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 September 30, 2002
------------------------------------------------
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 (IRS Employer Identification Number)
of 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
----------- -----------
The number of the registrant's shares of common stock outstanding was 6,450,586
as of November 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 September 30, 2002 (unaudited)
and December 31, 2001.........................................3
Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended September 30, 2002 and 2001.......4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 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....................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......30
Item 4. Controls and Procedures..........................................31
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings................................................32
Item 6. Exhibits and Reports on Form 8-K.................................32
Signatures ........................................................33
Certifications ........................................................34
2
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land ........................................................ $ 21,481,825 $ 23,113,670
Buildings and improvements .................................. 130,693,262 139,223,965
------------- -------------
152,175,087 162,337,635
Less:
Accumulated depreciation ................................. (12,813,642) (9,873,232)
Impairment reserve ....................................... (2,174,853) (2,174,853)
------------- -------------
137,186,592 150,289,550
Residential units available for sale ........................ 10,417,911 5,400,951
Construction in progress .................................... 5,410,831 5,399,631
------------- -------------
153,015,334 161,090,132
Notes receivable ............................................... 28,612,000 34,784,727
Investment in joint ventures ................................... 96,135,896 95,806,509
------------- -------------
Total real estate and investments .............................. 277,763,230 291,681,368
Cash and cash equivalents ...................................... 38,949,484 36,148,529
Restricted cash and investments ................................ 9,294,864 7,553,159
Prepaid and other assets ....................................... 9,191,125 10,455,101
------------- -------------
Total assets ................................................... $ 335,198,703 $ 345,838,157
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ...................................... $ 115,446,817 $ 121,730,604
Accrued expenses and other liabilities, including
the liability for deferred compensation of
$8,821,239 and $6,604,106 ................................. 14,512,545 17,532,211
------------- -------------
Total liabilities .............................................. 129,959,362 139,262,815
------------- -------------
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 .............................................. 3,396,756 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 - 6,279,303 and 6,235,338 shares
issued and outstanding .................................... 125,586 124,707
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 ...................... 162,777,526 162,083,959
Retained earnings ........................................... 21,221,310 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 ...... (247,604) (102,736)
Deferred compensation ....................................... (588,497) (1,520,996)
Treasury stock, 314,810 and 317,997 shares .................. (6,449,134) (6,499,134)
------------- -------------
Total shareholders' equity ..................................... 176,842,585 178,078,702
------------- -------------
Total liabilities and shareholders' equity ..................... $ 335,198,703 $ 345,838,157
============= =============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Rental revenue .................................. $ 4,162,799 $ 3,337,914 $ 11,899,563 $ 10,610,284
Revenue from sales of residential units ......... 2,977,451 3,904,750 7,301,305 18,477,550
Interest revenue ................................ 1,002,588 1,180,366 3,113,400 4,068,670
Fee revenue ..................................... 200,082 183,762 462,091 482,404
------------ ------------ ------------ ------------
Total revenues ............................... 8,342,920 8,606,792 22,776,359 33,638,908
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales of residential units .............. 2,699,273 3,514,233 6,637,991 16,324,229
Property operating and maintenance .............. 1,540,740 871,668 4,136,324 2,789,067
Real estate taxes ............................... 372,374 312,050 1,138,636 996,172
Depreciation and amortization ................... 1,333,702 1,189,348 3,895,365 4,083,800
Property management ............................. 128,900 130,480 381,587 431,549
Interest ........................................ 1,455,288 1,125,425 4,404,098 3,345,246
General and administrative ...................... 1,649,572 1,914,666 4,981,412 5,832,398
------------ ------------ ------------ ------------
Total costs and expenses ..................... 9,179,849 9,057,870 25,575,413 33,802,461
------------ ------------ ------------ ------------
Income (loss) from joint ventures .................. 505,283 (763,377) 1,255,068 1,941,497
------------ ------------ ------------ ------------
(Loss) income before minority interest, income taxes
and accrued distributions and amortization of
costs on Convertible Trust Preferred Securities . (331,646) (1,214,455) (1,543,986) 1,777,944
Minority interest benefit (expense) ................ 13,206 (44,570) 84,653 (229,871)
------------ ------------ ------------ ------------
(Loss) income before income taxes and accrued
distributions and amortization of costs on
Convertible Trust Preferred Securities .......... (318,440) (1,259,025) (1,459,333) 1,548,073
Income tax expense ................................. 60,000 122,000 49,000 394,000
------------ ------------ ------------ ------------
(Loss) income before accrued distributions and
amortization of costs on Convertible Trust
Preferred Securities ............................ (378,440) (1,381,025) (1,508,333) 1,154,073
Accrued distributions and amortization of costs
on Convertible Trust Preferred Securities,
net of income tax benefit of $105,000, $178,000,
$315,000 and $535,000, respectively ............. 419,954 346,954 1,259,861 1,039,861
------------ ------------ ------------ ------------
Net (loss) income .................................. $ (798,394) $ (1,727,979) $ (2,768,194) $ 114,212
============ ============ ============ ============
Net (loss) income per common share, basic .......... $ (0.12) $ (0.27) $ (0.43) $ 0.02
============ ============ ============ ============
Net (loss) income per common share, diluted ........ $ (0.12) $ (0.27) $ (0.43) $ 0.02
============ ============ ============ ============
Weighted average number of common shares
outstanding, basic .............................. 6,449,206 6,333,094 6,432,094 7,508,946
============ ============ ============ ============
Weighted average number of common shares
outstanding, diluted ............................ 6,449,206 6,333,094 6,432,094 7,524,593
============ ============ ============ ============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................... $ (2,768,194) $ 114,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................... 3,923,351 3,928,786
Amortization of deferred compensation ................. 932,499 854,923
Distributions in excess of joint venture income ....... -- 989,407
Undistributed joint venture income .................... (630,086) --
Undistributed minority interest (benefit) ............. (84,653) 229,871
Shares issued for director compensation ............... 68,000 60,000
Interest funded by construction loan .................. 431,120 --
Changes in assets and liabilities:
Restricted cash and investments .................... (1,741,705) 2,493,656
Residential units available for sale ............... 5,351,848 13,794,168
Prepaid and other assets ........................... 1,162,525 1,480,107
Accrued expenses and other liabilities ............. (3,016,595) (3,736,819)
------------ ------------
Net cash provided by operating activities ............. 3,628,110 20,208,311
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets ........................... (736,390) (1,964,204)
Investments in joint ventures and other entities:
Capital contributions ................................. (209,800) (3,014,862)
Returns of capital .................................... -- 18,113,458
Investments in notes receivable ............................. -- (500,000)
Repayments of notes receivable .............................. 6,172,727 2,940,537
Proceeds from sale of real estate assets .................... -- 15,680,180
------------ ------------
Net cash provided by investing activities ............. 5,226,537 31,255,109
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facility ............................. -- 12,000,000
Repayment of credit facility ................................ -- (17,000,000)
Repayment of mortgage notes payable ......................... (6,714,907) (16,343,131)
Proceeds from option exercises .............................. 676,446 --
Distributions to minority interest .......................... (15,231) (16,386)
Cost to repurchase warrants ................................. -- (80,000)
Repurchase of common shares ................................. -- (36,576,192)
------------ ------------
Net cash used in financing activities ................. (6,053,692) (58,015,709)
------------ ------------
Net decrease in cash and cash equivalents ...................... 2,800,955 (6,552,289)
Cash and cash equivalents, beginning of period ................. 36,148,529 36,368,706
------------ ------------
Cash and cash equivalents, end of period ....................... $ 38,949,484 $ 29,816,417
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest, including amounts
capitalized of $1,356,617 during 2001 ..................... $ 4,172,115 $ 4,722,032
============ ============
Cash paid during the period for income taxes, net of tax
refunds ................................................... $ (75,046) $ 1,582,574
============ ============
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 ....... $ 144,868 $ 264,947
============ ============
Net reclassification of costs of 58 Silver Mesa units from
land, building and improvements and accumulated
depreciation to residential units available for sale .. $ 10,368,808
============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
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 nine
months ended September 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
discontinued operations. Even though the Company is pursuing a sale of the
remaining two operating properties in the Wellsford Capital SBU (five of
the seven properties have been sold during 2000 and 2001), the Company
could not definitively determine that the assets would likely be sold
within the one year time frame as required by SFAS No. 144. The operations
of these two properties have not been classified as discontinued operations
but treated as held for use and accordingly the Company recorded
depreciation expense for the three and nine months ended September 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
----------- ----------- ----------- ------ ------------
SEPTEMBER 30, 2002
------------------
Investment properties:
Real estate held for investment,
net ............................ $ -- $ -- $136,773 $ -- $136,773
Real estate held for sale** ....... -- 5,825 -- -- 5,825
Residential units available for
sale ........................... -- -- 10,418 -- 10,418
-------- -------- -------- -------- --------
Real estate, net ..................... -- 5,825 147,191 -- 153,016
Notes receivable ..................... -- 28,612 -- -- 28,612
Investment in joint ventures ......... 57,819 38,317 -- -- 96,136
Cash and cash equivalents ............ -- 5,995 453 32,501 38,949
Restricted cash and investments ...... -- -- 474 8,821 9,295
Other assets ......................... -- 9,434 1,188 (1,431) 9,191
-------- -------- -------- -------- --------
Total assets ......................... $ 57,819 $ 88,183 $149,306 $ 39,891 $335,199
======== ======== ======== ======== ========
Mortgage notes payable ............... $ -- $ -- $115,447 $ -- $115,447
Accrued expenses and other liabilities -- 3,222 2,492 8,799 14,513
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest .................... 6 -- 3,391 -- 3,397
Equity ............................... 57,813 84,961 27,976 6,092 176,842
-------- -------- -------- -------- --------
Total liabilities and equity ......... $ 57,819 $ 88,183 $149,306 $ 39,891 $335,199
======== ======== ======== ======== ========
DECEMBER 31, 2001
-----------------
Investment properties:
Real estate held for investment, $ -- $ -- $150,129 $ -- $150,129
net
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
======== ======== ======== ======== ========
<FN>
- ----------
* 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 operating properties as
disclosed in footnote 2, is net of an impairment reserve of $2,175 at
September 30, 2002 and December 31, 2001.
</FN>
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 SEPTEMBER 30, 2002
------------------------
Rental revenue ........................ $ -- $ 185 $ 3,978 $ -- $ 4,163
Revenue from sales of residential
units .............................. -- -- 2,977 -- 2,977
Interest revenue ...................... -- 845 -- 158 1,003
Fee revenue ........................... -- 192 (14) 22 200
------- ------- ------- ------- -------
Total revenues ........................ -- 1,222 6,941 180 8,343
------- ------- ------- ------- -------
Cost of sales of residential units .... -- -- 2,699 -- 2,699
Operating expenses .................... -- 212 1,830 -- 2,042
Depreciation and amortization ......... 110 52 1,153 19 1,334
Interest .............................. -- -- 1,408 47 1,455
General and administrative ............ -- 9 -- 1,641 1,650
------- ------- ------- ------- -------
Total costs and expenses .............. 110 273 7,090 1,707 9,180
------- ------- ------- ------- -------
Income from joint ventures ............ 173 332 -- -- 505
Minority interest benefit ............. -- -- 14 -- 14
------- ------- ------- ------- -------
Income (loss) before income taxes and
accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $ 63 $ 1,281 $ (135) $(1,527) $ (318)
======= ======= ======= ======= =======
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
------------------------
Rental revenue ........................ $ -- $ 374 $ 2,964 $ -- $ 3,338
Revenue from sales of residential
units .............................. -- -- 3,905 -- 3,905
Interest revenue ...................... -- 1,019 -- 162 1,181
Fee revenue ........................... -- 99 (28) 112 183
------- ------- ------- ------- -------
Total revenues ........................ -- 1,492 6,841 274 8,607
------- ------- ------- ------- -------
Cost of sales of residential units .... -- -- 3,514 -- 3,514
Operating expenses .................... -- 210 1,104 -- 1,314
Depreciation and amortization ......... 396 1 766 27 1,190
Interest .............................. -- 156 956 13 1,125
General and administrative ............ -- 14 -- 1,901 1,915
------- ------- ------- ------- -------
Total costs and expenses .............. 396 381 6,340 1,941 9,058
------- ------- ------- ------- -------
(Loss) income from joint ventures ..... (854) 91 -- -- (763)
Minority interest (expense) ........... -- -- (45) -- (45)
------- ------- ------- ------- -------
(Loss) income before income taxes
and accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $(1,250) $ 1,202 $ 456 $(1,667) $(1,259)
======= ======= ======= ======= =======
<FN>
- ----------
* 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.
</FN>
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 NINE MONTHS
ENDED SEPTEMBER 30, 2002
------------------------
Rental revenue ........................ $ -- $ 839 $ 11,061 $ -- $ 11,900
Revenue from sales of residential
units .............................. -- -- 7,301 -- 7,301
Interest revenue ...................... -- 2,651 -- 462 3,113
Fee revenue ........................... -- 474 (41) 29 462
-------- -------- -------- -------- --------
Total revenues ........................ -- 3,964 18,321 491 22,776
-------- -------- -------- -------- --------
Cost of sales of residential units .... -- -- 6,638 -- 6,638
Operating expenses .................... -- 627 5,029 -- 5,656
Depreciation and amortization ......... 361 159 3,321 55 3,896
Interest .............................. -- 7 4,285 112 4,404
General and administrative ............ -- 28 -- 4,953 4,981
-------- -------- -------- -------- --------
Total costs and expenses .............. 361 821 19,273 5,120 25,575
-------- -------- -------- -------- --------
Income from joint ventures ............ 534 721 -- -- 1,255
Minority interest benefit ............. -- -- 85 -- 85
-------- -------- -------- -------- --------
Income (loss) before income taxes and
accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $ 173 $ 3,864 $ (867) $ (4,629) $ (1,459)
======== ======== ======== ======== ========
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001
------------------------
Rental revenue ........................ $ -- $ 1,637 $ 8,973 $ -- $ 10,610
Revenue from sales of residential
units .............................. -- -- 18,478 -- 18,478
Interest revenue ...................... -- 3,143 -- 926 4,069
Fee revenue ........................... -- 185 (41) 338 482
-------- -------- -------- -------- --------
Total revenues ........................ -- 4,965 27,410 1,264 33,639
-------- -------- -------- -------- --------
Cost of sales of residential units .... -- -- 16,324 -- 16,324
Operating expenses .................... -- 1,099 3,118 -- 4,217
Depreciation and amortization ......... 1,704 5 2,296 79 4,084
Interest .............................. -- 254 3,089 2 3,345
General and administrative ............ -- 54 -- 5,778 5,832
-------- -------- -------- -------- --------
Total costs and expenses .............. 1,704 1,412 24,827 5,859 33,802
-------- -------- -------- -------- --------
Income from joint ventures ............ 1,835 106 -- -- 1,941
Minority interest (expense) ........... -- -- (230) -- (230)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $ 131 $ 3,659 $ 2,353 $ (4,595) $ 1,548
======== ======== ======== ======== ========
<FN>
- ----------
* 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.
</FN>
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 32.59%
interest in Wellsford/Whitehall at September 30, 2002.
The Company's investment in Wellsford/Whitehall, which is accounted for on
the equity method, was approximately $57,819,000 and $57,790,000 at
September 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 $112,000 and
$338,000 related to asset sales and an acquisition during the three and
nine months ended September 30, 2001, respectively. The Company earned fees
of approximately $7,000 related to one asset sale during the nine months
ended September 30, 2002 and approximately $22,000 related to one
acquisition during the three and nine months ended September 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 SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------- ------------------ -----------------
Real estate, net ........... $ 511,088 $ 511,648
Cash and cash equivalents .. 14,238 32,723
Other assets (A) ........... 30,497 27,740
Total assets ............... 555,823 572,111
Mortgages payable .......... 104,498 111,949
Credit facility ............ 258,060 258,060
Common equity .............. 185,344 183,815
Other comprehensive loss ... (1,267) (526)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
CONDENSED OPERATING DATA 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
Rental revenue (B) ............ $ 17,564 $ 18,122 $ 54,612 $ 58,939
Interest and other income (C) . 1,646 330 2,299 1,084
-------- -------- -------- --------
Total revenues ................ 19,210 18,452 56,911 60,023
-------- -------- -------- --------
Operating expenses ............ 7,634 8,200 21,255 23,327
Depreciation and amortization . 4,278 4,356 12,742 12,458
Interest ...................... 5,329 7,522 16,148 20,420
General and administrative .... 1,437 1,665 4,883 5,254
-------- -------- -------- --------
Total expenses ................ 18,678 21,743 55,028 61,459
Gain (loss) on sale of assets . -- 1,497 (259) 22,707
Impairment provision .......... -- (332) -- (15,893)
-------- -------- -------- --------
Income (loss) before preferred
equity distributions in 2001 $ 532 $ (2,126) $ 1,624 $ 5,378
======== ======== ======== ========
<FN>
- ----------
(A) Includes the marked to market value of an interest rate protection contract
of $53 and $1,089 at September 30, 2002 and December 31, 2001,
respectively.
(B) Includes income of $355 and a reduction in income of $128 from the
straight-lining of tenant rents for the three months ended September 30,
2002 and 2001, respectively, and income of $991 and a reduction of income
of $348 for the nine months ended September 30, 2002 and 2001,
respectively, also from the straight-lining of tenant rates.
(C) Includes lease cancellation income of $1,507 for the three months ended
September 30, 2002 (none in the corresponding 2001 period) and $1,828 and
$312 for the nine months ended September 30, 2002 and 2001, respectively.
</FN>
At September 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 nine months ended September 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 September 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 September 30, 2002 and had an average
remaining term to maturity of approximately 4.4 years; (ii) approximately
$31,325,000 in companies which were organized to invest in debt
instruments, including $27,896,000 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
$5,825,000, totaling approximately 175,000 square feet located in Salem,
New Hampshire and Philadelphia, Pennsylvania at September 30, 2002.
SECOND HOLDING
The Company's investment in Second Holding, which is accounted for on the
equity method, was approximately $27,896,000 and $27,803,000 at September
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 51.1% of the remaining 65%.
13
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 Second Holding:
(amounts in thousands)
CONDENSED BALANCE SHEET DATA SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------- ------------------ -----------------
Cash and cash equivalents..... $ 66,929 $ 76,487
Investments................... 1,589,328 926,453
Other assets (A).............. 48,364 19,943
Total assets.................. 1,704,621 1,022,883
Debt.......................... 1,636,937 962,465
Total equity.................. 55,059 54,581
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
CONDENSED OPERATING DATA 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
Interest revenue ............. $11,490 $ 8,274 $29,612 $22,348
------- ------- ------- -------
Total revenue ................ 11,490 8,274 29,612 22,348
------- ------- ------- -------
Interest expense ............. 9,701 7,632 25,387 20,518
Fees and other ............... 1,028 670 2,761 1,812
------- ------- ------- -------
Total expenses ............... 10,729 8,302 28,148 22,330
------- ------- ------- -------
Net income (loss) attributable
to members (B) ............ $ 761 $ (28) $ 1,464 $ 18
======= ======= ======= =======
<FN>
- ----------
(A) Other assets include interest rate swap assets with a fair value of $31,917
and $13,531 at September 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.
</FN>
At September 30, 2002, Second Holding had real estate debt and other
asset-backed securities investments of approximately $1,589,328,000. The
investment-grade assets are variable rate based and have a weighted average
annual interest rate of 2.56% and 2.58% at September 30, 2002 and December
31, 2001, respectively.
Second Holding utilizes funds from the issuance of bonds and medium term
notes to make investments. At September 30, 2002, Second Holding had total
debt of approximately $1,636,937,000 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 $181,058,000 at September 30, 2002 and an
effective annual interest rate of LIBOR + 0.90% (2.76% at September 30,
2002) and (ii) approximately $1,459,880,000 of medium term notes with a
weighted average annual interest rate of 1.95%, both of which are offset by
unamortized issuance costs and discounts of approximately $4,001,000. The
weighted average annual interest rate on Second Holding's debt was 2.03%
and 2.15% at September 30, 2002 and December 31, 2001, respectively.
14
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table details the allocation of investments at September 30,
2002 and December 31, 2001 for Second Holding:
(amounts in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
SECURITY FOR INVESTMENTS (A) AMOUNT PERCENT AMOUNT PERCENT
---------------------------- ------ ------- ------ -------
Real estate ............................... $ 521,379 33% $ 334,601 36%
Corporate debt ............................ 413,369 26% 135,686 15%
Bank deposits ............................. 105,000 7% 70,000 8%
Consumer/trade receivables ................ 95,000 6% 33,500 3%
Aircraft leases ........................... 80,000 5% 70,000 8%
Sovereign debt ............................ 73,000 4% 73,000 8%
Fuel/oil receivables ...................... 35,000 2% 35,000 3%
Other asset-backed securities ............. 266,580 17% 174,666 19%
---------- --- ---------- ---
$1,589,328 100% $ 926,453 100%
========== === ========== ===
STANDARD & POOR'S RATINGS OF INVESTMENTS
----------------------------------------
AAA ....................................... $1,108,300 70% $ 759,241 82%
AA+ ....................................... 25,000 2% -- 0%
AA ........................................ 145,612 9% 42,750 5%
AA- ....................................... 151,653 9% 28,000 3%
A+ ........................................ 24,922 2% -- 0%
A ......................................... 99,625 6% 60,210 7%
A- ........................................ 34,216 2% 34,441 3%
Other ..................................... -- 0% 1,811 0%
---------- --- ---------- ---
$1,589,328 100% $ 926,453 100%
========== === ========== ===
<FN>
- ----------
(A) Investments may be secured by the assets, interests in such assets or their
respective economic benefits.
</FN>
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 $5,825,000 at September 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 $153,000 related to
these two properties during the three and nine months ended September 30,
2002, respectively. No depreciation was recorded in 2001 for these two
properties.
15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT
------------------------------------------------------
At September 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 139 units have been sold through September
30, 2002. The following table provides information regarding the sale of
units for the three and nine months ended September 30, 2002 and 2001:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Number of units sold ........... 14 19 34 89
Gross proceeds ................. $ 2,977,000 $ 3,905,000 $ 7,301,000 $18,478,000
Pre-tax gains .................. $ 278,000 $ 391,000 $ 663,000 $ 2,154,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 2,487,000 $ 3,330,000 $ 6,100,000 $15,768,000
Initially, 136 Silver Mesa units were held for rental on a temporary basis.
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 in January 2002 and additionally reclassified net costs of
$5,955,000 for 30 units in July 2002. The remaining 78 units at Silver Mesa
continue to be included in rental operations (85% occupied at September 30,
2002) and additional units will be transferred into the sales inventory in
the future as the inventory has to be further replenished. In October 2002,
the Company will reclassify net costs for an additional 38 units to further
replenish the sales inventory.
Rental revenue for the Silver Mesa units being rented amounted to $343,000
and $577,000 for the three months ended September 30, 2002 and 2001,
respectively and $1,137,000 and $1,717,000 for the nine months ended
September 30, 2002 and 2001, respectively. Net operating income (defined as
rental revenue less property operating and maintenance expenses, real
estate taxes and property management fees) for the Silver Mesa units being
rented was $170,000 and $371,000 for the three months ended September 30,
2002 and 2001, respectively and $636,000 and $1,111,000 for the nine months
ended September 30, 2002 and 2001, respectively. As the Company continues
to sell units during the remainder of 2002 and beyond, rental revenues and
corresponding operating expenses will diminish.
The Company has submitted applications with potential lenders to obtain
permanent financing on the Green River phase of Palomino Park. This
financing would replace the existing approximately $37,200,000 construction
loan, which has an annual interest rate of LIBOR + 1.75% (3.57% at
September 30, 2002) and has a current maturity of January 2003, with a
six-month extension at the Company's option. The Company anticipates that a
permanent loan will be obtained by the end of the first quarter of 2003,
however, no assurance can be given.
16
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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
September 30, 2002 reducing the accrual balance from $3,466,000 at December
31, 2001 to approximately $699,000; such remaining amount is payable during
the first quarter of 2003. The Company utilized available cash for payments
made during 2002.
5. SHAREHOLDERS' EQUITY
The Company did not declare or distribute any dividends for the three or
nine months ended September 30, 2002 and 2001.
The following table details the components of comprehensive (loss) income:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income ....................... $ (798,394) $(1,727,979) $(2,768,194) $ 114,212
Share of unrealized loss on interest rate
protection contract purchased by joint
venture investment, net of income tax
benefit .............................. (23,254) (264,947) (144,868) (264,947)
----------- ----------- ----------- -----------
Comprehensive (loss) income ............. $ (821,648) $(1,992,926) $(2,913,062) $ (150,735)
=========== =========== =========== ===========
6. INCOME TAXES
The income tax expense for the three and nine months ended September 30,
2002, respectively, principally 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 nine months ended September 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.
17
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator for net (loss) income per common
share, basic and diluted .................. $ (798,394) $(1,727,979) $(2,768,194) $ 114,212
=========== =========== =========== ===========
Denominator:
Denominator for net (loss) income per
common share, basic--weighted average
common shares .......................... 6,449,206 6,333,094 6,432,094 7,508,946
Effect of dilutive securities:
Employee stock options ............... -- -- -- 15,647
Convertible Trust Preferred Securities -- -- -- --
----------- ----------- ----------- -----------
Denominator for net income per common
share, diluted--weighted average
common shares .......................... 6,449,206 6,333,094 6,432,094 7,524,593
=========== =========== =========== ===========
Net (loss) income per common share, basic .... $ (0.12) $ (0.27) $ (0.43) $ 0.02
=========== =========== =========== ===========
Net (loss) income per common share, diluted .. $ (0.12) $ (0.27) $ (0.43) $ 0.02
=========== =========== =========== ===========
18
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 32.59% interest in
Wellsford/Whitehall at September 30, 2002.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $57,819,000 and $57,790,000 at September 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 $112,000 and $338,000 related to asset
sales and an acquisition during the three and nine months ended September 30,
2001, respectively. The Company earned fees of approximately $7,000 related to
one asset sale during the nine months ended September 30, 2002 and approximately
$22,000 related to one acquisition during the three and nine months ended
September 30, 2002.
At September 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 nine months ended September 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 23 leases pertaining to new, renewal and
expansion space during the nine months ended September 30, 2002 for
approximately 148,000 square feet at a weighted average base rate of $26.10 per
square foot. Six leases for approximately 39,000 square feet at a weighted
average base rate of $24.76 per square foot were signed during the three months
ended September 30, 2002. Leasing activity has
19
been negatively impacted during the periods because of decreased corporate
demand in the submarkets in which Wellsford/Whitehall owns its properties.
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 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
market place, while utilizing both our and our joint venture partners' expertise
to analyze the underlying assets and thereby effectively minimizing risk.
At September 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 September 30, 2002 and had an average remaining term
to maturity of approximately 4.4 years; (ii) approximately $31,325,000 in
companies which were organized to invest in debt instruments, including
$27,896,000 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
$5,825,000, totaling approximately 175,000 square feet located in Salem, New
Hampshire and Philadelphia, Pennsylvania at September 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 that could be achieved by
acquiring stabilized properties. Certain future 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 September 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 sold 139 units through September 30,
2002 and 78 of the unsold units are available for rent and included in
operations until the sales inventory has to be replenished. The land for the
remaining approximate 352 unit fifth phase is being held for possible future
development.
20
OTHER SEGMENT INFORMATION
The following table provides occupancy rates and gross leasable square
footage/gross rentable units by SBU as of each specified date:
COMMERCIAL PROPERTY DEVELOPMENT AND
OPERATIONS (A) DEBT AND EQUITY INVESTMENTS (B) LAND INVESTMENTS (C)
-------------- ------------------------------- --------------------
GROSS GROSS GROSS
LEASABLE LEASABLE RENTABLE
OCCUPANCY % SQUARE FEET OCCUPANCY % SQUARE FEET OCCUPANCY % UNITS
----------- ----------- ----------- ----------- ----------- -----
September 30, 2002 ... 70% 3,874,000 60% 175,000 94% 1,262
June 30, 2002 ........ 71% 3,874,000 62% 175,000 84% 1,292
March 31, 2002 ....... 70% 3,905,000 62% 175,000 76% 1,292
December 31, 2001 .... 69% 3,307,000 62% 175,000 77% 896
September 30, 2001 ... 81% 3,417,000 60% 218,000 86% 896
June 30, 2001 ........ 82% 3,480,000 60% 218,000 86% 896
March 31, 2001 ....... 90% 3,452,000 66% 321,000 88% 896
December 31, 2000 .... 87% 3,431,000 74% 482,000 93% 896
<FN>
- ----------
(A) Occupancy % and Gross Leasable Square Feet exclude square feet for
properties under renovation for December 31, 2001 and prior periods. All
2002 information includes square feet for properties owned including
properties under renovation.
(B) Occupancy rates for the remaining assets acquired from Value Property Trust
("VLP") held in this SBU.
(C) Increases in the physical occupancy rate from December 31, 2001 to
September 30, 2002 were achieved, in part, by an increase in concessions
during the nine months ended September 30, 2002. As of September 30, 2002,
the average concession was approximately 2.5 months of rents on a 12-month
lease. The number of Gross Rentable Units decreased by 30 units from June
30, 2002 to September 30, 2002 and will continue to decline in the fourth
quarter 2002 as Silver Mesa units are transferred into the sales inventory.
</FN>
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 SEPTEMBER 30, 2002 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
Rental revenue increased $825,000. 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 ($1,276,000), offset by (i) reduced rental
revenue from the Silver Mesa phase at Palomino Park from unit sales ($234,000),
(ii) the sale of VLP properties in the Wellsford Capital SBU during 2001,
including one in December 2001 ($189,000) and (iii) decreased economic occupancy
at the Blue Ridge and Red Canyon phases at Palomino Park ($28,000).
Revenues from the sale of Silver Mesa residential units and the associated cost
of sales from such units were $2,977,000 and $2,699,000, respectively, from 14
sales during the three months ended September 30, 2002 and were $3,905,000 and
$3,514,000, respectively, from 19 sales during the corresponding 2001 period.
The reduction of 2002 sales from 2001 sales is primarily due to the decline in
general and local economic conditions. The decline in gross profit per unit
during the 2002 period results generally from sales price concessions.
Interest revenue decreased $178,000. This decrease is due to reduced interest
income earned on loans of $186,000 as a portion of the total loan balances
outstanding during the third quarter 2001 was subsequently repaid in full or
amortized during the latter part of 2001 and during the first nine months of
2002, offset by increased interest earned on cash of $8,000 from the net effect
of a higher average cash balance during the current period versus the comparable
2001 period offset by lower interest rates.
Fee revenue increased $16,000. Such increase resulted from an increase in the
Company's management fees for its role in the Second Holding investment of
$118,000 from increased assets under management in that venture,
21
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 $112,000 for the 2001 period, with $22,000 earned in the
corresponding 2002 period, as well as $12,000 of loan modification fees earned
in 2001 with no corresponding amount in 2002.
Property operating and maintenance expense increased $669,000. This increase is
the result of (i) the commencement of operations at Green River on January 1,
2002 ($341,000), (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 ($280,000) and (iii) a net increase in operating expenses from the VLP
properties for current year non-capitalizable maintenance expenses in excess of
reduced expenses as a result of assets sold in 2001 ($48,000).
The increase in real estate taxes of $60,000 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 and Red Canyon operational phases ($41,000), the Silver Mesa units
sold ($22,000) and a decrease in real estate taxes from the sale of VLP
properties during 2001 ($12,000).
Depreciation and amortization expense increased $144,000. This increase is
primarily attributable to the commencement of depreciation on the Green River
rental phase ($442,000) 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), offset by reduced
amortization of joint venture costs as no properties were sold by
Wellsford/Whitehall during the 2002 period whereas two properties were sold in
the prior year's comparable period ($286,000) and reduced basis from the
transfer of 58 units at Silver Mesa during 2002 to replenish sales inventory
($85,000).
Property management expenses decreased $2,000. 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 ($32,000), plus decreased rental revenues from
lower economic occupancy at Blue Ridge, Red Canyon and Silver Mesa ($8,000),
entirely offset by the commencement of operations at Green River ($38,000).
Interest expense increased $330,000. This increase is primarily attributable to
the cessation of capitalized interest and debt costs in 2002 at Palomino Park
($325,000 was capitalized in the 2001 period for Green River and Gold Peak) and
interest on the Green River Construction Loan ($339,000). Such amounts are
offset by expense in the prior year of $156,000 for the Wellsford Finance
Facility (which had up to $7,000,000 of outstanding balances for portions of the
2001 period and expired in January 2002), reduced expense from a lower
outstanding balance and a reduced interest rate on the Silver Mesa Conversion
Loan ($141,000), reduced interest on the Palomino Park Bonds from a lower base
interest rate in 2002 ($24,000) 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 $265,000. 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 increased $1,269,000. This increase is primarily due
to an increase in the Company's share of Wellsford/Whitehall operations of
$1,478,000 (as the 2002 third quarter income from Wellsford/Whitehall was
$173,000 and the comparable period loss was $1,305,000), and an increase in the
Company's share of earnings from Second Holding of $241,000 as a result of a
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. Such increases were offset by the Company's share of
2001 gains from property sales, net of impairment provisions, at
Wellsford/Whitehall of $450,000, with no sales during the third quarter of 2002.
22
Minority interest changed $58,000 from an expense of $45,000 in 2001 to a
benefit of $13,000 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 tax expense amounted to $60,000 in 2002, primarily as a result of state
and local taxes on capital with no federal income tax benefit recognized from
the pre-tax loss. The tax expense for 2001 is primarily attributable to the
federal tax benefit of the Convertible Trust Preferred Securities' distribution.
The $73,000 decrease in the net benefit associated with the Convertible Trust
Preferred Securities' distribution in 2002 is attributable to the federal tax
benefit being recorded at 20% for 2002 versus 34% for 2001.
The decrease in net (loss) income per share, basic and diluted of $0.15 per
share is attributable to a current period loss of ($798,000) whereas in the 2001
period, the Company reported a loss of ($1,728,000).
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Rental revenue increased $1,289,000. 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 ($3,134,000), 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 ($798,000),
(ii) reduced rental revenue from the Silver Mesa phase at Palomino Park from
unit sales ($580,000) and (iii) decreased occupancy at the Blue Ridge and Red
Canyon phases at Palomino Park ($467,000).
Revenues from the sale of Silver Mesa residential units and the associated cost
of sales from such units were $7,301,000 and $6,638,000, respectively, from 34
sales during the nine months ended September 30, 2002 and were $18,478,000 and
$16,324,000, respectively, from 89 sales during the corresponding 2001 period.
The reduction of 2002 sales from 2001 sales is primarily due to the backlog of
contracts which were closed after receipt of final approvals and releases in
February 2001 to begin the condominium sales process and general and local
economic conditions. The decline in gross profit per unit during the 2002 period
results primarily from sales price concessions.
Interest revenue decreased $955,000. This decrease is due to reduced interest
income earned on loans of $503,000 as a portion of the total loan balances
outstanding during the first nine months of 2001 was subsequently repaid in full
or amortized during the latter part of 2001 and during the first nine months of
2002, as well as reduced interest earned on cash of $452,000 from lower interest
rates during the current period versus the comparable 2001 period.
Fee revenue decreased $20,000. 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 $338,000
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, offset by an increase in the Company's management fees for its
role in the Second Holding investment of $301,000 from increased assets under
management in that venture.
Property operating and maintenance expense increased $1,347,000. This increase
is the result of (i) the commencement of operations at Green River on January 1,
2002 ($881,000), (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 ($720,000), offset by (iii) operating expenses from the four VLP
properties sold in 2001, net of current year non-capitalizable maintenance
expenses ($254,000).
23
The increase in real estate taxes of $142,000 is due to the commencement of
operations at Green River ($265,000) and the cessation of cost capitalization on
the undeveloped Gold Peak land ($141,000), offset by decreases in taxes for the
Blue Ridge, Red Canyon and Silver Mesa operational phases ($123,000), a decrease
in real estate taxes from the sale of four VLP properties during 2001 ($102,000)
and Silver Mesa units sold ($39,000).
Depreciation and amortization expense decreased $188,000. This decrease is
primarily attributable to reduced amortization of joint venture cost 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 ($1,344,000) and reduced basis from the
transfer of 58 units at Silver Mesa during 2002 to replenish sales inventory (as
28 units became part of sales inventory in January 2002 and an additional 30
units in July 2002) ($157,000), offset by the commencement of depreciation on
the Green River rental phase ($1,132,000) 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 ($153,000).
Property management expenses decreased $50,000. Such decrease is due to the sale
of the four VLP properties during 2001 and the assumption of certain asset
management duties by the Company in April 2002, which were previously performed
by a third party for the VLP properties ($114,000), plus decreased rental
revenues from lower economic occupancy at Blue Ridge, Red Canyon and Silver Mesa
($30,000), partially offset by the commencement of operations at Green River
($94,000).
Interest expense increased $1,059,000. This increase is primarily attributable
to the cessation of interest and debt cost capitalization in 2002 at Palomino
Park ($1,528,000 was capitalized in the 2001 period for Green River and Gold
Peak) and interest on the Green River Construction Loan ($976,000). Such amounts
are offset by reduced expense from a lower outstanding balance and a reduced
interest rate on the Silver Mesa Conversion Loan ($1,025,000), reduced interest
on the Palomino Park Bonds from a lower base interest rate in 2002 ($134,000),
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)
($247,000) and lower interest on the Blue Ridge and Red Canyon fixed rate loans
from lower average outstanding balances due to principal amortization $39,000).
General and administrative expenses decreased $851,000. 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 $686,000. This decrease is due to the
Company's share of 2001 gains from property sales, net of impairment provisions,
at Wellsford/Whitehall of $2,629,000, with the Company's share of a loss of
$82,000 from one sale during the 2002 period, offset by an increase in the
Company's share of Wellsford/Whitehall operations of $1,410,000, and an increase
in the Company's share of earnings from Second Holding of $615,000 as a result
of a 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 $315,000 from an expense of $230,000 in 2001 to a
benefit of $85,000 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 tax expense decreased $345,000 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 $220,000 decrease in the net benefit associated with the Convertible Trust
Preferred Securities' distributions in 2002 is attributable to the federal
income tax benefit being recorded at 20% for 2002 versus 34% for 2001.
24
The change to a net (loss) per share, basic and diluted aggregating $0.45 per
share is attributable to a current period loss of ($2,768,000) whereas in the
2001 period, the Company reported income of $114,000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company expects to meet its short-term liquidity requirements and operating
expenses generally through its available cash, sales of residential units in the
Wellsford Development SBU and cash provided by operations.
The Company has submitted applications with potential lenders to obtain
permanent financing on the Green River phase of Palomino Park. This financing
would replace the existing approximately $37,200,000 construction loan, which
has an annual interest rate of LIBOR + 1.75% (3.57% at September 30, 2002) and
has a current maturity of January 2003, with a six-month extension at the
Company's option. The Company anticipates that a permanent loan will be obtained
by the end of the first quarter of 2003, however, no assurance can be given.
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 residential units in the Wellsford Development SBU (proceeds from such
sales will increase from the current amount of approximately 10% of net sales
proceeds to 100% when the Silver Mesa Conversion Loan, with a balance of
$7,252,000 at September 30, 2002, is fully repaid), 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, 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 September 30, 2002,
Wellsford/Whitehall's cash and cash equivalents balance was approximately
$14,238,000 and restricted cash available for certain capital improvements was
approximately $6,500,000.
Second Holding expects to meet its liquidity requirements for purchases of
investments with proceeds from the issuance of bonds, medium-term notes and
commercial paper. Liquidity for the repayments of bonds, medium-term notes and
commercial paper is expected to be provided from principal repayments from
amortization of investments and upon repayment of investments at maturity.
Second Holding also has available a $400,000,000 line of credit.
The Company's retained earnings included approximately $1,921,000 of
undistributed earnings from Second Holding at September 30, 2002, as
distributions are limited to 48.25% of earnings.
SILVER MESA CONDOMINIUM SALES AND RENTAL OPERATIONS
During the three months ended September 30, 2002, 14 Silver Mesa units were sold
and the Company received net proceeds of approximately $224,000, after the
repayment of principal on the Silver Mesa Conversion Loan of approximately
$2,487,000 and selling costs. During the nine months ended September 30, 2002,
34 units were sold and the Company received net proceeds of approximately
$610,000, after the repayment of principal on the Silver Mesa Conversion Loan of
approximately $6,100,000 and selling costs. Net proceeds received by the Company
from the above sales are available for working capital purposes.
25
Rental revenue for the Silver Mesa units being rented amounted to $343,000 and
$577,000 for the three months ended September 30, 2002 and 2001, respectively
and $1,137,000 and $1,717,000 for the nine months ended September 30, 2002 and
2001, respectively. Net operating income (defined as rental revenue less
property operating and maintenance expenses, real estate taxes and property
management fees) for the Silver Mesa units being rented was $170,000 and
$371,000 for the three months ended September 30, 2002 and 2001, respectively
and $636,000 and $1,111,000 for the nine months ended September 30, 2002 and
2001, respectively. As the Company continues to sell units during the remainder
of 2002 and beyond, rental revenues and corresponding operating expenses will
diminish.
WORLD TRADE CENTER DEBT INVESTMENT
In August 2001, Second Holding purchased an aggregate of $24,825,000 in two
classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC
Certificates") (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 financing of
the acquisition of the leasehold interests does not exclude acts of terrorism;
such insurance is from a consortium of 22 insurers. As of September 30, 2002,
the rating agencies have not changed their ratings on the WTC Certificates and
all payments of principal and 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 September 30, 2002
reducing the accrual balance from $3,466,000 at December 31, 2001 to
approximately $699,000; such remaining amount is payable during the first
quarter of 2003. The Company utilized available cash for payments made during
2002.
26
CAPITAL COMMITMENTS
At September 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 September 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. The Company does not expect to
fund any of this commitment prior to its expiration.
(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
may 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 including, but not limited to, a minimum
shareholders' equity covenant including the $25,000,000 of Convertible Trust
Preferred Securities, as required by a credit enhancement 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
September 30, 2002; none during the nine months ended September 30, 2002.
WELLSFORD FINANCE FACILITY
During January 2002, the Wellsford Finance Facility expired. In the future, the
Company may seek to obtain a new facility based upon future liquidity
requirements.
CASH FLOWS
- ----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Cash flow provided by operating activities of $3,628,000 consists of (i) a net
decrease in residential units available for sale of $5,352,000, (ii)
depreciation and amortization of $3,923,000, (iii) a decrease in prepaid and
other assets of $1,163,000, (iv) amortization of deferred compensation of
$932,000, (v) interest funded by a construction loan of $431,000 and (vi) shares
issued for director compensation of $68,000, offset by (vii) a decrease in
accrued expenses and other liabilities of $3,016,000, (viii) a net loss of
$2,768,000, (ix) an increase in restricted cash and investments of $1,742,000,
(x) undistributed joint venture income of $630,000 and (xi) minority interest
benefit of $85,000.
Cash flow provided by investing activities of $5,227,000 consists of repayments
of notes receivable of $6,173,000, offset by additional investments in real
estate assets of $736,000 and a capital contribution to Reis of $210,000.
27
Cash flow used in financing activities of $6,054,000 consists of principal
payments of mortgage notes payable of $6,715,000 (including $6,100,000 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 NINE MONTHS ENDED SEPTEMBER 30, 2001
Cash flow provided by operating activities of $20,208,000 primarily consists of
$114,000 of net income plus (i) a decrease in residential units available for
sale of $13,794,000, (ii) depreciation and amortization of $3,929,000, (iii) a
decrease in restricted cash and investments of $2,494,000, (iv) a decrease in
prepaid and other assets of $1,480,000, (v) undistributed joint venture income
of $989,000, (vi) amortization of deferred compensation of $855,000, (vii)
undistributed minority interest of $230,000 and (viii) shares issued for
director compensation of $60,000, offset by decreases in accrued expenses and
other liabilities of $3,737,000.
Cash flow provided by investing activities of $31,255,000 consists of returns of
capital from joint venture investments of $18,113,000, proceeds from the sale of
real estate assets of $15,680,000 and repayments of notes receivables of
$2,941,000, partially offset by capital contributions to joint ventures of
$3,015,000, investments in real estate assets of $1,964,000 and investments in
notes receivable of $500,000.
Cash flow used in financing activities of $58,016,000 consists of (i) the
repurchase of common shares of $36,576,000, (ii) repayments of the Wellsford
Finance Facility of $17,000,000, (iii) principal payments of mortgage notes
payable of $16,343,000 (including $15,768,000 for the Silver Mesa Conversion
Loan), (iv) costs incurred to repurchase warrants of $80,000 and (v)
distribution of minority interest of $17,000, 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 consultant engaged by the Company with respect to groundwater and
surface water monitoring and testing which took place during 2001 on one of its
owned properties. In January 2002 the NHDES indicated concerns about surface
water contamination, volatile organic chemical ("VOC") migration off of the
property and air quality, and mandated further testing. Further test results and
a "Scope of Work" plan for the required tests were submitted to the NHDES in
February 2002. In June 2002, the NHDES renewed the Groundwater Monitoring Permit
(the"GMP") with certain stipulations and again expressed concerns related to
indoor air quality, contaminant migration offsite and surface water
contamination. It mandated further testing and the submission of a "Scope of
Work" plan related thereto by August 1, 2002. The Company complied with the
NHDES request and received approval in October 2002 to commence the additional
testing which includes testing on an adjacent property for VOC migration. 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.
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
28
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; uncertainties
pertaining to debt investments, including, but not limited to the WTC
Certificates, including scheduled interest payments, the ultimate repayment of
principal, adequate insurance coverages, the ability of insurers to pay claims
and effects of changes in ratings from rating agencies; risks of subordinate
loans; risks of leverage; risks associated with equity investments in and with
third parties; availability and cost of financing; interest rate risks; demand
by prospective buyers of condominium and commercial properties; inability to
realize gains from the real estate assets held for sale; lower than anticipated
sales prices; inability to close on sales of properties under contract;
illiquidity of real estate investments; environmental risks; and other risks
listed from time to time in the Company's reports filed with the SEC. Therefore,
actual results could differ materially from those projected in such statements.
29
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
SEPTEMBER 30, RATE ON INCOME
2002 (EXPENSE)
---- ---------
Consolidated assets and liabilities:
Notes receivable:
Fixed rate ............................... $ 28,612 $ --
========= ---------
Mortgage notes payable:
Variable rate ............................ $ 57,111 (571)
Fixed rate ............................... 58,336 --
--------- ---------
$ 115,447 (571)
========= ---------
Convertible Trust Preferred Securities:
Fixed rate ............................... $ 25,000 --
========= ---------
Proportionate share of assets and liabilities
from investments in joint ventures:
Second Holding:
Investments:
Variable rate ......................... $ 812,769 8,128
=========
Debt:
Variable rate ......................... $ 822,502 (8,225)
========= ---------
Net effect from Second Holding ........... (97)
---------
Wellsford/Whitehall:
Debt:
Variable rate ......................... $ -- --
Variable rate, with LIBOR cap (A) ..... 88,999 (890)
Fixed rate ............................ 29,158 --
--------- ---------
$ 118,157
=========
Effect from Wellsford/Whitehall .......... (890)
---------
Fordham Tower:
Investment:
Fixed rate ............................ $ 3,400 --
========= ---------
Net decrease in annual income, before income tax
benefit ..................................... (1,558)
Income tax benefit ............................. 623
---------
Net decrease in annual net income .............. $ (935)
=========
Per share, basic and diluted ................... $ (0.15)
=========
<FN>
- ----------
(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 1.82% at September 30, 2002.
</FN>
30
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's chief executive officer and chief financial
officer concluded that the disclosure controls and procedures are 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.
31
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.
None.
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed with this Form 10-Q:
99.1 Chief Executive Officer and Chief Financial Officer
Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, Wellsford Real
Properties, Inc. filed the following reports on Form 8-K:
Date of Report Items Date
(Date of Earliest Event) Reported Filed
- ------------------------ -------- -----
August 12, 2002 Chief Executive Officer and Chief August 12, 2002
Financial Officer certifications
filed under Item 9.
32
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: November 7, 2002
33
CERTIFICATION
I, Jeffrey H. Lynford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ Jeffrey H. Lynford
----------------------
Jeffrey H. Lynford
Chief Executive Officer
34
CERTIFICATION
I, James J. Burns, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ James J. Burns
-------------------
James J. Burns
Chief Financial Officer
35