and early spring. Therefore, past quarterly results may not be indicative
of the sales pace in future quarters.
40
The number and timing of future sales of Silver Mesa residential units could be
adversely impacted by increases in interest rates and the availability of credit
to potential buyers in 2004, whereas during 2003, historically low interest
rates may have benefited sales results. The sale of residential units at Fordham
Tower could be similarly impacted by increases in interest rates.
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; future impairment charges as a result of
possible continuing declines in the expected values and cash flows of owned
properties; 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; inability
to obtain relief under existing financing terms; risk of foreclosure on
collateral; risk related to the maintenance of tax indemnities; risks of
investments in debt instruments, including possible payment defaults and
reductions in the value of collateral; uncertainties pertaining to debt
investments, 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 associated with
the ability to renew or obtain necessary credit enhancements from third parties;
risks of subordinate loans; risks of leverage; risks associated with equity
investments in and with third parties; risks associated with our reliance on
joint venture partners including, but not limited to, the inability to obtain
consent from partners for certain business decisions, reliance on partners who
are solely responsible for the books, records and financial statements of such
ventures, the potential risk that our partners may become bankrupt, have
economic or other business interests and objectives which may be inconsistent
with those of the Company and our partners being in a position to take action
contrary to our instructions or requests; risk of not executing final amendments
pursuant to the GECC Letter Agreement; inability and/or unwillingness of
partners to provide their share of any future capital requirements; availability
and cost of financing; interest rate risks; demand by prospective buyers of
condominium and commercial properties; the uncertainties regarding the Buy/Sell
Agreement between the Company and Whitehall with respect to the
Wellsford/Whitehall venture including, but not limited to, whether either party
will exercise their rights there under, the timing of such exercise, and the
inability by the ultimate purchaser to meet the financial terms of such
transaction; inability to realize gains from the real estate assets held for
sale; lower than anticipated sales prices; inability to close on sales of
properties; illiquidity of real estate investments; the risks of seasonality and
increasing interest rates on the Company's ability to sell condominium units;
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 and its joint venture investments each generally manage this risk by
offsetting its investments and financing exposures as well as by strategically
timing and structuring its transactions. The investments described below are
generally made for long-term investing and not for trading purposes. 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 Income December 31, Rate on Income
2003 (Expense) 2002 (Expense)
------------- ---------------- ------------- ----------------
Consolidated assets and liabilities:
Notes receivable:
Variable rate.......................... $ -- $ -- $ -- $ --
Fixed rate............................. 3,096 -- 28,612 --
------------- ---------------- ------------- ----------------
$ 3,096 -- $ 28,612 --
============= ---------------- ============= ----------------
Mortgage notes payable:
Variable rate.......................... $ 12,680 (127) $ 54,109 (541)
Fixed rate............................. 96,825 -- 58,124 --
------------- ---------------- ------------- ----------------
$ 109,505 (127) $ 112,233 (541)
============= ---------------- ============= ----------------
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....................... $ 891,993 8,920 $ 912,705 9,127
============= =============
Debt:
Variable rate....................... $ 932,409 (9,324) $ 871,100 (8,711)
============= ---------------- ============= ----------------
Net effect from Second Holding............ (404) 416
---------------- ----------------
Wellsford/Whitehall:
Debt:
Variable rate, with LIBOR cap (A)... $ 39,398 (394) $ 90,977 (910)
Fixed rate.......................... 26,323 -- 29,071 --
------------- ---------------- ------------- ----------------
$ 65,721 $ 120,048
============= =============
Effect from Wellsford/Whitehall........... (394) (910)
---------------- ----------------
Fordham Tower:
Fixed rate (B)......................... $ 2,890 -- $ 3,400 --
============= ---------------- ============= ----------------
Net decrease in annual income, before minority
interest benefit and income tax benefit... (925) (1,035)
Minority interest benefit.................... 18 77
Income tax benefit........................... -- 383
--------------- ----------------
Net decrease in annual net income............ $ (907) $ (575)
=============== ================
Per share, basic and diluted................. $ (0.14) $ (0.09)
=============== ================
_________________________________________
(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 1.12% and 1.38% at December 31, 2003 and 2002, respectively.
(B) The Company's investment in Fordham Tower was reduced to $2,890 as a result
of partial principal payments in October and December 2003, as provided in
the amended loan agreement. For purposes of this disclosure, the balance
will be presented as a fixed rate investment as the balance does not accrue
interest and future earnings from this venture by the Company will be based
upon future proceeds from sales of units and commercial phases, or other
capital events.
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 starting at F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9a. Controls and Procedures.
As of the end of the period covered by 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 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.
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......... 56 Chairman of the Board, Chief Executive Officer,
President and Director**
James J. Burns............. 64 Senior Vice President, Chief Financial Officer
and Secretary
Willliam H. Darrow II...... 56 Vice President
David M. Strong............ 45 Vice President of Development
Mark P. Cantaluppi......... 33 Vice President, Chief Accounting Officer
Bonnie R. Cohen............ 61 Director***
Douglas Crocker II......... 63 Director**
Meyer S. Frucher........... 57 Director***
Mark S. Germain............ 53 Director**
Edward Lowenthal........... 59 Director*
David J. Neithercut........ 48 Director*
- -----------------------------------
* Term expires during 2004.
** Term expires during 2005.
*** Term expires during 2006.
The information contained in the sections captioned "Nominees for Election as
Directors", "Other Directors" and "Executive Officers" of the Company's
definitive proxy statement for the 2004 annual meeting of shareholders is
incorporated herein by reference.
43
Item 11. Executive Compensation.
The information contained in the sections captioned "Compensation of Directors",
"Executive Compensation", "Employment Agreements", and "Management Incentive
Plans" of the Company's definitive proxy statement for the 2004 annual meeting
of shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" and "Related Shareholder Matters" of
the Company's definitive proxy statement for the 2004 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 2004 annual meeting of shareholders
is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information contained in the section captioned "Principal Accountant Fees
and Services" of the Company's definitive proxy statement for the 2004 annual
meeting of shareholders is incorporated herein by reference.
PART IV
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, 2003 and 2002.
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements
and Notes.
Second Holding Company, LLC Consolidated Financial Statements and
Notes.
(2) Financial Statement Schedules
III. Real Estate and Accumulated Depreciation
44
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. ****
3.5 Articles Supplementary reclassifying and designating 350,000
shares of unissued Common Stock as Class A-1 Common Stock, dated
as of May 5, 2000. &&&&&
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. ****
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 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. **
4.7 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. &&&&&
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. *
45
Exhibit No. Description& (continued)
---------- ------------
10.5 Amendment to Wellsford Reimbursement Agreement by and between
PPPIC, Wellsford Residential Property Trust and the Company,
dated as of May 30, 1997. ****
10.6 Credit Enhancement Agreement by and between the Company and ERP
Operating Limited Partnership, dated as of May 30, 1997, relating
to Palomino Park. ****
10.7 Reimbursement and Indemnification Agreement by and between the
Company and ERP Operating Limited Partnership, dated as of May
30, 1997, relating to Palomino Park. ****
10.8 Common Stock and Preferred Stock Purchase Agreement by and
between the Company and ERP Operating Limited Partnership, dated
as of May 30, 1997. ****
10.9 Registration Rights Agreement by and between the Company and ERP
Operating Limited Partnership dated as of May 30, 1997. ****
10.10 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. ****
10.11 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. ++
10.12 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. &&&&
10.13 Limited Liability Company Operating Agreement of
Wellsford/Whitehall Group, L.L.C. ("WWG"), dated as of May 28,
1999. +++
10.14 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). &&&&&&
10.15 $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. +
10.16 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. +
10.17 1998 Management Incentive Plan of the Company. ++
10.18 1997 Management Incentive Plan of the Company. **
10.19 Rollover Stock Option Plan of the Company. **
10.20 Amended and Restated Employment Agreement dated as of December
7, 2001 by and between Wellsford Real Properties, Inc. and
Jeffrey H. Lynford. ^^^
10.21 Employment Separation Agreement dated as of December 7, 2001 by
and between Wellsford Real Properties, Inc. and Edward Lowenthal.
^^^
10.22 Employment Agreement between the Company and David M. Strong.
^^^^^
46
Exhibit No. Description& (continued)
---------- ------------
10.23 Certificate of Trust of WRP Convertible Trust I, as filed with
the Secretary of State of the State of Delaware on May 5, 2000.
&&&&&
10.24 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. &&&&&
10.25 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. &&&&&
10.26 Preferred Securities Guarantee, dated as of May 5, 2000, by and
between Wellsford Real Properties, Inc. and Wilmington Trust
Company, as Trustee. &&&&&
10.27 Common Securities Guarantee, dated as of May 5, 2000, by
Wellsford Real Properties, Inc. &&&&&
10.28 Amendment to Registration Rights Agreement, dated as of May 5,
2000, by and between Wellsford Real Properties, Inc. and ERP
Operating Limited Partnership. &&&&&
10.29 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. #
10.30 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. #
10.31 Promissory Note, dated June 16, 2000, between Wellsford Real
Properties, Inc. and Commerzbank AG. #
10.32 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. ##
10.33 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. ##
10.34 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. ##
10.35 Operating Agreement of Silver Mesa at Palomino Park LLC between
Wellsford Park Highlands Corp. and Al Feld, dated as of December
10, 1998. +++++
10.36 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. +++++
10.37 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. ^
47
Exhibit No. Description& (continued)
---------- ------------
10.38 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.++++++
10.39 Promissory Note, dated June 25, 2001, between General Electric
Capital Corporation and Wellsford/Whitehall Holdings, L.L.C. ^
10.40 Guaranty, dated as of June 25, 2001, made by WWG 401 North
Washington LLC in favor of General Electric Capital Corporation.^
10.41 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. ^
10.42 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. ^
10.43 Indemnity Regarding Guaranty Obligations, dated as of June 25,
2001, between Wellsford/Whitehall Holdings, L.L.C. and WWG 401
North Washington LLC. ^
10.44 October 2001 Amendment to the Letter of Credit Reimbursement
Agreement, dated October 26, 2001 among PPPIC, Wellsford Real
Properties, Inc. and Commerzbank AG. ^^
10.45 November 2003 Amendment to the Letter of Credit Reimbursement
Agreement dated November 7, 2003 among PPPIC, Wellsford Real
Properties, Inc. and Commerzbank AG.
10.46 Operating Agreement of Green River at Palomino Park LLC between
Wellsford Park Highlands Corp. and Al Feld, dated as of January
5, 2000. +++++
10.47 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. +++++
10.48 $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. +++++
10.49 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. +++++
10.50 Operating Agreement of Park at Highlands L.L.C. between
Wellsford Park Highlands Corp. and Al Feld, dated as of April 27,
1995. ^^^^
10.51 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. ^^^^
10.52 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. ^^^^
10.53 Wellsford Real Properties, Inc. Code of Business Conduct and
Ethics for Directors, Senior Financial Officers, Other Officers
and All Other Employees.++++++
48
Exhibit No. Description& (continued)
---------- ------------
10.54 Deed of Trust, Security Agreement and Fixture Filing for Green
River at Palomino Park LLC, as grantor to The Public Trustee of
Douglas County, as trustee for the benefit of AUSA Life Insurance
Company, Inc. dated February 6, 2003.++++++
10.55 $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.++++++
10.56 Sale-Purchase Agreement dated as of March 14, 2003 between
Wellsford Capital Properties, L.L.C. and 955 Perimeter Road
Realty, LLC for the sale of 15, 19 and 23 Keewaydin Drive, Salem,
New Hampshire.###
10.57 Third Amendment to Sale-Purchase Agreement dated as of June 3,
2003 between Wellsford Capital Properties, L.L.C. and 955
Perimeter Road Realty, LLC for the sale of 15, 19 and 23
Keewaydin Drive, Salem, New Hampshire.###
10.58 Letter Agreement dated January 20, 2004 between General Electric
Capital Corporation and Wellsford/Whitehall Holdings, L.L.C.
setting forth the terms of an extension of the portfolio loan.
10.59 March 2004 Amendment to the Letter of Credit Reimbursement
Agreement, dated March 11, 2004 among PPPIC, the Company and
Commerzbank AG.
10.60 Second Amendment to the Limited Liability Company Operating
Agreement of Wellsford/Whitehall Group, L.L.C., dated as of
March 5, 2004.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Ernst & Young LLP.
31.1 Chief Executive Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer and Chief Financial Officer
Certifications 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.
& 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, 2002.
++++++ Previously filed as an exhibit to the Form 10-K filed on March 26, 2003.
# 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 on June 30, 2003.
^ 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.
49
(b) During the last quarter of the period covered by this report, the
Company filed the following reports on Form 8-K:
Date of Report
(Date of Earliest Event) Items Reported Date Filed
----------------------- ----------------------- ------------------
November 13, 2003 The Company furnished November 13, 2003
under Item 9, a copy of
(November 13, 2003) the press release
reporting results for the
third quarter ended
September 30, 2003
(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.
50
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 9, 2004
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, March 9, 2004
- ----------------------------- Chief Executive Officer,
Jeffrey H. Lynford President and Director
/s/ Bonnie R. Cohen Director March 9, 2004
- -----------------------------
Bonnie R. Cohen
/s/ Douglas Crocker II Director March 9, 2004
- -----------------------------
Douglas Crocker II
/s/ Meyer S. Frucher Director March 9, 2004
- -----------------------------
Meyer S. Frucher
/s/ Mark S. Germain Director March 9, 2004
- -----------------------------
Mark S. Germain
/s/ Edward Lowenthal Director March 9, 2004
- -----------------------------
Edward Lowenthal
/s/ David J. Neithercut Director March 9, 2004
- -----------------------------
David J. Neithercut
51
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, 2003 and 2002.................F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001.....................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001.....................F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001.....................F-6
Notes to Consolidated Financial Statements...................................F-8
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements
and Notes...............................................................F-47
Second Holding Company, LLC Consolidated Financial Statements and
Notes...................................................................F-64
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.
We have audited the accompanying consolidated balance sheets of Wellsford Real
Properties, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, 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, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15(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. The financial statements of Second Holding Company, LLC, (a joint
venture in which the Company has a 51.1% interest), have been audited by other
auditors whose report has been furnished to us; insofar as our opinion on the
consolidated financial statements relates to the amounts included for Second
Holding Company, LLC, it is based solely on their report. In the consolidated
financial statements, the Company's investment in Second Holding Company, LLC
is stated at $29,230,179 and $28,228,810, respectively, at December 31, 2003
and 2002, and the Company's equity in net income (loss) of Second Holding
Company, LLC is stated at $1,639,879, $723,430, and $(162,933), respectively,
for the three years in the period ended December 31, 2003.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Wellsford Real Properties, Inc. and
subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 8, 2004
F-2
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
2003 2002
------------ -------------
ASSETS
Real estate assets, at cost:
Land..............................................$ 18,735,969 $ 19,402,840
Buildings and improvements........................ 113,556,952 117,320,307
------------ ------------
132,292,921 136,723,147
Less:
Accumulated depreciation....................... (16,774,867) (12,833,600)
------------ ------------
115,518,054 123,889,547
Residential units available for sale.............. 9,235,970 14,541,634
Land held for development......................... 5,828,453 5,410,831
------------ ------------
130,582,477 143,842,012
Notes receivable..................................... 3,096,000 28,612,000
Assets held for sale................................. 2,334,535 6,255,666
Investment in joint ventures......................... 53,759,723 94,180,991
------------ ------------
Total real estate and investments.................... 189,772,735 272,890,669
Cash and cash equivalents............................ 55,377,515 38,581,841
Restricted cash and investments...................... 10,210,405 9,543,934
Investments in U.S. Government securities............ 27,516,211 --
Prepaid and other assets............................. 2,950,260 11,758,599
------------ ------------
Total assets.........................................$285,827,126 $332,775,043
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable............................$109,504,562 $112,232,830
Accrued expenses and other liabilities,
including the liability for deferred
compensation of $9,748,487 and $8,933,607...... 16,283,419 15,312,782
Liabilities attributable to assets held for sale.. 317,486 224,007
------------ ------------
Total liabilities.................................... 126,105,467 127,769,619
------------ ------------
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 interests................................... 3,447,615 3,438,127
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 - 6,286,091 and 6,280,683
shares issued and outstanding.................. 125,722 125,614
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............ 162,736,723 162,751,498
Retained earnings (deficit)....................... (25,242,236) 20,617,085
Accumulated other comprehensive loss; share of
unrealized loss on interest rate protection
contract purchased by joint venture investment,
net of income tax benefit...................... (50,429) (253,500)
Deferred compensation............................. -- (277,664)
Treasury stock, 305,249 and 311,624 shares........ (6,299,134) (6,399,134)
------------ ------------
Total shareholders' equity........................... 131,274,044 176,567,297
------------ ------------
Total liabilities and shareholders' equity...........$285,827,126 $332,775,043
============ ============
See notes to Consolidated Financial Statements
F-3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- --------------
REVENUES
Rental revenue.............. $ 14,256,344 $ 15,105,552 $ 12,441,232
Revenue from sales of
residential units........ 12,535,481 10,635,188 21,932,050
Interest revenue............ 7,451,199 4,096,374 5,175,162
Fee revenue................. 1,359,408 674,975 617,376
------------- ------------- -------------
Total revenues........... 35,602,432 30,512,089 40,165,820
------------- ------------- -------------
COSTS AND EXPENSES
Cost of sales of residential
units.................... 10,708,448 9,543,905 19,363,647
Property operating and
maintenance.............. 4,894,726 4,815,091 3,236,690
Real estate taxes........... 1,296,883 1,290,439 863,219
Depreciation and
amortization............. 8,537,016 5,264,499 5,307,394
Property management......... 292,102 419,163 438,969
Interest.................... 6,583,411 5,850,719 4,355,864
General and administrative.. 5,590,971 6,567,166 8,466,948
Restructuring charge........ -- -- 3,526,772
------------- ------------- -------------
Total costs and expenses. 37,903,557 33,750,982 45,559,503
(Loss) income from joint
ventures.................... (34,429,066) (208,751) 4,564,406
------------- ------------- -------------
(Loss) before minority interest,
income taxes, accrued
distributions and amortization
of costs on Convertible
Trust Preferred Securities and
discontinued operations..... (36,730,191) (3,447,644) (829,277)
Minority interest benefit
(expense)................... 85,337 43,281 (282,526)
------------- ------------- -------------
(Loss) before income taxes,
accrued distributions and
amortization of costs on
Convertible Trust Preferred
Securities and discontinued
operations.................. (36,644,854) (3,404,363) (1,111,803)
Income tax expense (benefit)... 7,135,000 (1,322,000) 513,000
------------- ------------- -------------
(Loss) before accrued distributions
and amortization of costs on
Convertible Trust Preferred
Securities and discontinued
operations.................. (43,779,854) (2,082,363) (1,624,803)
Accrued distributions and
amortization of costs on
Convertible Trust Preferred
Securities, net of income
tax benefit of $720,000 in
2002 and 2001............... 2,099,815 1,379,815 1,379,815
------------- ------------- -------------
(Loss) from continuing
operations.................. (45,879,669) (3,462,178) (3,004,618)
Income from discontinued
operations, net of income tax
expense of $16,000, $22,000 and
$186,000, respectively...... 20,348 89,759 280,002
------------- ------------- -------------
Net (loss) .................... $ (45,859,321) $ (3,372,419) $ (2,724,616)
============= ============= =============
Per share amounts, basic and
diluted:
(Loss) from continuing
operations............... $ (7.11) $ (0.53) $ (0.42)
Income from discontinued
operations............... -- 0.01 0.04
------------- ------------- -------------
Net (loss).................. $ (7.11) $ (0.52) $ (0.38)
============= ============= =============
Weighted average number of common
shares outstanding:
Basic....................... 6,454,236 6,436,755 7,213,029
============= ============= =============
Diluted..................... 6,454,236 6,436,755 7,213,029
============= ============= =============
See notes to Consolidated Financial Statements
F-4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Accumulated
Common Shares* Retained Other Total
------------------- Paid-in Earnings Comprehensive Deferred Shareholders' Comprehensive
Shares Amount Capital** (Deficit) (Loss)Income Compensation Equity (Loss)
--------- -------- ------------ ------------ ------------- ------------ ------------- -------------
Balance, January 1,
2001.............. 8,350,378 $167,008 $190,889,226 $ 26,714,120 -- $(1,788,005) $215,982,349
Director and employee
share grants...... 75,647 1,513 1,434,487 -- -- (1,356,000) 80,000 $ --
Amortization of deferred
compensation***... -- -- -- -- -- 1,623,009 1,623,009 --
Shares repurchased and
cancelled......... (2,020,784) (40,416) (36,535,776) -- -- -- (36,576,192) --
Registration costs... -- -- (123,112) -- -- -- (123,112) --
Warrants repurchased
and cancelled..... -- -- (80,000) -- -- -- (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) (2,724,616)
--------- -------- ------------ ------------ -------- ----------- ------------ ------------
Balance, December 31,
2001.............. 6,405,241 128,105 155,584,825 23,989,504 (102,736) (1,520,996) 178,078,702 $ (2,827,352)
============
Director share
grants............ 4,760 95 91,905 -- -- -- 92,000 $ --
Stock option
exercises......... 40,585 812 675,634 -- -- -- 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) (3,372,419)
--------- -------- ------------ ------------ -------- ----------- ------------ ------------
Balance, December 31,
2002.............. 6,450,586 129,012 156,352,364 20,617,085 (253,500) (277,664) 176,567,297 $ (3,523,183)
============
Director share
grants............ 5,408 108 85,225 -- -- -- 85,333 $ --
Amortization of deferred
compensation...... -- -- -- -- -- 277,664 277,664 --
Share of unrealized
income on interest
rate protection contract
purchased by joint
venture investment, net
of income tax benefit
of $135,381....... -- -- -- -- 203,071 -- 203,071 203,071
Net (loss)........... -- -- -- (45,859,321) -- -- (45,859,321) (45,859,321)
--------- -------- ------------ ------------ -------- ----------- ------------ ------------
Balance, December 31,
2003.............. 6,455,994 $129,120 $156,437,589 $(25,242,236) $(50,429) $ -- $131,274,044 $(45,656,250)
========= ======== ============ ============ ======== =========== ============ ============
* 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-5
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss).................................................... $(45,859,321) $(3,372,419) $(2,724,616)
Adjustments to reconcile net (loss) to net cash provided by
operating activities:
Share of impairment charges from Wellsford/Whitehall....... 37,376,500 -- --
Deferred tax provision (credit)............................ 6,842,000 (1,225,000) 1,503,000
Depreciation and amortization.............................. 8,685,996 5,511,980 5,126,018
Amortization of deferred compensation...................... 277,664 1,243,332 1,578,009
Non-cash charges in restructuring charge................... -- -- 61,081
Distributions (less than) in excess of joint venture income (1,282,797) 923,875 163,695
Undistributed minority (benefit) expense................... (85,337) (43,281) 282,526
Stock issued for director compensation..................... 85,333 92,000 80,000
Value of option grants for director compensation........... 93,600 -- --
Changes in assets and liabilities:
Restricted cash and investments......................... (666,471) (1,990,775) 2,368,347
Residential units available for sale.................... 9,342,643 7,763,125 16,448,630
Assets held for sale.................................... (356,001) (744,892) (217,173)
Prepaid and other assets................................ 2,126,663 (329,732) (763,682)
Accrued expenses and other liabilities.................. 877,037 (1,985,788) 2,432,801
Liabilities attributable to assets held for sale........ 93,479 (6,563) (69,911)
------------ ----------- -----------
Net cash provided by operating activities.................. 17,550,988 5,835,862 26,268,725
------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of U.S. Government securities........................ (27,516,211) -- --
Investments in real estate assets............................. (19,558) (472,697) (39,646,193)
Land held for development..................................... (360,551) -- --
Investments in joint ventures:
Capital contributions...................................... -- (209,800) (8,565,877)
Returns of capital......................................... 509,963 -- 31,616,900
Investments in notes receivable............................... -- -- (500,000)
Repayments of notes receivable................................ 25,516,000 6,172,727 3,589,255
Proceeds from sale of real estate assets...................... 4,165,467 -- 18,553,458
------------ ----------- -----------
Net cash provided by investing activities.................. 2,295,110 5,490,230 5,047,543
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facility............................... -- -- 12,000,000
Repayment of credit facility.................................. -- -- (24,000,000)
Borrowings from mortgage notes payable........................ 40,000,000 -- 36,747,451
Deferred financing costs...................................... (316,881) -- --
Interest funded by construction loan.......................... -- 431,120 --
Repayment of mortgage notes payable........................... (42,728,268) (9,928,894) (19,420,817)
Proceeds from option exercises................................ -- 676,446 --
Distributions to minority interest............................ (5,275) (15,232) (16,385)
Costs to repurchase warrants.................................. -- -- (80,000)
Registration costs............................................ -- -- (123,112)
Repurchase of common shares................................... -- -- (36,576,192)
------------ ----------- -----------
Net cash (used in) financing activities.................... (3,050,424) (8,836,560) (31,469,055)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents............. 16,795,674 2,489,532 (152,787)
Cash and cash equivalents, beginning of year..................... 38,581,841 36,092,309 36,245,096
------------ ----------- -----------
Cash and cash equivalents, end of year........................... $ 55,377,515 $38,581,841 $36,092,309
============ =========== ===========
F-6
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- --------------
SUPPLEMENTAL INFORMATION:
Cash paid during the year
for interest, including
amounts capitalized of
$1,610,359 in 2001........ $ 6,556,762 $ 5,763,774 $ 5,849,094
============ =========== ============
Tax refunds in excess of
payments for income
taxes..................... $ 1,795,490 $ 107 $ 1,154,461
============ =========== ============
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Other comprehensive income
(loss); share of
unrealized income
(loss) on interest rate
protection contract
purchased by joint
venture investment,
net of tax............. $ 203,071 $ (150,764) $ (102,736)
============ =========== ============
Release of shares held in
deferred compensation
plan................... $ 100,000 $ 50,000
============ ===========
Reclassification of Silver
Mesa units from land,
building and improvements
and accumulated depreciation
to residential units
available for sale in 2003
and 2002, respectively. $ 4,036,979 $16,903,808
============ ===========
Value of land, net other
assets and minority
interest assumed on
investment in land held
for development........ $ 100,100
============
See notes to Consolidated Financial Statements
F-7
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 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 - Wellsford
Capital SBU; and (iii) Property Development and Land Investments -
Wellsford Development SBU.
See Note 13 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.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN
46"). A Variable Interest Entity ("VIE") is created when (i) the equity
investment at risk is not sufficient to permit the entity from financing
its activities without additional subordinated financial support from other
parties or (ii) equity holders either (a) lack direct or indirect ability
to make decisions about the entity, (b) are not obligated to absorb
expected losses of the entity or (c) do not have the right to receive
expected residual returns of the entity if they occur. If an entity is
deemed to be a VIE, pursuant to FIN 46, an enterprise that absorbs a
majority of the expected losses or receives a majority of the residual
returns of the VIE is considered the primary beneficiary and must
consolidate the VIE. The provisions of FIN 46 are effective immediately for
variable interest entities formed or acquired after January 31, 2003 and in
the period ending after December 15, 2003 for variable interest entities in
which the Company held an interest before February 1, 2003. The Company has
two variable interest entities, one of which is consolidated under the
provisions of FIN 46 at December 31, 2003. In addition, based on the
provisions of FIN 46, the Company will be required to deconsolidate the
entity which issued the Convertible Trust Preferred Securities during the
quarter ending March 31, 2004. The Company is currently assessing the
impact to the display changes for the financial statements, but believes
that there will be no material impact to financial position, results of
operations or cash flows upon adoption.
F-8
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Summary of Significant Accounting Policies (continued)
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.
Cash and Cash Equivalents. The Company considers all demand and money
market accounts and short term investments in government funds with a
maturity of three months or less at the date of purchase to be cash and
cash equivalents.
Investment in U.S. Government Securities. Investments in U.S. Government
securities are classified as held-to-maturity and are carried at amortized
cost.
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 $8,537,000,
$5,264,000 and $5,307,000 in 2003, 2002 and 2001, respectively, and
included approximately $4,021,000, $758,000 and $1,950,000 of amortization
in 2003, 2002 and 2001, respectively, of certain costs capitalized to the
Company's Investment in Joint Ventures. The 2003 amount includes (i) a
charge to write-off the remaining $2,644,000 of unamortized warrant costs
by the Company relating to the Wellsford/Whitehall venture as a result of
an impairment charge recorded by that venture during the fourth quarter of
2003 and (ii) accelerated amortization attributable to asset sales in 2003
of $994,000 in excess of the straight-line amount.
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.
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
F-9
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Summary of Significant Accounting Policies (continued)
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. The Company reclassified two properties in the Wellsford
Capital SBU as a discontinued operation at June 30, 2003. Accordingly, the
Company reclassified the December 31, 2002 balance sheet and prior period
presentation of its statements of operations and cash flows in accordance
with SFAS No. 144. Assets held for sale are recorded at the lower of
historical cost or market value less selling costs. One of the properties
was sold in July 2003. The operations of these two properties had not been
classified as discontinued operations but treated as held for use for the
year ended December 31, 2002 and accordingly the Company recorded
depreciation expense during that year. No depreciation was recorded
subsequent to July 1, 2003 for these two properties. Depreciation was not
recorded during the year ended December 31, 2001 as a result of these
assets being held for sale at that time as well.
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 Company records cost of sales based upon relative sales values.
Sales price concessions are recognized as a reduction in sales revenues as
individual units are sold. 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. No impairment has been recorded during the years ended
December 31, 2003, 2002 and 2001.
Debt, Other Liabilities and Equity. In May 2003, SFAS No. 150 "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity" was issued. SFAS No. 150 defines the appropriate balance sheet
classification of instruments with both debt and equity components and the
appropriate expense classification for any dividend, interest or fair value
adjustments. SFAS No. 150 is effective for interim periods beginning after
June 15, 2003. The Company has determined that this statement did not have
any impact on its financial position or results of operations.
Revenue Recognition. Commercial properties are leased under operating
leases. Rental revenue from office properties is recognized on a
straight-line basis over the terms of the respective leases. Residential
units 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. Prepayment penalties on mortgages receivable are recorded as
interest revenue in the period that such fees are earned. Fee revenues are
recorded in the period earned, based upon formulas as defined by agreement
for management services or upon asset sales and purchases by certain joint
venture investments. Sales of real estate assets are recognized at closing,
subject to receipt of down payments and other requirements in accordance
with applicable accounting guidelines.
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
F-10
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Summary of Significant Accounting Policies (continued)
Principles Board Opinion ("APB") No. 25, but are required to provide pro
forma net income and earnings per share information "as if" the fair value
approach had been adopted. The Company previously elected to account for
its share based compensation plans under APB No. 25, resulting in no impact
on the Company's consolidated financial statements for the years ended
December 31, 2002 and 2001.
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
determined that the prospective method of transition will be used to
account for stock-based compensation on a fair value basis during 2003 and
in the future. This method results in the Company applying the provisions
of SFAS No. 123 to all 2003 and future grants and significant modifications
to the terms of previously granted options by expensing the determined fair
value of the options over the future vesting periods.
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 (expense).
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-11
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,
------------------------------------------------
2003 2002 2001
------------- ------------- --------------
Numerator:
(Loss) from continuing
operations............. $(45,879,669) $(3,462,178) $(3,004,618)
Income from discontinued
operations, net of
income tax expense of
$16,000, $22,000 and
$186,000, respectively. 20,348 89,759 280,002
------------ ----------- -----------
Net (loss)................ $(45,859,321) $(3,372,419) $(2,724,616)
============ =========== ===========
Denominator:
Denominator for net (loss)
per common share,
basic - weighted average
common shares.......... 6,454,236 6,436,755 7,213,029
Effect of dilutive
securities:
Stock options.......... -- -- --
Convertible Trust
Preferred
Securities.......... -- -- --
Warrants............... -- -- --
------------ ----------- -----------
Denominator for net (loss)
per common share,
diluted - weighted average
common shares.......... 6,454,236 6,436,755 7,213,029
============ =========== ===========
Per share amounts, basic and
diluted:
(Loss) from continuing
operations............. $ (7.11) $ (0.53) $ (0.42)
Income from discontinued
operations............. -- 0.01 0.04
------------ ----------- -----------
Net (loss)................... $ (7.11) $ (0.52) $ (0.38)
============ =========== ===========
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 periods. Actual results could differ
materially from those estimates.
Reclassification. Amounts in certain accounts in the Consolidated Balance
Sheets, Consolidated Statements of Operations, the Consolidated Statements
of Cash Flows and certain tables in the footnote disclosures have been
reclassified to conform to the current period presentation primarily from
the presentation requirements for assets classified as held for sale during
2003.
3. Restricted Cash and Investments
Restricted cash and investments primarily consists of deferred compensation
arrangement deposits and debt service, construction reserve and
environmental reserve balances. At December 31, 2003 and 2002, deferred
compensation arrangement deposits amounted to approximately $9,748,000 and
$8,934,000, respectively, and reserve balances amounted to approximately
$462,000 and $610,000, 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. Investments in U.S. Government Securities
Investments in securities primarily consists of U.S. Government treasury
obligations which are being held to maturity by the Company. As of December
31, 2003 the balance of these securities was
F-12
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Investments in U.S. Government Securities (continued)
approximately $27,516,000, had a weighted average yield to maturity of
1.35% per annum, after fees, and a weighted average term to maturity of
approximately 17 months. No security in the portfolio has a maturity longer
than 22 months from its initial purchase date and the latest maturity as of
December 31, 2003 is October 31, 2005.
5. Notes Receivable
At December 31, 2003 and 2002, notes receivable consisted of the following:
Interest
Rate in Balance at December 31,
Stated Effect Payment ---------------------------
Notes Receivable (A) Interest Rate (B) Maturity Date Terms 2003 2002
----------------------- ------------- ---------- ------------- ------- ------------- -----------
277 Park Loan.......... 12.00% 12.00% May 2007 (C) $ -- $ 25,000,000
Guggenheim............. 8.25% 8.25% December 2005 (D) 3,096,000 3,612,000
------------- ------------
$ 3,096,000 $ 28,612,000
============= ============
--------------------------
(A) For additional information regarding notes receivable, see Footnote
13, "Segment Information, Debt and Equity Investments."
(B) At December 31, 2003 based upon then in effect fixed rates.
(C) The 277 Park Loan was prepaid by the borrower in September 2003. Prior
to prepayment, monthly interest only payments were required.
(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 5, 2004, the Company received a principal
payment of $1,032,000 relating to 2003.
6. Debt
At December 31, 2003 and 2002, the Company's debt consisted of the
following:
Balance at December 31,
Initial Stated ---------------------------
Debt/Project Maturity Date Interest Rate 2003 2002
-------------------------------------- ------------- ------------------ ------------ ------------
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) 31,944,959 32,447,478
Red Canyon Mortgage................ December 2008 6.68% (C) 25,293,789 25,676,576
Silver Mesa Conversion Loan........ December 2003 LIBOR + 2.00% (D) -- 4,317,501
Green River Construction Loan...... January 2003 LIBOR + 1.75% (E) -- 37,111,275
Green River Mortgage............... March 2013 5.45% (C) 39,585,814 --
------------ ------------
Total mortgage notes payable.......... $109,504,562 $112,232,830
============ ============
Carrying amount of real estate assets
collateralizing mortgage notes
payable............................ $120,957,010 $143,842,011
============ ============
-----------------------------------------
(A) Tax-exempt bonds are secured by liens on four of the five phases of
Palomino Park (see below).
(B) Rate approximates the Standard & Poor's / J.J. Kenney index for
short-term high grade tax-exempt bonds (average annual rates,
exclusive of credit enhancement costs, were approximately 1.79% and
1.68% for 2003 and 2002, respectively).
(C) Principal payments are made based on a 30-year amortization schedule.
(D) Effective interest rate was approximately 3.38% at December 31, 2002.
Principal payments were based on approximately 90% of net sales
proceeds from condominium sales prior to the May 2003 payment of the
then remaining unpaid principal balance.
(E) Effective interest rate was approximately 3.17% at December 31, 2002.
The Green River Construction Loan was repaid in February 2003 with
proceeds from the Green River Mortgage.
F-13
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Debt (continued)
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, 2003
and 2002 and are 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 May 2005, replaced an expiring letter of credit. A
subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such
guarantee also expires in May 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. In the fourth quarter 2003, after the
prepayment of the 277 Park Loan and with no expected near-term replacement
of that investment's revenue and income impact, it was anticipated that the
Company would not meet the existing debt service ratio requirements under
the terms of the agreement with Commerzbank AG for the Palomino Park Bonds
during one of the quarterly tests in 2004. In December 2003, the letter of
credit was amended to include the effect of offsetting the loss of income
from the 277 Park Loan for the six fiscal quarters beginning with the
December 31, 2003 quarter.
At December 31, 2003 Wellsford/Whitehall recorded an impairment charge of
approximately $114,700,000 related to 12 assets in the portfolio of which
the Company's share was approximately $37,377,000, before a related charge
to write-off the remaining unamortized warrant costs on the Company's books
of approximately $2,644,000. As a result, the Company notified Commerzbank
AG in January 2004 that it would not meet the minimum shareholders' equity
covenant at December 31, 2003. The Company received a modification to the
terms of the letter of credit to reduce the minimum net worth requirement
to $120,000,000, which amount includes the $25,000,000 of Convertible Trust
Preferred Securities as equity. As a result of this modification, the
Company is in compliance with the letter of credit agreement covenants.
The Company incurred aggregate fees of approximately $230,000 for each of
the years ended December 31, 2003, 2002 and 2001 related to all of the
credit enhancement costs for the Palomino Park Bonds.
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. Interest
expense, including unused facility fees was approximately $7,000 and
$300,000 for the years ended December 31, 2002 and 2001, respectively. In
the future, the Company may seek to obtain a new facility based upon future
liquidity requirements.
F-14
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:
For the Years Ended Palomino Park
December 31, Mortgages Bonds Total
-------------------- ------------- ------------- --------------
2004................. $ 1,436,000 $ -- $ 1,436,000
2005................. 1,578,000 12,680,000 14,258,000
2006................. 1,682,000 -- 1,682,000
2007................. 31,341,000 -- 31,341,000
2008................. 24,140,000 -- 24,140,000
Thereafter........... 36,648,000 -- 36,648,000
------------- ------------- -------------
Total................ $ 96,825,000 $ 12,680,000 $ 109,505,000
============= ============= =============
The Company capitalizes interest related to buildings and condominiums
under construction and renovations to the extent such assets qualify for
capitalization. Total interest capitalized on consolidated assets during
the year ended December 31, 2001 was approximately $1,610,000. No interest
was capitalized during the years ended December 31, 2003 and 2002.
7. 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. 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.
Based on the provisions of FIN 46, the Company will be required to
deconsolidate WRP Trust I during the quarter ending March 31, 2004. The
Company is currently assessing the impact to the display changes for the
financial statements, but believes that there will be no material impact to
financial position, results of operations or cash flows upon adoption.
F-15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Income Taxes
The components of the income tax provision (benefit) for continuing
operations are as follows:
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------ ------------- -----------
Current federal tax (A)........ $ -- $ (395,000) $ (773,000)
Current state and local tax.... 293,000 298,000 (217,000)
Deferred federal tax........... 7,090,000 (850,000) 1,353,000
Deferred state and local tax... (248,000) (375,000) 150,000
------------ ------------- -----------
$ 7,135,000 $(1,322,000) $ 513,000
============ ============= ===========
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense for continuing operations is as follows:
For the Years Ended December 31,
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------------- --------- ------------ --------- ----------- ---------
Tax (benefit) at U.S. statutory
rate (A)....................... $(12,826,000) (35.00%) $(1,191,000) (35.00%) $(389,000) (35.00%)
State taxes, net of federal
benefit........................... 29,000 0.08% 194,000 5.70% 120,000 10.79%
State and local tax operating loss
carryforwards, net of federal
taxes.......................... -- -- -- -- (171,000) (15.38%)
Change in valuation allowance, net 19,551,000 53.35% (313,000) (9.19%) 806,000 72.49%
Non-deductible/non-taxable items,
net............................ 15,000 0.04% (63,000) (1.85%) 131,000 11.78%
Effect of difference in tax rate.. 366,000 1.00% 51,000 1.50% 16,000 1.44%
-------------- --------- ------------ --------- ----------- ---------
$ 7,135,000 19.47% $(1,322,000) (38.84%) $ 513,000 46.12%
============== ========= ============ ========= =========== =========
-----------------------------------
(A) The aforementioned income tax expense (benefit) for 2002 and 2001 is
prior to the tax benefit aggregating $720,000 in each of these periods
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 approximately $56,500,000 at December 31, 2003, 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 $16,500,000 could
be utilized in 2004 to offset Federal taxable income.
F-16
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,
--------------------------------
2003 2002
------------- --------------
Deferred Tax Assets
-------------------------------------------------------
Net operating loss..................................... $ 19,216,683 $ 21,031,195
Deferred compensation and severance arrangements....... 5,376,915 5,329,393
Wellsford/Whitehall asset basis differences............ 19,848,858 1,044,469
Value Property Trust asset basis differences........... 555,147 1,279,590
AMT credit carryforwards............................... 547,564 547,564
Other.................................................. 454,621 421,374
------------- --------------
45,999,788 29,653,585
Valuation allowance.................................... (41,952,945) (18,996,470)
------------- --------------
Total deferred tax assets.............................. 4,046,843 10,657,115
------------- --------------
Deferred Tax Liabilities
-------------------------------------------------------
Palomino Park asset basis differences.................. (3,312,254) (3,019,961)
Deferred gain on sale of Liberty Hampshire............. (1,256,068) (1,303,194)
Other.................................................. (26,701) (25,543)
------------- --------------
Total deferred tax liabilities......................... (4,595,023) (4,348,698)
------------- --------------
Net deferred tax (liability) asset..................... $ (548,180) $ 6,308,417
============= ==============
The Company's net deferred tax liability is included in accrued expenses
and other liabilities at December 31, 2003 and its net deferred tax asset
is included in prepaid and other assets at December 31, 2002 in the
accompanying consolidated balance sheets.
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 valuation allowances of
$41,952,945 and $18,996,470 at December 31, 2003 and 2002, respectively,
are necessary. The valuation allowance at December 31, 2003 relates to
fully reserving the NOL carryforwards, the impact of deferred compensation
and severance arrangements and alternative minimum tax credit carryforwards
and substantially all of the difference in the basis of the Company's
investment in Wellsford/Whitehall. As a result of the impairment charge
recorded in the fourth quarter of 2003 by Wellsford/Whitehall (see Note
13), the Company determined that it was appropriate to increase the
valuation allowance attributable to NOL carryforwards so that the
unreserved balance of approximately $6,680,000 at September 30, 2003 became
fully reserved.
F-17
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Transactions With Affiliates
The following table details revenues and costs for transactions with
affiliates for the years ended December 31, 2003, 2002 and 2001:
(amounts in thousands)
For the Years Ended December 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Revenues
WP Commercial (B):
Asset acquisition fee revenue.......... $ -- $ 22 $ 23
Asset disposition fee revenue.......... 430 7 365
Second Holding fees, net of fees paid to
Reis of $120, $120 and $180, respectively 930 646 217
------------- ------------- -------------
$ 1,360 $ 675 $ 605
============= ============= =============
Costs (A)
Affiliates of the Whitehall Funds (B):
Management fees for VLP properties (C). $ -- $ 20 $ 142
EQR:
Credit enhancement..................... 81 81 81
------------- ------------- -------------
$ 81 $ 101 $ 223
============= ============= =============
-------------------------------------------------
(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) Wellsford/Whitehall is 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. See Note
13 for additional information.
(C) 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, 2003 and 2002 ("Hunt Trust"))
who, together with other Hunt Trust related 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, 2003 and 2002, the Company's aggregate investment in Reis, which is
accounted for under the cost method, was approximately $6,790,000 or
approximately 21.8% 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
and Lowenthal 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 Hunt Trust related entities, own an approximate 39% interest in
Reis Capital.
F-18
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Transactions With Affiliates (continued)
Messrs. Lynford and Lowenthal were members of the EQR board of directors
from the date of the Merger through their retirements from the EQR board in
May 2003. In addition, the former president and vice-chairman of EQR, Mr.
Crocker, is a member of the Company's Board of Directors. Mr. Neithercut,
the current executive vice president and chief financial officer of EQR was
elected to the Company's Board of Directors on January 1, 2004 to represent
EQR's interests in the Company. EQR has a 14.15% interest in the Company's
residential project in Denver, Colorado at December 31, 2003 and 2002,
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. With respect to
EQR's 14.15% interest in the corporation that owns Palomino Park, there
exists a put/call option between the Company and EQR related to one-half of
such interest (7.075%) for $1,900,000. A transaction for the remaining
interest would be subject to negotiation between the Company and EQR.
Additionally, EQR is the beneficiary of certain rights of first offer on
the Blue Ridge and Red Canyon phases at Palomino Park.
See Note 13 for additional related party information.
10. Shareholders' Equity
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.
The following table summarizes the stock repurchase activity by the Company
and approvals thereof by the Company's Board of Directors during the year
ended December 31, 2001. There were no repurchases or additional
authorizations made by the Board of Directors during the years ended
December 31, 2003 and 2002, respectively.
Purchase Aggregate
Repurchases Actual Number of Price per Purchase
Purchased From Approved Repurchases Transactions Share Price
---------------------- ----------- ----------- ------------ --------- ------------
June 2001... Institutional shareholder 2,020,784 2,020,784 1 $18.10 $ 36,576,000
========== ========== ====== ============
The Company has the ability to purchase up to an additional 1,229,837
common shares under previously authorized plans, subject to meeting the
minimum shareholders' equity covenant as required by Commerzbank AG's
letter of credit agreement for the Palomino Park Bonds.
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, 2003,
an aggregate of 305,249 shares (which had an aggregate market value of
approximately $5,678,000 based on the Company's December 31, 2003 closing
stock price of $18.60 per share), have been classified as Treasury Stock in
the Company's consolidated financial statements. Such shares are held in a
Rabbi Trust and are accounted for pursuant to existing accounting
literature. Historically, bonus awards vested immediately and the deferred
compensation awards vested 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 was still employed by the Company. A summary of
activity for the three years ended December 31, 2003 follows:
F-19
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Shareholders' Equity (continued)
For the Years Ended December 31,
----------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ---------------------
Number Value at Number Value at Value at
of Date of of Date of Number of Date of
Shares Issuance Shares Issuance Shares Issuance
--------- -------- -------- -------- --------- ---------
Shares issued pursuant to plan,
January 1................. 311,624 317,997 257,935
Shares issued as deferred
compensation awards....... -- -- 71,087 $ 19.08
Shares released under terms of
agreements................ (6,375) $ 15.69 (6,373) $ 15.69 (11,025) $ 20.00/15.69
--------- -------- ---------
Balance at December 31........ 305,249 311,624 317,997
========= ======== ========
Shares vested at December 31.. 305,249 270,226 231,297
========= ======== ========
During the years ended December 31, 2003, 2002 and 2001, the Company
recorded costs approximating $278,000, $1,243,000 and $1,578,000,
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 5,408 and 4,760 common shares during
2003 and 2002, 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 $85,000 and $92,000 during 2003 and 2002, respectively.
The Company's common stock and class A-1 common stock's par value is $0.02
per share and both have rights that are substantially similar to each other
including voting rights where each share of common stock and class A-1
common stock is entitled to one vote and equal voting rights.
The Company's retained earnings included approximately $3,205,000 of
undistributed earnings from Second Holding at December 31, 2003 as
distributions are limited to approximately 48% of earnings.
The Company did not declare or distribute any dividends during 2003, 2002
or 2001.
11. 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-20
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:
2003 2002 2001
--------------------------- -------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ----------- ---------- ------------ ----------- -----------
Outstanding at January 1........... 772,186 $ 20.09 1,140,624 $ 21.52 1,761,655 $ 24.20
Granted............................ 10,000 18.58 15,000 15.80 12,500 19.25
Exercised.......................... -- -- (40,585) (16.67) -- --
Forfeited/cancelled/expired (A).... (116,514) (19.59) (342,853) (25.06) (633,531) (28.92)
----------- ---------- -----------
Outstanding at December 31......... 665,672 20.16 772,186 20.09 1,140,624 21.52
=========== ========== ===========
Options exercisable at December 31. 657,597 $ 20.19 739,236 $ 20.21 922,261 $ 21.48
=========== =========== ========== ============ =========== ===========
Weighted average fair value of options
granted (per option).......... $ 9.36 $ 7.92 $ 10.72
=========== ========== ===========
Weighted average remaining
contractual life at December 31 3.5 years 4.3 years 6.0 years
- ---------------------------------------
(A) Amounts primarily include 284,551 options during 2002 and 2001,
respectively, 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,
2003:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Options Price
----------------- ----------- ------------ ---------- --------- ----------
$13.34 to $16.13 40,733 6.2 $ 15.53 39,733 $ 15.51
$16.30 23,125 4.9 16.30 21,250 16.30
$17.82 28,000 2.9 17.82 28,000 17.82
$18.38 to $19.75 48,500 7.2 18.66 43,300 18.69
$20.60 507,814 2.9 20.60 507,814 20.60
$29.75 to $31.50 17,500 3.2 31.00 17,500 31.00
--------- --------
665,672 3.5 20.16 657,597 20.19
========= ========
F-21
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)
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,
------------------------------------------------------------
2003 2002 2001
----------------- ----------------- ----------------
Net (loss) - as reported.......................... $ (45,859) $ (3,372) $ (2,725)
Add stock option expense included in net (loss) as
reported, net of tax.......................... 94 -- --
Deduct fair value expense for stock options, net of
tax........................................... (249) (717) (1,677)
----------------- ----------------- ----------------
Net (loss) - pro forma............................ $ (46,014) $ (4,089) $ (4,402)
================= ================= ================
Net (loss) per common share, basic and diluted:
As reported................................... $ (7.11) $ (0.52) $ (0.38)
================= ================= ================
Pro forma..................................... $ (7.13) $ (0.64) $ (0.61)
================= ================= ================
Assumptions:
Expected volatility ranges.................... 30% 32% 34%
Expected life................................. 10 years 10 years 10 years
Risk-free interest rate ranges................ 4.27% 3.83% 5.17%
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.
During 2003, the Company adopted the prospective method to transition to a
fair value basis of accounting for stock option grants in accordance with
SFAS No. 148. For the year ended December 31, 2003, the Company recorded an
expense of $93,600 related to the 10,000 options granted during 2003.
12. Commitments and Contingencies
The Company has entered into employment agreements with five of its
officers. Such agreements are for terms which expire during 2004 and 2005
and provide for aggregate minimum annual fixed payments of approximately
$1,672,000 and $590,000 in 2004 and 2005, respectively.
In connection with his retirement, Mr. Lowenthal and the Company entered
into an employment separation agreement which, among other benefits,
provided 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. Mr. Lowenthal exercised such option in January 2003. For the
F-22
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Commitments and Contingencies (continued)
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.
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 was paid during the first quarter
of 2003.
During July 2003, the Company sold the Keewaydin, New Hampshire property in
the Wellsford Capital SBU. This property had been subject to ground water
and surface water monitoring and testing as well as possible surface water
contamination, volatile organic chemical migration off of the property and
air quality issues. As conditions to the sale, the Company is obligated to
pay certain agreed upon expenses for testing and other environmental
related costs up to a maximum liability of $250,000 which will expire on
July 2, 2004. The Company reserved all of this liability at the time of
closing and placed $250,000 into escrow. The balance of this reserve has
been reduced to approximately $219,000 by December 31, 2003. The Company
has no further obligations to the buyer after the $250,000 has been
exhausted or if any amount is unused by the July 2004 expiration date. Any
unused escrow is released back to the Company at the expiration date. For
the period prior to the sale of the property in 2003 and for the years
ended December 31, 2002 and 2001, the Company incurred approximately
$27,000, $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 adverse effect on the Company's financial
condition, results of operations or cash flows.
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, 2003, 2002 and 2001, the Company made
contributions to this plan of approximately $31,000, $38,000 and $43,000,
respectively.
The Company is a tenant under an operating lease for its New York office
through October 2008. Rent expense was approximately $887,000, $851,000 and
$866,000 for the years ended December 31, 2003, 2002 and 2001,
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, 2003 are as follows:
For the Years Ended December 31, Amount
-------------------------------- ------
2004.................................. $ 815,000
2005.................................. 815,000
2006.................................. 815,000
2007.................................. 815,000
2008.................................. 679,000
F-23
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Commitments and Contingencies (continued)
At December 31, 2003, the Company had capital commitments of $366,000
relating to one of its investments. The Company and Whitehall have agreed
to provide up to $8,000,000 to Wellsford/Whitehall through March 31, 2005
(of which the Company's share is 35%), however, there can be no assurance
that this amount will be sufficient.
The Company may make additional equity investments subject to board
approval if deemed prudent to do so to protect or enhance its existing
investment.
Wellsford/Whitehall has agreed to maintain certain tax indemnities through
2007, for a family group who are partners of the joint venture, relating to
assets acquired from those partners in 1998. The Company believes that this
indemnity was maintained during 2003 by Wellsford/Whitehall. The tax
indemnity is not an obligation of the Company and 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.
Accordingly, future sales of Wellsford/Whitehall properties may be limited
in order to preserve this tax indemnity.
See Note 13 for additional commitments and contingencies.
F-24
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. 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
2003, 2002 and 2001:
(amounts in thousands) Commercial Debt and Development
Property Equity and Land
Investments Investments Investments Other* Consolidated
----------- ----------- ------------ ---------- ------------
December 31, 2003
--------------------------------------
Investment properties:
Real estate held for investment,
net............................... $ -- $ 389 $ 120,957 $ -- $ 121,346
Residential units available
for sale........................ -- -- 9,236 -- 9,236
---------- ---------- ------------ ---------- ----------
Real estate, net.................... -- 389 130,193 -- 130,582
Notes receivable.................... -- 3,096 -- -- 3,096
Asset held for sale**............... -- 2,335 -- -- 2,335
Investment in joint ventures........ 14,616 39,144 -- -- 53,760
Cash and cash equivalents........... -- 6,635 551 48,192 55,378
Restricted cash and investments..... -- -- 462 9,748 10,210
U.S. Government Securities.......... -- -- -- 27,516 27,516
Prepaid and other assets............ -- 561 1,386 1,003 2,950
---------- ---------- ------------ ---------- ----------
Total assets........................ $ 14,616 $ 52,160 $ 132,592 $ 86,459 $ 285,827
========== ========== ============ ========== ==========
Mortgage notes payable.............. $ -- $ -- $ 109,505 $ -- $ 109,505
Accrued expenses and other liabilities -- 41 2,815 13,427 16,283
Liabilities attributable to asset
held for sale**................... -- 317 -- -- 317
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest................... -- 95 3,353 -- 3,448
Equity.............................. 14,616 51,707 16,919 48,032 131,274
---------- ---------- ------------ ---------- ----------
Total liabilities and shareholders'
equity............................ $ 14,616 $ 52,160 $ 132,592 $ 86,459 $ 285,827
========== ========== ============ ========== ==========
For the Year
Ended December 31, 2003
--------------------------------------
Rental revenue....................... $ -- $ -- $ 14,256 $ -- $ 14,256
Revenue from sales of residential units -- -- 12,535 -- 12,535
Interest revenue..................... -- 6,927 -- 524 7,451
Fee revenue.......................... -- 940 (10) 430 1,360
---------- ---------- ------------ ---------- ----------
Total revenues...................... -- 7,867 26,781 954 35,602
---------- ---------- ------------ ---------- ----------
Cost of sales of residential units... -- -- 10,708 -- 10,708
Operating expenses................... -- 6 6,478 -- 6,484
Depreciation and amortization........ 3,968 59 4,414 96 8,537
Interest............................. -- (2) 6,095 490 6,583
General and administrative........... -- 51 -- 5,540 5,591
---------- ---------- ------------ ---------- ----------
Total costs and expenses.......... 3,968 114 27,695 6,126 37,903
---------- ---------- ------------ ---------- ----------
(Loss) income from joint ventures.... (36,473) 2,044 -- -- (34,429)
Minority interest benefit............ -- 6 79 -- 85
---------- ---------- ------------ ---------- ----------
(Loss) income before income taxes,
accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities and
discontinued operations............ $ (40,441) $ 9,803 $ (835) $ (5,172) $ (36,645)
========== ========== ============ ========== ==========
Income from discontinued operations
before taxes....................... $ -- $ 36 $ -- $ -- $ 36
========== ========== ============ ========== ==========
__________________________________
*Includes corporate cash, restricted cash and investments, U.S. Government
securities, 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.
**Asset held for sale in the Debt and Equity Investments SBU is net of the
remaining impairment reserve of $2,153.
F-25
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, 2002
---------------------------------------
Investment properties:
Real estate held for investment, net $ -- $ -- $ 129,300 $ -- $ 129,300
Residential units available for sale -- -- 14,542 -- 14,542
---------- ---------- ------------ ---------- ----------
Real estate, net..................... -- -- 143,842 -- 143,842
Notes receivable..................... -- 28,612 -- -- 28,612
Assets held for sale**............... -- 6,256 -- -- 6,256
Investment in joint ventures......... 55,592 38,589 -- -- 94,181
Cash and cash equivalents............ -- 6,158 166 32,258 38,582
Restricted cash and investments...... -- -- 610 8,934 9,544
Prepaid and other assets............. -- 8,958 1,669 1,131 11,758
---------- ---------- ------------ ---------- ----------
Total assets......................... $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775
========== ========== ============ ========== ==========
Mortgage notes payable............... $ -- $ -- $ 112,233 $ -- $ 112,233
Accrued expenses and other liabilities -- 3,378 2,637 9,298 15,313
Liabilities attributable to assets
held for sale**................... -- 224 -- -- 224
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 shareholders'
equity............................ $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775
========== ========== ============ ========== ==========
For the Year
Ended December 31, 2002
--------------------------------------
Rental revenue....................... $ -- $ -- $ 15,106 $ -- $ 15,106
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.................... -- 4,196 25,687 629 30,512
---------- ---------- ------------ ---------- ----------
Cost of sales of residential units... -- -- 9,544 -- 9,544
Operating expenses................... -- -- 6,525 -- 6,525
Depreciation and amortization........ 755 6 4,427 75 5,263
Interest............................. -- 7 5,677 167 5,851
General and administrative........... -- 41 -- 6,526 6,567
---------- ---------- ------------ ---------- ----------
Total costs and expenses.......... 755 54 26,173 6,768 33,750
---------- ---------- ------------ ---------- ----------
(Loss) income from joint ventures.... (1,292) 1,083 -- -- (209)
Minority interest benefit............ -- -- 43 -- 43
---------- ---------- ------------ ---------- ----------
(Loss) income before income taxes,
accrued distributions and amortization
of costs on Convertible Trust
Preferred Securities and discontinued
operations........................... $ (2,047) $ 5,225 $ (443) $ (6,139) $ (3,404)
========== ========== ============ ========== ==========
Income from discontinued operations
before taxes..................... $ -- $ 112 $ -- $ -- $ 112
========== ========== ============ ========== ==========
----------------------------------------
*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.
**Assets held for sale in the Debt and Equity Investments SBU is net of the
remaining impairment reserve of $2,175.
F-26
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
----------- ----------- ------------ ---------- ------------
For the Year
Ended December 31, 2001
---------------------------------------
Rental revenue....................... $ -- $ 692 $ 11,750 $ -- $ 12,442
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.................... -- 5,141 33,628 1,397 40,166
---------- ---------- ------------ ---------- ----------
Cost of sales of residential units... -- -- 19,364 -- 19,364
Operating expenses................... -- 541 3,997 -- 4,538
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.......... 1,947 913 30,454 12,245 45,559
---------- ---------- ------------ ---------- ----------
Income from joint ventures........... 4,367 197 -- -- 4,564
Minority interest expense............ -- -- (283) -- (283)
---------- ---------- ------------ ---------- ----------
Income (loss) before income taxes,
accrued distributions and
amortization of costs on
Convertible Trust Preferred
Securities and discontinued
operations........................... $ 2,420 $ 4,425 $ 2,891 $ (10,848) $ (1,112)
========== ========== ============ ========== ==========
Income from discontinued operations
before taxes.................... $ -- $ 466 $ -- $ -- $ 466
========== ========== ============ ========== ==========
----------------------------------------
*Includes 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.
Commercial Property Operations - Wellsford/Whitehall
----------------------------------------------------
The Company's commercial property operations 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, 2003 and 2002.
The manager of the joint venture is a Goldman Sachs and Whitehall
affiliate. At December 31, 2003, Wellsford/Whitehall owns and operates 25
properties (including 17 office properties, five net-leased retail
properties and three land parcels), totaling approximately 2,808,000 square
feet of improvements, primarily located in New Jersey and Massachusetts.
Wellsford/Whitehall is a private real estate operating company organized to
lease and re-lease space, perform construction for tenant improvements,
expand buildings, re-develop 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 near
future.
F-27
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
The Company's investment in Wellsford/Whitehall, which is accounted for on
the equity method, was approximately $14,616,000 and $55,592,000 at
December 31, 2003 and 2002, respectively. The Company's share of (loss)
income from Wellsford/Whitehall was approximately $(36,473,000),
$(1,292,000) and $4,367,000 for the years ended December 31, 2003, 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, 2003:
(amounts in thousands)
2003 2002 2001
--------- -------- --------
Investment balance at January 1,.............. $ 55,592 $ 57,790 $ 82,820
Contributions.............................. -- -- 8,468
Distributions.............................. (738) -- (35,984)
Share of:
(Loss) income from operations........... (2,126) (770) 302
Net gain (loss) from assets sold........ 3,030 (82) 10,321
Impairment charges...................... (37,377) (440) (6,256)
Other comprehensive income (loss)....... 203 (151) (103)
Amortization and unamortized warrant cost
impairment.............................. (3,968) (755) (1,778)
--------- -------- --------
Investment balance at December 31,............ $ 14,616 $ 55,592 $ 57,790
========= ======== ========
Upon formation of Wellsford/Whitehall in August 1997, $150,000,000 was
committed by the partners ($75,000,000 each), including the amount of
contributed properties, net of assumed debt. The capital requirements were
modified in June 1999 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 provide an aggregate of $10,000,000 of additional
financing or preferred equity to Wellsford/Whitehall if required. No
amounts were advanced by either partner prior to the expiration of this
commitment at December 31, 2003. Additionally, WP Commercial, L.L.C. ("WP
Commercial"), replaced the Company as the managing member of
Wellsford/Whitehall. WP Commercial is owned by affiliates of Goldman Sachs
and 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
disposed of by Wellsford/Whitehall.
The Amendments included a buy/sell agreement of equity interests between
the Company and Whitehall which can be exercised by either party after
December 31, 2003 with respect to the Wellsford/Whitehall venture (the
"Buy/Sell Agreement"). The nature of the Buy/Sell Agreement allows for
either the Whitehall funds as a group or the Company to provide notice that
it intends to purchase the non-initiating partner's interest at a specific
price. The non-initiating party may either accept that offer or instead may
reject that offer and become the purchaser at the initially offered price.
The terms of the Wellsford/Whitehall GECC Facility allow for the
continuance of such debt as long as the Company or Whitehall has ultimate
decision-making authority over the management and operations of
Wellsford/Whitehall. As of the date of this report, neither party has
exercised its buy/sell right under the Buy/Sell Agreement.
F-28
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
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.
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 2003 2002
------------------------------------- ----------- -----------
Real estate, net..................... $ 236,143 $ 340,133
Cash and cash equivalents............ 11,607 16,663
Assets held for sale................. 12,338 173,140
Other assets (A)..................... 17,032 27,383
Total assets......................... 277,120 557,319
Notes payable........................ 201,659 368,359
Members' equity...................... 65,561 179,742
Accumulated other comprehensive
loss............................... (194) (1,297)
For the Years Ended December 31,
-----------------------------------
Condensed Operating Data 2003 2002 (B) 2001 (B)
------------------------------------ --------- ---------- ----------
Rental revenue...................... $ 40,897 $ 45,532 $ 56,456
Interest and other income........... 1,295 2,352 4,973
--------- --------- ---------
Total revenues...................... 42,192 47,884 61,429
--------- --------- ---------
Operating expenses.................. 23,451 22,999 26,996
Depreciation and amortization....... 10,568 14,509 12,208
Interest............................ 11,118 12,599 17,130
General and administrative.......... 748 727 922
--------- --------- ---------
Total expenses...................... 45,885 50,834 57,256
(Loss) from impairment.............. (114,687) -- --
Gain on sale of assets (C).......... -- -- 10,791
--------- --------- ---------
(Loss) income before discontinued
operations and preferred
distributions..................... (118,380) (2,950) 14,964
Income (loss) from discontinued
operations (D).................... 6,464 (1,029) (2,218)
--------- --------- ---------
Net (loss) income before preferred
distributions....................... $(111,916) $ (3,979) $ 12,746
========= ========= =========
________________________________________
(A) Includes the marked to market value of an interest rate protection
contract of $13 at December 31, 2002. The contract did not have any
fair value at December 31, 2003.
(B) Operations reclassified for assets held for sale.
(C) The 2001 amount is net of the effect of an aggregate impairment
provision of $16,545 during that period.
(D) Includes an aggregate impairment provision of $1,351 attributable to
two properties held for sale at December 31, 2002.
F-29
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 (unaudited):
Number of Properties
------------------------------------------- Total
Land Portfolio Undepreciated
Total Parcels Office Retail Square Feet Cost Basis (A)
------- ------- ------ ------ ----------- --------------
As of December 31, 2003
New Jersey..................... 13 2 9 2 1,530,000 $ 158,377,000
Boston, Massachusetts.......... 8 1 7 -- 1,103,000 122,800,000
Other (B)...................... 4 -- 1 3 175,000 24,025,000
------- ------ ----- ----- ---------- -------------
25 3 17 5 2,808,000 $ 305,202,000
======= ====== ===== ====== ========== =============
As of December 31, 2002
New Jersey..................... 17 2 13 2 2,140,000 $ 277,502,000
Boston, Massachusetts.......... 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
======= ====== ===== ====== ========== =============
___________________________
(A) Aggregate balance is net of an impairment charge of approximately
$114,700,000 taken in the fourth quarter of 2003.
(B) One office property located in Columbia, Maryland (145,000 square
feet) is held for sale at December 31, 2003.
One tenant in the Wellsford/Whitehall portfolio accounted for 12% of rental
revenues by Wellsford/Whitehall for the year ended December 31, 2003. No
other tenant accounted for more than 9% of rental revenues during the
year.
F-30
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
During the years ended December 31, 2003, 2002 and 2001,
Wellsford/Whitehall completed the following purchase and sale transactions:
(amounts in millions, except square feet and per square foot amounts)
2003 Activity
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
------------ ------------------------------ ------------------ ----------- ------------- -----------
January Decatur - CVS................. Decatur, GA 10,000 $ 2.4 $ 234
---------- -------------
February Portfolio sale (A):
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.... 956,000 136.8 143
---------- -------------
March 60 Turner Street.............. Waltham, MA 16,000 1.3 81
---------- -------------
May 79 Milk Street (B)............ Boston, MA 65,000
24 Federal Street (B)......... Boston, MA 75,000
----------
140,000 33.0 236
---------- -------------
June Greenbrook land............... Fairfield, NJ -- 0.8 --
---------- -------------
1,122,000 $ 174.3
========== =============
2002 Activity
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
------------ ------------------------------ ------------------ ----------- ------------- -----------
June McDonough Crossroads.......... Owings Mills, MD 31,732 $ 2.9 $ 91
========== ============= ===========
2001 Activity
Purchases (C):
Gross Purchase
Leasable Purchase Price per
Month Property Location Square Feet Price Square Foot
------------ ------------------------------ ------------------ ----------- ------------- -----------
April Five CVS locations............ Various 54,000 $ 18.7 $ 342
October Decatur - CVS................. Decatur, GA 10,000 2.3 232
---------- -------------
64,000 $ 21.0
========== =============
F-31
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
Sales:
Gross Sales
Leasable Sales Price per
Month Property Location Square Feet Price Square Foot
--------- ----------------------------- ---------------- ------------- ------------- -----------
February Portfolio sale (D):
70 Wells Avenue........... Newton, MA 29,000
100 Wells Avenue.......... Newton, MA 21,000
150 Wells Avenue.......... Newton, MA 11,000
160 Wells Avenue.......... Newton, MA 19,000
72 River Park............. Newton, MA 22,000
-------------
Total portfolio sale... 102,000 $ 18.0 $ 176
April 2331 Congress Street......... Portland, ME 24,000 1.6 67
May Morris Technology Center..... Parsippany, NJ 257,000 61.5 239
August Shattuck Office Center....... Andover, MA 63,000 9.2 146
September Pointview.................... Wayne, NJ 564,000 35.5 63
November 1800 Valley Road............. Wayne, NJ 56,000 8.2 146
November Chatham Executive Center..... Chatham, NJ 63,000 12.0 190
-------------- -------------
1,129,000 $ 146.0
============== =============
_____________________________________
(A) The portfolio sale of assets in February 2003 was to a single
purchaser.
(B) This sale was to a single purchaser. Wellsford/Whitehall recorded an
impairment provision of $1.3 in the fourth quarter of fiscal 2002
related to this sale.
(C) 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.
(D) The sale of five properties in February 2001 was to a single
purchaser.
Annually, after the preparation of budgets for the following year and as
part of the financial statement closing process, Wellsford/Whitehall
performs evaluations for impairment on all of its real estate assets. As
part of this evaluation, Wellsford/Whitehall recorded an impairment charge
of approximately $114,700,000 related to 12 assets in the portfolio during
the fourth quarter of 2003. The provision is not the result of a change in
intended use of such assets, however, it is the result of several factors,
including, but not limited to, a continued deterioration of and outlook for
the suburban office submarkets where Wellsford/Whitehall's properties are
situated. Specifically, these include decreasing market rents, slower
absorption trends and greater tenant concession costs. The Company's share
of this impairment charge was approximately $37,377,000 in 2003 and as a
result, the Company wrote-off related unamortized warrant costs on the
Company's books of approximately $2,644,000.
At December 31, 2002, in anticipation of the sales of the Decatur, GA and
Boston, MA properties, Wellsford/Whitehall recorded impairment provisions
aggregating approximately $1,351,000 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 in 2002 and
as a result, the Company wrote-off related unamortized warrant costs on the
Company's books of approximately $284,000.
The aggregate impairment provisions recorded during 2001 (primarily
relating to the Pointview property, a 194 acre complex with two buildings
totaling approximately 564,000 square feet, located in Wayne, New Jersey),
were $16,545,000, of which the Company's share was $6,256,000.
F-32
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 ("GECC
Facility") with an initial funding of approximately $273,000,000 before
transaction costs. The facility bore interest at LIBOR + 2.90% per annum
(4.02% at December 31, 2003) and was set to initially mature in June 2004
with two 12-month extension options, subject to meeting certain operating
and valuation covenants. Prior to June 30, 2003 the GECC Facility provided
for additional financing to fund certain capital expenditures related to
its properties if certain operating ratios were met; such ability expired
at June 30, 2003 with no funds being advanced. This financing was arranged
by Goldman Sachs, to whom Wellsford/Whitehall paid a fee of approximately
$2,644,500 during 2001.
Wellsford/Whitehall executed a letter agreement with GECC effective January
20, 2004, relating to the modification of the GECC Facility. The
modification is subject to the execution of the final amended agreement
documents. The amended agreement provides for an extension of the loan
maturity to December 31, 2006, interest at LIBOR plus 3.25% per annum, a
principal paydown of $1,000,000 and a $17,000,000 line of credit to fund
certain capital improvements through December 31, 2005. Excess cash flow,
as defined, from the properties collateralizing the GECC Facility can only
be used for capital expenditures for such properties. Wellsford/Whitehall
is required to establish lock box arrangements for the deposit of all rent
receipts relating to each of the properties collateralizing the GECC
Facility.
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 at December 31, 2002 and had no fair
value at December 31, 2003. This Cap was purchased from Goldman Sachs based
upon the results of a competitive bidding process. The amended GECC
Facility requires that a similar cap be purchased through December 31,
2006.
The following table summarizes the long-term debt at Wellsford/Whitehall:
Stated Balance at December 31,
Initial Maturity Interest -----------------------------------
Debt/Project Date Rate 2003 2002
------------------------------------ --------------- ------------ ----------------- ---------------
Wellsford/Whitehall GECC Facility.... December 2006 LIBOR + 3.25% $ 106,078,000 $ 264,160,000
Nomura Loan (A)...................... February 2027 8.03% 64,666,000 65,458,000
Oakland Ridge Loan (B)............... March 2004 LIBOR + 2.00% 6,905,000 6,959,000
Retail properties (C)................ January 2024 7.28% 16,104,000 16,371,000
Airport Park Loan.................... March 2004 LIBOR + 2.05% 7,906,000 8,037,000
Other loans on office properties
sold............................... Various Various -- 7,373,000
--------------- -------------
$ 201,659,000 $ 368,358,000
=============== =============
------------------------------------
(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 (the "Nomura Loan").
(B) The non-recourse loan is secured by the leasehold interest in the
Oakland Ridge office park in Columbia, Maryland. The loan was extended
by Wellsford/Whitehall in March 2003 for one year. This asset is held
for sale at December 31, 2003.
(C) Comprised of five mortgages secured by the leasehold interest in five
net-leased retail properties.
F-33
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
During February 2004, Whitehall requested a dialogue with the special
servicer of the Nomura Loan to discuss various forms of debt relief under
the terms of the Nomura Loan. The Nomura Loan is collateralized by six of
the Boston area properties in the Wellsford/Whitehall portfolio. There can
be no assurance as to the outcome of these discussions.
The Company and Whitehall have agreed to provide up to $8,000,000 to
Wellsford/Whitehall through March 31, 2005 (of which the Company's share is
35%), however, there can be no assurance that this amount will be
sufficient.
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, 2003, 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,
-------------------------------------
2003 2002 2001
---------- ----------- -----------
Administrative management.......... $ 4,604,000 $ 5,826,000 $ 6,422,000
=========== =========== ===========
Construction, construction
management, development
development and leasing.......... $ 1,925,000 $ 905,000 $ 1,787,000
=========== =========== ===========
Pursuant to the terms of the Amendments, 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
thresholds 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,
-------------------------------------
2003 2002 2001
---------- ----------- -----------
Asset disposition fees............. $ 430,000 $ 7,000 $ 365,000
Asset acquisition fees............. -- 22,000 23,000
---------- ----------- -----------
Total fees......................... $ 430,000 $ 29,000 $ 388,000
========== =========== ===========
Debt and Equity Activities - Wellsford Capital
----------------------------------------------
At December 31, 2003, the Company had the following investments: (i) a
direct debt investment of $3,096,000 which bore interest at 8.25% per annum
during 2003 and had a remaining term to maturity of two years; (ii)
approximately $32,353,000 of equity investments in companies which were
organized to invest in debt instruments, including approximately
$29,167,000 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 approximately
$3,186,000 in Clairborne Fordham, a company initially organized to provide
$34,000,000 of mezzanine financing for a highrise condominium project in
Chicago; (iii) approximately $6,790,000 invested in Reis, a real estate
F-34
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
information and database company; (iv) a 49,000 square foot commercial
property located in Philadelphia, Pennsylvania with a net book value of
approximately $1,973,000; and (v) a $330,000 loan to a venture organized to
purchase land parcels for rezoning, subdivision and creation of
environmental mitigation credits.
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.
During September 2003, the 277 Park Loan was prepaid by the borrowers and
pursuant to the terms of the loan, WRP received a yield maintenance penalty
of $4,368,000 which is included in interest revenue for the year ended
December 31, 2003. This note would have provided for $767,000 of interest
revenue in the fourth quarter of 2003 and $3,042,000 for future annual
periods to May 2006 for both the Wellsford Capital SBU and the Company's
consolidated statement of operations. The 277 Park Loan bore interest at
12.00% per annum with a stated maturity of May 2007. The 277 Park Loan was
secured primarily by a pledge of the Equity Interests owned by the
borrowers and thus was junior to a first mortgage loan on the 277 Park
Property.
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,
including Second Holding (see below). 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 $3,096,000 and $3,612,000 at
December 31, 2003 and 2002, respectively. On January 5, 2004, the Company
received a payment which included the 2003 principal paydown of $1,032,000
and the 2003 interest.
F-35
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 revenue from continuing operations during such periods for the
Wellsford Capital SBU:
For the Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
----------------------- ------------------------ -------------------------
Interest Interest Interest
Revenue Percent Revenue Percent Revenue Percent
------------ ------- ------------ ------- -------------- -------
277 Park Loan (A)...................... $ 6,643,000 18.7% $ 3,042,000 10.0% $ 3,042,000 7.6%
Guggenheim Loan........................ 259,000 0.7% 302,000 1.0% 345,000 0.8%
Other.................................. 3,000 0.0% 147,000 0.5% 707,000 1.8%
------------ ------- ------------ ------- -------------- -------
Interest revenue from loans............ 6,905,000 19.4% 3,491,000 11.5% 4,094,000 10.2%
Interest revenue from cash and
cash equivalents in the SBU......... 22,000 0.1% 5,000 0.0% 72,000 0.2%
------------ ------- ------------ ------- -------------- -------
Total interest revenue................. $ 6,927,000 19.5% $ 3,496,000 11.5% $ 4,166,000 10.4%
============ ======= ============ ======= ============== =======
Consolidated revenue from continuing
operations (base from which
percentage is calculated)........... $ 35,602,432 $ 30,512,089 $ 40,165,820
============ ============ ==============
____________________________
(A) Includes the yield maintenance penalty of $4,368,000 during 2003.
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's net contribution to Second Holding was approximately
$24,600,000 to obtain an approximate 51.1% non-controlling interest in
Second Holding, with Liberty Hampshire owning 10% and the Hunt Trust,
together with other Hunt Trust related entities, own the remaining
approximate 39%.
During the latter part of 2000, an additional partner was admitted to the
venture. This partner is committed through April 2010 to provide 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 bond issue of $150,000,000 initially, which was reduced to
$100,000,000 during January 2003. The parent company of this partner
announced during 2003 that its subsidiary (the partner of Second Holding)
will no longer write new credit enhancement business, however, it will
continue to support its existing book of credit enhancement business. The
Company does not believe that this decision will have a material adverse
impact on the business and operations of Second Holding as a result of that
partner's existing commitment to the venture. This partner is entitled to
35% of net income as defined by 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-36
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
The Company's investment in Second Holding, which is accounted for on the
equity method, was approximately $29,167,000 and $28,166,000 at December
31, 2003 and 2002, respectively. The Company's share of income (loss) from
Second Holding was approximately $1,640,000, $723,000 and $(163,000) for
the years ended December 31, 2003, 2002 and 2001, 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
$930,000, $646,000 and $217,000 for the years ended December 31, 2003, 2002
and 2001, respectively.
The following table presents a condensed balance sheet and operating data
for Second Holding:
(amounts in thousands)
December 31,
------------------------------
Condensed Balance Sheet Data 2003 2002
---------------------------- ------------- -------------
Cash and cash equivalents............ $ 133,389 $ 16,876
Investments.......................... 1,744,282 1,785,758
Other assets (A)..................... 26,248 37,462
Total assets......................... 1,903,919 1,840,096
Medium-term notes (B)................ 1,722,663 1,552,945
Long-term debt (C) (D)............... 115,038 169,988
Total equity......................... 57,693 55,910
For the Years Ended December 31,
------------------------------------
Condensed Operating Data 2003 2002 2001
--------------------------------- --------- -------- --------
Interest.......................... $ 42,339 $ 41,802 $ 30,528
--------- -------- --------
Total revenue..................... 42,339 41,802 30,528
--------- -------- --------
Interest expense.................. 32,391 35,594 28,017
Fees and other.................... 4,905 3,894 2,422
--------- -------- --------
Total expenses.................... 37,296 39,488 30,439
--------- -------- --------
Net income attributable
to members (D)................... $ 5,043 $ 2,314 $ 89
========= ======== ========
-----------------
(A) Other assets include an interest rate swap asset with a fair value of
$16,900 and $22,638 at December 31, 2003 and 2002, respectively.
(B) At December 31, 2003, the net reported amount of medium-term notes
includes the face amount of such notes of $1,725,000, offset by net
unamortized discounts and debt issuance costs of $2,337. At December
31, 2002, the net reported amount of medium-term notes included the
face amount of such notes of $1,555,000, plus a fair value adjustment
for swaps of $513, offset by unamortized discounts and debt issuance
costs of $2,568.
(C) Long-term debt outstanding is a privately placed ten-year junior
subordinated bond-issue maturing April 2010, issued at a fixed rate of
7.96% per annum with a face amount of $100,000 and $150,000 at
December 31, 2003 and 2002, respectively. The effect of fair value
adjustments for the long-term debt (which is primarily an offset to
the fair value of the interest rate swap asset as described in (A)
above) was $16,900 and $22,125 at December 31, 2003 and 2002,
respectively, net of unamortized debt issuance costs.
(D) The partner which was admitted in the latter part of 2000 (who is
committed through April 2010 to provide an insurance policy, through
one of its affiliates, for the payment of principal and interest for
the junior subordinated bond-issue of $100,000 (see (C))) is entitled
to 35% of net income, as defined by the operating agreement, while
other partners, including the Company, share in the remaining 65%. The
Company's allocation of income is approximately 51.1% of the remaining
65%, however, the Company's share of losses is approximately 51.1% of
the total loss as this other partner does not participate in any
losses of the venture except if any of its credit enhancement
obligations is required to be paid.
F-37
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
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.
As a result of the events of September 11, 2001, these structures were
destroyed. During December 2003, the entire bond offering, including the
WTC Certificates, was repaid in full by the borrower.
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 during the period September 23, 2004 through
October 2, 2004. At this time, no determination can be made by the Company
with regards to the outcome of this agreement.
Reis
The Company has direct and indirect equity 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. The Company has determined that
Reis is a VIE, but consolidation is not required. At December 31, 2003 and
2002 the Company's aggregate investment in Reis was approximately
$6,790,000. A portion of the investment is held directly by the Hunt Trust
who, together with other Hunt Trust related entities, own an approximate
39% interest in Reis Capital.
A summary of the Company's direct and indirect investments in Reis at
December 31, 2003 and 2002 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................................................ 5,000
---------------
Total direct ownership............................... 2,237,000
---------------
Total investment at December 31, 2003................ $ 6,790,000
===============
--------------------------------
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.
F-38
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
(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.
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 the commitment of $419,600 expired at December 31, 2003
without being called by Reis. 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 which also expired unused by
Reis at December 31, 2003. 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.
At December 31, 2003, the Company's investment in Reis, through direct
ownership and its pro rata share of its investment in Reis Capital,
amounted to approximately 21.8% 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
18.6%. The investments of the Company's officers and directors at December
31, 2003, together with shares of common stock previously held by Mr.
Lynford represent approximately 2.5% 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 4.6% converted
interest. The current executive vice president and chief financial officer
of EQR and its former vice-chairman both serve as directors of the Company.
Messrs. Lynford and Lowenthal 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, $240,000 and $360,000 in connection with
such services for each of the years ended December 31, 2003, 2002 and 2001,
respectively. The Company's share of such fees was $120,000, $120,000 and
$180,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Clairborne Fordham
In October 2000, the Company and Prudential Real Estate Investors ("PREI"),
an affiliate of Prudential Life Insurance Company, organized Clairborne
Fordham which provided an aggregate of $34,000,000 of mezzanine financing
for the construction of Fordham Tower, a 50-story, 244 unit, luxury
F-39
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
condominium apartment project to be built on Chicago's near northside
("Fordham Tower"). The Company, which has a 10% interest in Clairborne
Fordham, fully funded its $3,400,000 share of the loan. The loan, which
matured in October 2003, bore interest at a fixed rate of 10.50% per annum
with provisions for additional interest to PREI and the Company and was
secured by a lien on the equity interests of the owner of Fordham Tower.
The Company may earn fees from PREI's additional interest based upon
certain levels of returns on the project. Such additional interest and fees
had not been accrued by the Company or Clairborne Fordham through the
maturity of the loan. The Company's investment in the Clairborne Fordham
venture is accounted for on the equity method. The Company's share of
income from Clairborne Fordham through the initial maturity of the loan in
October 2003 was approximately $270,000, $361,000 and $361,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Construction is complete and delivery of certain units commenced in
December 2002. As of December 31, 2003, no units were under contract and
220 units (including nine penthouses and 211 standard units) had closed for
gross proceeds of approximately $143,800,000. The remaining unsold units
consist of five standard units, 13 penthouses and six townhouses. One
penthouse unit was sold in February 2004 with another penthouse unit and a
standard unit under contract. In addition, the owner of Fordham Tower is
seeking to sell the 12,000 square feet of retail space and a 200 space
commercial parking facility, both of which are part of the project.
The loan was not repaid at maturity and as of October 2003 an amended loan
agreement was executed extending the loan to December 31, 2004. The amended
terms provided for the placement of a first mortgage lien on the project,
no interest to be accrued after September 30, 2003 and for the borrower to
add to the existing principal amount the additional interest due Clairborne
Fordham at September 30, 2003 of approximately $19,240,000. In lieu of
interest after September 30, 2003 Clairborne Fordham will also participate
in certain additional cash flows, as defined, if earned from net sales
proceeds of the Fordham Tower project.
The amended agreement provided for a $3,000,000 additional capital
contribution by the borrower and use of an existing cash collateral account
to pay off the existing construction loan, any unpaid construction costs
and to make principal payment to Clairborne Fordham in October 2003 of
approximately $4,600,000, of which the Company's share was approximately
$460,000. An additional payment of approximately $554,000 was received by
Clairborne Fordham in December 2003 of which the Company's share was
approximately $55,000. The agreement provides for all proceeds after
project costs to be first applied to payment in full of the loan and the
additional interest to Clairborne Fordham before any sharing of project
cash flow with the borrower. An additional principal payment of
approximately $1,277,000 was made in February 2004 (of which the Company's
share was $128,000) as a result of the sale of the penthouse unit.
The Company and Clairborne Fordham have (i) concluded that their respective
investment and loan balances are not impaired at December 31, 2003 and (ii)
determined to recognize a portion of the additional interest over the
expected remaining life of the loan. The Company's share of additional
interest earned for the year ended December 31, 2003 was approximately
$136,000. The Company did not recognize any additional interest during 2002
and 2001. The Company's equity investment, after the effect of the above
activity, was $3,186,000 and $3,631,000 at December 31, 2003 and 2002,
respectively.
F-40
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
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.
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 properties were sold during 2001 for aggregate sales
of approximately $34,217,000. 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. There
were no additional gains or losses recorded by the Company as a result of
the four property sales during 2001.
In July 2003, the Company sold the Salem, New Hampshire property for a net
sales price of approximately $4,200,000 and the Company utilized $22,000 of
the impairment reserve. The Company is actively marketing the remaining VLP
property, a 49,000 square foot office building located in Philadelphia,
Pennsylvania. The net book value for the unsold properties at December 31,
2003 and 2002 was approximately $1,973,000 and $6,027,000, respectively,
after considering the remaining impairment reserve of $2,153,000 and
$2,175,000 at December 31, 2003 and 2002, respectively.
West Deptford Venture
During November 2003, the Company made a $330,000 loan to a venture
organized to purchase land parcels for rezoning, subdivision and creation
of environmental mitigation credits (the "West Deptford Venture"). At
December 31, 2003, the West Deptford Venture had a leasehold interest in a
154 acre parcel in West Deptford, New Jersey which included at least 64.5
acres of wetlands and a maximum of 71 acres of developable land. The
Company consolidated the West Deptford Venture during 2003 and its
investment is primarily included in land held for development on the
consolidated balance sheet at December 31, 2003. The Company has committed
$366,000 of capital in addition to the loan to the West Deptford Venture.
Property Development and Land Operations-Wellsford Development
--------------------------------------------------------------
Palomino Park
The Company owns a five-phase 1,800 unit class A multifamily development
("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado.
At December 31, 2003 and 2002, 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.
F-41
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
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. As a result of weakness in the
Denver, Colorado economy, fluctuating occupancy, significant concessions
and high leverage ratios (a deterrent to institutional investors), the
Company has determined that it would no longer continue to search for such
an investor at this time.
With respect to EQR's 14.15% interest in the corporation that owns Palomino
Park, there exists a put/call option between the Company and EQR related to
one-half of such interest (7.075%) for $1,900,000. A transaction for the
remaining interest would be subject to negotiation between the Company and
EQR.
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. The Palomino Park Bonds have an outstanding balance of
$12,680,000 at December 31, 2003 and 2002 and are 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 provide additional
collateral for the Palomino Park Bonds. This letter of credit, which
expires in May 2005, replaced an expiring letter of credit. A subsidiary of
EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also
expires in May 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was
completed at a cost of approximately $41,600,000. 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 bore interest at LIBOR + 2.00% per annum, was
collateralized by the unsold Silver Mesa units, matured in December 2003
and provided for one six-month extension at the Company's option.
Generally, 90% of net sales proceeds per unit were applied to principal
repayments. During May 2003, the Company repaid the remaining unpaid
principal balance of the Silver Mesa Conversion Loan with proceeds from
Silver Mesa unit sales and available cash.
F-42
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment Information (continued)
Sales of condominium units at the Silver Mesa phase of Palomino Park
commenced in February 2001 and 209 units have been sold through December
31, 2003. The following table provides information regarding sales of
Silver Mesa units:
For the Years Ended December 31,
---------------------------------------------- Project
2003 2002 2001 Totals
------------ ----------- ------------ --------------
Number of units sold.................... 56 48 105 209
Gross proceeds.......................... $ 12,535,000 $ 10,635,000 $ 21,932,000 $ 45,102,000
Principal paydown on Silver Mesa
Conversion Loan...................... $ 4,318,000 $ 9,034,000 $ 18,648,000 $ 32,000,000
The following table details operating information related to the Silver
Mesa units being rented. As the Company continues to sell units, rental
revenue, the corresponding operating expenses and cash flow from this
activity will diminish.
For the Years Ended December 31,
-----------------------------------------------
2003 2002 2001
----------- -------------- --------------
Rental revenue............ $ 702,000 $ 1,462,000 $ 2,224,000
Net operating income (A).. $ 431,000 $ 884,000 $ 1,488,000
-------------------------------
(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 $56,300,000. 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
at December 31, 2002 and bore interest at LIBOR + 1.75% per annum (3.17% at
December 31, 2002).
In February 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. The proceeds of the Green River Mortgage were used to repay the
Green River Construction Loan, with excess proceeds available for working
capital purposes.
Phase V, the improved 29.8 acre parcel of land known as Gold Peak, had a
cost basis of approximately $5,439,000 and $5,411,000 at December 31, 2003
and 2002, respectively. The Company is holding this land for possible
future development.
East Lyme
On March 2, 2004, the Company entered into a contract to acquire a 144 acre
parcel of land in East Lyme, Connecticut. The purchase price for the land
is approximately $6,200,000, including a $200,000 refundable deposit made
by the Company upon entering into the contract. The closing is conditioned
upon obtaining building permits for 100 single family homes. The Company is
in the process of negotiating an agreement with a home builder who would
construct and sell these homes.
F-43
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. 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, 2003 and 2002:
(amounts in thousands)
Historical Cost Fair Value
at December 31, at December 31,
--------------------- ---------------------------
Notes Receivable (A) 2003 2002 2003 2002
- -------------------------- -------- -------- ------------ ------------
Fixed rate:
277 Park Loan.......... $ -- $ 25,000 $ -- $ 27,771 (D)
Guggenheim............. 3,096 3,612 3,514 (D) 3,782 (D)
Other.................. -- -- -- --
-------- -------- -------- --------
Total fixed rate
notes.................. 3,096 28,612 3,514 31,553
-------- -------- -------- --------
Floating rate:
Total floating rate
notes.................. -- -- -- --
-------- -------- -------- --------
Total notes
receivable............. $ 3,096 $ 28,612 $ 3,514 $ 31,553
======== ======== ======== ========
Investments (B)
- --------------------------
Fixed rate U.S.
Government treasury
obligations............ $ 27,516 $ -- $ 27,534 (E) $ --
======== ======== ======== ========
Debt (C)
- --------------------------
Floating rate:
Palomino Park
Bonds............... $ 12,680 $ 12,680 $ 12,680 (F) $ 12,680 (F)
Silver Mesa
Conversion Loan..... -- 4,318 -- 4,318 (F)
Green River
Construction Loan... -- 37,111 -- 37,111 (F)
-------- -------- -------- --------
Total floating rate debt.. 12,680 54,109 12,680 54,109
-------- -------- -------- --------
Fixed rate:
Blue Ridge Mortgage.... 31,945 32,447 34,345 (G) 35,472 (G)
Red Canyon Mortgage.... 25,294 25,677 26,795 (G) 27,845 (G)
Green River Mortgage... 39,586 -- 38,225 (G) --
-------- -------- -------- --------
Total fixed rate debt..... 96,825 58,124 99,365 63,317
-------- -------- -------- --------
Total debt................ $109,505 $112,233 $112,045 $117,426
======== ======== ======== ========
- --------------------------
(A) For more information regarding the Company's note receivables, see Footnote
5.
(B) For more information regarding the Company's investments in securities, see
Footnote 4.
(C) For more information regarding the Company's debt, see Footnote 6.
(D) The fair value of the Company's fixed rate investments was determined by
reference to comparable investment market data.
(E) Based upon quoted market value of such securities at December 31, 2003.
(F) The fair value of the Company's floating rate debt is considered to be its
carrying amounts.
(G) The fair value of the Company's fixed rate debt was determined by reference
to comparable investment market data.
F-44
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. Summarized Consolidated Quarterly Information (Unaudited)
Summarized consolidated quarterly financial information for the years ended
December 31, 2003 and 2002 is as follows:
For the Three Months Ended
-----------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- -------------------------------------------------- ----------- ------------ ------------ ------------
Revenues.......................................... $ 6,633,550 $ 7,307,634 $ 14,911,884 $ 6,749,364
Costs and expenses................................ (7,756,228) (8,178,388) (11,208,548) (10,760,393)
Income (loss)from joint ventures (A) (B).......... 2,585,215 (175,314) 461,114 (37,300,081)
Minority interest (expense) benefit............... (5,775) 47,124 16,137 27,851
----------- ----------- ------------- -----------
Income (loss) before income taxes, accrued
distributions and amortization of costs on
Convertible Trust Preferred Securities and
discontinued operations........................ 1,456,762 (998,944) 4,180,587 (41,283,259)
Income tax (expense) benefit (A)(B)............... (681,000) 467,000 (1,615,000) (5,306,000)
Accrued distributions and amortization of costs on
Convertible Trust Preferred Securities, net of
income tax benefit ............................ (344,954) (494,953) (194,954) (1,064,954)
----------- ----------- ------------ ------------
Income (loss) from continuing operations.......... 430,808 (1,026,897) 2,370,633 (47,654,213)
Income (loss) from discontinued operations, net of
tax............................................ 45,474 (5,542) (12,564) (7,020)
----------- ----------- ------------ ------------
Net income (loss) (A)............................. $ 476,282 $(1,032,439) $ 2,358,069 $(47,661,233)
=========== =========== ============ ============
Per share amounts, basic and diluted (A):
Income (loss) from continuing operations....... $ 0.06 $ (0.16) $ 0.37 $ (7.38)
Income from discontinued operations............ 0.01 -- -- --
----------- ----------- ------------ ------------
Net income (loss).............................. $ 0.07 $ (0.16) $ 0.37 $ (7.38)
=========== =========== ============ ============
Weighted average number of common shares
outstanding:
Basic*........................................... 6,452,092 6,453,730 6,455,074 6,455,994
=========== =========== ============ ============
Diluted*......................................... 6,452,691 6,453,730 6,456,818 6,455,994
=========== =========== ============ ============
For the Three Months Ended
-----------------------------------------------------------
2002 March 31 June 30 September 30 December 31
- -------------------------------------------------- ----------- ------------ ----------- ------------
Revenues.......................................... $ 6,681,849 $ 7,097,635 $ 8,158,037 $ 8,574,568
Costs and expenses................................ (7,864,388) (8,012,769) (8,918,215) (8,955,610)
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 income taxes, accrued distributions
and amortization of costs on Convertible Trust
Preferred Securities and discontinued
operations..................................... (716,866) (559,575) (241,689) (1,886,233)
Income tax benefit (expense) (C).................. 34,000 4,000 (75,000) 1,359,000
Accrued distributions and amortization of costs on
Convertible Trust Preferred Securities, net of
income tax benefit (C)........................... (419,954) (419,953) (419,954) (119,954)
----------- ----------- ------------- ------------
(Loss) from continuing operations................. (1,102,820) (975,528) (736,643) (647,187)
Income (loss) from discontinued operations, net of
tax............................................ 26,406 82,142 (61,751) 42,962
----------- ----------- ------------- ------------
Net (loss)........................................ $(1,076,414) $ (893,386) $ (798,394) $ (604,225)
=========== =========== ============= ============
Per share amounts, basic and diluted:
(Loss) from continuing operations.............. $ (0.17) $ (0.15) $ (0.11) $ (0.10)
Income (loss) from discontinued operations.... -- 0.01 (0.01) 0.01
----------- ----------- ------------- ------------
Net (loss)..................................... $ (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
=========== =========== ============= ============
Diluted*....................................... 6,409,248 6,437,390 6,449,206 6,450,586
=========== =========== ============= ============
- ------------------------------
F-45
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Summarized Consolidated Quarterly Information (Unaudited) (continued)
*Aggregate quarterly earnings per share amounts may not equal annual
amounts presented elsewhere in these consolidated financial statements due
to rounding differences.
(A) As a result of adjustments recorded by Wellsford/Whitehall, previously
reported income and per share amounts for the first, second and third
quaters of 2003 have been adjusted as follows:
Quarterly Amounts
-------------------------------
First Second Third
----- ------ -----
Income(loss) from joint ventures
as previously reported........... $ 3,125,472 $(790,177) $576,330
Adjustment........................ (540,257) 614,863 (115,216)
----------- ----------- ----------
Income(loss) from joint
ventures as adjusted.............. $ 2,585,215 $ (175,314) $ 461,114
=========== =========== ==========
Income(loss) as
previously reported.............. $ 832,539 $(1,438,302) $2,434,285
Adjustment........................ (356,257) 405,863 (76,216)
----------- ----------- ----------
Net income(loss) as adjusted...... $ 476,282 $(1,032,439) $2,358,069
=========== =========== ==========
Net income(loss) per share
as previously reported........... $ 0.13 $ (0.22) $ 0.38
Adjustment........................ (0.06) 0.06 (0.01)
----------- ----------- ----------
Net income(loss) per share
as adjusted...................... $ 0.07 $ (0.16) $ 0.37
=========== =========== ==========
(B) During the fourth quarter of 2003, Wellsford/Whitehall recorded an
impairment charge of approximately $114,700,000 related to 12 assets
in the portfolio. The Company's share of this impairment charge was
approximately $37,377,000 and as a result, the Company wrote-off
related unamortized warrant costs on the Company's books of
approximately $2,644,000 related to Wellsford/Whitehall and determined
that it was not appropriate to carry the balance of the net deferred
tax asset attributable to NOL carryforwards and recorded a valuation
allowance of $6,680,000 in the fourth quarter of 2003.
(C) 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-46
Wellsford/Whitehall Group, L.L.C. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2003, 2002 and 2001 with Report of Independent Auditors
F-47
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Auditors.............................................F-49
Consolidated Balance Sheets................................................F-50
Consolidated Statements of Operations......................................F-51
Consolidated Statements of Members' Equity.................................F-52
Consolidated Statements of Cash Flows......................................F-53
Notes to Consolidated Financial Statements.................................F-54
F-48
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 as of December 31, 2003 and
2002, and the related consolidated statements of operations, changes in members'
equity, and cash flows for each of the three years in the period ended December
31, 2003. 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 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, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 12, 2004, except for
paragraph five of Note 1,
as to which the date is
March 5, 2004
F-49
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2003 2002
------------- -------------
ASSETS
Real estate assets:
Land $ 46,400,903 $ 41,727,134
Building and improvements 188,307,892 288,011,383
------------- -------------
234,708,795 329,738,517
Less accumulated depreciation (55,684,770) (45,269,044)
------------- -------------
179,024,025 284,469,473
Construction in progress 57,119,191 55,664,016
------------- -------------
236,143,216 340,133,489
Assets held for sale 12,337,777 173,140,012
Cash and cash equivalents 11,607,306 16,662,841
Restricted cash 12,945,699 17,587,502
Deferred costs, less accumulated amortization 827,643 4,605,528
Receivables, prepaids and other assets, net 3,257,887 5,189,350
------------- -------------
Total assets $ 277,119,528 $ 557,318,722
============= =============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Notes payable $ 201,658,784 $ 368,358,860
Accrued expenses and other liabilities 9,320,435 9,005,855
Accured interest on notes payable 773,338 397,828
Ground lease obligation - 1,111,239
------------- -------------
Total liabilities 211,752,557 378,873,782
Commitments and contingencies
Members' equity 65,366,971 178,444,940
------------- -------------
Total liabilities and members' equity $ 277,119,528 $ 557,318,722
============= =============
See Notes to Consolidated Financial Statements
F-50
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -------------
Revenues:
Rental income $ 36,506,322 $ 41,148,441 $ 50,940,879
Recoverable expenses 4,390,988 4,383,517 5,514,831
Interest and other income 1,295,337 2,351,881 4,973,337
------------- ------------- -------------
Total revenues 42,192,647 47,883,839 61,429,047
------------- ------------- -------------
Expenses:
Property operations 13,579,007 13,103,128 15,938,324
Real estate taxes 5,690,788 5,413,481 6,000,713
Insurance 704,683 569,894 381,814
Interest 11,117,650 12,598,551 17,130,040
Depreciation and amortization 10,568,230 14,508,842 12,207,869
Asset management fees 3,476,937 3,912,625 4,674,350
Ownership 748,165 727,072 922,160
Loss from impairment 114,687,022 - -
------------- ------------- -------------
Total expenses 160,572,482 50,833,593 57,255,270
------------- ------------- -------------
(Loss)/income available before
gains on dispositions, income/
(loss) from discontinued
operations and preferred
distributions (118,379,835) (2,949,754) 4,173,777
Gain on dispositions, net of
losses on impairment - - 10,790,576
------------- ------------- -------------
(Loss)/income available before
discontinued operations and
preferred distributions (118,379,835) (2,949,754) 14,964,353
Discontinued Operations:
Gain/(loss) on dispositions 9,297,121 (258,711) -
Operating income 2,027,306 9,322,465 7,210,147
Interest and amortization (4,860,628) (8,741,918) (9,428,616)
Loss from impairment - (1,350,638) -
------------- ------------- -------------
Income/(loss) from discontinued
operations 6,463,799 (1,028,802) (2,218,469)
Net (loss)/income available for
members before preferred
distributions (111,916,036) (3,978,556) 12,745,884
Preferred distributions - - (757,541)
------------- ------------- -------------
Net (loss)/income available
for members $(111,916,036) $ (3,978,556) $ 11,988,343
============= ============ =============
See Notes to Consolidated Financial Statements
F-51
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
Series A
Convertible Excess of Other
Membership Preferred Distributions Compre- Total
---------------------- Paid-In Membership Over hensive Members'
Units Amount Capital Units Earnings Loss Equity
----------- ---------- ------------- ------------ ------------- ---------- ------------
January 1, 2001 14,303,472 $ 143,035 $201,667,531 $ 18,322,550 $ (766,124) $ - $219,366,992
Additional equity
contributions, net 3,980,435 39,804 55,772,075 - - - 55,811,879
Conversion of equity 982,286 9,823 18,312,727 (18,322,550) - - -
Net income - - - 757,541 11,988,343 - 12,745,884
Other comprehensive loss - - - - - (525,560) (525,560)
Distributions - - - (757,541) (103,352,145) - (104,109,686)
----------- ----------- ------------- ------------ ------------- ---------- ------------
December 31, 2001 19,266,193 192,662 275,752,333 - (92,129,926) (525,560) 183,289,509
Redemption of units (7,865) (79) (94,921) - - - (95,000)
Net loss - - - - (3,978,556) - (3,978,556)
Other comprehensive loss - - - - - (771,013) (771,013)
----------- ----------- ------------- ------------ ------------- ---------- ------------
December 31, 2002 19,258,328 192,583 275,657,412 - (96,108,482) (1,296,573) 178,444,940
Net loss - - - - (111,916,036) - (111,916,036)
Other comprehensive loss - - - - - 1,102,893 1,102,893
Distributions - - - - (2,264,826) - (2,264,826)
----------- ----------- ------------- ------------ ------------- ---------- ------------
December 31, 2003 19,258,328 $ 192,583 $275,657,412 $ - $(210,289,344) $ (193,680) $ 65,366,971
========== =========== ============= ============ =============- =========== ============
See Notes to Consolidated Financial Statements
F-52
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------------
2003 2002 2001
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $(111,916,036) $ (3,978,556) $ 12,745,884
Adjustments to net (loss)/income to net cash
from operating activities:
Loss/(gain) on disposition of real estate assets (9,297,121) 258,711 (27,335,636)
Depreciation and amortization 11,200,304 21,321,899 17,323,039
Loss on impairment of real estate assets 114,687,022 1,350,638 16,545,060
Amortization of deffered financing costs 4,964,321 3,394,446 3,186,126
Change in receivables, prepaids and other assets 3,431,762 2,292,240 (4,010,596)
Change in accrued expenses and other liabilities 690,090 (4,061,903) (4,670,072)
------------- ------------ ------------
Net cash provided by operating activities 13,760,342 20,577,475 13,783,805
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets - - (20,553,532)
Improvements to real estate assets (23,807,946) (26,640,962) (47,066,583)
Cash received for transfer of real estate assets
to New Venture - - 5,277,002
Cash transferred with assets transferred
to New Venture - - (306,791)
Disposal of real estate assets, net of selling
expenses 170,509,950 4,230,617 139,305,312
------------- ------------ ------------
Net cash provided by (used in) investing
activities 146,702,004 (22,410,345) 76,655,408
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 8,409,968 289,831,774
Repayment of notes payable (166,700,076) (10,060,204) (296,524,814)
Repayment of ground lease obligations (1,111,239) (13,742) -
Decrease/(increase) in restricted cash 4,641,803 (7,742,082) (865,175)
Deferred financing costs (83,543) (505,127) (9,726,778)
Preferred distributions - - (757,541)
Member distributions (2,264,826) (4,221,364) (101,646,062)
Equity contributions - - 55,811,879
Redemption of equity - (95,000) -
------------- ------------ ------------
Net cash used in financing activities (165,517,881) (14,227,551) (63,876,717)
------------- ------------ ------------
Net change in cash and cash equivalents (5,055,535) (16,060,421) 26,562,496
Cash and cash equivalents, beginning of year 16,662,841 32,723,262 6,160,768
------------- ------------ ------------
Cash and cash equivalents, end of year $ 11,607,306 $ 16,662,841 $ 32,723,264
============= ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 12,369,290 $ 20,471,820 $ 28,276,227
============= ============ ============
Non-cash conversion to Series A convertible
preferred membership units $ 18,322,550
============
See Notes to Consolidated Financial Statements
F-53
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Wellsford/Whitehall Group, L.L.C. and subsidiaries (the "Company"), was
formed in May 1999 and consists of the following members: Wellsford
Commercial Properties Trust ("WCPT"), a subsidiary of Wellsford Real
Properties, Inc. ("WRP"); WHWEL Real Estate Limited Partnership ("WHWEL"),
WXI/WWG Realty L.L.C. and W/W Group Holdings, L.L.C. (collectively the
"Whitehall Members"); and the Saracen Members. These are collectively
referred to as the "Members."
WP Commercial, L.L.C. ("WP") manages the Company on a day-to-day basis;
however, certain major and operational decisions require the consent of the
Members. 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"). WP is owned by affiliates of the Whitehall Members.
Under the terms of existing agreements, it is expected that the Company
will not purchase any additional 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. Separately, a buy/sell
agreement exists related to the ownership interests of WCPT and the
Whitehall Members which was effective after December 31, 2003 with respect
to any remaining assets. 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. The Company will
terminate on December 31, 2045, unless sooner by the written consent of all
Members.
WRP (through WCPT), WHWEL, and WP are entitled to receive incentive
compensation, payable out of distributions made by the Company (the
"Promote") after return of capital and minimum annual returns of 17.5% on
such capital balances (as defined in the Company's Operating Agreement). To
date, WRP, WHWEL and WP have not earned or received any distribution of the
Promote.
WCPT and the Whitehall Members agreed to contribute an aggregate of $10
million on a revolving, as needed basis ("Revolving Equity") through
December 31, 2003. Subsequent to December 31, 2003, the Revolving Equity
commitment was extended by agreement of WCPT and the Whitehall Members
through March 31, 2005. As part of the extension, the aggregate limit of
the Revolving Equity has been reduced from $10 million to $8 million. The
Revolving Equity accrues dividends at a rate of LIBOR + 5.00% and is senior
to the membership units. At December 31, 2003, none of the Revolving Equity
had been drawn.
The number of membership units issued and outstanding are as follows:
December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
WCPT..................... 6,276,780 6,276,780 6,276,780
Whitehall Members........ 11,547,422 11,547,422 11,555,287
Saracen Members.......... 1,434,126 1,434,126 1,434,126
---------- ---------- ----------
Total.................... 19,258,328 19,258,328 19,266,193
========== ========== ==========
During 2002, the Company redeemed 7,865 units from the Whitehall member for
$95,000. During 2001, the Saracen Members, as holders of the Series A
convertible preferred membership units, exercised a conversion option;
982,286 membership units were issued in connection with this conversion.
F-54
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 2003, distributions of $2,264,826 were declared, of which none
remained unpaid at December 31, 2003. During 2001, distributions of
$103,352,145 were declared, of which $4,221,364 remained unpaid at December
31, 2001.
As of December 31, 2003, the Company owned 24 properties, excluding one
property held for sale, containing approximately 2,663,000 square feet
(unaudited) of office and retail space in Massachusetts (7 operating
properties and 1 tract of land), New Jersey (11 operating properties, 2
tracts of land), and 3 other retail properties.
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. All significant intercompany accounts and transactions 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,
adjusted for impairment losses. 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. 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 an
average term of the related leases. Depreciation is computed over the
expected useful lives of the depreciable properties using methods that
approximate straight-line, principally 40 years for commercial properties
and five to 12 years for furnishings and equipment.
Management reviews its real estate assets for impairment annually in
connection with the preparation of budgets for the upcoming year and as
part of the financial statement closing process. The Company performs
evaluations for impairment on all of its real estate assets. As part of
this evaluation, the Company recorded impairment provisions of
approximately $114,687,000, $1,351,000 and $16,545,000 during the years
ended December 31, 2003, 2002 and 2001, respectively. The 2003 impairment
provision relates to 12 assets classified as held for use in the portfolio.
The 2002 impairment provision related to two assets that were held for sale
at December 31, 2002 and were subsequently sold during the year ended
December 31, 2003. The 2001 impairment provision related to the change in
intended use for three assets that were sold during the year ended December
31, 2001. The 2003 provisions are not the result of a change in the
intended use of such assets, however they are the result of significant
declines in the economics of such assets and the markets in which they are
located resulting in decreasing market rents, slower absorption trends and
greater tenant concession costs in the current year analysis as compared to
analysis performed in prior years. For real estate assets held and used,
the Company recognizes an impairment loss only if the carrying amount of
the asset is not recoverable from its undiscounted cash flows and measures
an impairment loss as the difference between the carrying amount and the
fair value of the asset. Real estate assets considered held for sale are
reported at the lower of carrying amount or fair value less costs to sell
and are not depreciated.
Deferred Costs. Deferred costs consist primarily of costs incurred to
obtain financing. These deferred financing costs are amortized over the
expected term of the respective agreements, adjusted for any
F-55
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
unscheduled prepayments. Such amortization is included in interest expense
in the accompanying consolidated statements of operations. The Company
recorded amortization expense related to deferred costs totaling
$3,844,000, $3,089,000 and $2,821,000 during the years ended December 31,
2003, 2002 and 2001, respectively. Accumulated amortization was $8,906,000
and $5,062,000 at December 31, 2003 and 2002, respectively.
Profit and Revenue Recognition. Sales of real estate assets are recognized
at closing, subject to the receipt of an adequate down payment and the
relinquishment of substantial ownership risks in the future operations of
the asset. 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. Properties planned to be sold within one year
following the balance sheet date are classified as held for sale and the
related results of operations have been reported separately as discontinued
operations for the years ended December 31, 2003, 2002 and 2001. Assets
attributable to properties held for sale have been classified separately in
the Company's balance sheets at December 31, 2003 and 2002.
Income Taxes. The Company is a limited liability company. 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 and local income
taxes.
Derivative and Hedging Activities. The Company recognizes all derivatives
on the balance sheet at fair market value. The Company's derivative is an
interest rate protection agreement which limits the base rate of variable
rate debt. The ineffective portion of the 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. At
December 31, 2003, approximately $194,000 of accumulated other
comprehensive loss remained in members' equity, which will be fully
amortized during 2004.
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.
Reclassifications. Certain reclassifications have been made to the prior
year's presentation to conform to the current year presentation.
F-56
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Commercial Properties
The Company owns the following properties from continuing operations.
Amounts are presented net of impairment provisions (amounts in thousands):
Properties Collateralizing Portfolio Loan Location 2003 2002
-------------------------------------------- ----------------- ------------ -------------
300 Atrium Drive..................... Somerset, NJ $ 12,568 $ 19,551
400 Atrium Drive..................... Somerset, NJ 37,244 37,191
500 Atrium Drive..................... Somerset, NJ 15,140 21,108
700 Atrium Drive..................... Somerset, NJ 13,294 18,839
Garden State Exhibit Center ......... Somerset, NJ 6,190 6,190
Cutler Lake Corporate Center......... Needham, MA 37,113 36,030
377/379 Campus Drive................. Franklin Twp, NJ 15,983 23,792
Samsung/105 Challenger Road.......... Ridgefield Park, NJ 24,473 21,286
150 Mount Bethel..................... Warren, NJ 10,256 9,787
----------- ------------
172,261 193,774
----------- ------------
Properties Collateralizing the Nomura Loan
------------------------------------------
333 Elm Street....................... Dedham, MA 3,793 6,193
Dedham Place......................... Dedham, MA 14,758 31,064
Stony Brook Corporate Park........... Waltham, MA 17,547 48,810
201 University Avenue................ Westwood, MA 5,532 10,363
7/57 Wells Avenue.................... Newton, MA 14,236 12,744
75/85/95 Wells Avenue................ Newton, MA 29,821 41,856
----------- ------------
85,687 151,030
----------- ------------
Properties Collateralizing Other Mortgages or Unencumbered
----------------------------------------------------------
600 Atrium Drive (land)*............. Somerset, NJ 967 2,885
74 Turner Street (land)*............. Waltham, MA - 1,001
Airport Executive Park............... Hanover Twp, NJ 9,595 14,034
Airport Executive Park-Land*......... Hanover Twp, NJ 4,608 3,969
CVS.................................. Essex, MD 4,776 4,776
CVS.................................. Pennsauken, NJ 3,925 3,925
CVS.................................. Runnemede, NJ 4,134 4,134
CVS.................................. Wetumpka, AL 2,681 2,681
CVS.................................. Richmond, VA 3,194 3,194
------------ ------------
33,880 40,599
------------ ------------
Investment in Real Estate $ 291,828 $ 385,403
============ ============
* - Unencumbered
The three largest tenants contributed approximately 27% of total rental
revenue for the year ended December 31, 2003.
The Company capitalizes interest related to properties under renovation to
the extent such assets qualify for capitalization. Total interest
capitalized was $2,762,897, $2,486,948 and $2,583,797, respectively, for
the years ended December 31, 2003, 2002 and 2001.
F-57
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, 2003, are as follows (amounts in
thousands):
Properties Collateralizing
---------------------------------
For the Years Portfolio Nomura
Ended December 31, Total Loan Loan Other
------------------ --------- --------- --------- ---------
2004 $ 28,927 $ 14,695 $ 10,764 $ 3,468
2005 25,164 13,200 8,551 3,413
2006 18,234 9,723 6,124 2,387
2007 13,848 7,881 3,678 2,289
2008 11,808 6,455 3,236 2,117
Thereafter 20,924 6,081 8,374 6,469
--------- --------- --------- ---------
Total $ 118,905 $ 58,035 $ 40,727 $ 20,143
========= ========= ========= =========
The future minimum lease payments do not include specified payments for
tenant reimbursements of operating expenses.
5. Ground Leases
The leasehold interests in two properties and a tract of land are subject
to ground leases. At December 31, 2003, aggregate future minimum rental
payments under the leases which expire at various dates through January
2084, are as follows (amounts in thousands):
For the Years Ended December 31, Amount
-------------------------------- ----------
2004 $ 231
2005 233
2006 234
2007 235
2008 237
Thereafter 28,102
--------
$ 29,272
========
F-58
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Notes Payable
The Company's notes payable consisted of the following (amounts in
thousands):
December 31,
Interest Rate at -------------------------
Debt Maturity Date December 31, 2003 2003 2002
- ------------------------------------- ------------- ----------------- ----------- -----------
General Electric Capital Real Estate December 2006* LIBOR + 2.90% $ 106,078 $ 264,160
Nomura Loan February 2027 8.035% 64,666 65,458
Other Mortgage Loans
Washington Mutual March 2004 LIBOR + 2.05% 7,906 8,037
Provident March 2004 LIBOR + 2.00% 6,905 6,959
Welks Fargo January 2004 7.28% 16,104 16,372
IDS Life Insurance N/A 8.50% - 4,623
Seller Financing N/A 10.50% - 2,750
--------- ---------
$ 201,659 $ 368,359
========= =========
* - A term sheet was signed effective January 20, 2024 extending the
maturity date of this loan through December 31, 2006 (Refer to Note 11).
In June 2001, the Company obtained a loan with General Electric Capital
Real Estate (the "Portfolio Loan") which requires monthly payments of
interest until maturity. The principal balance, along with any accrued,
unpaid interest is due at maturity in June 2004. The Nomura Loan requires
monthly payments of principal and interest until maturity in February 2027.
The Nomura Loan includes prepayment restrictions that do not allow for
prepayment of the note until February 11, 2007 with the exception of sales
of individual properties collateralizing the loan. The Company has begun
dialogue with the special servicer of the Nomura Loan to discuss various
forms of debt relief. There can be no assurance of the outcome of these
discussions.
The 30-day LIBOR rate was 1.12%, 1.38% and, 1.88%, respectively, on
December 31, 2003, 2002 and 2001.
In connection with the disposition of any property, the Company is required
to remit to the lender the sold property's outstanding loan balance. For
properties collateralized by the Portfolio Loan and Nomura Loan, the
Company is required to remit, in addition to that property's allocated loan
amount, a release premium, as defined, which is then applied to reduce the
outstanding balance of the remaining loan.
At December 31, 2003, the property collateralizing the Provident loan is
classified as held for sale. Upon the sale of the property held for sale,
the outstanding balance under this loan will be paid in full.
As of December 31, 2003 and 2002, the Company was in compliance with the
terms of covenants under all loan agreements.
F-59
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Notes Payable (continued)
The aggregate maturities for the Company's notes payable obligations for
each of the next five years and thereafter are as follows, after
considering the extension of the Portfolio Loan maturity (amounts in
thousands):
Other
For the Years Portfolio Nomura Mortgage
Ended December 31, Total Loan Loan Loans
------------------ --------- --------- --------- ---------
2004 $ 16,943 $ 1,000 $ 844 $ 15,099
2005 1,240 - 931 309
2006 106,420 105,078 1,010 332
2007 1,452 - 1,095 357
2008 1,558 - 1,174 384
Thereafter 74,046 - 59,612 14,434
--------- --------- --------- ---------
Total $ 201,659 $ 106,078 $ 64,666 $ 30,915
========= ========= ========= =========
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% until June 2004 on $285,000,000 of debt.
At December 31, 2003 and 2002, the fair market value of the Cap was
approximately $0 and $13,000, respectively. The ineffective portion of the
Cap's change in fair market value was recorded as an adjustment to interest
expense of $812,654, $79,724 and $17,347 in 2003, 2002 and 2001,
respectively. The effective portion of the Cap's change in fair market
value, which was recorded as an adjustment to accumulated other
comprehensive loss during 2003, 2002 and 2001, was ($1,102,893), $771,013
and $525,560. An affiliate of the Whitehall Members is the counterparty
under the Cap.
7. Transactions with Affiliates
As discussed in Note 1, WP performs management services for 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 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 $4,603,582, $5,826,131 and $6,421,577 in 2003, 2002 and 2001,
respectively, related to these fees.
The Company also pays WP for construction management, development and
leasing based upon a schedule of rates in each geographic area in which the
Company operates. The Company incurred an aggregate of $1,925,072, $816,966
and $897,730 in 2003, 2002 and 2001, respectively, related to these
services. These amounts have been capitalized as part of real estate
assets.
WP currently leases space at one building owned by the Company and at three
buildings previously owned by the Company, one of which was sold in 2001,
and two of which were sold in 2003. The building expenses, net of rental
income under the leases with WP, were capitalized for the years ended
December 31, 2003 and 2002, as these properties were under development.
Rental income under these leases was approximately $219,864 for the year
ended December 31, 2001.
F-60
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 $691,126,
$849,583 and $3,182,139 in 2003, 2002 and 2001, respectively, for these
services.
Affiliates of the Saracen Members perform property management services for
certain assets of the Company, which amounted to approximately $252,000,
$267,000 and $337,000, respectively, for the years ended December 31, 2003,
2002 and 2001. Pursuant to an asset management agreement that was
terminated in 1999, the Company agreed to pay the Saracen Members
$1,000,000 in January 2004, plus quarterly interest at 10% per annum paid
currently. This liability is included in accrued expenses and other
liabilities in the accompanying balance sheets as of December 31, 2003.
Affiliates of the Saracen Members lease space at one building. Revenue
related to these leases for the years ended December 31, 2003, 2002 and
2001, totaled $49,014, $46,895 and $47,258, respectively.
At December 31, 2003 and 2002 the Company had approximately $1,094,000 and
$735,000, respectively payable to its Members or their affiliates. These
amounts are included in accrued expenses and other liabilities on the
accompanying balance sheets.
See Notes 1, 6 and 10 for additional related party interest information.
8. Discontinued Operations
As of December 31, 2003, the Company has one property totaling 145,000
square feet (unaudited) which is classified as held for sale. As of
December 31, 2002, the Company had ten properties totaling 1,122,000 square
feet (unaudited) which were being 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,
2003, 2002 and 2001. Assets anticipated to be sold attributable to the
property held for sale have been classified separately in the Company's
balance sheets, and are summarized as follows (amounts in thousands):
December 31,
------------------------
2003 2002
ASSETS ----------- ----------
Net real estate $ 11,980 $ 171,129
Accounts receivable 358 2,011
---------- ---------
Total assets held for sale $ 12,338 $ 173,140
========== =========
In conjunction with the expected sale of the property classified as held
for sale at December 31, 2003, the Company will be required to pay off the
outstanding loan balance related to the property. The outstanding loan
balance at December 31, 2003 is approximately $6,905,000. The outstanding
loan balance at December 31, 2002 related to the assets held for sale was
$146,143,000. As a result of stipulated release premiums, the total
principal payments related to assets sold during 2003 were $165,455,000.
F-61
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Discontinued Operations (continued)
Revenues attributable to the properties held for sale for the years ended
December 31, 2003, 2002 and 2001 were $6,006,003, $28,181,439 and
$26,124,604, respectively.
The Company sold the following properties ($ in thousands):
Years Ended December 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Number of properties 11 1 11
========= ========= =========
Net sales proceeds $ 170,510 $ 4,231 $ 139,305
========= ========= =========
(Gain)/loss on sales $ 9,297 $ (259) $ 27,336
========= ========= =========
9. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
interest rate protection agreements and notes payable. The carrying amount
of cash and cash equivalents approximates fair value due to the short
maturity of this item. The fair values of the interest rate derivative
instruments are the amount at which they could be settled, based on
estimates obtained from the sellers. The carrying values of certain of the
notes payable approximate fair values because such debt consists of
variable rate debt that reprices frequently. The fair value of the fixed
rate debt approximates $86,110,000 compared to a book value of
approximately $80,770,000 as of December 31, 2003, based upon various
market data analysis.
The fair value calculation of the fixed rate debt is based upon an
assumption that the Nomura Loan will be paid off in February 2007 when the
stipulated prepayment restrictions expire. The calculation also assumes
that the other fixed rate debt outstanding owed to Wells Fargo will be
assumed by the buyer when the properties collateralizing the debt are sold.
The properties are planned to be sold in 2007.
10. Commitments and Contingencies
As of December 31, 2003, the Company has an obligation to perform certain
repair and maintenance items at a property pursuant to the terms of the
sale of the property, which occurred in 2001. These items were estimated to
be approximately $250,000 and $518,000 at December 31, 2003 and 2002,
respectively. These amounts are included in accrued expenses and other
liabilities in the accompanying balance sheets.
The Company has agreed to maintain certain tax indemnities through 2007,
for the Saracen Members, relating to assets acquired from the Saracen
Members in 1998. The Company regularly evaluates the probability of having
to fund amounts associated with these tax indemnities and accrues expected
payments that are probable. As of December 31, 2003, the Company has not
recorded an accrual related to these tax indemnities. The Company will
continue to monitor future asset sales and debt levels with respect to
these tax indemnities.
As a commercial real estate owner, the Company is subject to potential
environmental costs. At December 31, 2003, management of the Company is not
aware of any environmental concerns that would have a material adverse
effect on the Company's financial condition, results of operations or cash
flows in the future.
F-62
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Commitments and Contingencies (continued)
From time to time, legal actions are brought against the Company in the
ordinary course of business. Although there can be no assurance, the
Company is not a party to any legal action that would have a material
adverse effect on the Company's financial condition, results of operations
or cash flows in the future.
11. Subsequent Event
On January 20, 2004, the Company signed a commitment letter with General
Electric Capital Corporation which modifies certain terms of the existing
Portfolio Loan. Among other modifications, the maturity date will be
extended from June 30, 2004 to December 31, 2006. The interest rate on the
Portfolio Loan will increase from LIBOR + 2.90% to LIBOR + 3.25%, subject
to a floor of 4.35%. The Company will extend the existing interest rate cap
for two years through December 31, 2006. The Company will be required to
pay a commitment fee, due at closing, in the amount of $610,391 and make a
$1,000,000 principal payment on the existing loan amount. The total loan
commitment is $122,078,131 which includes $17,000,000 for future tenant
improvements, leasing commissions and capital improvements, subject to
certain lender restrictions. Final closing of the executed loan agreements
is expected to occur prior to March 31, 2004.
F-63
Second Holding Company, LLC
Consolidated Financial Statements
Years ended December 31, 2003, 2002, and 2001 with Independent Auditors' Report
F-64
SECOND HOLDING COMPANY, LLC
CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Independent Auditors' Report.............................................. F-66
Consolidated Balance Sheets............................................... F-67
Consolidated Statements of Income......................................... F-68
Consolidated Statements of Members' Equity................................ F-69
Consolidated Statements of Cash Flows..................................... F-70
Notes to Consolidated Financial Statements................................ F-71
F-65
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
February 13, 2004
F-66
SECOND HOLDING COMPANY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
-----------------------------------
2003 2002
-------------- -------------
Assets
Cash and cash equivalents $ 133,389 $ 16,876
Investments 1,744,282 1,785,758
Interest receivable 7,109 12,252
Prepaid expenses and other assets 19,139 25,210
------------ ------------
Total assets $ 1,903,919 $ 1,840,096
============ ============
Liabilities and Members' Equity
Medium-term notes, net of unamortized
discount and debt issuance costs:
$2,341 in 2003 and $2,568 in 2002 $ 1,722,663 $ 1,552,945
Long-term debt, net of unamortized
debt issuance costs: $1,858 in
2003 and $2,137 in 2002 115,038 169,988
Interest payable 6,272 10,917
Other liabilities 2,253 50,336
----------- ------------
Total liabilities 1,846,226 1,784,186
Members' equity 57,693 55,910
----------- ------------
Total liabilities
and members' equity $ 1,903,919 $ 1,840,096
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-67
SECOND HOLDING COMPANY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
For the Years Ended
December 31
--------------------------------------------------
2003 2002 2001
------------- ------------- ------------
Revenue:
Interest $ 42,339 $ 41,802 $ 30,528
------------- ------------- ------------
Total revenue 42,339 41,802 30,528
------------- ------------- ------------
Expenses:
Interest 32,391 35,594 28,017
Fees to affiliates 3,153 2,308 1,117
Liquidity fees 662 690 690
Rating agency and other debt related fees 868 705 319
Other 222 191 296
------------- ------------- ------------
Total expenses 37,296 39,488 30,439
------------- ------------- ------------
Net income $ 5,043 $ 2,314 $ 89
============= ============= ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-68
SECOND HOLDING COMPANY, LLC
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands)
Undistributed Undistributed
net income net income
Capital Class A Class C Total*
----------- ------------- ------------- -----------
Balance - December 31, 2000 $ 51,128 $ 3,364 $ - $ 54,492
Net income - 89 - 89
----------- ---------- ---------- -----------
Balance - December 31, 2001 $ 51,128 $ 3,453 $ - $ 54,581
----------- ---------- ---------- -----------
Distributions - (694) (291) (985)
Net income - 1,433 881 2,314
----------- ---------- ---------- -----------
Balance - December 31, 2002 $ 51,128 $ 4,192 $ 590 $ 55,910
----------- ---------- ---------- -----------
Distributions - (1,226) (2,034) (3,260)
Net income - 3,210 1,833 5,043
----------- ---------- ---------- -----------
Balance - December 31, 2003 $ 51,128 $ 6,176 $ 389 $ 57,693
=========== ========== ========== ===========
*Balance by share class at December 31 is as follows:
2003 2002
----------- -----------
Class A: 57,300 55,316
Class B: 4 4
Class C: 389 590
Class D: - -
<
The accompanying notes are an integral part
of these consolidated financial statements.
F-69
SECOND HOLDING COMPANY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31
--------------------------------------------------
2003 2002 2001
------------- ------------- ------------
Cash flows from operating activities:
Net income $ 5,043 $ 2,314 $ 89
Adjustments to reconcile net income to net
cash flows from operating activities:
Amortization of discount and debt issuance costs 1,446 1,312 1,488
Changes in:
Interest receivable 5,143 (5,965) (1,528)
Prepaid expenses and other assets 356 (2,470) (89)
Interest payable (4,645) 5,320 (1,550)
Other liabilities 1,893 119 (188)
---------- ---------- ----------
Net cash provided by (used in) operating
activities 9,236 630 (1,778)
---------- ---------- ----------
Cash flows from investing activities:
Investment purchases (234,575) (880,529) (734,962)
Proceeds from investment principal
payments and calls 226,051 71,224 37,492
---------- ---------- ----------
Net cash used in investing activities (8,524) (809,305) (697,470)
---------- ---------- ----------
Cash flows from financing activities:
Net change in commercial paper - (58,770) 58,035
Proceeds from issuance of medium-term notes 169,061 808,922 644,609
Repayment of long-term debt (50,000) (103) (45)
Distributions (3,260) (985) -
---------- ---------- ----------
Net cash provided by financing activites 115,801 749,064 702,599
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 116,513 (59,611) 3,351
Cash and cash equivalents - beginning of year 16,876 76,487 73,136
---------- ---------- ----------
Cash and cash equivalents - end of year $ 133,389 $ 16,876 $ 76,487
========== ========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the year for interest $ 66,468 $ 70,438 $ 75,682
========== ========== ==========
Supplemental disclosure of non-cash
investing activity -
Trade date investment purchase $ - $ 50,000 $ -
========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-70
SECOND HOLDING COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. General Information
Second Holding Company, LLC ("Second Holding"), is a Delaware limited
liability company formed primarily to invest in special purpose companies
that raise funds in the global capital markets and invest the proceeds in
asset-backed and other fixed income obligations.
The consolidated financial statements include the accounts of Second
Holding and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The equity of Second Holding consists of four classes of interests. In
January 2002, the holders of the class A and class C interests agreed to
amend the terms on which Second Holding's income is allocated and
distributions are made among these two classes. Net income is allocated
among class A, B, C, and D interests based on a contractual formula agreed
to by 100% of holders of interests. Through December 31, 2003, based on
this formula, class B and D have not been allocated any portion of net
income. In the event of a liquidation, any funds remaining after all
obligations have been satisfied and any net income realized upon such
liquidation has been allocated and distributed, will be allocated to
holders of interests proportional to the balances of their capital
accounts.
2. Summary of Significant Accounting Policies
Basis of Presentation
Second Holding maintains its accounting records on the accrual basis of
accounting. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain prior year amounts have
been reclassified to conform with the current year's presentation.
Cash Equivalents
Marketable investments that are highly liquid and have maturities of three
months or less at the date of purchase are classified as cash equivalents.
Investments
Investments are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". At December 31, 2003, and 2002, investments are
classified as held-to-maturity and are carried at amortized cost. Interest
income is recognized on the accrual basis, based upon contractual terms of
the respective assets. Investments are recorded on a trade date basis.
Amortization of Premium/Discount
Premiums and discounts on investments are amortized to interest income
using the effective interest method over the life of the related financial
instrument. Discounts on commercial paper issued and medium-term notes
payable are amortized to interest expense using the straight-line method
over the life of the paper and debt. The amounts computed using this method
are not materially different from the amounts that would be computed using
the effective interest method.
F-71
SECOND HOLDING COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
Derivative Hedging Instruments
Derivative hedging instruments are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Certain Hedging Activities," as
amended. Second Holding, through its subsidiaries, utilizes interest rate
swaps to offset market risks related to fluctuations in interest rates
associated with certain assets and liabilities held by the subsidiaries.
Second Holding does not utilize derivative instruments for non-hedging
purposes.
Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others ("FIN 45"), which elaborates on the disclosures to be made by a
guarantor about its obligations under certain guarantees issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee at the inception of such guarantees for the
obligations the guarantor has undertaken. Additional disclosures are also
prescribed for certain guarantee contracts. The initial recognition and
initial measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements for periods ending
after December 15, 2002. The adoption of FIN 45, as required in fiscal year
ending December 2003, did not have a material impact on Second Holding's
financial position or results of operations.
In December 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (revised in December 2003), "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51" ("FIN 46(R)"). FIN 46(R) changes the method of determining
whether certain entities, including securitization entities, should be
included in the Company's consolidated financial statements. An entity is
subject to FIN 46(R) and is called a Variable Interest Entity ("VIE") if it
has (1) equity that is insufficient to permit it to finance its activities
without additional subordinated financial support from other parties, or
(2) equity investors that cannot make significant decisions about the
entity's operations, or that do not absorb the expected losses or receive
the expected returns of the entity. A VIE is consolidated by its Primary
Beneficiary, which is the party involved with the VIE that has a majority
of the expected losses or a majority of the expected residual returns, or
both. All other entities are evaluated for consolidation under SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries". Second Holding is a
private company and has elected to adopt FIN 46(R) for the year ended
December 31, 2003. The adoption of FIN 46(R) did not have a material impact
on the financial statements.
Income Taxes
Second Holding is organized as a limited liability company and is being
taxed as a partnership under provisions of the Internal Revenue Code. Under
this election, the liability for payment of Federal and state income taxes
on Second Holding's earnings will be the responsibility of its members,
rather than that of Second Holding.
Debt Issue Costs
Costs incurred in the issuance of debt are being amortized to interest
expense using the straight-line method over a ten-year period ending in
2010.
F-72
SECOND HOLDING COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
3. Commercial Paper Issued
Second Holding, through one of its subsidiaries, issues commercial paper at
prevailing market rates, with maturities less than 364 days. The commercial
paper was rated A-1 and F-1 by Standard & Poor's Rating Services and Fitch
Ratings, respectively. The following information in regard to commercial
paper issued during the years ended was calculated using a daily weighted
average (dollars in thousands):
2003 2002
---------- ----------
Average amount outstanding during the year $ 1,854 $ 10,311
========== ==========
Maximum month-end outstanding during the year $ - $ 39,113
========== ==========
Balance at December 31 $ - $ -
========== ==========
Average yield - during the year 1.36% 1.96%
========== ==========
4. Debt Issued
Second Holding, through one of its wholly owned subsidiaries, established a
U.S. Medium-Term Note program that permits aggregate borrowings of up to
$3.5 billion. The program ends in 2040, subject to ongoing compliance tests
under the security agreement. The program is extendible with the consent of
Second Holding and the rating agencies. The Notes are rated AAA by Standard
& Poor's Rating Services and Fitch Ratings. Notes with a face amount of
approximately $1,725 and $1,555 million were outstanding at December 31,
2003 and 2002, respectively, under the U.S. Medium-Term Note program.
At December 31, 2003 and 2002, Second Holding, through one of its wholly
owned subsidiaries, had Long-term debt outstanding with a principal amount
of $100 million and $150 million, respectively. At December 31, 2003 and
2002, the fair value of the long-term debt is approximately $115 million
and $170 million, respectively.
The rates on the total debt issued ranged from 1.11% to 7.96% with a
weighted average rate of 1.73% at December 31, 2003. The rates on the total
debt issued ranged from 1.41% to 7.96% with a weighted average rate of
2.14% at December 31, 2002. At December 31, 2003, the maturities of the
total debt issued are approximately $1,475 million in 2004 and $350 million
in 2005 through 2010. Second Holding intends to repay obligations from cash
and cash equivalents, collections on investments and from issuance of debt
for a period of time extending beyond one year. Second Holding has sources
of liquidity sufficient to provide for all payments on long-term debt in
accordance with the terms of the documentation of the programs. Second
Holding monitors and maintains the following sources of liquidity:
committed lines, cash and cash equivalents and other liquid assets,
uncommitted facilities and facilities to issue special debt, and amounts
available under Second Holding's debt program.
5. Derivative Instruments and Hedging Activities
Second Holding, through its subsidiaries, utilizes interest rate swaps
designated and qualifying as fair value hedging instruments to offset the
fair value exposure related to fluctuations in interest rates. These
interest rate swaps hedge financial instruments in which the rate of
interest is fixed for the hedging period by providing for receipt of a
fixed rate of interest, and payment of a floating rate of interest,
eliminating fair value exposure. At December 31, 2003, a net increase in
the fair value of these swaps of
F-73
SECOND HOLDING COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
approximately $16.9 million is reported in other assets, with a
corresponding increase of approximately $16.9 million and $3 thousand
reported in long-term debt and medium-term notes, respectively. At December
31, 2002, a net increase in the fair value of these swaps of approximately
$22.6 million is reported in other assets, with a corresponding increase of
approximately $22.1 million and $0.5 million reported in long-term debt and
medium-term notes, respectively. This change in fair value is a non-cash
item and is not reflected in the statement of cash flows. This change in
fair value of the swaps, long-term debt, and medium-term notes does not
affect net income, and will be eliminated over time as the swaps, long-term
debt, and medium-term notes mature.
Second Holding, through its subsidiaries, utilizes interest rate swaps
designated and qualifying as cash flow hedging instruments to offset the
variability in interest payments due to fluctuations in interest rates.
These interest rate swaps hedge floating-rate financial instruments by
providing for receipt of a floating rate of interest, and payment of a rate
of interest which is fixed for the hedging period, eliminating the
variability in cash flows. Due to the short hedging periods and the
frequency of the interest rate repricings on these cash flow hedging
instruments, the fair value of the interest rate swaps is zero. As such,
the carrying amount of the swaps does not result in a financial statement
impact.
Second Holding, through its subsidiaries, utilizes, as counterparties,
financial institutions with high credit quality, and as such, believes no
significant counterparty credit risk exists on its derivative instruments.
6. Liquidity Facility
As of December 31, 2003 and 2002, a wholly owned subsidiary of Second
Holding entered into a Liquidity Loan Agreement that permits the subsidiary
to borrow up to $375 million and $400 million, respectively, from three
financial institutions, two rated A-1+ and one rated A-1, at either the
institution's prime rate of interest or the London Interbank Offered Rate
(LIBOR). The subsidiary pays a quarterly commitment fee ranging from 0.15%
to 0.175% per annum on the unused portion of the commitment. As of December
31, 2003 and 2002, there were no borrowings under the Liquidity Loan
Agreement.
7. Related Party Transactions
Pursuant to compensation agreements with affiliates which Second Holding,
through its subsidiaries, had engaged to perform services, Second Holding,
through its subsidiaries, had incurred approximately $3.2 million, $2.3
million, and $1.1 million in fees during the years ended December 31, 2003,
2002 and 2001, respectively. Fees are paid based on a percentage of the
subsidiaries' average daily assets. At December 31, 2003 and 2002, Second
Holding had $264 thousand and $254 thousand, respectively, in fees payable
to affiliates.
8. Fair Value of Financial Instruments
At December 31, 2003 and 2002, the carrying amounts for cash and cash
equivalents, investments, interest receivable, medium-term notes payable
and interest payable approximate fair value due to the variable interest
terms inherent in these financial instruments and/or their short-term
nature.
F-74
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(amounts in thousands, except square footage and units)
Cost
Initial Cost Capitalized
Units/ --------------------------------------- Subsequent
Date Year Square Depreciable Building and to
Description Acquired Built Feet Life Land Improvements Total Acquisition
- ---------------- -------- ----- ------ ----------- ------- ------------ --------- -----------
Blue Ridge - Dec-
Denver, CO... 1997 1997 456 27.5 yrs $ 5,225 $ 36,339 $ 41,564 $429
Red Canyon - Nov-
Denver, CO... 1998 1998 304 27.5 yrs 5,060 28,844 33,904 36
Green River - Dec-
Denver, CO... 2001 2001 424 27.5 yrs 8,451 47,889 56,340 10
Nov-
Other........... 2003 N/A -- Various -- 10 10 --
----- ------- -------- -------- ----
Total........... 1,184 $18,736 $113,082 $131,818 $475
===== ======= ======== ======== ====
Total Cost
----------------------------------
Building and Accumulated
Description Land Improvements Total Depreciation Encumbrance
- ---------------- ------- ------------ -------- ------------ -----------
Blue Ridge -
Denver, CO... $ 5,225 $ 36,768 $ 41,993 $ (8,101) $31,945 (A)
Red Canyon -
Denver, CO... 5,060 28,880 33,940 (5,368) 25,294 (A)
Green River -
Denver, CO... 8,451 47,899 56,350 (3,305) 39,586 (A)
Other........... -- 10 10 (1) --
------- -------- -------- -------- -------
Total........... $18,736 $113,557 $132,293 $(16,775) $96,825
======= ======== ======== ======== =======
(A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680 at December 31, 2003. The Palomino Park
Bond collateral includes Blue Ridge, Red Canyon and Green River operational
phases, as well as the undeveloped Gold Peak land.
S-1
The following is a reconciliation of real estate assets and accumulated
depreciation:
(amounts in thousands)
For the Years Ended December 31,
------------------------------------------
2003 2002 2001
--------- --------- ---------
Real Estate
Balance at beginning
of period............. $136,723 $154,116 $120,104
Additions:
Acquisitions and
transfers from
construction in
progress........... -- -- 56,340
Capital improvements.. 20 461 137
-------- -------- --------
136,743 154,577 176,581
Less:
Reclassified costs to
residential units
held available
for sale........... (4,450) (17,854) --
Cost of real estate
sold............... -- -- (22,465)
-------- -------- --------
Balance at end of
period................ $132,293 (A) $136,723 $154,116
======== ======== ========
Accumulated Depreciation
Balance at beginning
of period............. $ 12,834 $ 9,386 $ 7,761
Additions:
Charged to operating
expense............ 4,354 4,398 3,066
-------- -------- --------
17,188 13,784 10,827
Less:
Accumulated
depreciation on
costs reclassified
to residential units
held for sale...... (413) (950) --
Accumulated
depreciation on real
estate sold........ -- -- (1,441)
-------- -------- --------
Balance at end
period................ $16,775 (A) $ 12,834 $ 9,386
======== ======== ========
- -----------------------------
(A) The aggregate depreciated cost for federal income tax purposes was
approximately $7,600,000 less at December 31, 2003.
S-2