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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-12917
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WELLSFORD REAL PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
Maryland 13-3926898
- --------------------------------- ------------------------------------
(State of other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of the registrant's shares of common stock outstanding was 6,449,206
as of August 7, 2002 (including 169,903 shares of class A-1 common stock).
1
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TABLE OF CONTENTS
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Page
Number
------
PART I. FINANCIAL INFORMATION:
----------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001......................................3
Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended June 30, 2002 and 2001..........4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2002 and 2001....................5
Notes to Consolidated Financial Statements (unaudited).........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk....28
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................................29
Item 4. Submission of Matters to a Vote of Security Holders...........29
Item 6. Exhibits and Reports on Form 8-K..............................29
Signatures ..........................................................30
2
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land ................................................................... $ 22,425,458 $ 23,113,670
Buildings and improvements ............................................. 135,596,570 139,223,965
------------- -------------
158,022,028 162,337,635
Less:
Accumulated depreciation ............................................ (11,967,075) (9,873,232)
Impairment reserve .................................................. (2,174,853) (2,174,853)
------------- -------------
143,880,100 150,289,550
Residential units available for sale ................................... 6,715,434 5,400,951
Construction in progress ............................................... 5,410,831 5,399,631
------------- -------------
156,006,365 161,090,132
Notes receivable .......................................................... 28,612,000 34,784,727
Investment in joint ventures .............................................. 96,210,114 95,806,509
------------- -------------
Total real estate and investments ......................................... 280,828,479 291,681,368
Cash and cash equivalents ................................................. 38,666,966 36,148,529
Restricted cash and investments ........................................... 9,309,622 7,553,159
Prepaid and other assets .................................................. 8,911,371 10,455,101
------------- -------------
Total assets .............................................................. $ 337,716,438 $ 345,838,157
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ................................................. $ 118,142,657 $ 121,730,604
Accrued expenses and other liabilities, including the liability for
deferred compensation of $8,905,154 and $6,604,106 ..................... 13,834,420 17,532,211
------------- -------------
Total liabilities ......................................................... 131,977,077 139,262,815
------------- -------------
Company-obligated, mandatorily redeemable convertible preferred
securities of WRP Convertible Trust I, holding solely 8.25% junior
subordinated debentures of Wellsford Real Properties, Inc. ("Convertible
Trust Preferred Securities") ........................................... 25,000,000 25,000,000
Minority interest ......................................................... 3,409,961 3,496,640
Commitments and contingencies
Shareholders' equity:
Series A 8% convertible redeemable preferred stock, $.01 par value
per share, 2,000,000 shares authorized, no shares issued and
outstanding ......................................................... -- --
Common stock, 98,825,000 shares authorized, $.02 par value per
share - 6,278,151 and 6,235,338 shares issued and outstanding ....... 125,563 124,707
Class A-1 common stock, 175,000 shares authorized, $.02 par value
per share - 169,903 shares issued and outstanding ................... 3,398 3,398
Paid in capital in excess of par value ................................. 162,753,549 162,083,959
Retained earnings ...................................................... 22,019,704 23,989,504
Accumulated other comprehensive loss; share of unrealized loss on
interest rate protection contract purchased by joint venture
investment, net of income tax benefit ............................... (224,350) (102,736)
Deferred compensation .................................................. (899,330) (1,520,996)
Treasury stock, 314,810 and 317,997 shares ............................. (6,449,134) (6,499,134)
------------- -------------
Total shareholders' equity ................................................ 177,329,400 178,078,702
------------- -------------
Total liabilities and shareholders' equity ................................ $ 337,716,438 $ 345,838,157
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Rental revenue .................................... $ 4,009,548 $ 3,438,856 $ 7,736,764 $ 7,272,370
Revenue from sales of residential units ........... 2,245,269 8,125,200 4,323,854 14,572,800
Interest revenue .................................. 1,042,645 1,344,400 2,110,812 2,888,304
Fee revenue ....................................... 145,029 223,426 262,009 298,642
------------ ------------ ------------ ------------
Total revenues ................................. 7,442,491 13,131,882 14,433,439 25,032,116
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales of residential units ................ 2,033,158 7,159,195 3,938,718 12,809,996
Property operating and maintenance ................ 1,285,306 928,872 2,595,584 1,917,399
Real estate taxes ................................. 401,932 319,300 766,262 684,122
Depreciation and amortization ..................... 1,300,858 1,844,309 2,561,663 2,894,452
Property management ............................... 120,978 135,983 252,687 301,069
Interest .......................................... 1,455,074 1,094,637 2,948,810 2,219,821
General and administrative ........................ 1,658,177 1,986,078 3,331,840 3,917,732
------------ ------------ ------------ ------------
Total costs and expenses ....................... 8,255,483 13,468,374 16,395,564 24,744,591
------------ ------------ ------------ ------------
Income from joint ventures ........................... 329,582 758,816 749,785 2,704,874
------------ ------------ ------------ ------------
(Loss) income before minority interest, income
taxes and accrued distributions and amortization of
costs on Convertible Trust Preferred Securities ... (483,410) 422,324 (1,212,340) 2,992,399
Minority interest benefit (expense) .................. 25,977 (93,662) 71,447 (185,301)
------------ ------------ ------------ ------------
(Loss) income before income taxes and accrued
distributions and amortization of costs on
Convertible Trust Preferred Securities ............ (457,433) 328,662 (1,140,893) 2,807,098
Income tax expense (benefit) ......................... 16,000 (193,000) (11,000) 272,000
------------ ------------ ------------ ------------
(Loss) income before accrued distributions and
amortization of costs on Convertible Trust
Preferred Securities .............................. (473,433) 521,662 (1,129,893) 2,535,098
Accrued distributions and amortization of costs on
Convertible Trust Preferred Securities, net of
income tax benefit of $105,000, $182,000,
$210,000 and $357,000, respectively ............... 419,953 342,953 839,907 692,907
------------ ------------ ------------ ------------
Net (loss) income .................................... $ (893,386) $ 178,709 $ (1,969,800) $ 1,842,191
============ ============ ============ ============
Net (loss) income per common share, basic ............ $ (0.14) $ 0.02 $ (0.31) $ 0.23
============ ============ ============ ============
Net (loss) income per common share, diluted .......... $ (0.14) $ 0.02 $ (0.31) $ 0.23
============ ============ ============ ============
Weighted average number of common shares
outstanding, basic ................................ 6,437,390 7,864,302 6,423,397 8,106,616
============ ============ ============ ============
Weighted average number of common shares
outstanding, diluted .............................. 6,437,390 7,873,327 6,423,397 8,115,704
============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ......................................................... $ (1,969,800) $ 1,842,191
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................... 2,580,320 2,902,109
Amortization of deferred compensation ............................... 621,666 583,837
Undistributed joint venture income .................................. (570,407) (619,894)
Undistributed minority interest (benefit) ........................... (71,447) 185,301
Shares issued for director compensation ............................. 44,000 40,000
Interest funded by construction loan ................................ 431,120 --
Changes in assets and liabilities:
Restricted cash and investments .................................. (1,756,463) 2,272,090
Residential units available for sale ............................. 3,099,325 10,780,276
Prepaid and other assets ......................................... 1,487,045 1,944,587
Accrued expenses and other liabilities ........................... (3,694,739) (4,758,699)
------------ ------------
Net cash provided by operating activities ........................... 200,620 15,171,798
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets ......................................... (287,257) (1,623,664)
Investments in joint ventures and other entities:
Capital contributions ............................................... (209,800) (2,984,862)
Returns of capital .................................................. -- 2,482,505
Investments in notes receivable ........................................... -- (500,000)
Repayments of notes receivable ............................................ 6,172,727 2,925,073
Proceeds from sale of real estate assets .................................. -- 15,680,180
------------ ------------
Net cash provided by investing activities ............................ 5,675,670 15,979,232
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities ......................................... -- 12,000,000
Repayment of credit facility .............................................. -- (17,000,000)
Repayment of mortgage notes payable ....................................... (4,019,067) (12,817,764)
Proceeds from option exercises ............................................ 676,446 --
Distributions to minority interest ........................................ (15,232) --
Repurchase of common shares ............................................... -- (36,576,192)
------------ ------------
Net cash used in financing activities ............................... (3,357,853) (54,393,956)
------------ ------------
Net decrease in cash and cash equivalents .................................... 2,518,437 (23,242,926)
Cash and cash equivalents, beginning of period ............................... 36,148,529 36,368,706
------------ ------------
Cash and cash equivalents, end of period ..................................... $ 38,666,966 $ 13,125,780
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest, including amounts
capitalized of $1,090,921 during 2001 .................................. $ 2,645,385 $ 3,350,330
============ ============
Cash paid during the period for income taxes, net of tax
refunds ................................................................ $ (120,278) $ 1,519,615
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Release of shares held in deferred compensation plan ................... $ 50,000
============
Other comprehensive loss; share of unrealized loss on
interest rate protection contract purchased by joint
venture investment, net of tax benefit .............................. $ 121,614
============
Net reclass of costs of Silver Mesa units from land, building and
improvements and accumulated depreciation to residential
units available for sale ............................................ $ 4,413,808
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 through the
Wellsford Capital SBU; and (iii) property development and land operations
through the Wellsford Development SBU. See Note 3 for additional
information regarding the Company's SBUs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The
accompanying consolidated financial statements include the accounts of
Wellsford Real Properties, Inc. 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 Wellsford Real
Properties, Inc. and its subsidiaries have been eliminated in
consolidation.
The accompanying consolidated financial statements include the assets and
liabilities contributed to and assumed by the Company from the Trust, from
the time such assets and liabilities were acquired or incurred,
respectively, by the Trust. Such financial statements have been prepared
using the historical basis of the assets and liabilities and the historical
results of operations related to the Company's assets and liabilities.
The accompanying consolidated financial statements and notes of the Company
have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared under
generally accepted accounting principles have been condensed or omitted
pursuant to such rules. In the opinion of management, all adjustments
considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows have been included and are
of a normal and recurring nature. These consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2001, as filed with the Securities and Exchange
Commission. The results of operations and cash flows for the three and six
months ended June 30, 2002 and 2001 are not necessarily indicative of a
full year's results.
6
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATION. Amounts in certain accounts have been reclassified to
conform to the current period presentation.
RECENTLY ISSUED PRONOUNCEMENTS. In August 2001, Statement of Financial
Accounting Standard ("SFAS") No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS" was issued. SFAS No. 144 supersedes SFAS No.
121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF." The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 by the Company on January 1, 2002, did
not have a material effect on its results of operations or financial
position. Adoption of the standard requires a change in display of
operating results as the operations of properties which are classified as
held for sale or are sold subsequent to January 1, 2002 will be included as
discounted operations. Even though the Company is pursuing a sale of the
remaining two operating properties in the Wellsford Capital SBU (five of
the seven properties have been sold during 2000 and 2001), the Company
could not definitively determine that the assets would likely be sold
within the one year time frame as required by SFAS No. 144. The operations
of these two properties have not been classified as discontinued operations
but treated as held for use and accordingly the Company recorded
depreciation expense for the three and six months ended June 30, 2002. No
depreciation was recorded in 2001 for these two properties.
7
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. SEGMENT INFORMATION
The Company's operations are organized into three SBUs. The following table
presents condensed balance sheet and operating data for these SBUs:
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
JUNE 30, 2002
-------------
Investment properties:
Real estate held for investment, net $ -- $ -- $143,751 $ -- $143,751
Real estate held for sale** ......... -- 5,540 -- -- 5,540
Residential units available for sale -- -- 6,715 -- 6,715
-------- -------- -------- -------- --------
Real estate, net ....................... -- 5,540 150,466 -- 156,006
Notes receivable ....................... -- 28,612 -- -- 28,612
Investment in joint ventures ........... 57,779 38,431 -- -- 96,210
Cash and cash equivalents .............. -- 5,605 378 32,684 38,667
Restricted cash and investments ........ -- -- 405 8,905 9,310
Other assets ........................... -- 9,438 1,239 (1,766) 8,911
-------- -------- -------- -------- --------
Total assets ........................... $ 57,779 $ 87,626 $152,488 $ 39,823 $337,716
======== ======== ======== ======== ========
Mortgage notes payable ................. $ -- $ -- $118,143 $ -- $118,143
Accrued expenses and other liabilities . -- 3,260 2,171 8,403 13,834
Convertible Trust Preferred Securities . -- -- -- 25,000 25,000
Minority interest ...................... 6 -- 3,404 -- 3,410
Equity ................................. 57,773 84,366 28,770 6,420 177,329
-------- -------- -------- -------- --------
Total liabilities and equity ........... $ 57,779 $ 87,626 $152,488 $ 39,823 $337,716
======== ======== ======== ======== ========
DECEMBER 31, 2001
-----------------
Investment properties:
Real estate held for investment, net $ -- $ -- $150,129 $ -- $150,129
Real estate held for sale** ......... -- 5,560 -- -- 5,560
Residential units available for sale -- -- 5,401 -- 5,401
-------- -------- -------- -------- --------
Real estate, net ....................... -- 5,560 155,530 -- 161,090
Notes receivable ....................... -- 34,785 -- -- 34,785
Investment in joint ventures ........... 57,790 38,017 -- -- 95,807
Cash and cash equivalents .............. 11 8,217 442 27,479 36,149
Restricted cash and investments ........ -- -- 949 6,604 7,553
Other assets ........................... -- 9,331 2,066 (943) 10,454
-------- -------- -------- -------- --------
Total assets ........................... $ 57,801 $ 95,910 $158,987 $ 33,140 $345,838
======== ======== ======== ======== ========
Mortgage notes payable ................. $ -- $ -- $121,731 $ -- $121,731
Accrued expenses and other liabilities . -- 3,641 3,955 9,936 17,532
Convertible Trust Preferred Securities . -- -- -- 25,000 25,000
Minority interest ...................... 21 -- 3,475 -- 3,496
Equity ................................. 57,780 92,269 29,826 (1,796) 178,079
-------- -------- -------- -------- --------
Total liabilities and equity ........... $ 57,801 $ 95,910 $158,987 $ 33,140 $345,838
======== ======== ======== ======== ========
- ----------
* Includes corporate cash, restricted cash and investments, other
assets, accrued expenses and other liabilities that have not been
allocated to the operating segments.
** Real estate held for sale, but classified as an operating property as
disclosed in footnote 2, is net of an impairment reserve of $2,175 at
June 30, 2002 and December 31, 2001.
8
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
FOR THE THREE MONTHS
ENDED JUNE 30, 2002
-------------------
Rental revenue .......................... $ -- $ 345 $ 3,665 $ -- $ 4,010
Revenue from sales of residential units -- -- 2,245 -- 2,245
Interest revenue ........................ -- 888 -- 155 1,043
Fee revenue ............................. -- 152 (14) 7 145
-------- -------- -------- -------- --------
Total revenues .......................... -- 1,385 5,896 162 7,443
-------- -------- -------- -------- --------
Cost of sales of residential units ...... -- -- 2,033 -- 2,033
Operating expenses ...................... -- 194 1,615 -- 1,809
Depreciation and amortization ........... 110 52 1,120 19 1,301
Interest ................................ -- -- 1,420 35 1,455
General and administrative .............. -- 8 -- 1,650 1,658
-------- -------- -------- -------- --------
Total costs and expenses ................ 110 254 6,188 1,704 8,256
-------- -------- -------- -------- --------
Income from joint ventures .............. 119 211 -- -- 330
Minority interest benefit ............... -- -- 26 -- 26
-------- -------- -------- -------- --------
Income (loss) before income taxes and
accrued distributions and amortization
of costs on Convertible Trust
Preferred Securities ................. $ 9 $ 1,342 $ (266) $ (1,542) $ (457)
======== ======== ======== ======== ========
FOR THE THREE MONTHS
ENDED JUNE 30, 2001
-------------------
Rental revenue .......................... $ -- $ 478 $ 2,961 $ -- $ 3,439
Revenue from sales of residential units . -- -- 8,125 -- 8,125
Interest revenue ........................ -- 1,028 -- 316 1,344
Fee revenue ............................. -- 59 -- 165 224
-------- -------- -------- -------- --------
Total revenues .......................... -- 1,565 11,086 481 13,132
-------- -------- -------- -------- --------
Cost of sales of residential units ...... -- -- 7,159 -- 7,159
Operating expenses ...................... -- 326 1,058 -- 1,384
Depreciation and amortization ........... 1,051 2 765 26 1,844
Interest ................................ -- 45 1,051 (1) 1,095
General and administrative .............. -- 23 -- 1,963 1,986
-------- -------- -------- -------- --------
Total costs and expenses ................ 1,051 396 10,033 1,988 13,468
-------- -------- -------- -------- --------
Income from joint ventures .............. 670 89 -- -- 759
Minority interest ....................... -- -- (94) -- (94)
-------- -------- -------- -------- --------
(Loss) income before income taxes and
accrued distributions and amortization
of costs on Convertible Trust
Preferred Securities ................. $ (381) $ 1,258 $ 959 $ (1,507) $ 329
======== ======== ======== ======== ========
- ----------
* Includes interest revenue, fee revenue, depreciation and amortization
expense, interest expense and general and administrative expenses that have
not been allocated to the operating segments.
9
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
FOR THE SIX MONTHS
ENDED JUNE 30, 2002
--------------------
Rental revenue .......................... $ -- $ 654 $ 7,083 $ -- $ 7,737
Revenue from sales of residential units.. -- -- 4,324 -- 4,324
Interest revenue ........................ -- 1,806 -- 305 2,111
Fee revenue ............................. -- 282 (27) 7 262
-------- -------- -------- -------- --------
Total revenues .......................... -- 2,742 11,380 312 14,434
-------- -------- -------- -------- --------
Cost of sales of residential units ...... -- -- 3,939 -- 3,939
Operating expenses ...................... -- 415 3,199 -- 3,614
Depreciation and amortization ........... 251 107 2,168 36 2,562
Interest ................................ -- 7 2,877 65 2,949
General and administrative .............. -- 19 -- 3,313 3,332
-------- -------- -------- -------- --------
Total costs and expenses ................ 251 548 12,183 3,414 16,396
-------- -------- -------- -------- --------
Income from joint ventures .............. 361 389 -- -- 750
Minority interest benefit ............... -- -- 71 -- 71
-------- -------- -------- -------- --------
Income (loss) before income taxes and
accrued distributions and amortization
of costs on Convertible Trust
Preferred Securities ................. $ 110 $ 2,583 $ (732) $ (3,102) $ (1,141)
======== ======== ======== ======== ========
FOR THE SIX MONTHS
ENDED JUNE 30, 2001
-------------------
Rental revenue .......................... $ -- $ 1,263 $ 6,009 $ -- $ 7,272
Revenue from sales of residential units.. -- -- 14,573 -- 14,573
Interest revenue ........................ -- 2,124 -- 764 2,888
Fee revenue ............................. -- 86 (13) 226 299
-------- -------- -------- -------- --------
Total revenues .......................... -- 3,473 20,569 990 25,032
-------- -------- -------- -------- --------
Cost of sales of residential units ...... -- -- 12,810 -- 12,810
Operating expenses ...................... -- 889 2,014 -- 2,903
Depreciation and amortization ........... 1,308 4 1,530 52 2,894
Interest ................................ -- 98 2,133 (11) 2,220
General and administrative .............. -- 40 -- 3,878 3,918
-------- -------- -------- -------- --------
Total costs and expenses ................ 1,308 1,031 18,487 3,919 24,745
-------- -------- -------- -------- --------
Income from joint ventures .............. 2,690 15 -- -- 2,705
Minority interest ....................... -- -- (185) -- (185)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
accrued distributions and amortization
of costs on Convertible Trust
Preferred Securities ................. $ 1,382 $ 2,457 $ 1,897 $ (2,929) $ 2,807
======== ======== ======== ======== ========
- ----------
* Includes interest revenue, fee revenue, depreciation and amortization
expense, interest expense and general and administrative expenses that have
not been allocated to the operating segments.
10
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
COMMERCIAL PROPERTY OPERATIONS--WELLSFORD/WHITEHALL
---------------------------------------------------
The Company's commercial property operations currently consist solely of
its interest in Wellsford/Whitehall, a joint venture 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 32.58%
interest in Wellsford/Whitehall at June 30, 2002.
The Company's investment in Wellsford/Whitehall, which is accounted for on
the equity method, was approximately $57,779,000 and $57,790,000 at June
30, 2002 and December 31, 2001, respectively.
Pursuant to an amended agreement executed in December 2000, Whitehall has
agreed to pay the Company fees with respect to assets sold by
Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up
to 60 basis points (30 basis points are deferred pending certain return on
investment hurdles being reached) for each purchase of real estate made by
certain other affiliates of Whitehall, until such purchases aggregate
$400,000,000. The Company earned fees of approximately $165,000 and
$226,000 related to asset sales and an acquisition during the three and six
months ended June 30, 2001, respectively. The Company earned fees of
approximately $7,000 related to one asset sale during the three and six
months ended June 30, 2002.
11
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table presents condensed balance sheets and operating data
for the Wellsford/Whitehall segment:
(amounts in thousands)
CONDENSED BALANCE SHEET DATA JUNE 30, 2002 DECEMBER 31, 2001
---------------------------- ------------- -----------------
Real estate, net ............. $ 509,697 $ 511,648
Cash and cash equivalents .... 16,782 32,723
Other assets (A) ............. 27,103 27,740
Total assets ................. 553,582 572,111
Mortgages payable ............ 102,530 111,949
Credit facility .............. 258,060 258,060
Common equity ................ 184,907 183,815
Other comprehensive loss ..... (1,148) (526)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
CONDENSED OPERATING DATA 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
Rental revenue (B) ........... $ 18,578 $ 20,059 $ 37,048 $ 40,817
Interest and other income (C) 159 300 653 754
--------- --------- --------- ---------
Total revenues ............... 18,737 20,359 37,701 41,571
--------- --------- --------- ---------
Operating expenses ........... 6,477 7,298 13,621 15,127
Depreciation and amortization 4,590 4,490 8,464 8,102
Interest ..................... 5,397 6,626 10,819 12,898
General and administrative ... 1,664 1,937 3,446 3,589
--------- --------- --------- ---------
Total expenses ............... 18,128 20,351 36,350 39,716
(Loss) gain on sale of assets (259) 17,603 (259) 21,210
Impairment provision ......... -- (15,561) -- (15,561)
--------- --------- --------- ---------
Income before preferred equity
distributions in 2001 ..... $ 350 $ 2,050 $ 1,092 $ 7,504
========= ========= ========= =========
- ----------
(A) Includes the marked to market value of an interest rate protection contract
of $211 and $1,089 at June 30, 2002 and December 31, 2001, respectively.
(B) Includes income of $500 and a reduction in income of $110 from the
straight-lining of tenant rents for the three months ended June 30, 2002
and 2001, respectively, and income of $636 and a reduction of income of
$220 for the six months ended June 30, 2002 and 2001, respectively.
(C) Includes lease cancellation income of $21 for the three months ended June
30, 2002 and $321 and $312 for the six months ended June 30, 2002 and 2001,
respectively.
At June 30, 2002, Wellsford/Whitehall owned and operated 34 properties
(substantially all office properties) totaling approximately 3,874,000
square feet (including approximately 546,000 square feet under renovation),
primarily located in New Jersey, Massachusetts and Maryland.
During the six months ended June 30, 2002, Wellsford/Whitehall sold the
following property:
GROSS SALES PRICE
LEASABLE NUMBER OF PER
MONTH LOCATION SQUARE FEET PROPERTIES SALES PRICE SQUARE FOOT GAIN (LOSS)
----- -------- ----------- ---------- ----------- ----------- -----------
June Owings Mills, MD 31,732 1 $2,900,000 $ 91.39 $(259,000)
====== = ========== ========= =========
12
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL
---------------------------------------------
At June 30, 2002, the Company had the following investments: (i)
$28,612,000 of direct debt investments which bear interest at an average
yield of approximately 11.69% at June 30, 2002 and had an average remaining
term to maturity of approximately 4.7 years; (ii) approximately $31,439,000
in companies which were organized to invest in debt instruments, including
$28,009,000 in Second Holding Company, L.L.C., a company which was
organized to purchase investment and non-investment grade rated real estate
debt instruments and investment-grade rated other asset-backed securities
("Second Holding"); and (iii) approximately $6,992,000 in a real estate
information and database company and another real estate-related venture.
In addition, the Company owned and operated two commercial properties with
a net book value of approximately $5,540,000, totaling approximately
175,000 square feet located in Salem, New Hampshire and Philadelphia,
Pennsylvania at June 30, 2002.
SECOND HOLDING
The Company's investment in Second Holding, which is accounted for on the
equity method, was approximately $28,009,000 and $27,803,000 at June 30,
2002 and December 31, 2001, respectively.
Effective January 1, 2002, the owners of Second Holding modified the terms
of how income is allocated among the partners to remove the cumulative
preference on earnings related to one of the partners. This one partner is
entitled to 35% of net income, as defined by the agreement, while the other
partners, including the Company, share in the remaining 65%. The Company's
allocation of income is approximately 51% of the remaining 65%.
The following table presents condensed balance sheets and operating data
for Second Holding:
(amounts in thousands)
CONDENSED BALANCE SHEET DATA JUNE 30, 2002 DECEMBER 31, 2001
---------------------------- ------------- -----------------
Cash and cash equivalents .... $ 57,312 $ 76,487
Investments .................. 1,210,141 926,453
Other assets (A) ............. 30,779 19,943
Total assets ................. 1,298,232 1,022,883
Debt ......................... 1,234,439 962,465
Total equity ................. 55,284 54,581
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
CONDENSED OPERATING DATA 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
Interest ..................... $ 9,696 $ 7,323 $ 18,122 $ 14,074
----------- ----------- ----------- -----------
Total revenue ................ 9,696 7,323 18,122 14,074
----------- ----------- ----------- -----------
Interest expense ............. 8,370 6,826 15,686 12,886
Fees and other ............... 902 598 1,733 1,142
----------- ----------- ----------- -----------
Total expenses ............... 9,272 7,424 17,419 14,028
----------- ----------- ----------- -----------
Net income (loss) attributable
to members (B) ............ $ 424 $ (101) $ 703 $ 46
=========== =========== =========== ===========
- ----------
(A) Other assets include interest rate swap assets with a fair value of $19,188
and $13,531 at June 30, 2002 and December 31, 2001, respectively.
(B) A partner which was admitted in the latter part of 2000 was entitled to a
cumulative preference on earnings; accordingly, all fiscal 2001 income was
allocable to this partner.
13
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
At June 30, 2002, Second Holding had real estate debt and other
asset-backed securities investments of approximately $1,210,141,000 and
also had approximately $57,312,000 invested in commercial paper which was
included in cash and cash equivalents in the Condensed Balance Sheet Data.
The investment-grade assets are variable rate based and have a weighted
average annual interest rate of 2.62% and 2.58% at June 30, 2002 and
December 31, 2001, respectively.
Second Holding utilizes funds from the issuance of bonds and medium term
notes to make investments. At June 30, 2002, Second Holding had total debt
of approximately $1,234,439,000 which is comprised of (i) a privately
placed ten-year $150,000,000 junior subordinated bond issue maturing April
2010 with a fair value of $168,258,000 at June 30, 2002 and an effective
annual interest rate of LIBOR + 0.90% (2.85% at June 30, 2002) and (ii)
approximately $1,070,000,000 of medium term notes with a weighted average
annual interest rate of 2.03%, both of which are offset by unamortized
issuance costs and discounts of approximately $3,846,000. The weighted
average annual interest rate on Second Holding's debt was 2.13% and 2.15%
at June 30, 2002 and December 31, 2001, respectively.
The following table details the allocation of investments at June 30, 2002
and December 31, 2001 for Second Holding:
(amounts in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
SECURITY FOR INVESTMENTS (A) AMOUNT PERCENT AMOUNT PERCENT
---------------------------- ------ ------- ------ -------
Real estate ............................... $ 395,147 33% $ 334,601 36%
Corporate debt ............................ 320,718 26% 135,686 15%
Sovereign debt ............................ 73,000 6% 73,000 8%
Bank deposits ............................. 70,000 6% 70,000 8%
Aircraft leases ........................... 70,000 6% 70,000 8%
Consumer/trade receivables ................ 45,000 3% 33,500 3%
Fuel/oil receivables ...................... 35,000 3% 35,000 3%
Other asset-backed securities ............. 201,276 17% 174,666 19%
---------- --- ---------- ---
$1,210,141 100% $ 926,453 100%
========== === ========== ===
STANDARD & POOR'S RATINGS OF INVESTMENTS
----------------------------------------
AAA ....................................... $ 885,647 73% $ 759,241 82%
AA+ ....................................... 25,000 2% -- 0%
AA ........................................ 75,750 6% 42,750 5%
AA- ....................................... 102,731 8% 28,000 3%
A+ ........................................ 7,000 1% -- 0%
A ......................................... 79,749 7% 60,210 7%
A- ........................................ 34,264 3% 34,441 3%
Other ..................................... -- 0% 1,811 0%
---------- --- ---------- ---
$1,210,141 100% $ 926,453 100%
========== === ========== ===
- ----------
(A) Investments may be secured by the assets, interests in such assets or their
respective economic benefit.
14
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
VALUE PROPERTY TRUST ("VLP")
During the fourth quarter of 2000, the Company made the strategic decision
to sell the seven VLP properties. One of the properties was sold in
December 2000 and four other properties were sold during 2001, leaving two
properties unsold at December 31, 2001. The net book value of the two
unsold properties was approximately $5,540,000 at June 30, 2002, net of the
remaining impairment reserve of $2,175,000. During the three months ended
March 31, 2002, the Company could not definitively determine that the
assets would likely be sold within the one year time frame as required by
SFAS No. 144 and treated the properties as held for use. Accordingly, the
Company recorded depreciation expense of $50,000 and $103,000 related to
these two properties during the three and six months ended June 30, 2002,
respectively. No depreciation was recorded in 2001 for these two
properties.
DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT
------------------------------------------------------
At June 30, 2002, the Company had an 85.85% interest as the managing owner
in a five-phase, 1,800 unit class A multifamily development ("Palomino
Park") in Highlands Ranch, a south suburb of Denver, Colorado. The first,
second and fourth phases containing 1,184 units are completed and
operational. The 264 unit third phase is being converted into condominiums.
The land for the remaining approximate 352 unit fifth phase is being held
for possible future development.
Sales of condominium units at the Silver Mesa phase of Palomino Park
commenced in February 2001 and through June 30, 2002, 125 of the Silver
Mesa units were sold. The following table provides information regarding
the sale of units for the three and six months ended June 30, 2002 and
2001:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Number of units sold ........... 11 38 20 70
Gross proceeds ................. $ 2,245,000 $ 8,125,000 $ 4,324,000 $14,573,000
Pre-tax gains .................. $ 212,000 $ 966,000 $ 385,000 $ 1,763,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 1,872,000 $ 6,994,000 $ 3,613,000 $12,438,000
In January 2002, the Company reclassified net costs of approximately
$4,414,000 for 28 units at Silver Mesa to residential units available for
sale from land, building and improvements and accumulated depreciation to
replenish the sales inventory. The remaining 108 units at Silver Mesa
continue to be included in rental operations (55% occupied at June 30,
2002) and sections will be transferred into the sales inventory in the
future as the inventory has to be further replenished. The Company will
transfer a 30 unit section during July 2002.
4. COMMITMENTS
The Company recorded a charge of approximately $3,527,000 during the fourth
quarter of 2001 related to the retirement of the Company's President and
other personnel changes. The Company made payments of $2,767,000 by June
30, 2002 reducing the accrual balance from $3,466,000 at December 31, 2001
to approximately $699,000; such remaining amount is expected to be paid
during the first quarter of 2003. The Company utilized available cash for
these payments.
15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
5. SHAREHOLDERS' EQUITY
The Company did not declare or distribute any dividends for the three or
six months ended June 30, 2002 and 2001.
The following table details the components of comprehensive (loss) income:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income ....................... $ (893,386) $ 178,709 $(1,969,800) $ 1,842,191
Share of unrealized loss on interest rate
protection contract purchased by joint
venture investment, net of income tax
benefit .............................. (79,777) -- (121,614) --
----------- ----------- ----------- -----------
Comprehensive (loss) income ............. $ (973,163) $ 178,709 $(2,091,414) $ 1,842,191
=========== =========== =========== ===========
6. INCOME TAXES
The income tax expense and benefit for the three and six months ended June
30, 2002, respectively, results from expected refundable income taxes
arising from the losses for the periods, offset by minimum state and local
taxes based upon capital of the Company. The income tax provision for the
three and six months ended June 30, 2001 reflects (i) the reduction in the
valuation allowance attributable to the utilization of the net operating
loss carryforwards for Federal income tax purposes and (ii) the reversal,
during the three months ended March 31, 2001, of previously recorded state
income tax liabilities of $265,000 (before Federal tax cost), as a result
of the availability of net loss carryforwards in one state.
7. EARNINGS PER SHARE
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 and Convertible Trust
Preferred Securities.
16
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
The following table details the computation of earnings per share, basic
and diluted:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator for net (loss) income per common
share, basic and diluted .................. $ (893,386) $ 178,709 $(1,969,800) $ 1,842,191
=========== =========== =========== ===========
Denominator:
Denominator for net (loss) income per
common share, basic--weighted average
common shares .......................... 6,437,390 7,864,302 6,423,397 8,106,616
Effect of dilutive securities:
Employee stock options ............... -- 9,025 -- 9,088
Convertible Trust Preferred Securities -- -- -- --
----------- ----------- ----------- -----------
Denominator for net income per common
share, diluted--weighted average
common shares .......................... 6,437,390 7,873,327 6,423,397 8,115,704
=========== =========== =========== ===========
Net (loss) income per common share, basic .... $ (0.14) $ 0.02 $ (0.31) $ 0.23
=========== =========== =========== ===========
Net (loss) income per common share, diluted .. $ (0.14) $ 0.02 $ (0.31) $ 0.23
=========== =========== =========== ===========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
- -------
Capitalized terms used herein which are not defined elsewhere in this quarterly
report on Form 10-Q shall have the meanings ascribed to them in the Company's
annual report on Form 10-K for the year ended December 31, 2001, as filed with
the Securities and Exchange Commission on March 22, 2002.
BUSINESS
- --------
The Company is a real estate merchant banking firm headquartered in New York
City which acquires, develops, finances and operates real properties and
organizes and invests in private and public real estate companies. The Company
has established three strategic business units ("SBUs") within which it executes
its business plan: (i) commercial property operations which are held in the
Company's subsidiary, Wellsford Commercial Properties Trust, through its
ownership interest in Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall");
(ii) debt and equity activities through the Wellsford Capital SBU; and (iii)
property development and land operations through the Wellsford Development SBU.
COMMERCIAL PROPERTY OPERATIONS--WELLSFORD/WHITEHALL
The Company's commercial property operations currently consist solely of its
interest in Wellsford/Whitehall, a joint venture 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 32.58% interest in
Wellsford/Whitehall at June 30, 2002.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $57,779,000 and $57,790,000 at June 30, 2002
and December 31, 2001, respectively.
Pursuant to an amended operating agreement executed in December 2000, Whitehall
has agreed to pay the Company fees with respect to assets sold by
Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up to 60
basis points (30 basis points are deferred pending certain return on investment
hurdles being reached) for each purchase of real estate made by certain other
affiliates of Whitehall, until such purchases aggregate $400,000,000. The
Company earned fees of approximately $165,000 and $226,000 related to asset
sales and an acquisition during the three and six months ended June 30, 2001,
respectively. The Company earned fees of approximately $7,000 related to one
asset sale during the three and six months ended June 30, 2002.
At June 30, 2002, Wellsford/Whitehall owned and operated 34 properties
(substantially all office properties) totaling approximately 3,874,000 square
feet (including approximately 546,000 square feet under renovation), primarily
located in New Jersey, Massachusetts and Maryland.
During the six months ended June 30, 2002, Wellsford/Whitehall sold the
following property:
GROSS SALES PRICE
LEASABLE NUMBER OF PER
MONTH LOCATION SQUARE FEET PROPERTIES SALES PRICE SQUARE FOOT GAIN (LOSS)
----- -------- ----------- ---------- ----------- ----------- -----------
June Owings Mills, MD 31,732 1 $2,900,000 $ 91.39 $(259,000)
====== = ========== ========= =========
Wellsford/Whitehall entered into 17 leases pertaining to new, renewal and
expansion space during the six months ended June 30, 2002 for approximately
109,000 square feet at a weighted average base rate of $26.58 per square foot.
Ten leases for approximately 42,000 square feet at a weighted average base rate
of $27.45 per square feet were signed during the three months ended June 30,
2002.
18
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL
The Company, through the Wellsford Capital SBU, makes loans directly, or through
joint ventures, predominantly in real estate related senior, junior or otherwise
subordinated debt instruments and also in investment grade rated other
asset-backed securities. The debt instruments may be unsecured or secured by
liens on real estate 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 and other debt, especially in the low or below investment grade tranches,
at significant returns as a result of inefficiencies in pricing, while utilizing
both our and our joint venture partners' expertise to analyze the underlying
assets and thereby effectively minimizing risk.
At June 30, 2002, the Company had the following investments: (i) $28,612,000 of
direct debt investments which bear interest at an average yield of approximately
11.69% at June 30, 2002 and had an average remaining term to maturity of
approximately 4.7 years; (ii) approximately $31,439,000 in companies which were
organized to invest in debt instruments, including $28,009,000 in Second Holding
Company, L.L.C., a company which was organized to purchase investment and
non-investment grade rated real estate debt instruments and investment grade
rated other asset-backed securities ("Second Holding"); and (iii) approximately
$6,992,000 in a real estate information and database company and another real
estate-related venture. In addition, the Company owned and operated two
commercial properties with a net book value of approximately $5,540,000,
totaling approximately 175,000 square feet located in Salem, New Hampshire and
Philadelphia, Pennsylvania at June 30, 2002.
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 which could be achieved by
acquiring stabilized properties. Certain development activities may be conducted
in joint ventures with local developers who may bear the substantial portion of
the economic risks associated with the construction, development and initial
rent-up of 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.
At June 30, 2002, the Company had an 85.85% interest as the managing owner in a
five-phase, 1,800 unit class A multifamily development ("Palomino Park") in
Highlands Ranch, a south suburb of Denver, Colorado. Three phases containing
1,184 units are completed and operational. The 264 unit third phase is being
converted into condominiums. The Company has sold 125 units as of June 30, 2002
and 108 of the unsold units are available for rent and included in operations
until the sales inventory has to be replenished. During July 2002, 30 units were
transferred to condominium sales inventory leaving 78 units available for rent.
The land for the remaining approximate 352 unit fifth phase is being held for
possible future development.
19
OTHER SEGMENT INFORMATION
The following table provides occupancy rates by SBU as of each specified date:
COMMERCIAL PROPERTY DEBT AND EQUITY DEVELOPMENT AND
OPERATIONS INVESTMENTS* LAND INVESTMENTS
---------- ------------ ----------------
June 30, 2002....... 71% 62% 84%
March 31, 2002...... 70% 62% 76%
December 31, 2001... 69% 62% 77%
June 30, 2001....... 82% 60% 86%
March 31, 2001...... 90% 66% 88%
December 31, 2000... 87% 74% 93%
- ----------
* Occupancy rates for the remaining assets acquired from Value Property Trust
("VLP") held in this SBU.
See Note 3 of the Company's unaudited consolidated financial statements for
quarterly financial information regarding the Company's industry segments.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 TO THE THREE MONTHS ENDED
JUNE 30, 2001
Rental revenue increased $571,000. 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 ($1,048,000), offset by (i) reduced rental
revenue from Silver Mesa as 28 fewer units were classified as rental units than
in the corresponding prior period (as such units became part of sales inventory)
($206,000), (ii) decreased occupancy at the Blue Ridge and Red Canyon phases at
Palomino Park ($138,000) and (iii) the sale of VLP properties in the Wellsford
Capital SBU during 2001, including one in May 2001 and another in December 2001
($133,000).
Revenues from sales of residential units and the associated cost of sales from
such units were $2,245,000 and $2,033,000, respectively, from 11 sales during
the three months ended June 30, 2002 and were $8,125,000 and $7,159,000,
respectively, from 38 sales during the corresponding 2001 period. The magnitude
of the 2001 sales in excess of 2002 is due to the surfeit of contracts which
were closed after receipt of final approvals and releases in February 2001 to
begin the condominium sales process and the general and local economic
environment. The decline in gross profit per unit during the 2002 period results
generally from sales price concessions and sales of lower priced units.
Interest revenue decreased $302,000. This decrease is due to reduced interest
earned on cash of $163,000 from lower interest rates during the current period
versus the comparable 2001 period and reduced interest income earned on loans of
$139,000 as a portion of the loan balances outstanding during the second quarter
2001 were subsequently repaid in full or amortized during the latter part of
2001 and during the first six months of 2002.
Fee revenue decreased $78,000. Such decrease resulted from 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 $164,000
for the 2001 period, with only $7,000 earned in the corresponding 2002 period,
offset by an increase in the Company's management fees for its role in the
Second Holding investment of $79,000 from increased assets under management in
that venture.
Property operating and maintenance expense increased $356,000. This increase is
the result of (i) the commencement of operations at Green River on January 1,
2002 ($272,000), (ii) increased property level payroll, insurance and
retenanting costs plus the cessation of capitalization of certain costs at Gold
Peak commencing January 1, 2002 ($169,000) offset by (iii) the operating
expenses from the four VLP properties sold in 2001 ($85,000).
20
The increase in real estate taxes of $83,000 is due to the commencement of
operations at Green River ($88,000) and the cessation of cost capitalization on
the undeveloped Gold Peak land ($47,000), offset by decreases in taxes for the
Blue Ridge, Red Canyon and Silver Mesa operational phases ($42,000) and a
decrease in real estate taxes from the sale of VLP properties during 2001
($10,000).
Depreciation and amortization expense decreased $543,000. This decrease is
primarily attributable to reduced amortization of joint venture costs as only
one property was sold by Wellsford/Whitehall during the 2002 period whereas two
properties were sold and a large property was subject to an impairment provision
in the prior year's comparable period ($941,000) and reduced basis from the
transfer of 28 units at Silver Mesa from operations to residential units
available for sale ($36,000), offset by the commencement of depreciation on the
Green River rental phase ($378,000) and depreciation on the two unsold VLP
properties due to a change in accounting classification under the application of
SFAS No. 144, effective January 1, 2002, to operating ($50,000).
Property management expenses decreased $15,000. Such decrease is due to the sale
of the VLP properties during 2001 and the assumption of certain asset management
duties by the Company in April 2002, which were previously performed by a third
party for the VLP properties ($39,000), plus decreased rental revenues from
lower occupancy at Blue Ridge, Red Canyon and Silver Mesa ($8,000), partially
offset by the commencement of operations at Green River ($32,000).
Interest expense increased $360,000. This increase is primarily attributable to
the cessation of capitalized interest in 2002 at Palomino Park ($503,000 was
capitalized in the 2001 period) and interest on the Green River Construction
Loan ($305,000), which was incurred beginning January 1, 2002. Such amounts are
offset by reduced interest expense from a lower outstanding balance and a
reduced interest rate on the Silver Mesa Conversion Loan ($338,000), reduced
interest on the Palomino Park Bonds from a lower base interest rate in 2002
($53,000), the expiration of the Wellsford Finance Facility in January 2002
(which had up to $12,000,000 outstanding for a portion of the 2001 period)
($44,000) and lower interest on the Blue Ridge and Red Canyon fixed rate loans
from lower average outstanding balances due to principal amortization ($13,000).
General and administrative expenses decreased $328,000. 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.
Income from joint ventures decreased $429,000. This decrease is primarily due to
the Company's share of 2001 gains from property sales, net of impairment
provisions, at Wellsford/Whitehall of $772,000, with the Company's share of a
loss of $82,000 from one sale during the second quarter of 2002, offset by an
increase in the Company's share of Wellsford/Whitehall operations of $303,000
and an increase in the Company's share of earnings from Second Holding of
$121,000 as a result of change in the allocation of income for the members of
the venture effective January 1, 2002; the Company was not allocated any income
from Second Holding during the 2001 period.
Minority interest changed $120,000 from an expense of $94,000 in 2001 to a
benefit of $26,000 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 a benefit of $193,000 in 2001 to an expense of $16,000
in 2002, primarily from a reversal of a provision recorded in the first quarter
of 2001 as a result of available net operating loss carryforwards for Federal
income tax purposes.
The decrease in net (loss) income per share, basic and diluted of $0.16 per
share is attributable to a current period loss of $893,000 whereas in the 2001
period, the Company reported income of $179,000.
21
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001
Rental revenue increased $464,000. This increase is due to the commencement of
operations effective January 1, 2002 at the Green River phase at Palomino Park
($1,858,000), offset by (i) the sale of four of the VLP properties in the
Wellsford Capital SBU during 2001 including two during January 2001, one in May
2001 and the fourth in December 2001 ($609,000), (ii) decreased occupancy at the
Blue Ridge and Red Canyon phases at Palomino Park in the Wellsford Development
SBU ($438,000) and (iii) reduced rental revenue from Silver Mesa as 28 fewer
units were classified as rental units than in the corresponding prior period (as
such units became part of sales inventory) ($347,000).
Revenues from sales of residential units and the associated cost of sales from
such units were $4,324,000 and $3,939,000, respectively, from 20 sales during
the six months ended June 30, 2002 and were $14,573,000 and $12,810,000,
respectively, from 70 sales during the corresponding 2001 period. The magnitude
of the 2001 sales in excess of 2002 is due to the surfeit of contracts which
were closed after receipt of final approvals and releases in February 2001 to
begin the condominium sales process and the general and local economic
environment. The decline in gross profit per unit during the 2002 period results
primarily from sales price concessions.
Interest revenue decreased $777,000. This decrease is due to reduced interest
earned on cash of $460,000 from lower interest rates during the current period
versus the comparable 2001 period, and reduced interest income earned on loans
of $317,000 as a portion of the loan balances outstanding during the first six
months of 2001 were subsequently repaid in full or amortized during the latter
part of 2001 and during the first six months of 2002.
Fee revenue decreased $37,000. Such decrease resulted from 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 $226,000
for the 2001 period, with only $7,000 earned in the corresponding 2002 period,
offset by an increase in the Company's management fees for its role in the
Second Holding investment of $182,000 from increased assets under management in
that venture.
Property operating and maintenance expense increased $678,000. This increase is
the result of (i) the commencement of operations at Green River on January 1,
2002 ($541,000), (ii) increased property level payroll, insurance and
retenanting costs plus the cessation of capitalization of certain costs at Gold
Peak commencing January 1, 2002 ($439,000), offset by (iii) the operating
expenses from the four VLP properties sold in 2001 ($302,000).
The increase in real estate taxes of $82,000 is due to the commencement of
operations at Green River ($176,000) and the cessation of cost capitalization on
the undeveloped Gold Peak land ($94,000), offset by decreases in taxes for the
Blue Ridge, Red Canyon and Silver Mesa operational phases ($98,000) and a
decrease in real estate taxes from the sale of four VLP properties during 2001
($90,000).
Depreciation and amortization expense decreased $333,000. This decrease is
primarily attributable to reduced amortization of joint venture costs as only
one property was sold by Wellsford/Whitehall during the 2002 period whereas
seven properties were sold and a large property was subject to an impairment
provision in the prior year's comparable period ($1,058,000) and reduced basis
from the transfer of 28 units at Silver Mesa from operations to residential
units available for sale ($72,000), offset by the commencement of depreciation
on the Green River rental phase ($690,000) and depreciation on the two unsold
VLP properties due to a change in accounting classification under the
application of SFAS No. 144, effective January 1, 2002, to operating ($103,000).
Property management expenses decreased $48,000. Such decrease is due to the sale
of the four VLP properties during 2001 and the assumption of certain asset
managment duties by the Company in April 2002, which were previously performed
by a third party for the VLP properties ($82,000), plus decreased rental
revenues from
22
lower occupancy at Blue Ridge, Red Canyon and Silver Mesa ($22,000), partially
offset by the commencement of operations at Green River ($56,000).
Interest expense increased $729,000. This increase is primarily attributable to
the cessation of interest capitalization in 2002 at Palomino Park ($1,203,000
was capitalized in the 2001 period) and interest on the Green River Construction
Loan ($637,000), which was charged to operations beginning January 1, 2002. Such
amounts are offset by reduced interest expense from a lower outstanding balance
and a reduced interest rate on the Silver Mesa Conversion Loan ($884,000),
reduced interest on the Palomino Park Bonds from a lower base interest rate in
2002 ($110,000), 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) ($92,000) and lower interest on the Blue Ridge and Red Canyon fixed
rate loans from lower average outstanding balances due to principal amortization
($25,000).
General and administrative expenses decreased $586,000. 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.
Income from joint ventures decreased $1,955,000. This decrease is due to the
Company's share of 2001 gains from property sales, net of impairment provisions,
at Wellsford/Whitehall of $2,179,000, with the Company's share of a loss of
$82,000 from one sale during the 2002 period and a decrease in the Company's
share of Wellsford/Whitehall operations of $68,000, offset by an increase in the
Company's share of earnings from Second Holding of $374,000 as a result of
change in the allocation of income for the members of the venture effective
January 1, 2002; the Company was not allocated any income from Second Holding
during the 2001 period.
Minority interest changed $257,000 from an expense of $185,000 in 2001 to a
benefit of $71,000 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 $283,000 from an expense of $272,000 in 2001 to a benefit
of $11,000 in 2002, primarily from the Company having a loss resulting in
refundable income taxes in the 2002 fiscal period compared to a profit in the
corresponding period in 2001. 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.
The decrease in net (loss) income per share, basic and diluted of $0.54 per
share is attributable to a current period loss of $1,970,000 whereas in the 2001
period, the Company reported income of $1,842,000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company expects to meet its short-term liquidity requirements generally
through its available cash, sales of properties and distributions of cash from
Wellsford/Whitehall, sales of residential units in the Wellsford Development SBU
and cash flow provided by operations.
The Company expects to meet its long-term liquidity requirements such as
refinancing mortgages and maturing construction debt, financing acquisitions and
development, financing capital improvements and joint venture loan requirements
through the use of available cash, repayments of notes receivable at maturity,
sales of properties in the Wellsford/Whitehall SBU, the issuance of debt and the
offering of additional debt and equity securities. The Company considers its
ability to generate cash to be adequate and expects it to continue to be
adequate to meet operating requirements both in the short and long terms.
Wellsford/Whitehall expects to meet its short and long-term liquidity
requirements, such as financing additional renovations and tenant improvements
to its properties with available cash, operating cash flow from its properties,
financing available under the Wellsford/Whitehall GECC Facility, proceeds from
any asset sales,
23
financings of unencumbered assets, refinancing of existing loans and draws from
the $10,000,000 commitment of additional financing or preferred equity from the
principal owners of Wellsford/Whitehall, if required. At December 31, 2001, the
Company and Whitehall each had completed funding their entire respective capital
commitments. The additional financing/preferred equity commitment, of which the
Company's share is $4,000,000, is fully available to Wellsford/Whitehall until
December 31, 2003. At June 30, 2002, Wellsford/Whitehall's cash and cash
equivalents balance was approximately $16,782,000 and restricted cash available
for certain capital improvements was approximately $6,000,000.
Second Holding expects to meet its liquidity requirements for purchases of
investments with proceeds from the issuance of bonds and medium term notes.
The Company's retained earnings included approximately $2,034,000 of
undistributed earnings from Second Holding at June 30, 2002, as such
distributions are limited to 48% of earnings.
WORLD TRADE CENTER BONDS
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 Company's share of which is $12,683,000). 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 interest
in towers 1 and 2 and the office components of buildings 4 and 5 of the World
Trade Center in New York City. Subsequent to the events of September 11, 2001
which resulted in the destruction of these buildings, the Company has been
informed by GMAC Commercial Mortgage Corporation, the master and special
servicer, that the WTC Certificates are not in default. The property casualty
and business interruption insurance obtained in connection with the WTC
Certificates does not exclude acts of terrorism and such insurance is from a
consortium of 22 insurers. As of June 30, 2002, the rating agencies did not
change their ratings on the WTC Certificates and all payments of interest were
current. The Company believes that the insurance coverage is sufficient to cover
Second Holding's investment and that an impairment reserve is not required. Both
Second Holding and the Company will continue to evaluate the ultimate
collectibility of the principal and interest.
RESTRUCTURING CHARGE
The Company recorded a charge of approximately $3,527,000 during the fourth
quarter of 2001 related to the retirement of the Company's President and other
personnel changes. The Company made payments of $2,767,000 by June 30, 2002
reducing the accrual balance from $3,466,000 at December 31, 2001 to
approximately $699,000; such remaining amount is expected to be paid during the
first quarter of 2003. The Company utilized available cash for these payments.
24
CAPITAL COMMITMENTS
At June 30, 2002, the Company had capital commitments to certain joint venture
investments. The Company may make additional equity investments, subject to
board approval if deemed prudent to do so to protect or enhance its existing
investment. At June 30, 2002, capital commitments are as follows:
COMMITMENT AMOUNT
---------- ------
Wellsford/Whitehall............... $ 4,000,000 (A)
Clairborne Prudential equity...... 10,208,000 (B)
Reis.............................. 420,000 (C)
- ----------
(A) The Company could provide for up to 40% of a $10,000,000 loan to, or
preferred equity in, the venture with Whitehall committed to fund the
remaining $6,000,000.
(B) Capital calls are subject to the Company's approval of such investments.
This commitment expires December 31, 2002.
(C) In June 2002, the Company provided $210,000 to Reis, resulting in a
remaining commitment of $420,000. This funding was the Company's share of
an additional $667,000 capital subscription to Reis from the group of
investors who also contributed capital in April 2000. The other investors
have a remaining aggregate commitment of $913,000.
STOCK REPURCHASE PROGRAM
On April 20, 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 the 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. 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 June 30, 2002; none during the six months ended June
30, 2002.
WELLSFORD FINANCE FACILITY
During January 2002, the Wellsford Finance Facility expired.
PROPERTY SALES
During the three months ended June 30, 2002, 11 residential units were sold and
the Company received net proceeds of approximately $203,000, after the repayment
of principal on the Silver Mesa Conversion Loan of approximately $1,872,000 and
selling costs. During the six months ended June 30, 2002, 20 residential units
were sold and the Company received net proceeds of approximately $386,000, after
the repayment of principal on the Silver Mesa Conversion Loan of approximately
$3,613,000 and selling costs. Net proceeds received by the Company from the
above sales are available for working capital purposes.
CASH FLOWS
- ----------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Cash flow provided by operating activities of $201,000 primarily consists of (i)
a net decrease in residential units available for sale of $3,099,000, (ii)
depreciation and amortization of $2,580,000, (iii) a decrease in prepaid and
other assets of $1,487,000, (iv) amortization of deferred compensation of
$622,000 and (v) interest funded by a construction loan of $431,000 almost
entirely offset by (vi) a net loss of $1,970,000, (vii) a decrease in accrued
expenses and other liabilities of $3,695,000, (viii) an increase in restricted
cash and investments of $1,756,000 and (ix) undistributed joint venture income
of $570,000.
25
Cash flow provided by investing activities of $5,676,000 consists of repayments
of notes receivable of $6,173,000, offset by additional investments in real
estate assets of $287,000 and a capital contribution to Reis of $210,000.
Cash flow used in financing activities of $3,358,000 consists of principal
payments of mortgage notes payable of $4,019,000 (including $3,613,000 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.
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Cash flow provided by operating activities of $15,172,000 primarily consists of
$1,842,000 of net income plus (i) a decrease in residential units available for
sale of $10,780,000, (ii) depreciation and amortization of $2,902,000, (iii) a
decrease in restricted cash of $2,272,000, (iv) a decrease in prepaid and other
assets of $1,945,000, (v) amortization of deferred compensation of $584,000 and
(vi) undistributed minority interest of $185,000, offset by (vii) decreases in
accrued expenses and other liabilities of $4,759,000 and (viii) undistributed
joint venture income of $620,000.
Cash flow provided by investing activities of $15,979,000 consists of proceeds
from the sale of real estate assets of $15,680,000, repayments of notes
receivables of $2,925,000 and returns of capital from joint venture investments
of $2,482,000, partially offset by capital contributions to joint ventures of
$2,985,000, investments in real estate assets of $1,623,000 and investments in
notes receivable of $500,000.
Cash flow used in financing activities of $54,394,000 consists of (i) the
repurchase of common shares of $36,576,000, (ii) repayments on the Wellsford
Finance Facility of $17,000,000 and (iii) principal payments of mortgage notes
payable of $12,818,000 (including $12,438,000 for the Silver Mesa Conversion
Loan), partially offset by borrowings on the Wellsford Finance Facility of
$12,000,000.
ENVIRONMENTAL
- -------------
In December 2001, the Company submitted a report to the New Hampshire Department
of Environmental Services ("NHDES") that summarized the findings of an
environmental testing firm consultant engaged by the Company with respect to
groundwater and surface water monitoring and testing which took place during
2001 on one of its owned properties. The NHDES responded in January 2002 with
concerns about surface water contamination, volatile organic chemical ("VOC")
migration off of the property and air quality. The NHDES mandated further
testing before a remediation action plan is considered. Further preliminary
testing conducted by the environmental testing firm since the NHDES response
suggests that the surface water contamination is caused by the groundwater
contamination and that the VOC contamination may be migrating off of the
property. These results, along with a "Scope of Work" plan for additional
required tests, were submitted to the NHDES in February 2002. In June 2002, the
NHDES responded to the Company's most recent submission as well as renewed the
Groundwater Monitoring Permit with certain stipulations. Again, the concerns
expressed by the NHDES related to indoor air quality, contaminant migration
offsite and surface water contamination. Consequently, the NHDES has mandated
certain additional tests and has requested that an additional "Scope of Work"
plan with regard to the additional testing be submitted by August 1, 2002. The
Company and its environmental consultant have submitted such plan, and once
approved by the NHDES, the additional testing will commence. At this time, it is
too early to conclude the form of remediation that will be required, if any, or
the cost thereof, but in all likelihood, if remediation is required, it will be
a more aggressive and costly one than natural attenuation.
26
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following,
which are discussed in greater detail in the "Risk Factors" section of the
Company's registration statement on Form S-3 (file No. 333-73874) filed with the
Securities and Exchange Commission ("SEC") on December 14, 2001, as may be
amended, which is incorporated herein by reference: general and local economic
and business conditions, which will, among other things, affect demand for
commercial and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability and cost of financing;
ability to find suitable investments; competition; risks of real estate
acquisition, development, construction and renovation including construction
delays and cost overruns; ability to comply with zoning and other laws;
vacancies at commercial and multifamily properties; dependence on rental income
from real property; adverse consequences of debt financing including, without
limitation, the necessity of future financings to repay maturing debt
obligations; inability to meet financial and valuation covenants contained in
loan agreements; inability to repay financings; risks of investments in debt
instruments, including possible payment defaults and reductions in the value of
collateral; uncertainty pertaining to the WTC Certificates, including scheduled
interest payments, the ultimate repayment of principal, adequate insurance
coverages, the ability of insurers to pay claims and effects of changes in
ratings from Standard & Poor's and Fitch; risks of subordinate loans; risks of
leverage; risks associated with equity investments in and with third parties;
availability and cost of financing; interest rate risks; demand by prospective
buyers of condominium and commercial properties; inability to realize gains from
the real estate assets held for sale; lower than anticipated sales prices;
inability to close on sales of properties under contract; illiquidity of real
estate investments; environmental risks; and other risks listed from time to
time in the Company's reports filed with the SEC. Therefore, actual results
could differ materially from those projected in such statements.
27
ITEM 3. 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 manage this risk by offsetting its
investments and financing exposures to the extent possible as well as by
strategically timing and structuring its transactions. The following table
presents the effect of a 1.00% increase in the base rates on all variable rate
notes receivable and debt and its impact on annual net income:
(amounts in thousands, except per share amounts)
EFFECT OF 1%
BALANCE AT INCREASE IN BASE
JUNE 30, RATE ON INCOME
2002 (EXPENSE)
---- ---------
Consolidated assets and liabilities:
Notes receivable:
Fixed rate ............................... $ 28,612 $ --
========= ---------
Mortgage notes payable:
Variable rate ............................ $ 59,598 (596)
Fixed rate ............................... 58,545 --
--------- ---------
$ 118,143 (596)
========= ---------
Convertible Trust Preferred Securities:
Fixed rate ............................... $ 25,000 --
========= ---------
Proportionate share of assets and liabilities
from investments in joint ventures:
Second Holding:
Investments:
Variable rate ......................... $ 618,457 6,185
=========
Debt:
Variable rate ......................... $ 623,309 (6,233)
========= ---------
Net effect from Second Holding
(48)
---------
Wellsford/Whitehall:
Debt:
Variable rate ......................... $ -- --
Variable rate, with LIBOR cap (A) ..... 88,244 (882)
Fixed rate ............................ 29,236 --
--------- ---------
$ 117,480
=========
Effect from Wellsford/Whitehall .......... (882)
---------
Fordham Tower:
Investment:
Fixed rate ............................ $ 3,400 --
========= ---------
Net decrease in annual income, before income tax
benefit ..................................... (1,526)
Income tax benefit ............................. 610
---------
Net decrease in annual net income .............. $ (916)
=========
Per share, basic and diluted ................... $ (0.14)
=========
- ----------
(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 the in effect
30-day LIBOR contract of 1.84% at June 30, 2002.
28
PART II. OTHER INFORMATION:
ITEM 1: LEGAL PROCEEDINGS.
Neither the Company nor its equity investments are presently
defendants in any material litigation.
ITEM 2: CHANGES IN SECURITIES.
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 28, 2002, the Company held its annual meeting of
shareholders. A total of 5,418,888 common shares, representing
approximately 84.3% of the 6,425,469 common shares outstanding
and entitled to vote (including 169,903 class A-1 common
shares), as of the record date (April 24, 2002) were
represented in person or by proxy vote and constituted a
quorum. The Company's common shares and class A-1 common
shares are hereinafter referred to as the "Common Shares".
At the meeting, Jeffrey H. Lynford, Douglas Crocker II and
Mark S. Germain were elected as directors to serve terms of
three years expiring at the 2005 annual meeting of
shareholders or, until their respective successors are duly
elected and qualify. Each of the elected directors received
the affirmative vote of at least 5,303,951 Common Shares.
These elected directors join the following existing directors
until their terms expire: Martin Bernstein, Richard S. Frary
and Meyer "Sandy" Frucher, whose terms expire in 2003; Edward
Lowenthal and Rodney F. Du Bois, whose terms expire in 2004.
The shareholders also ratified the appointment of Ernst &
Young LLP as the Company's independent public accountants for
the fiscal year ending December 31, 2002 by the affirmative
vote of 5,271,764 Common Shares. Votes cast against the
proposal were 144,245 Common Shares and 2,879 Common Shares
abstained from voting.
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed with this Form 10-Q:
10.106 Second Amended and Restated Employment Agreement dated as
of June 25, 2002 between Wellsford Real Properties, Inc.
and David M. Strong.
(b) Reports on Form 8-K.
During the quarter ended June 30, 2002, Wellsford Real
Properties, Inc. filed the following reports on Form 8-K:
None.
29
SIGNATURES
Pursuant to the requirements 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
By: /s/ Mark P. Cantaluppi
----------------------------------------------
Mark P. Cantaluppi
Vice President, Chief Accounting Officer
Dated: August 7, 2002
30