ITEM 1. BUSINESS
On June 9, 2000, the shareholders of Wellsford Real Properties, Inc., a Maryland corporation, approved a reverse stock split whereby every two outstanding shares of common stock and class A-1 common stock were converted into one share of outstanding common stock and class A-1 common stock. The par value of both classes of stock increased from $0.01 per share to $0.02 per share and the number of authorized shares was halved from 197,650,000 to 98,825,000 for common shares and from 350,000 to 175,000 for class A-1 common shares. The reverse split was effective for trading beginning June 12, 2000. Resulting fractional shares were redeemed for cash.
All share and per share amounts in this filing, including the financial statements and the notes thereto, have been adjusted for the impact of the split, for all periods presented.
Wellsford Real Properties, Inc. and subsidiaries, (collectively, the "Company") was formed on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the "Trust"). The Trust was formed in 1992 as the successor to Wellsford Group Inc. and affiliates, which was formed in 1986. On May 30, 1997, the Trust merged (the "Merger") with Equity Residential Properties Trust ("EQR"). Immediately prior to the Merger, the Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of the Trust. Immediately after the contribution of assets to the Company and immediately prior to the Merger, the Trust distributed to its common shareholders all of the outstanding shares of the Company owned by the Trust (the "Spin-off"). On June 2, 1997, the Company sold 6,000,000 shares of its common stock in a private placement (the "Private Placement") to a group of institutional investors at $20.60 per share, the Company's then book value per share.
The Company is a real estate merchant banking firm headquartered in New York City which acquires, develops, finances and operates real properties and organizes and invests in private and public real estate companies. The Company's operations are organized into three Strategic Business Units ("SBUs"). The portfolio of investments held in each SBU at December 31, 2000 includes:
Wellsford/Whitehall Group, L.L.C. A 39.7% interest in a private joint venture that owned and operated 40 office properties totaling approximately 4,953,000 square feet (including approximately 1,522,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. In December 2000, the Company and various entities affiliated with the Whitehall Funds, private real estate funds sponsored by Goldman, Sachs & Co. ("Whitehall"), executed definitive agreements modifying the terms of their joint venture, Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall") effective January 1, 2001 (the "Amendments").
Wellsford Capital o $69,122,000 of debt related investments including $37,824,000 of direct debt investments which bore interest at an average yield of 11.45% during 2000 and $31,298,000 in companies which were organized to invest in debt instruments; o Venture capital investments of approximately $6,851,000 in a real estate e-commerce company and other real estate-related ventures; and o Six commercial properties totaling approximately 482,000 square feet located in the Northeastern United States, two of which were sold in January 2001. A seventh property, located in California, was sold in December 2000.
Wellsford Development An 85.85% interest in Palomino Park, a five phase, 1,800 unit multifamily residential development in Highlands Ranch, a south suburb of Denver, Colorado. Two phases containing 760 units are completed and operational. The third phase consists of 264 units which the Company is converting into condominiums and expects to sell as individual units over the next 24 months. The 424 unit fourth phase is under construction and the land for the remaining approximate 352 unit phase is being prepared for sale or possible future development.
See the accompanying consolidated financial statements for certain financial information regarding the Company's industry segments.
The Company's executive offices are located at 535 Madison Avenue, New York, New York, 10022; telephone, (212) 838-3400. The Company has 19 employees on January 1, 2001.
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL
The Company's commercial property operations segment consists of Wellsford/Whitehall, which is accounted for on the equity method.
In 1997, at the time of the Spin-off, the Company owned six commercial office buildings, five of which were then vacant, containing an aggregate of approximately 949,400 square feet which were acquired for an aggregate of approximately $47,600,000 (the "WRP Commercial Properties").
In August 1997, the Company, in a joint venture with Whitehall formed a private real estate operating company, Wellsford/Whitehall. The Company contributed the WRP Commercial Properties and Whitehall contributed four commercial properties upon formation of Wellsford/Whitehall. Prior to the Amendments, the Company managed Wellsford/Whitehall on a day-to-day basis. The Company had a 39.7% interest in Wellsford/Whitehall at December 31, 2000.
In December 2000, the Company and Whitehall executed the Amendments, which, among other items, provided for the Company and Whitehall to extend their existing capital commitments to Wellsford/Whitehall for one year to December 31, 2001 and to provide an aggregate of $10,000,000 of additional financing or preferred equity to Wellsford/Whitehall through December 2003, if required. As a result of the Amendments, an affiliate of Whitehall replaced the Company as the managing member of Wellsford/Whitehall. All employees working on Wellsford/Whitehall business were transferred from the Company to WP Commercial, L.L.C. ("WP"), the new management company, which is owned by affiliates of Whitehall and senior management of WP. WP will provide management, construction, development and leasing services to Wellsford/Whitehall based upon an agreed upon fee schedule. WP will also provide similar services to a new venture formed by Whitehall (the "New Venture").
Wellsford/Whitehall discontinued payment of a $600,000 annual administrative fee to the Company as of December 31, 2000; however, Whitehall has agreed to pay the Company fees with respect to assets 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. Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's common stock, which had previously been issued to Whitehall, were returned and cancelled.
Under the terms of the Amendments, it is expected that Wellsford/Whitehall will not purchase any new real estate assets, except in limited cases, to replace certain assets being sold or acquisitions that compliment presently owned real estate assets. The Amendments provide for an orderly disposal of the Wellsford/Whitehall's assets and the Company and Whitehall agreed to a buy/sell agreement effective after December 31, 2003 with respect to any remaining assets.
As of December 31, 2000, Wellsford/Whitehall owned and operated 40 office properties totaling approximately 4,953,000 square feet (including approximately 1,522,000 square feet under renovation), primarily located in New Jersey, Massachusetts, and Maryland.
During the years ended December 31, 2000, 1999 and 1998, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts)
In March 2000, Wellsford/Whitehall obtained a $23,500,000 loan from Principal Capital Management, L.L.C. for the rehabilitation of Gateway Tower, a 236,000 square foot, nine-story office building located at 401 North Washington Street, Rockville, Maryland. At December 31, 2000, $15,500,000 was drawn upon this loan. The non-recourse loan is secured by a first mortgage on the property, has a term of three years, plus two six-month extensions at Wellsford/Whitehall's option and bears interest at LIBOR + 3.50% per annum.
In September 2000, Wellsford/Whitehall obtained a $8,150,000 loan from Provident Bank of Maryland, of which $4,371,000 was drawn upon at December 31, 2000. The non-recourse loan, which will be used to rehabilitate the property, is secured by the leasehold interest in the 144,000 square foot Oakland Ridge office park, a four building office complex located in Columbia, Maryland, has a term of 2.5 years, plus one twelve-month extension at Wellsford/Whitehall's option and bears interest at LIBOR + 2.00% per annum, which is capitalized into the loan.
The Company made temporary advances to Wellsford/Whitehall during 2000 and 1999 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000 and 1999, respectively.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility. Under the new terms, $300,000,000 represents a senior secured credit facility bearing interest at LIBOR + 1.65% per annum and $75,000,000 represents a second mezzanine facility bearing interest at LIBOR + 3.20% per annum. As of December 31, 2000, approximately $244,250,000 was outstanding under the Wellsford/Whitehall Bank Facility (approximately $181,728,000 of which was under the senior facility). At March 31, 2000, the ability to draw on this facility expired. Wellsford/Whitehall exercised its right under the agreements to have the due date of both facilities extended for one year to December 15, 2001. Wellsford/Whitehall is presently seeking to refinance the
facility. The Wellsford/Whitehall Bank Facility provides for the meeting of certain operating and balance sheet covenants and limits the amount of distributions to members.
The Company is entitled to receive incentive compensation payable out of distributions made by Wellsford/Whitehall (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to the Company and Whitehall. Pursuant to the Amendments, the Company will be entitled to earn 53.3% to 57.5% of the Promote. To date, the Company has not earned or received any distribution of the Promote and there can be no assurance that such Promote will be earned or received.
In June 1999, the capital commitment requirements of Wellsford/Whitehall were modified from an aggregate of $150,000,000 ($75,000,000 by each partner) to an aggregate of $250,000,000. The Company's total portion is $85,000,000 of which $8,468,000 remained to be contributed as of December 31, 2000 and Whitehall's total portion is $165,000,000 of which $47,249,000 remained to be contributed as of December 31, 2000.
In connection with the formation of Wellsford/Whitehall, the Company issued warrants (the "Whitehall Warrants") to Whitehall to purchase 2,066,115 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until August 28, 2002 and payable in cash or membership units in Wellsford/Whitehall. As part of the new capital commitment from Whitehall in 1999, the Company issued additional warrants to purchase an additional 61,984 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until May 28, 2004 and payable in cash or membership units of Wellsford/Whitehall. Pursuant to the Amendments, all 2,128,099 Whitehall Warrants were returned and cancelled. In addition, Whitehall's right to convert $25,000,000 of membership units in Wellsford/Whitehall for shares of the Company's common stock, or cash at the Company's election, was terminated.
As a condition to the formation of Wellsford/Whitehall in 1997, the Company had agreed with Whitehall to conduct its business and activities relating to office properties (but not other types of commercial properties) located in North America solely through its interest in Wellsford/Whitehall. Whitehall has agreed to waive this condition in connection with the Amendments.
DEBT AND EQUITY ACTIVITIES - WELLSFORD CAPITAL - ----------------------------------------------
The Company, through the Wellsford Capital SBU, makes loans that constitute, or will invest in, real estate related senior, junior or otherwise subordinated debt instruments, which may be unsecured or secured by liens on real estate, interests therein or the economic benefits thereof, and which have the potential for high yields or returns more characteristic of equity ownership. These investments 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, especially in the low or below investment grade tranches, at significant returns as a result of inefficiencies in pricing, while utilizing management's real estate expertise to analyze the underlying properties and thereby effectively minimizing risk.
At December 31, 2000, the Company had the following investments: (i) approximately $37,824,000 of direct debt investments which bore interest at an average yield of 11.45% during 2000 and had an average remaining term to maturity of approximately five years; (ii) approximately $31,298,000 in companies which were organized to invest in debt instruments, including Second Holding Company, LLC (formerly Belford Capital Holdings, LLC) ("Second Holding"); and (iii) approximately $6,851,000 in a real estate e-commerce company and other real estate related ventures. Following is information regarding these investments.
DEBT INVESTMENTS
277 PARK LOAN
In April 1997, the Company and Fleet National Bank originated an $80,000,000 loan (the "277 Park Loan") to entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 1,750,000 square foot office building located in New York City (the "277 Park Property"). The Company has advanced $25,000,000 pursuant to the 277 Park Loan. The 277 Park Loan is secured primarily by a pledge of the Equity Interests owned by the borrowers. The 277 Park Loan is subordinated to a 10-year $345,000,000 (unamortized balance of $327,004,000 at December 31, 2000) first mortgage loan (the "REMIC Loan") on the 277 Park Property.
The 277 Park Loan bears interest at the rate of 12.00% per annum for the first nine years of its term and at a floating rate during the tenth year equal to LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per annum, as elected by the borrowers. The principal amount of the 277 Park Loan and all accrued interest will be payable in May 2007; the REMIC Loan is also due in May 2007. The Company earned approximately $3,050,000, $3,042,000 and $3,042,000 per year of interest income from the 277 Park Loan during 2000, 1999 and 1998, respectively, or 12.2%, 10.1% and11.7% of its total non-joint venture revenues during such periods.
PATRIOT LOAN
In September 1999, the Company and Fleet National Bank originated a $10,000,000 second mortgage loan. Pursuant to this second mortgage loan, the Company advanced $5,000,000 (its 50% share) which is subordinate to a $75,000,000 first mortgage with Fleet National Bank (unamortized balance of $73,668,000 at December 31, 2000). The loan bears interest at LIBOR + 4.75% per annum with payments of interest only through August 2001 and principal and interest based on a 25-year amortization through the loan's maturity in July 2002 (the "Patriot Loan"). The Patriot Loan is secured by a second mortgage lien on a 608,000 square foot mixed-use property in Boston, Massachusetts. The Company earned approximately $564,000 and $189,000 of interest income from the Patriot Loan during 2000 and 1999, respectively, or 2.3% and 0.6% of its total non-joint venture revenues during such periods.
THE ABBEY COMPANY CREDIT FACILITY
In August 1997, the Company and Morgan Guaranty Trust Company of New York ("MGT") originated a $70,000,000 credit facility secured by first mortgages (the "Abbey Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May 1998, the Company and MGT expanded the Abbey Credit Facility to $120,000,000. In December 1998, Abbey repaid $20,000,000, thereby reducing the total available balance to $100,000,000. In September 1999, an additional $83,500,000 was repaid, thereby reducing the total available balance to $16,500,000. Advances under the facility were made for up to 65% of the value of the borrowing base collateral which consisted of first mortgage loans on three properties (one each of office, industrial and retail), all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance was approximately $4,300,000 at December 31, 1999. In August 2000, the remaining balance was repaid and the facility was terminated.
The Company was entitled to interest on its advances under the Abbey Credit Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000, $2,941,000 and $3,920,000 of interest income from the Abbey Credit Facility during 2000, 1999 and 1998, respectively, or 1.2%, 9.8% and 15.1% of its total non-joint venture revenues during such periods.
SAFEGUARD CREDIT FACILITY
In December 1998, the Company and MGT originated a $90,000,000 credit facility secured by cross-collateralized first mortgages on nine properties (the "Safeguard Credit Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit Facility which was made available to Safeguard until April 2001 was terminated on January 30, 2001 when the outstanding balance of $2,900,000 was repaid. Advances under the facility were made for up to 75% of the value of the borrowing base collateral which consists of nine self-storage properties totaling approximately 608,000 square feet. The Company was entitled to interest on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum.
Approximately $5,900,000 had been advanced by the Company under the Safeguard Credit Facility at December 31, 1998, with additional advances made of approximately $2,200,000 through March 1999, at which time, the loan with a balance of $8,100,000 was contributed to the Company's joint venture investment, Second Holding. This venture also assumed the first $25,000,000 of the Company's commitment to fund additional advances under the Safeguard Credit Facility (including amounts advanced through December 31, 1999). The Company retained the remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard in September 1999 and was outstanding at December 31, 2000 and 1999, respectively. The Company earned approximately $306,000, $292,000 and $46,000 of interest income from the Safeguard Credit Facility during 2000, 1999 and 1998, respectively, or 1.2%, 1.0% and 0.2% of its total non-joint venture revenues during such periods.
DEBARTOLO LOAN
In July 1998, the Company, Bank One, N.A. and several other financial institutions originated a $175,000,000 loan, in which the Company had an $18,000,000 participation (the "DeBartolo Loan"), to entities owned by Simon DeBartolo Group, L.P. The DeBartolo Loan is secured by partnership units in Simon DeBartolo Group, L.P., the operating partnership of a real estate investment trust which owns shopping malls nationwide. The DeBartolo Loan bears interest at 8.547% per annum, is payable quarterly, pays principal based on a 20-year amortization schedule and is due in July 2008. In March 1999, the amortized loan balance of approximately $17,600,000 was contributed to Second Holding. The Company earned approximately $360,000 and $716,000 of interest income from the DeBartolo Loan during 1999 and 1998, respectively, or 1.2% and 2.8% of its total non-joint venture revenues during such periods.
WOODLANDS LOAN
In December 1997, the Company, Fleet National Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders made available to the owners and developers of a 25,000 acre master-planned residential community located north of Houston (the "Woodlands Property"), loans in the aggregate principal amount of $369,000,000 (the "Woodlands Loan"). The Woodlands Loan consisted of a revolving credit loan in the principal amount of $179,000,000 (the "Revolving Loan"), a secured term loan in the principal amount of $130,000,000 (the "Secured Loan"), and a second secured term loan in the principal amount of $60,000,000 (the "Second Secured Loan"). The Company advanced $15,000,000 pursuant to the Second Secured Loan. The Second Secured Loan was subordinate to the Revolving Loan and the Secured Loan and bore interest equal to LIBOR + 4.40% per annum. The principal amount of the Woodlands Second Secured Loan was repaid in full prior to December 31, 1999. The Company earned approximately $1,295,000 and $1,517,000 of interest income from the Woodlands Second Secured Loan during 1999 and 1998, respectively, or 4.3% and 5.8% of its total non-joint venture revenues during such periods.
REIT BRIDGE LOAN
In August 1998, the Company, Deutsche Bank, N.A. and certain other lenders originated a $100,000,000 unsecured loan in which the Company had a $15,000,000 participation (the "REIT Bridge Loan") to a publicly traded real estate investment trust which owned 22 regional malls, eight multifamily apartment properties and
five office properties nationwide. This loan bore interest at 9.875% per annum and was due in February 1999, with two three-month extensions available to the borrower. In January 1999, the REIT Bridge Loan was modified to extend the maturity date to August 1999 and increased the interest rate to 12.00% per annum. The borrower paid a 1.50% loan fee at origination and a 1.00% loan fee upon modification. This loan was repaid in full in July 1999. The Company earned approximately $1,050,000 and $749,000 of interest income from the REIT Bridge Loan during 1999 and 1998, respectively, or 3.5% and 2.9% of its total non-joint venture revenues during such periods.
BROOMFIELD LOAN
In January 1999, the Company acquired a parcel of land in Broomfield, Colorado for approximately $7,200,000 pursuant to an outstanding standby commitment issued in 1998. In connection with this transaction, the Company collected approximately $401,000 of fees in 1998. In July 1999, the Company sold this land for $7,200,000 to a third party ("Buyer") and simultaneously collected an additional $1,100,000 in fees. The Company then purchased $11,740,000 of tax-exempt notes, bearing interest at 6.25% per annum and due in December 1999. These notes were issued by a quasi-governmental agency partially controlled by the Buyer and were guaranteed by a AA rated bank. The notes were repaid in full in December 1999. The Company earned approximately $1,555,000 and $401,000 on the Broomfield transaction during 1999 and 1998, respectively, or 5.2% and 1.5% of its total non-joint venture revenues during such periods.
SECOND HOLDING
The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to a 51% owned joint venture special purpose finance company ("SPFC"), Second Holding, with The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire") owning 10% and another entity owning the remaining 39%. The 1999 contribution was comprised of two of the Company's debt investments, the $17,600,000 DeBartolo Loan and the $8,100,000 outstanding balance of the Safeguard Credit Facility, net of $1,500,000 of cash received back from Second Holding. The other partners contributed their respective shares of their capital contributions in cash.
The Company's investment in Second Holding, which is accounted for on the equity method, was approximately $27,868,000 and $30,932,000 at December 31, 2000 and 1999, respectively.
Second Holding has been organized to purchase investment and non-investment grade rated real estate debt. In September 2000 an affiliate of Second Holding privately placed a ten-year $150,000,000 junior subordinated bond issue. The bonds were issued at an effective annual interest rate of LIBOR + 0.90%. By December 31, 2000, $100,000,000 of medium term notes were issued at an effective annual interest rate of LIBOR + 0.06%.
By December 31, 2000, Second Holding invested $190,000,000 in a variety of collateralized debt obligations and commercial mortgage backed securities which earn interest at a weighted average interest rate of LIBOR + 0.55% per annum. Through February 28, 2001, Second Holding purchased an additional $35,000,000 of securities which earn interest at a weighted average interest rate of LIBOR + 0.52%. The aggregate investments of $225,000,000 have a weighted average life of approximately 7.1 years. Of the $225,000,000 purchased, $185,000,000 has a AAA rating with the remainder having a AA- or better.
LIBERTY HAMPSHIRE
In July and August 1998, the Company invested a total of approximately $2,100,000 for an approximate 4.20% equity interest in Liberty Hampshire, which structures, establishes and provides management and services for SPFCs formed to invest in financial assets. In December 2000, the Company sold this interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The Company received $1,032,000 of cash and a note for the remaining balance of $4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and has scheduled annual principal and interest payments (the "Guggenheim Loan").
VENTURE CAPITAL INVESTMENTS
At December 31, 2000, the Company had venture capital investments of $6,851,000 in a real estate e-commerce company and other real estate-related ventures. Following is information regarding these investments.
REIS REPORTS, INC.
The Company has direct and indirect investments in a real estate market research internet company, Reis Reports, Inc. ("Reis"), a leading provider of real estate market information to institutional investors. At December 31, 2000, the Company's aggregate investment in Reis was $6,575,000, or 22% of Reis' equity on an as converted basis. The primary shareholder of Reis is the brother of Mr. Lynford, Chairman of the Company. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. The Chairman, President and certain directors of the Company who have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis.
CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS
In January 1998, the Company formed Creamer Vitale Wellsford, L.L.C. ("CVW") in which it had a 49% interest and acquired the same interest in a related real estate advisory and consulting firm. In September 2000, one of the two principals left CVW to pursue other employment and the venture was terminated. The Company will continue to conduct business through relationships that CVW created.
CVW, together with Prudential Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance Company, established the Clairborne Investors Mortgage Investment Program ("Clairborne") to make opportunistic investments and to provide liquidity to lenders and participants in mortgage loan transactions. The parties agreed to contribute up to $150,000,000 to fund acquisitions approved by the parties, of which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW was to originate, co-invest, and manage the investments of the program.
The Company's original investment in these entities was $1,250,000 of cash and 74,000 five-year warrants to purchase the Company's common shares at $30.35 per share, valued at approximately $750,000 at that time. In November 1998, Clairborne acquired an approximate $17,000,000 participation in a $56,000,000 mortgage, bearing interest at LIBOR + 1.75% per annum and due in 3.5 years, at a significant discount to face value. The Company funded approximately $1,400,000 of the cost of this participation, which was prepaid entirely at the face amount during 1999 by the borrower.
FORDHAM TOWER LOAN
In October 2000, the Company and PREI organized a new venture which provided an aggregate of $34,000,000 of mezzanine financing for the construction of Fordham Tower, a 50-story, 244 unit, luxury condominium apartment project to be built on Chicago's near northside. The Company fully funded its share of the loan of $3,400,000. The loan, which matures in October 2003, bears interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and the Company and fees to the Company, based upon certain levels of returns on the project and is secured by a lien on equity interests in the borrower.
OTHER INVESTMENTS
VALUE PROPERTY TRUST
In February 1998, the Company completed the merger with Value Property Trust ("VLP") (the "VLP Merger") for total consideration of approximately $169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP properties, which were under contract to an affiliate of Whitehall, were subsequently sold for an aggregate of approximately $64,000,000. The Company retained seven of the VLP properties with an allocated value upon purchase of approximately $38,300,000, containing an aggregate of approximately 597,000 square feet with one property located in California and the remaining six properties located in the northeastern United States. VLP had cash of $60,800,000 and other net assets of $5,900,000 at the close of the transaction. In October 1998, the Company obtained a $28,000,000 loan, which was cross-collateralized by the seven VLP properties, bore interest at LIBOR + 2.75% per annum and matures in October 2001.
During the fourth quarter of 2000, the Company made the strategic decision to sell the seven VLP properties. One of the properties was sold in December 2000 and two of the properties were sold in January 2001. The Company recorded a gain of approximately $4,943,000 on the December transaction which was offset by a provision for impairment of $4,725,000 recorded in 2000, attributable to expected sales proceeds being less than the respective carrying amounts on four of the remaining six unsold VLP properties at December 31, 2000. The Company repaid in full the $28,000,000 loan in December 2000 which was cross-collateralized by the seven properties and expensed all of the remaining unamortized deferred loan costs associated with the financing.
PROPERTY DEVELOPMENT AND LAND OPERATIONS - WELLSFORD DEVELOPMENT - ----------------------------------------------------------------
The Company, through the Wellsford Development SBU, engages in selective development activities as opportunities arise and when justified by expected returns. The Company believes that by pursuing selective development activities, it can achieve returns which are greater than returns which could be achieved by acquiring stabilized properties. Certain development activities may be conducted in joint ventures with local developers who may bear the substantial portion of the economic risks associated with the construction, development and initial rent-up of properties. As part of its strategy, the Company may seek to issue tax-exempt bond financing authorized by local governmental authorities which generally bears interest at rates substantially below rates available from conventional financing.
PALOMINO PARK
The Company currently owns an 85.85% interest in a five phase 1,800 unit class A multifamily development ("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. Effective October 1, 2000, EQR elected not to make a capital contribution attributable to the last three phases of Palomino Park and its ownership interest was reduced from 20.00% to 14.15%. In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,500,000. At that time, the Company obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in January 2008 and bears interest at a fixed rate of 6.92% per annum. Principal payments are based on a 30-year amortization schedule.
In November 1998, Phase II, the 304 unit phase known as Red Canyon, was completed at a cost of approximately $33,900,000. At that time, the Company acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon Mortgage")
secured by a first mortgage on Red Canyon. The Red Canyon Mortgage matures in December 2008 and bears interest at a fixed rate of 6.68% per annum. Principal payments are based on a 30-year amortization schedule.
In October 2000, Phase III, the 264 unit phase known as Silver Mesa was substantially completed. The Company made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, the Company has prepared 128 units to be sold and will begin to sell them upon receipt of appropriate approvals and will continue to rent the remaining 136 units during the sellout period until the initial inventory has been significantly reduced and additional units need to be prepared for sale. In conjunction with this decision, the Company made a payment of $2,075,000 to reduce the outstanding balance on the tax-exempt bonds in order to obtain the release of the Silver Mesa phase from the Palomino Park Bond collateral. The allocable cost associated with the units being rented and the units available for sale was approximately $22,301,000 and $21,850,000 at December 31, 2000, respectively. In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum, is collateralized by the unsold units, matures in December 2003 and provides for one six-month extension at the Company's option. Approximately 90% of sales proceeds per unit goes toward principal repayments until the loan is paid in full.
In February 2001, the Company commenced sales of units at Silver Mesa. Through February 28, 2001, 23 units were sold for gross proceeds of approximately $4,292,000, approximately $3,890,000 of which was used to pay down principal on the Silver Mesa Conversion Loan.
The estimated total costs of the remaining two multifamily development phases at Palomino Park and related infrastructure costs at completion of these phases, including the Company's gross investment at December 31, 2000, are as follows:
The fourth phase of this project is being developed pursuant to a fixed-price contract. The Company is committed to purchase 100% of the improvements upon completion. In addition, the Company was obligated to fund the first 20% of development costs on the phase as incurred.
SONTERRA AT WILLIAMS CENTRE ("SONTERRA")
From the time of the Spin-off, the Company held a $17,800,000 mortgage on, and option to purchase, a 344-unit class A residential apartment complex located in Tucson, Arizona.
In January 1998, the Company exercised its option and acquired Sonterra for approximately $20,500,000, including satisfaction of the mortgage. In February 1998, the Company closed on $16,400,000 of first mortgage financing (the "Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in March 2008. Principal payments were based on a 30-year amortization schedule.
In November 2000, the Company sold the Sonterra property for $22,550,000 and recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed the Sonterra Mortgage, which had an unamortized balance of approximately $15,971,000, and paid the balance of the purchase price in cash.
SEGMENT FINANCIAL INFORMATION
See Note 13 to the Company's consolidated financial statements for additional information regarding the Company's industry segments.
FUTURE INVESTMENTS
The Company may in the future make equity investments in entities owned and/or operated by unaffiliated parties which engage in real estate-related businesses and activities or businesses that service the real estate industry. Some of the entities in which the Company may invest may be start-up companies or companies in need of additional capital. The Company may also manage and lease properties owned by it or in which it has an equity or debt investment.
ITEM 2.
ITEM 2. PROPERTIES.
The following property information is presented by SBU.
WELLSFORD/WHITEHALL
As of December 31, 2000, Wellsford/Whitehall owned and operated 40 office properties, totaling approximately 4,953,000 square feet. The following table sets forth certain information related to these properties at December 31, 2000 (excluding assets transferred to the New Venture, pursuant to the Amendments):
The following table sets forth historical Wellsford/Whitehall portfolio information by year:
SQUARE FEET OF OCCUPANCY TOTAL BUILDING OPERATING OF OPERATING DECEMBER 31, SQUARE FEET PROPERTIES PROPERTIES ------------ ----------- ---------- ---------- 2000............. 4,953,000 3,431,000 87% 1999............. 4,920,000 3,469,000 92% 1998............. 4,605,000 3,219,000 92% 1997............. 2,412,000 1,330,000 89%
The average lease term of the tenants' leases is approximately 6.7 years. Leases typically provide for step-ups in base rent periodically over the term of a lease and pass throughs to tenants of their pro rata share of increases in certain expenses (real estate taxes and operating expenses) over a base year. Leases may also provide for improvement allowances for all or a portion of the tenant's initial construction of its premises. The following table sets forth as of December 31, 2000 lease expirations for each of the next ten years, assuming tenants do not exercise any renewal options:
No tenant in the Wellsford/Whitehall portfolio accounted for more than 11% and 7% of rental revenues for the years ended December 31, 2000 and 1999, respectively.
WELLSFORD CAPITAL
Wellsford Capital owned the following commercial properties at December 31, 2000:
No tenant in the Wellsford Capital portfolio accounts for more than 2.3% and 6.8% of rental revenues for the years ended December 31, 2000 and 1999, respectively.
WELLSFORD DEVELOPMENT
The Company owned the following multifamily properties at December 31, 2000:
The average lease term of the tenants' leases range from six to fourteen months. Security deposits are generally required for all leases.
There are two additional phases of Palomino Park which, if both constructed, will include an additional 776 units. Development of the fourth phase, Green River, has begun and will include 424 units to be completed in the third quarter of 2002. Estimated total construction costs for this phase is approximately $56,000,000. The land for the 352 unit fifth phase, Gold Peak, is being prepared for sale or possible future development. The estimated total cost of the improved land and allocated infrastructure is $6,900,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor Wellsford/Whitehall are presently defendants in any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company or its other equity investments. However, the Company is a party to routine litigation arising in the ordinary course of business, which is expected to be covered by liability insurance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION - ------------------
The Company's common shares are traded on the American Stock Exchange under the symbol "WRP". The high and low sales prices for the common shares on the American Stock Exchange and the dividends declared for the years ended December 31, 2000 and 1999 are as follows:
COMMON SHARES --------------------------------- 2000 HIGH LOW DIVIDENDS ---- ---- --- --------- 1st Quarter $ 18.13 $ 15.00 None 2nd Quarter $ 18.13 $ 15.13 None 3rd Quarter $ 19.75 $ 15.75 None 4th Quarter $ 19.63 $ 15.31 None
COMMON SHARES --------------------------------- 1999 HIGH LOW DIVIDENDS ---- ---- --- --------- 1st Quarter $ 21.00 $ 17.00 None 2nd Quarter $ 24.50 $ 15.75 None 3rd Quarter $ 21.50 $ 15.50 None 4th Quarter $ 18.75 $ 15.25 None
HOLDERS - -------
The approximate number of holders of record of the common shares and class A-1 common shares (collectively, "Common Shares" or " Common Stock") were 3,900 and 1, respectively, as of December 31, 2000.
DIVIDENDS - ---------
The Company did not declare or distribute any dividends during 2000, 1999 or 1998. The Company does not plan to distribute dividends for the foreseeable future, which will permit it to accumulate, for reinvestment, cash flow from investments, disposition of investments and other business activities.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements included elsewhere in this Form 10-K.
Prior to the Company's 1997 investments, the Company's operations consisted of earning interest income on the Sonterra Mortgage (originated in July 1996) and the initial phase of construction development activity with respect to Palomino Park.
The earnings per share amounts conform with Statement of Financial Accounting Standards No. 128 "Earnings Per Share". For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW - --------
The following discussion should be read in conjunction with the "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.
RESULTS OF OPERATIONS - ---------------------
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.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
Rental income increased by $807,000. This increase is primarily due to three months of operations during 2000 for the Silver Mesa rental phase which was put into service on October 1, 2000 ($592,000) and increased rental revenues on the VLP properties ($552,000), partially offset by a reduction in the rental income on the Sonterra property from 10.5 months of income in the current year as it was sold in November 2000 ($224,000).
Interest income decreased by $6,039,000. This decrease is primarily the result of decreased lending activity by the Wellsford Capital SBU starting in the second half of 1999 and continuing in 2000 with loans being repaid in part or in full during 1999 and 2000 ($7,063,000) and decreased interest income from investments contributed to Second Holding in 1999 ($653,000), partially offset by new investments in 2000 and investments held for a longer period during 2000 than in 1999 ($1,384,000) and increased income on cash and cash equivalents from higher interest rates and greater outstanding balances ($229,000).
Property operating and maintenance expense increased by $323,000. This increase is primarily due to three months of operations for an asset put into service during 2000 (Silver Mesa) plus an increase in Denver office overhead costs directly charged to operations in 2000.
Real estate taxes increased by $64,000. This increase is primarily due to three months of operations for an asset put into service during 2000 (Silver Mesa) and an increase in taxes at certain properties during 2000.
Depreciation and amortization decreased by $1,187,000. This decrease is due to (i) the write-down of the CVW asset by $912,000 to its then estimated fair value in 1999, (ii) increased amortization during 1999 associated with the Company's deferred financing costs of $680,000 and (iii) 10.5 months of depreciation on the Sonterra property, which was sold, of $76,000, partially offset by additional depreciation on the VLP properties of $225,000, increased amortization of $145,000 attributable to one of the two principals leaving CVW to pursue other employment and the subsequent wind-down of the venture in 2000, and three months of depreciation on an asset put into service during 2000 (Silver Mesa) of $173,000.
Property Management expense increased $125,000. This increase is primarily due to three months of operations for an asset put in service during 2000 (Silver Mesa) and additional fees on the VLP properties during 2000.
Interest expense decreased by $2,323,000. This decrease is primarily due to (i) interest on higher average borrowing balances under the Company's credit facilities in 1999 than in 2000 ($2,038,000), (ii) additional capitalized interest due to a higher average construction in progress balance in 2000 ($919,000) and (iii) only 10.5 months of interest on the Sonterra property mortgage before it was assumed by the buyer at the time the property was sold ($151,000), partially offset by an increase in expense from variable rate debt ($462,000), the write-off of unamortized deferred financing costs on the VLP debt in December 2000 ($247,000) when the related debt was prepaid and three months of interest for an asset put into service during 2000 (Silver Mesa) ($122,000).
General and administrative expenses decreased by $349,000. This decrease is primarily due to a decrease in professional fees of $264,000, charitable contributions of $232,000 and other corporate expenses across all expense categories of $194,000, offset by increases in compensation and benefits of $341,000.
Gain on sale of investments in 2000 results from the sale of (i) the Sonterra property for a gain of $3,500,000, (ii) the investment in Liberty Hampshire for a gain of $2,492,000 and (iii) a net gain of $218,000 from the sale of one of the VLP properties ($4,943,000) offset by the impairment recorded on certain of the remaining VLP assets available for sale ($4,725,000).
Income from joint ventures decreased by $6,375,000. This decrease is primarily due to the Company's proportionate share of gains of $6,806,000 on the sale of assets from Wellsford/Whitehall in 1999, which was in excess of the 2000 share of gains of $92,000, plus decreases from the Liberty Hampshire/Second Holding Joint Venture investments ($496,000) and CVW ($456,000), offset by an increase in the Company's proportionate share of Wellsford/Whitehall operating income ($1,206,000) and income from the Fordham Tower Loan during the fourth quarter of 2000 ($85,000).
The income tax provision decreased $520,000. This decrease is primarily the result of lower pretax income and the utilization of state and local income tax carryforwards.
During the year ended December 31, 2000, the Company repurchased 1,318,732 shares of its outstanding common stock. The effect of these repurchases resulted in a $0.09 per share increase in net income per share--basic and diluted, excluding the impact of lost interest income on cash used for such repurchases.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
Rental income increased by $4,747,000. This increase is primarily due to a full year of operations during 1999 for assets acquired or put into service during 1998. The seven VLP properties were acquired in February 1998 ($833,000 increase) and Red Canyon was completed and placed into service in November 1998 ($3,818,000 increase).
Interest income decreased by $593,000. This decrease is primarily the result of loans being repaid in part or in full ($2,609,000) and decreased interest income from investments contributed to Second Holding ($356,000) offset by investments held for a longer period during 1999 than in 1998 ($1,107,000), additional interest and fee income from the Broomfield investment ($1,153,000) and increased income on cash and cash equivalents ($112,000).
Property operating and maintenance expense increased by $1,241,000. This increase is primarily due to a full year of operations during 1999 for assets acquired or put into service during 1998.
Real estate taxes increased by $345,000. This increase is primarily due to a full year of operations during 1999 for assets acquired or put into service during 1998, offset by reduced taxes at certain properties during 1999.
Depreciation and amortization increased by $2,997,000. This increase is primarily due to a full year of operations during 1999 for assets acquired or put in service during 1998 ($1,168,000 increase), as well as increased amortization during 1999 associated with the Company's joint venture investments and deferred financing costs ($249,000 and $639,000 increases, respectively) and the write-down of one of its joint venture investments, CVW, by $912,000 to its estimated fair value.
Property Management expense increased $175,000. This increase is primarily due to a full year of operations during 1999 for assets acquired or put in service during 1998.
Interest expense increased by $4,799,000. This increase is primarily due to debt that was outstanding for the full year in 1999 and only a partial year during 1998 as well as higher average outstanding balances. The Sonterra at Williams Centre debt was outstanding from February 1998 ($174,000), the mortgage on the VLP properties was
obtained in October 1998 ($2,025,000), the mortgage on Red Canyon was secured in November 1998 ($1,628,000) and there was a higher average outstanding balance on credit facilities ($1,283,000), offset by additional interest capitalized to the Company's remaining phases at Palomino Park ($268,000).
General and administrative expenses increased by $2,063,000. This increase is primarily due to overhead costs, primarily rent, resulting from the increase in the size of the Company's headquarters, salary increases related to an increased number of employees in Wellsford Capital, as well as an increase in professional fees from costs related to transactions the Company is no longer pursuing.
Gain on sale of investments in 1998 results from the sale of certain notes receivable acquired in the VLP merger.
Income from joint ventures increased by $6,099,000. This increase is primarily due to the Company's proportionate share of the increase in gains of $5,339,000 on the sale of assets from Wellsford/Whitehall, in excess of 1998 share of gains, plus growth from the Liberty Hampshire/Second Holding Joint Venture investments ($2,006,000 increase) offset by a decrease in the Company's proportionate share of Wellsford/Whitehall operating income ($968,000 decrease).
The income tax provision decreased $900,000. This decrease is primarily the result of lower pretax income, a reduction of the valuation allowance attributable to the utilization of available net operating loss carryforwards, and a lower effective state and local tax rate.
INCOME TAXES
The Company has recorded a net deferred tax asset of $6,600,000 as of December 31, 2000. Such amount is after reserves aggregating $17,500,000 established with respect to the utilization of existing tax net operating losses and future tax deductions under deferred compensation arrangements. While the deferred compensation deductions have been fully reserved because of the long term expected timing of deductibility, the Company has a recorded deferred tax asset of approximately $7,700,000 or 82% of the total recorded deferred tax asset of $9,400,000 at December 31, 2000. The majority of the remaining $1,700,000 asset is expected to be realized in 2001 upon the sale of the remaining VLP portfolio. During the year, the Company reduced its income tax asset valuation allowance by $1,500,000 principally as a result of the utilization of the annual utilizable amount of net operating carry forwards. In order to realize the remaining recorded deferred tax asset, the Company would have to realize $22,700,000 of taxable income by 2007 and 2012 when the majority of the tax carryforwards expire. The Company expects to be able to meet these amounts based upon current and expected income levels.
The Company has available at December 31, 2000, net operating loss carryforwards aggregating $64,700,000, which as a result of limitations under ss.382 of the Internal Revenue Service Code, as it applies to the VLP acquisition, the Company can only use $6,200,000 of such loss carryforwards each year. Any such amounts not utilized in a year can be carried forward to subsequent years.
The Company's major timing tax differences related to costs associated with the deferred compensation plan as well as income recognizable for income tax purposes on the $7,000,000 of assets currently in the deferred compensation plan arrangements of the Company. Such amounts aggregated $1,100,000 in 2000.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The Company expects to meet its short-term liquidity requirements generally through its working capital, sales of commercial and residential properties, cash flow provided by operations and if required, from draws on the $20,000,000 loan facility. 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.
The Company expects to meet its long-term liquidity requirements such as refinancing mortgages, financing acquisitions and development, financing capital improvements and joint venture capital requirements by long-term borrowings, through available cash, the issuance of debt and the offering of additional debt and equity securities.
Approximately $2,712,000 of the Company's retained earnings at December 31, 2000 relates to undistributed earnings of the Company's joint venture investments. Distributions from Second Holding are limited to 48% of earnings. The balance above principally reflects this retained amount.
RECURRING AND NON-RECURRING CAPITAL EXPENDITURES
WELLSFORD DEVELOPMENT
Regarding the Company's Blue Ridge, Red Canyon and Silver Mesa phases, the Company expects to incur approximately $140 per unit in apartment preparation costs from turnover of tenant leases during the year ending December 31, 2001, which will be charged to property operations.
The estimated total costs of the remaining two multifamily development phases at Palomino Park and related infrastructure costs at completion of these phases, including the Company's gross investment at December 31, 2000 are as follows:
The fourth phase of this project is being constructed pursuant to a fixed-price contract. The Company is committed to purchase 100% of the improvements upon completion. In addition, the Company was obligated to fund the first 20% of construction costs on the phase as incurred.
WELLSFORD CAPITAL
The Company expects to incur approximately $1,069,000 of total capital expenditures with respect to the remaining VLP properties through their expected sale dates during 2001.
WELLSFORD/WHITEHALL
In connection with its fully operational properties, Wellsford/Whitehall expects to incur approximately $47,004,000 of capital expenditures during the year ending December 31, 2001. Of that amount, Wellsford/Whitehall expects to incur approximately $16,346,000 of non-recurring capital expenditures on three operational properties during the year ending December 31, 2001. This work includes adding approximately 56,000 square feet to one building and cosmetic overhauls on the other two buildings. Recurring capital expenditures of $30,658,000 are as follows:
AMOUNT PER SQUARE FOOT ------ --------------- Maintenance capital........... $12,290,000 $ 4.73 Tenant improvements........... 13,583,000 4.39 Leasing commissions........... 4,785,000 1.55 ----------- ----------- $30,658,000 $ 10.67 =========== ===========
Wellsford/Whitehall is currently involved in several projects to renovate, expand or reposition properties which are classified as properties under renovation. For the year ending December 31, 2001, Wellsford/Whitehall expects to incur approximately $26,779,000 in connection with these projects.
To the extent that cash flows from operations and borrowings from financial institutions are not available to finance such capital projects, the Company will be required to provide approximately 15.2% of unfunded costs under the existing agreement with Whitehall, limited to the committed amounts.
CAPITAL COMMITMENTS
At December 31, 2000, the Company had capital commitments to certain joint venture investments. The Company may make additional equity investments subject to board approval if deemed prudent to do so to protect or enhance its existing investment. At December 31, 2000, capital commitments are as follows:
COMMITMENT AMOUNT ---------- ------ Wellsford/Whitehall equity............ $ 8,468,000 Wellsford/Whitehall loan.............. 4,000,000 (A) Clairborne Prudential equity.......... 10,208,000 (B)
- ----------
(A) Pursuant to the Agreement, the Company could provide for up to 40% of a $10,000,000 loan to, or equity in, the venture with its joint venture partner, Whitehall committed to fund the remaining $6,000,000. (B) Capital calls are subject to the Company's approval of such investments.
STOCK REPURCHASE PROGRAM
In April 2000, the Company's Board of Directors authorized the repurchase of up to 1,000,000 additional shares of its outstanding common stock. The Company intends to repurchase the shares from time to time by means of open market purchases depending on availability of shares, the Company's cash position, the price per share and other corporate matters. No minimum number or value of shares to be repurchased has been fixed. Pursuant to this program, 29,837 shares have been repurchased as of December 31, 2000.
RESOURCES
In January 1999, a wholly-owned subsidiary of the Company obtained a $35,000,000 loan facility (the "Wellsford Finance Facility") from Fleet National Bank. In June 2000, the Company modified the terms of the Wellsford Finance Facility and reduced the maximum borrowing amount to $20,000,000. The Wellsford Finance Facility which is secured by a $25,000,000 note receivable, bears interest at LIBOR + 2.75% per annum and matures in January 2002. The Company paid an origination fee of $75,000 and is obligated to pay a fee equal to 0.25% per annum on the average daily amount of the unused portion of the facility until maturity. At December 31, 2000, the outstanding balance under the Wellsford Finance Facility was $12,000,000. The balance was completely repaid on January 4, 2001. This facility provides for the Company to meet certain financial operating and balance sheet covenants.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to secure the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility. Under the new terms, $300,000,000 represents a senior secured credit facility bearing interest at LIBOR + 1.65% per annum and $75,000,000 represents a second mezzanine facility bearing interest at LIBOR + 3.20% per annum. As of December 31, 2000, approximately $244,250,000 was outstanding under the Wellsford/Whitehall Bank Facility (approximately $181,728,000 of which was under the senior facility). At March 31, 2000, the ability to draw on this facility expired. Wellsford/Whitehall has exercised its right under the agreements to have the due date of both facilities extended for one year to December 15, 2001. Wellsford/Whitehall is presently seeking to refinance the facility. The Wellsford/Whitehall Bank Facility provides for the meeting of certain operating and balance sheet covenants and limits the amount of distributions to members.
Wellsford/Whitehall expects to meet its other liquidity requirements, such as financing additional renovations to its properties and acquisitions of new properties, if any, with operating cash flow from its properties, proceeds from financings of unencumbered properties, proceeds from any asset sales and equity contributions from the owners of Wellsford/Whitehall.
PROPERTY SALES
During the fourth quarter of 2000, the Company made the strategic decision to sell the seven assets which were originally acquired as part of the 1998 merger with Value Property Trust ("VLP"). The Company sold one asset in December 2000 and two other properties during January 2001. The Company has determined that the aggregate carrying amount of one of the assets sold in 2001 and three of the four other assets which remain available for sale is less than the amounts expected to be ultimately realized upon sale, less selling expenses. The Company anticipates selling the remaining four properties during 2001. Accordingly, the Company has recorded an impairment provision of $4,725,000 which is reflected in the accompanying consolidated statements of income as an offset to the gain on the property sold in December 2000 of approximately $4,943,000. The Company will not record depreciation expense in 2001 related to these assets.
CASH FLOWS - ----------
2000 CASH FLOWS
Cash flow provided by operating activities of $10,023,000 primarily consists of net income of $6,468,000 plus (i) depreciation and amortization of $4,980,000, (ii) an increase in accrued expenses and other liabilities of $2,662,000, (iii) distributions received in excess of joint venture income of $1,493,000, (iv) amortization of deferred compensation of $907,000 and (v) decreases in restricted cash of $506,000, partially offset by the gain
on sale of assets (net of impairment provision of $4,725,000) of $6,135,000 and increases prepaid and other assets $1,003,000.
Cash flow used in investing activities of $22,778,000 consists of (i) investments in real estate assets of $39,026,000, (ii) investments in notes receivable of $28,833,000 and (iii) capital contributions to joint venture investments of $12,895,000 partially offset by (i) repayments of notes receivables of $32,408,000, (ii) $21,650,000 of proceeds from the sale of real estate assets, (iii) returns of capital from joint venture investments of $2,886,000 and (iv) proceeds from the sale of joint venture interests of $1,032,000.
Cash flow provided by financing activities of $14,383,000 primarily consists of (i) proceeds from mortgage notes payable of $32,000,000, (ii) proceeds from the issuance of Convertible Trust Preferred Securities of $25,000,000 and (iii) proceeds from draws on the Company's credit facility of $12,000,000, partially offset by the repayment of mortgage notes payable of $30,940,000, repurchases of the Company's common stock of $21,119,000 and deferred financing costs principally associated with the issuance of the Convertible Trust Preferred Securities of $544,000.
1999 CASH FLOWS
Cash flow provided by operating activities of $13,857,000 primarily consists of net income of $8,861,000 plus (i) depreciation and amortization of $5,937,000 and (ii) amortization of deferred compensation of $848,000, offset by undistributed joint venture income of $675,000, increases in restricted cash of $459,000 and prepaid and other assets of $498,000 and a decrease in accrued expenses and other liabilities of $297,000.
Cash flow provided by investing activities of $40,834,000 consists of repayments of notes receivable of $112,741,000, the proceeds from sale of real estate assets of $7,238,000 and returns of capital from joint ventures of $6,091,000, offset by additional investments in (i) notes receivable of $49,295,000, (ii) real estate assets of $18,975,000 and (iii) capital contributions to joint ventures of $16,968,000.
Cash flow used in financing activities of $30,072,000 primarily consists of (i) repayment of credit facilities of $54,000,000, (ii) the repurchase of common shares of $12,209,000 and (iii) repayment of mortgage notes payable of $862,000, offset by borrowings from credit facilities of $37,000,000.
1998 CASH FLOWS
Cash flow provided by operating activities of $7,005,000 primarily consists of net income of $9,444,000 plus depreciation and amortization of $3,034,000, an increase in accrued expenses and other liabilities of $4,031,000 and share grants of $775,000, offset by an increase in prepaid and other assets of $6,525,000 and undistributed joint venture income of $3,515,000.
Cash flow used in investing activities of $107,115,000 consists of additional investments in (i) real estate assets of $125,514,000, (ii) notes receivable of $67,230,000 and (iii) joint ventures of $33,512,000, offset by proceeds from the sale of real estate of $64,133,000 and repayments of notes receivable of $55,009,000.
Cash flow provided by financing activities of $80,337,000 primarily consists of proceeds from (i) a credit facility of $86,500,000 and (ii) mortgage notes payable of $71,400,000 offset by repayments of (i) credit facilities of $77,000,000 and (ii) mortgage notes payable of $478,000.
See the accompanying consolidated statements of cash flows included in the consolidated financial statements for a reconciliation of the Company's cash position for the years described therein.
INFLATION - ---------
Substantially all of Wellsford Capital's and Wellsford/Whitehall's office leases provide for separate escalations of real estate taxes and operating expenses over a base amount. In addition, many of the office leases provide
for fixed base rent increases or indexed escalations (based on the CPI or other measures). The Company believes that inflationary increases in expenses will generally be offset by the expense reimbursements and contractual rent increases described above.
A substantial majority of the leases at the Company's multifamily properties are for a term of one year or less which may enable the Company to seek increased rents upon renewal or re-letting of apartment units. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation.
NET CASH FLOW - -------------
The Company considers Net Cash Flow to be an important measure of its performance, to be considered in addition to Net Income predicated on generally accepted accounting principles. Net Cash Flow, for the Company's purposes, represents net income, plus depreciation and amortization on real estate assets, the provision for impairment and depreciation and amortization from unconsolidated partnerships and joint ventures offset by accumulated depreciation on assets sold. Included in such cash flow is the Company's share of undistributed cash retained by the unconsolidated partnerships and joint ventures for continuing investment in lieu of future fundings. Net Cash Flow should not be considered a replacement for Net Income as an indicator of the Company's operating performance and is not necessarily indicative of cash available to fund cash needs.
The following table reconciles Net Income and Net Cash Flow:
Below are the Company's cash flows provided by operating activities as disclosed in the Consolidated Statements of Cash Flows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 ---- ---- ---- Operating activities........ $ 10,023,485 $ 13,856,594 $ 7,004,813 ============= ============ =============
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS.
This Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following, which are discussed in greater detail in the "Risk Factors" section of the Company's registration statement on Form S-11 (file No. 333-32445) filed with the Securities and Exchange Commission ("SEC") on July 30, 1997, as may be amended, which is incorporated herein by reference: general and local economic and business conditions, which will, among other things, affect demand for commercial and residential properties, availability and credit worthiness of prospective tenants, lease rents and the availability and cost of financing; ability to find suitable investments; competition; risks of real estate acquisition, development, construction and renovation including construction delays and cost overruns; ability to comply with zoning and other laws; vacancies at commercial and multifamily properties; dependence on rental income from real property; adverse consequences of debt financing including, without limitation, the necessity of future financings to repay debt obligations; risks of investments in debt instruments, including possible payment defaults and reductions in the value of collateral; 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 properties; inability to realize gains from the real estate assets held for sale; lower than anticipated sales prices; 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in interest rates. The Company manages this risk by offsetting its investments and financing exposures as well as by strategically timing and structuring its transactions. The following table presents the effect of a 1.00% increase in the base rates on all variable rate notes receivable and debt and its impact on annual net income:
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is included as a separate section of this annual report on Form 10-K (see page).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, their ages and their positions are as follows:
NAME AGE POSITIONS AND OFFICES HELD ---- --- -------------------------- Jeffrey H. Lynford.... 53... Chairman of the Board, Secretary and Director** Edward Lowenthal...... 56... President, Chief Executive Officer and Director* Rodney F. Du Bois..... 65... Vice Chairman and Director* James J. Burns........ 61... Senior Vice President, Chief Financial Officer David M. Strong....... 42... Vice President for Development Mark P. Cantaluppi.... 30... Vice President, Chief Accounting Officer Martin Bernstein...... 63... Director*** Douglas Crocker II.... 60... Director** Richard S. Frary...... 53... Director*** Meyer S. Frucher...... 54... Director*** Mark S. Germain....... 50... Director**
- ----------
* Term expires 2001. ** Term expires 2002. *** Term expires 2003.
The information contained in the sections captioned "Nominees for Election as Directors", "Other Directors", "Executive Officers", and "Key Employees" of the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the sections captioned "Executive Compensation", "Compensation of Directors", "Board Committees", "Employment Agreements", and "Management Incentive Plans" of the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the section captioned "Certain Transactions" of the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes.
(2) FINANCIAL STATEMENT SCHEDULES
III. Real Estate and Accumulated Depreciation
IV. Mortgage Loans on Real Estate
All other schedules have been omitted because the required information of such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or is included in the consolidated financial statements.
(3) EXHIBITS
(A) EXHIBIT NO. DESCRIPTION @@@ --- ----------- ---------------
3.1 Articles of Amendment and Restatement of the Company. **** 3.2 Articles Supplementary Classifying 350,000 Shares of Common Stock as Class A Common Stock. **** 3.3 Articles Supplementary Classifying 2,000,000 Shares of Common Stock as Series A 8% Convertible Redeemable Preferred Stock. **** 3.4 Bylaws of the Company. **** 4.1 Specimen certificate for Common Stock. *** 4.2 Secimen certificate for Class A Common Stock. **** 4.3 Specimen certificate for Series A 8% Convertible Redeemable Preferred Stock. **** 4.4 Warrant Agreement, dated as of August 28, 1997, between the Company and United States Trust Company of New York, as warrant agent, and Warrant Certificate No. 1 of the Company for 5,000,000 Warrants registered in the name of WHWEL Real Estate Limited Partnership. @
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
4.41 Amendment No. 2 to the Warrant Agreement dated as of August 28, 1997 by and between Wellsford Real Properties, Inc. and United States Trust Company, dated as of May 28, 1999. +++ 4.42 Warrant Agreement by and between Wellsford Real Properties, Inc. and United States Trust Company, dated as of May 28, 1999. +++ 4.43 Registration Rights Agreement by and between Wellsford Real Properties, Inc. and W/W Group Holdings, L.L.C., dated as of May 28, 1999. +++ 4.44 Letter Agreement dated May 28, 1999 between WHWEL Real Estate Limited Partnership and Wellsford Real Properties, Inc., confirming that Wellsford Real Properties, Inc. will exchange shares of its stock for Excess Membership Units held by WHWEL. +++ 4.5 Registration Rights Agreement, dated as of February 23, 1998, among the Company and Franklin Mutual Advisors, Inc. and Angelo Gordon & Co., L.P. + 4.6 Warrant Sale Agreement, dated as of December 21, 2000, between Wellsford and W/W Group Holdings, L.L.C. ("Holding Co.") relating to the transfer to Wellsford of warrants issued by Wellsford to Holding Co. pursuant to that certain Warrant Agreement dated as of May 28, 1999, by and between Wellsford and United States Trust Company of New York (the "Warrant Agent"). @@@@@@ 4.7 Warrant Sale Agreement, dated as of December 21, 2000, between Wellsford and Holding Co. relating to the transfer to Wellsford of warrants issued by Wellsford to Holding Co. pursuant to that certain Warrant Agreement dated as of August 28, 1997, by and between Wellsford and the Warrant Agent, as amended on July 16, 1998, and as further amended on May 28, 1999. @@@@@@ 4.8 Agreement, dated as of December 21, 2000, terminating the Registration Rights Agreement between Wellsford and Holding Co., dated as of May 28, 1999. @@@@@@ 10.1 Operating Agreement of Red Canyon at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of April 17, 1996, relating to Red Canyon. * 10.2 First Amendment to Operating Agreement of Red Canyon at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of May 19, 1997, relating to Red Canyon. **** 10.3 Tri-Party Agreement by and among NationsBank of Texas, N.A., Red Canyon at Palomino Park LLC, Wellsford Park Highlands Corp., Wellsford Residential Property Trust, Al Feld and The Feld Company, dated May 29, 1997, relating to Red Canyon. **** 10.4 Assignment and Assumption of Tri-Party Agreement by and among Wellsford Residential Property Trust, ERP Operating Limited Partnership, Red Canyon at Palomino Park LLC, Wellsford Park Highlands Corp., The Feld Company, Al Feld and NationsBank of Texas, N.A. dated May 30, 1997, relating to Red Canyon. **** 10.5 Agreement and Acknowledgment Regarding Tri-Party Agreement by and among NationsBank of Texas, N.A., Red Canyon at Palomino Park LLC, Wellsford Park Highlands Corp. and ERP Operating Limited Partnership dated May 30, 1997, relating to Red Canyon. ****
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.501 First Amendment to the Limited Liability Company Operating Agreement of WWG, dated as of December 21, 2000, among WHWEL Real Estate Limited Partnership, Wellsford Commercial Properties Trust, WXI/WWG Realty, L.L.C., Holding Co. and WP Commercial, L.L.C., dated as of May 28, 1999 (excluding exhibits and schedules). @@@@@@ 10.6 Second Amended and Restated Vacant Land Purchase and Sale Agreement between Mission Viejo Company and The Feld Company dated March 23, 1995, as amended by First Amendment, dated May 1, 1996, relating to the land underlying Palomino Park. * 10.7 Trust Indenture, dated as of December 1, 1995, between Palomino Park Public Improvements Corporation ("PPPIC") and United States Trust Company of New York, as trustee, securing Wellsford Residential Property Trust's Assessment Lien Revenue Bonds Series 1995 - $14,755,000. ** 10.8 Letter of Credit Reimbursement Agreement, dated as of December 1, 1995, between PPPIC, Wellsford Residential Property Trust and Dresdner Bank AG, New York Branch. ** 10.9 First Amendment to Letter of Credit Reimbursement Agreement, dated as of May 30, 1997, between PPPIC, Wellsford Residential Property Trust, Dresdner Bank AG, New York Branch and the Company. **** 10.10 Amendment to Wellsford Reimbursement Agreement by and between PPPIC, Wellsford Residential Property Trust and the Company, dated as of May 30, 1997. **** 10.11 Assignment and Assumption Agreement by and between Wellsford Residential Property Trust and the Company, dated as of May 30, 1997. **** 10.12 Credit Enhancement Agreement by and between the Company and ERP Operating Limited Partnership, dated as of May 30, 1997, relating to Palomino Park. **** 10.13 Reimbursement and Indemnification Agreement by and between the Company and ERP Operating Limited Partnership, dated as of May 30, 1997, relating to Palomino Park. **** 10.14 Guaranty by ERP Operating Limited Partnership for the benefit of Dresdner Bank AG, New York Branch, dated as of May 30, 1997, relating to Palomino Park. **** 10.15 Amended and Restated Promissory Note of the Company to the order of Dresdner Bank AG, New York Branch, dated May 30, 1997, relating to Palomino Park. **** 10.16 Common Stock and Preferred Stock Purchase Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 10.17 Registration Rights Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 10.18 Credit Agreement, dated as of April 25, 1997, by and among Park Avenue Financing Company LLC, PAMC Co-Manager Inc., PAFC Management, Inc., Stanley Stahl, The First National Bank of Boston, the Company, Other Banks that may become parties to the Agreement and The First National Bank of Boston, as Agent, relating to 277 Park Avenue. ** 10.19 Assignment of Member's Interest, dated as of April 25, 1997, by PAFC Management, Inc. and Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to interests in the Park Avenue Financing Company, LLC). **
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.20 Assignment of Member's Interest, dated as of April 25, 1997, by PAMC Co-Manager Inc. and Park Avenue Financing, LLC to The First National Bank of Boston, relating to 277 Park Avenue (relating to interests in 277 Park Avenue, LLC). ** 10.21 Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in Park Avenue Management Corporation). ** 10.22 Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in PAMC Co-Manager Inc.). ** 10.23 Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in PAFC Management, Inc.). ** 10.24 Conditional Guaranty of Payment and Performance, dated as of April 25, 1997, by Stanley Stahl, relating to 277 Park Avenue. ** 10.25 Cash Collateral Account Security, Pledge and Assignment Agreement, dated as of April 25, 1997, by and among 277 Park Avenue, LLC, Park Avenue Management Corporation, Park Avenue Financing Company LLC, PAMC Co-Manager Inc., Stanley Stahl and The First National Bank of Boston, relating to 277 Park Avenue. ** 10.26 Recognition Agreement, dated as of April 25, 1997, by and among The First National Bank of Boston, the Company, Column Financial, Inc., Park Avenue Financing Company LLC, PAMC Co-Manager, Inc. and 277 Park Avenue, LLC, relating to 277 Park Avenue. ** 10.27 Intercreditor Agreement, dated as of April 25, 1997, between the Company and The First National Bank of Boston, as Agent, relating to 277 Park Avenue. ** 10.28 Assignment and Acceptance Agreement, dated June 19, 1997, between BankBoston, N.A. (formerly known as The First National Bank of Boston) ("BankBoston") and the Company, relating to 277 Park Avenue. **** 10.29 Revolving Credit Agreement by and among the Company, BankBoston, Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), other banks which may become parties and BankBoston, as agent, and Morgan Guaranty, as co-agent dated as of May 30, 1997. **** 10.30 Agreement Regarding Common Stock and Preferred Stock Purchase Agreement, dated as of May 30, 1997, among ERP Operating Limited Partnership, the Company and BankBoston, as agent. **** 10.31 Assignment of Common Stock Agreements, dated as of May 30, 1997, between the Company and BankBoston, as agent. **** 10.32 Collateral Assignment of Documents, Rights and Claims (including Collateral Assignment of Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing), made as of May 30, 1997, by the Company to BankBoston, as agent. **** 10.33 First Amended and Restated Loan Agreement, dated as of July 16, 1998 (the "First Amended and Restated Loan Agreement"), among Wellsford/Whitehall Holdings, L.L.C., as Borrower, and BankBoston, Goldman Sachs Mortgage Company, and Other Banks, as Banks, and BankBoston, as Administrative Agent and Co-Arranger and Co-Syndication Agent, and Goldman Sachs Mortgage Company, as Co-Arranger and Co-Syndication Agent. ++ 10.34 Form of promissory note payable to the order of eight lenders by Wellsford/Whitehall Properties, L.L.C. under the First Amended and Restated Loan Agreement. ++
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.35 Amended and Restated Assignment of Member's Interest under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Holdings, L.L.C. to BankBoston, as Agent. ++ 10.36 Amended and Restated Cash Collateral Agreement under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by and among Wellsford/Whitehall Holdings, L.L.C., WASH Manager L.L.C., Wells Avenue Holdings L.L.C. and BankBoston, as Agent. ++ 10.37 Indemnity Agreement Regarding Hazardous Materials under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Holdings, L.L.C., Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership for the benefit of BankBoston. ++ 10.38 Conditional Guaranty of Payment under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++ 10.39 Indemnity and Guaranty Agreement under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership in favor of BankBoston, Goldman Sachs Mortgage Company and Other Banks. ++ 10.40 Mezzanine Loan Agreement, dated as of July 16, 1998 (the "Mezzanine Loan Agreement"), among Wellsford/Whitehall Holdings II, L.L.C., as Borrower, and BankBoston, Goldman Sachs Mortgage Company, and Other Banks, as Banks, and BankBoston, as Administrative Agent and Co-Arranger and Co-Syndication Agent, and Goldman Sachs Mortgage Company, as Co-Arranger and Co-Syndication Agent. ++ 10.41 Form of promissory note payable to the order of five lenders by Wellsford/Whitehall Properties II, L.L.C. under the Mezzanine Loan Agreement. ++ 10.42 Assignment of Member's Interest under the Mezzanine Loan Agreement, dated as of July 16, 1998, between Wellsford/Whitehall Properties II, L.L.C. and BankBoston, as Agent. ++ 10.43 Indemnity Agreement Regarding Hazardous Materials under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Properties II, L.L.C., Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership for the benefit of BankBoston. ++ 10.44 Nomura Conditional Guaranty of Payment under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.45 Conditional Guaranty of Payment under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++ 10.46 Indemnity and Guaranty Agreement under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership in favor of BankBoston, Goldman Sachs Mortgage Company and Other Banks. ++ 10.461 First Amendment to Mezzanine Loan Agreement, dated as of May 28, 1999 by and among Wellsford/Whitehall Properties II, L.L.C., Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, Wellsford Real Properties, Inc., Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII, Whitehall Street Real Estate Limited Partnership VIII, Wells Avenue Holdings, L.L.C., Wash Manager L.L.C., BankBoston, N.A., Goldman Sachs Mortgage Company, BHF-Bank Aktiengesellschaft, Morgan Stanley Senior Funding Inc., and PAM Capital Funding LP. +++ 10.462 Contribution Agreement, dated as of February 12, 1998, among Saracen Properties, Inc., Saraceno Holding Trust General Partnership, Dominic J. Saraceno, 150 Wells Avenue Realty Trust, River Park Realty Trust, Seventy Wells Avenue LLC, Newton Acquisition LLC I, Saracen Portland L.L.C., KSA Newton Acquisition Limited Partnership II and KSA Newton Limited Partnership I, as Contributor, and Wellsford/Whitehall Properties, L.L.C., as Contributee. @@@@ 10.47 $50 million Revolving Credit Agreement, dated as of January 12, 1999, among Wellsford Finance, Inc., as Borrower, and BankBoston and Other Banks, as Lender, and BankBoston, as Agent. ++ 10.48 $50 million promissory note, dated January 12, 1999, payable to BankBoston by Wellsford Finance, Inc. ++ 10.49 Collateral Assignment of Documents, Rights and Claims, dated January 12, 1999, from Wellsford Finance, Inc. to BankBoston, as Agent. ++ 10.50 Limited Liability Company Operating Agreement of Wellsford/Whitehall Group, L.L.C., dated as of May 28, 1999. +++ 10.51 Letter Agreement, dated as of July 16, 1998, between the Company and WHWEL Real Estate Limited Partnership, relating to warrants to be issued to WHWEL Real Estate Limited Partnership. ++ 10.52 Fixed Rate Loan Agreement, dated as of August 11, 1998 (the "Fixed Rate Loan Agreement"), by and among First Union Real Estate Equity and Mortgage Investments, as Borrower, Bankers Trust Company, as Agent, and Bankers Trust Company, Wellsford Capital and BankBoston, as Lenders. ++ 10.53 $15 million promissory note, dated August 11, 1998, payable to the order of Wellsford Capital by First Union Real Estate Equity and Mortgage Investments under the Fixed Rate Loan Agreement. ++ 10.54 First Amendment of Fixed Rate Loan Agreement, dated as of January 8, 1999, among First Union Real Estate Equity and Mortgage Investments, as Borrower, Bankers Trust Company, Wellsford Capital and BankBoston, as Lenders, and Bankers Trust Company, as Agent. ++
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.55 Letter dated January 8, 1999, among First Union Real Estate Equity and Mortgage Investments, as Borrower, Bankers Trust Company, Wellsford Capital and BankBoston, as Lenders, and Bankers Trust Company, as Agent. ++ 10.56 Revolving Credit Agreement for $70 million, dated as of August 28, 1997, between AP-Anaheim LLC, AP-Arlington LLC, AP-Atlantic LLC, AP-Cityview LLC, AP-Farrell Ramon LLC, AP-Palmdale LLC, AP-Redlands LLC, AP-Victoria LLC, AP-Victorville LLC, and AP-Sierra LLC, each a California limited liability company (collectively, the "Abbey Affiliates"), as Borrower, and Morgan Guaranty Trust Company of New York, as Lender. @ 10.57 Amendment to Revolving Credit Agreement, dated as of April 6, 1998, by AP-Diamond Bar LLC, AP-Edinger LLC, AP- Glendora LLC, AP- Anaheim LLC, AP- Arlington LLC, AP- Atlantic LLC, AP- Cityview LLC, AP- Redlands LLC, AP- Palmdale LLC, AP- Farrell Ramon LLC, AP- Sierra LLC, AP- Victoria LLC and AP- Victorville LLC (collectively, the "Amended Abbey Affiliates"), as Borrower, and Morgan Guaranty Trust Company of New York, as Lender. ++ 10.58 Loan Participation Agreement, dated as of August 28, 1997, between Morgan Guaranty Trust Company of New York and the Company. + 10.59 First Amendment to Loan Participation Agreement, dated as of April 7, 1998, between Morgan Guaranty Trust Company of New York and Wellsford Capital. ++ 10.60 $70 million promissory note (the "Promissory Note"), dated August 28, 1997, payable to the order of Morgan Guaranty Trust Company of New York by the Abbey Affiliates. @ 10.61 Amendment to Promissory Note, dated as of April 6, 1998, between the Amended Abbey Affiliates and Morgan Guaranty Trust Company of New York. ++ 10.62 Purchase and Sale Agreement, dated as of September 18, 1997, among the Company, Wellsford Capital Corporation and Whitehall Street Real Estate Limited Partnership VII. @@ 10.63 First Amended and Restated Master Credit Agreement, dated December 30, 1997, effective as of July 31, 1997, among The Woodlands Commercial Properties Company, L.P., The Woodlands Land Development Company, L.P., and BankBoston, Morgan Stanley Senior Funding, Inc., as Documentation Agent, and Other Banks, and BankBoston, as Managing Agent and Syndication Agent. + 10.64 Intercreditor Agreement, dated December 30, 1997, effective as of July 31, 1997, by and between BankBoston, Morgan Stanley Senior Funding, Inc. and the Other Lenders, relating to Woodlands. + 10.65 $4,186,991.87 Commercial Company Second Secured Term Loan Note, dated December 30, 1997, payable to the order of the Company by The Woodlands Commercial Properties Company, L.P. and The Woodlands Land Development Company, L.P. + 10.66 $10,813,008.13 Land Company Second Secured Term Loan Note, dated December 30, 1997, payable to the order of the Company by The Woodlands Land Development Company, L.P. and The Woodlands Commercial Properties Company, L.P. + 10.67 Revolving Credit Agreement, dated as of March 28, 1998, among Safeguard Capital Fund, L.P., as Borrower, and Morgan Guaranty Trust Company of New York, as Lender. ++
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.68 $90 million promissory note, dated March 28, 1998, payable to Morgan Guaranty Trust Company of New York by Safeguard Capital Fund, L.P. ++ 10.69 Loan Participation Agreement, dated as of December 1, 1998, between Morgan Guaranty Trust Company of New York and Wellsford Capital. ++ 10.70 Program Agreement for Clairborne Investors Mortgage Program between Creamer Realty Consultants and The Prudential Investment Corporation, dated as of December 10, 1997. + 10.71 Amended and Restated General Partnership Agreement of Creamer Realty Consultants, dated as of January 1, 1998, by and between Wellsford CRC Holding Corp. and FGC Realty Consultants, Inc. + 10.72 Limited Liability Company Operating Agreement of Creamer Vitale Wellsford, L.L.C., dated as of January 20, 1998, by and between Wellsford CRC Holding Corp. and SX Advisors, LLC. + 10.73 Loan Agreement, dated as of February 27, 1998, between Wellsford Sonterra L.L.C., as Borrower, and Nationsbank, N.A., as Lender. + 10.74 $16,400,000 promissory note, dated February 27, 1998, payable to the order of NationsBank, N.A., by Wellsford Sonterra, L.L.C. + 10.75 Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated February 27, 1998 by Wellsford Sonterra, L.L.C. in favor of NationsBank, N.A. + 10.76 $34,500,000 Multifamily Note, dated December 24, 1997, payable to the order of GMAC Commercial Mortgage Corporation by Park at Highlands L.L.C. + 10.77 Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated December 24, 1997, by Park at Highlands L.L.C. in favor of GMAC Commercial Mortgage Corporation. + 10.78 $28 million secured promissory note, dated October 22, 1998, payable to the order of Lehman Brothers Holdings Inc. by Wellsford Capital Properties, L.L.C. ++ 10.79 Conditional Guarantee, dated as of October 22, 1998, by Wellsford Capital in favor of Lehman Brothers Holdings Inc. ++ 10.80 Mortgage and Security Agreement, dated as of October 22, 1998, by Wellsford Capital Properties, L.L.C. to Lehman Brothers Holdings Inc. ++ 10.81 1998 Management Incentive Plan of the Company. ++ 10.82 1997 Management Incentive Plan of the Company. ** 10.83 Rollover Stock Option Plan of the Company. ** 10.84 Employment Agreement between the Company and Jeffrey H. Lynford. **** 10.85 Employment Agreement between the Company and Edward Lowenthal. **** 10.86 Employment Agreement between the Company and David M. Strong. **** 10.87 Employment Agreement between the Company and Rodney F. Du Bois. +++ 10.88 Employment Agreement between the Company and James J. Burns. +++ 10.89 Certificate of Trust of WRP Convertible Trust I, as filed with the Secretary of State of the State of Delaware on May 5, 2000. @@@@@ 10.90 Declaration of Trust of WRP Convertible Trust I, dated as of May 5, 2000, by and among Rodney F. Du Bois and James J. Burns as Regular Trustees, Wilmington Trust Company as both Delaware Trustee and Institutional Trustee and Wellsford Real Properties, Inc., as Sponsor. @@@@@ 10.91 Indenture for 8.25% Convertible Junior Subordinated Debentures, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and Wilmington Trust Company, as Trustee. @@@@@
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.92 Preferred Securities Purchase Agreement, dated as of May 5, 2000, by and among Wellsford Real Properties, Inc., WRP Convertible Trust I and ERP Operating Limited Partnership. @@@@@ 10.93 Preferred Securities Guarantee, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and Wilmington Trust Company, as Trustee. @@@@@ 10.94 Common Securities Guarantee, dated as of May 5, 2000, by Wellsford Real Properties, Inc. @@@@@ 10.95 Amendment to Registration Rights Agreement, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and ERP Operating Limited Partnership. @@@@@ 10.96 Articles Supplementary reclassifying and designating 350,000 shares of unissued Common Stock as Class A-1 Common Stock, dated as of May 5, 2000. @@@@@ 10.97 Amended and Restated Revolving Credit Agreement, dated as of June 28, 2000, among Wellsford Finance, LLC, as Borrower and Fleet National Bank and other lenders which may become parties to this agreement, as Lenders and Fleet National Bank, as Agent. # 10.98 Bond Pledge and Security Agreement, dated June 16, 2000, among Palomino Park Public Improvements Corporation, as Bond Issuer, Wellsford Real Properties, Inc., together with Bond Issuer, as Pledgor, Commerzbank AG, as Bank, and United States Trust Company of New York, as Bond Trustee. # 10.99 Letter of Credit Reimbursement Agreement, dated June 16, 2000, among Palomino Park Public Improvements Corporation, as Bond Issuer, Wellsford Real Properties, Inc., together with Bond Issuer, as Account Parties, and Commerzbank AG, as Bank. # 10.100 Unconditional Guaranty of Payment and Performance, dated June 28, 2000, between Wellsford Real Properties, Inc., as Guarantor, and Fleet National Bank, as Lender. # 10.101 Promissory Note, dated June 16, 2000, between Wellsford Real Properties, Inc. and Commerzbank AG. # 10.102 Letter Agreement dated September 30, 2000, between Wellsford Real Properties, Inc. and Creamer Vitale Wellsford L.L.C. relating to the sale and subsequent assignment of SX Advisors, LLC's interest in Creamer Vitale Wellsford L.L.C. to Wellsford Real Properties, Inc. ## 10.103 Assignment of Membership Interest, dated as of October 1, 2000, between SX Advisors, LLC and Wellsford Fordham Tower, L.L.C., whereby SX Advisors, LLC assigned its interest in Creamer Vitale Wellsford L.L.C. to Wellsford Real Properties, Inc. ## 10.104 Memorandum of Understanding, dated October 25, 2000, among Wellsford Real Properties, Inc., Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, WXI/WWG Realty, L.L.C. and W/W Group Holdings, L.L.C., relating to Wellsford/Whitehall Group, L.L.C. ## 10.105 Purchase and Sale Agreement dated as of May 31, 2000, between Wellsford Sonterra LLC and Thayer Residential, Inc. for the sale of the Sonterra at Williams Centre Apartments in Tucson, Arizona. 10.106 Loan Agreement dated as of December 20, 2000, between Silver Mesa at Palomino Park LLC and KeyBank National Association. 10.107 $32,000,000 Promissory Note dated as of December 20, 2000, payable to KeyBank National Association by Silver Mesa at Palomino Park LLC.
EXHIBIT NO. DESCRIPTION @@@ (CONTINUED) ----------- ---------------------------
10.108 Guaranty dated December 20, 2000, by Wellsford Capital for the benefit of KeyBank National Association. 10.109 Sale-Purchase Agreement and Joint Escrow Instructions dated as of December 8, 2000, between Wellsford Capital Properties, L.L.C. and Dial Advisory Group, Inc. for the sale of properties located at 1651 Sixteenth Street and 900 Colorado Avenue, Santa Monica, California. 10.110 Sale-Purchase Agreement dated as of December 4, 2000, between Wellsford Capital Properties, L.L.C. and CRC Communities, Inc. for the sale of 501 Hoes Lane, Piscataway, New Jersey. 10.111 Sale-Purchase Agreement dated as of November 27, 2000, between Wellsford Capital Properties, L.L.C. and Windswept Development, LLC for the sale of the Bradford Plaza Shopping Center, West Chester, Pennsylvania. 21.1 Subsidiaries of the Registrant. 99.1 "Risk Factors" section of the Company's Registration Statement on Form S-11 (file no. 333-32445), as may be amended.
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* Previously filed as an exhibit to the Form 10 filed on April 23, 1997. ** Previously filed as an exhibit to the Form 10/A Amendment No. 1 filed on May 21, 1997. *** Previously filed as an exhibit to the Form 10/A Amendment No. 2 filed on May 28, 1997. **** Previously filed as an exhibit to the Form S-11 filed on July 30, 1997. *****Previously filed as an exhibit to Amendment No. 1 to Form S-11 filed on November 14, 1997. @ Previously filed as an exhibit to the Form 8-K filed on September 11, 1997. @@ Previously filed as an exhibit to the Form 8-K filed on September 23, 1997. @@@ Wellsford acquired its interest in a number of these documents by assignment. @@@@ Previously filed as an exhibit to the Form 8-K filed on April 28, 1998. @@@@@ Previously filed as an exhibit to the Form 8-K filed on May 11, 2000. @@@@@@ Previously filed as an exhibit to the Form 8-K filed on January 11, 2001. + Previously filed as an exhibit to the Form 10-K filed on March 31, 1998. ++ Previously filed as an exhibit to the Form 10-K filed on March 31, 1999. +++ Previously filed as an exhibit to the Form 10-K filed on March 29, 2000. # Previously filed as an exhibit to the Form 10-Q filed on August 2, 2000. ## Previously filed as an exhibit to the Form 10-Q filed on November 3, 2000.
(b) During the last quarter of the period covered by this report, the Company filed the following reports on Form 8-K:
None.
(c) The following exhibits are filed as exhibits to this Form 10-K: See Item 14 (a) (3) above.
(d) The following documents are filed as a part of this report:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WELLSFORD REAL PROPERTIES, INC.
By: /s/ James J. Burns ------------------------------- James J. Burns Senior Vice President, Chief Financial Officer
By: /s/ Mark P. Cantaluppi ------------------------------- Mark P. Cantaluppi Vice President, Chief Accounting Officer
Dated: March 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the registrant with the respective state of organization as of December 31, 2000:
SUBSIDIARY STATE ---------- ----- Wellsford Real Properties, Inc................. Maryland Wellsford Capital.............................. Maryland Wellsford Capital Properties, L.L.C............ Delaware Wellsford Finance, Inc......................... Maryland Wellsford Finance, L.L.C....................... Delaware Second Holding Company, LLC.................... Delaware Belford Capital Management, L.L.C.............. Delaware Belford Capital Group, L.L.C................... Delaware BPC Company, L.L.C............................. Delaware Wellsford CRC Holding Corp..................... Maryland Clairborne Fordham Tower, LLC.................. Delaware Creamer Vitale Wellsford L.L.C................. Delaware Wellsford Sonterra L.L.C....................... Arizona Wellsford Park Highlands Corp.................. Colorado Park at Highlands L.L.C........................ Colorado Red Canyon at Palomino Park L.L.C.............. Colorado Silver Mesa at Palomino Park L.L.C............. Colorado Green River at Palomino Park L.L.C............. Colorado Gold Peak at Palomino Park L.L.C............... Colorado Palomino Park Telecom L.L.C.................... Colorado Parkside Cafe at Palomino Park, Inc............ Colorado Wellsford Commercial Properties Trust.......... Maryland Wellsford/Whitehall Group, L.L.C............... Delaware Wellsford Ventures, Inc........................ Maryland
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. IN FORM 10-K ---------
Report of Independent Auditors...........................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............F-4
Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998............F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998............F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998............F-7
Notes to Consolidated Financial Statements...............................F-8
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes ...........................................F-41
FINANCIAL STATEMENT SCHEDULES
III - Real Estate and Accumulated Depreciation...........................S-1
IV - Mortgage Loans on Real Estate.......................................S-3
All other schedules have been omitted because the required information for such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the consolidated financial statements.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Wellsford Real Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Wellsford Real Properties, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of Second Holding Company, LLC, a 51% owned joint venture of the Company, for which the Company's net investment is $27,867,597 as of December 31, 2000 and equity in earnings of $1,431,835 for the year then ended. These statements were audited by other auditors whose report has been furnished to us, and in our opinion, insofar as it relates to the data included for the Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellsford Real Properties, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York March 14, 2001
INDEPENDENT AUDITORS' REPORT
The Board of Managers Second Holding Company, LLC:
We have audited the consolidated balance sheet of Second Holding Company, LLC and subsidiaries as of December 31, 2000, and the related consolidated statements of income, members' equity and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Second Holding Company, LLC and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Chicago, Illinois February 21, 2001
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REVERSE STOCK SPLIT
On June 9, 2000, shareholders of Wellsford Real Properties, Inc., a Maryland corporation, approved a reverse stock split whereby every two outstanding shares of common stock and class A-1 common stock were converted into one share of outstanding common stock and class A-1 common stock. The par value of both classes of stock increased from $0.01 per share to $0.02 per share and the number of authorized shares was halved from 197,650,000 to 98,825,000 for common shares and from 350,000 to 175,000 for class A-1 common shares. The reverse split was effective for trading beginning June 12, 2000. Resulting fractional shares were redeemed for cash.
All share and per share amounts in the financial statements and the notes there to have been adjusted for the impact of the split, for all periods presented.
2. ORGANIZATION AND BUSINESS
Wellsford Real Properties, Inc. (and subsidiaries, collectively the "Company") was formed on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the "Trust"). The Trust was formed in 1992 as the successor to Wellsford Group Inc. (and affiliates) which was formed in 1986. On May 30, 1997, the Trust merged (the "Merger") with Equity Residential Properties Trust ("EQR"). Immediately prior to the Merger, the Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of the Trust. Immediately after the contribution of assets to the Company and immediately prior to the Merger, the Trust distributed to its common shareholders all the outstanding shares of the Company owned by the Trust (the "Spin-off"). On June 2, 1997, the Company sold 6,000,000 shares of its common stock in a private placement (the "Private Placement") to a group of institutional investors at $20.60 per share, the Company's then book value per share.
The Company is a real estate merchant banking firm headquartered in New York City which acquires, develops, finances and operates real properties and organizes and invests in private and public real estate companies. The Company has established three strategic business units ("SBUs") within which it executes its business plan: (i) commercial property operations which are held in the Company's subsidiary, Wellsford Commercial Properties Trust, through its ownership interest in Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall"); (ii) debt and other equity activities through the Wellsford Capital SBU; and (iii) property development and land operations through the Wellsford Development SBU.
In December 2000, the Company and various entities affiliated with the Whitehall Funds, private real estate funds sponsored by Goldman, Sachs & Co. ("Whitehall"), executed definitive agreements modifying the terms of the Wellsford/Whitehall joint venture effective January 1, 2001 (the "Amendments"). The key features of the Amendments provide for the Company to retain its economic interest in Wellsford/Whitehall, while an affiliate of Whitehall will become responsible for day-to-day operations. The Company will maintain its current membership on Wellsford/Whitehall's management committee and must agree to specified "Major Decisions." Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's stock, which had previously been issued to Whitehall, were returned and cancelled. Whitehall has also agreed to pay the Company certain specified fees when Wellsford/Whitehall assets are sold as well as when certain new assets are acquired by Whitehall affiliates in a newly formed entity.
See Note 13 for additional information regarding the Company's industry segments.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 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. 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.
CASH AND CASH EQUIVALENTS. The Company considers all demand and money market accounts and short term investments in government funds with an original maturity of three months or less at the date of purchase to be cash and cash equivalents.
REAL ESTATE AND DEPRECIATION AND AMORTIZATION. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Ordinary repairs and maintenance are expensed as incurred.
Tenant improvements and leasing commissions related to commercial properties are capitalized and amortized over the terms of the related leases. Costs incurred to acquire investments in joint ventures are capitalized and if ascribed to tangible assets are amortized over the life of the related assets and if ascribed to intangible assets are amortized over a ten-year period. Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements, 40 years for commercial properties and five to twelve years for furnishings and equipment.
Depreciation and amortization expense was approximately $4,968,000, $6,155,000 and $3,157,000 in 2000, 1999 and 1998, respectively, and included approximately $664,000, $1,510,000 and $390,000 of amortization of certain costs capitalized to the Company's Investment in Joint Ventures in 2000, 1999 and 1998, respectively.
The Company reviews its real estate assets and investments in joint ventures (collectively its "long-lived assets") for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the fourth quarter of 2000, the Company made the strategic decision to sell the seven assets which were originally acquired as part of the 1998 merger with Value Property Trust ("VLP"). The Company sold one asset in December 2000 and two other properties during January 2001. The Company has determined that the aggregate carrying amount of the assets sold in 2001 and the four other assets which remain available for sale is less than the amounts expected to be ultimately realized upon sale, less selling expenses. The Company anticipates selling the remaining four properties during 2001. Accordingly, the Company has recorded an impairment provision of $4,725,000 which is reflected in the accompanying consolidated statements of income as an offset to the gain on the property sold in December 2000 of approximately $4,943,000. The Company will not record depreciation expense in 2001 related to these assets.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the year ended December 31, 1999, the Company determined that one of its joint venture investments, Creamer Vitale Wellsford, L.L.C. ("CVW") was impaired due to lower than expected operating results and accordingly wrote the asset down by approximately $912,000 to its then estimated fair value by recording additional depreciation and amortization expense in the accompanying consolidated financial statements. Fair value was based on estimated future cash flows to be generated by the long-lived asset, discounted at a market rate. In September 2000, the Company recorded additional depreciation and amortization expense of $145,000 as one of the two principals left CVW to pursue other employment and the venture was terminated. There were no such impairment provisions recorded during the year ended December 31, 1998.
REAL ESTATE - RESIDENTIAL UNITS AVAILABLE FOR SALE. The Company's residential units available for sale are recorded at the lower of historical cost or market value based upon current conditions. As units are sold, the cost of each unit will be charged to cost of sales based upon its relative sales value.
DEFERRED FINANCING COSTS. Deferred financing costs consist of costs incurred to obtain financing or financing commitments including the issuance of the Convertible Trust Preferred Securities. Such costs are amortized over the expected term of the respective agreements.
MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired if, based on current information and events, it is probable that all amounts due under the note agreement are not collectable. Impairment is measured based upon the fair value of the underlying collateral. No impairment has been recorded during the years ended December 31, 2000, 1999 and 1998.
INCOME RECOGNITION. Commercial properties are leased under operating leases. Rental revenue is recognized on a straight-line basis over the terms of the respective leases. Residential communities are leased under operating leases with terms of generally six to 14 months. Rental revenue is recognized monthly as it is earned. Interest income is recorded on an accrual basis over the life of the loan. Sales of real estate assets are recognized at closing, subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines.
SHARE BASED COMPENSATION. Statement of Financial Accounting Standard ("SFAS") 123 "Accounting for Stock-Based Compensation" establishes a fair value based method of accounting for share based compensation plans, including share options. However, registrants may elect to continue accounting for share option plans under Accounting Principles Board Opinion ("APB") 25, but are required to provide pro forma net income and earnings per share information "as if" the new fair value approach had been adopted. Because the Company has elected to continue to account for its share based compensation plans under APB 25, there has been no impact on the Company's consolidated financial statements resulting from SFAS 123.
Shares issued pursuant to the Company's deferred compensation plan are recorded at the market price on the date of issuance and amortized over the respective vesting periods.
INCOME TAXES. The Company accounts for income taxes under SFAS 109 "Accounting for Income Taxes." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted based upon periodic evaluations.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE DATA. Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period, including class A-1 common shares. Diluted earnings per common share are based upon the increased number of common shares that would be outstanding assuming the exercise of dilutive common share options, warrants and Convertible Trust Preferred Securities.
The following table details the computation of earnings per share, basic and diluted:
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998, SFAS No. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES was issued. In June1999, SFAS No. 137--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 (AN AMENDMENT OF FASB STATEMENT NO. 133) was issued. SFAS No. 137 extended the required date of adoption of SFAS No. 133 to the fiscal year beginning June 15, 2000. Although SFAS No. 137 permits early adoption, the Company will adopt SFAS No. 133 effective January 1, 2001. The Company does not anticipate that the adoption of SFAS No. 133 will have a material effect on its results of operations or financial position.
RECLASSIFICATION. Amounts in certain accounts have been reclassified to conform to the current year presentation.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRICTED CASH
Restricted cash primarily consists of deferred compensation arrangement deposits and debt service and construction reserve balances. At December 31, 2000 and 1999, deferred compensation arrangement deposits amounted to approximately $7,009,000 and $6,335,000, respectively, and reserve balances amounted to approximately $2,913,000 and $2,132,000, respectively. Deferred compensation arrangement deposits are made solely by, and at the discretion of, the Company's officers and employees who participate in the plan.
5. NOTES RECEIVABLE
At December 31, 2000 and 1999, notes receivable consisted of the following:
6. DEBT
At December 31, 2000 and 1999, the Company's debt consisted of the following:
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT (CONTINUED)
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. The Company will incur an annual fee of approximately $142,000 related to this enhancement and paid an origination fee of approximately $158,000 upon closing. The letter of credit agreement provides for the Company to meet certain financial operating and balance sheet covenants. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit. The Company incurred aggregate fees of $392,000 and $246,000 for the years ended December 31, 2000 and 1999 respectively, related to all of the credit enhancements for the Palomino Park Bonds.
In November 2000, in conjunction with the conversion of the Silver Mesa phase to a condominium project, the Company made a repayment of $2,075,000 of bond principal.
In May 1997, the Company obtained a $50,000,000 two-year line of credit (extendable for one year) from Fleet National Bank and Morgan Guaranty Trust Company of New York (the "WRP Bank Facility"). The WRP Bank Facility was secured by a capital contribution commitment and a $25,000,000 note receivable. In May 1999, the Company modified the WRP Bank Facility to extend the maturity date to May 2000. The modified WRP Bank Facility bore interest at LIBOR + 1.75% per annum and the Company paid a fee equal to three-eighths of one percent (0.375%) per annum on the average daily amount of the unused portion of the WRP Bank Facility until maturity. Prior to the modification, the Company was obligated to pay a fee equal to one-quarter of one percent (0.25%) per annum on the average daily amount of the unused portion of the WRP Bank Facility. In May 2000, the WRP Bank Facility was terminated in conjunction with a private placement of securities to EQR. The Company did not borrow funds under this facility during 2000 prior to its termination.
In January 1999, a wholly-owned subsidiary of the Company obtained a $35,000,000 loan facility (the "Wellsford Finance Facility") from Fleet National Bank. In June 2000, the Company modified the terms of the Wellsford Finance Facility and reduced the maximum borrowing amount to $20,000,000. The Wellsford Finance Facility which is secured by a $25,000,000 note receivable, bears interest at LIBOR + 2.75% per annum and matures in January 2002. The Company paid an origination fee of $75,000 and is obligated to pay a fee equal to 0.25% per annum on the average daily amount of the unused portion of the facility until maturity. At December 31, 2000, the outstanding balance under the Wellsford Finance Facility was $12,000,000. The balance was completely repaid on January 4, 2001. This facility provides for the Company to meet certain financial operating and balance sheet covenants.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT (CONTINUED)
The Company's long-term debt maturities for the next five years and thereafter are as follows:
The Company capitalizes interest related to buildings and condominiums under construction and renovation to the extent such assets qualify for capitalization. Total interest capitalized on consolidated assets during the years ended December 31, 2000, 1999 and 1998 and was approximately $2,347,000, $1,071,000 and $803,000, respectively.
7. CONVERTIBLE TRUST PREFERRED SECURITIES
In May 2000, the Company privately placed with a subsidiary of EQR 1,000,000 8.25% Convertible Trust Preferred Securities, representing beneficial interests in the assets of WRP Convertible Trust I, a Delaware statutory business trust which is a consolidated subsidiary of the Company ("WRP Trust I"), with an aggregate liquidation amount of $25,000,000 (the "Convertible Trust Preferred Securities"). WRP Trust I also issued 31,000 8.25% Convertible Trust Common Securities to the Company, representing beneficial interests in the assets of WRP Trust I, with an aggregate liquidation amount of $775,000. The proceeds from both transactions were used by WRP Trust I to purchase $25,775,000 of the Company's 8.25% Convertible Junior Subordinated Debentures ("Convertible Debentures"), which mature on May 4, 2022. The net proceeds from the sale of the Convertible Debentures, after transaction costs, will be used by the Company for general corporate purposes. The transactions between WRP Trust I and the Company are eliminated in the consolidated financial statements of the Company. The Company incurred approximately $450,000 of costs in connection with the issuance of the securities.
The Convertible Trust Preferred Securities are convertible into 1,123,696 common shares at $22.248 per share and are redeemable in whole or in part by the Company on or after May 30, 2002. EQR can require redemption on or after May 30, 2012 unless the Company exercises one of its two five-year extensions (subject to an interest adjustment to the then prevailing market rates if higher than 8.25% per annum). The redemption rights are subject to certain other terms and conditions contained in the related agreements. In connection with this issuance, the Company simultaneously terminated the $50,000,000 WRP Bank Facility.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the income tax provision are as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 ---- ---- ---- Current federal tax ........ $ 3,005,000 $ 700,000 $ 2,756,165 Current state and local tax 905,000 930,000 909,197 Deferred federal tax ....... (1,820,000) 240,000 (693,965) Deferred state and local tax (660,000) 80,000 (121,099) ----------- ----------- ----------- $ 1,430,000 $ 1,950,000 $ 2,850,298 =========== =========== ===========
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense is as follows:
The aforementioned income tax expense for 2000 is prior to the Federal, state and local tax benefit aggregating $510,000 attributable to the Convertible Trust Preferred Securities distributions and amortization.
The Company has net operating loss ("NOL") carryforwards, for Federal income tax purposes, resulting from the Company's merger with VLP in 1998. The NOLs aggregate $64,708,692 at December 31, 2000, expire in the years 2008 through 2012 and are subject to an annual and aggregate limit on utilization of NOLs after an ownership change, pursuant to Section 382 of the Internal Revenue Code.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------ 2000 1999 ---- ---- Deferred Tax Assets - ------------------- Net operating loss ......................... $ 22,000,950 $ 23,927,267 Deferred compensation arrangements ......... 3,193,971 2,779,540 AMT credit carryforward .................... -- 549,799 Value Property Trust asset basis differences 1,253,478 -- Other ...................................... 418,558 492,914 26,866,957 27,749,520 ------------ ------------ Valuation allowance ........................ (17,472,331) (18,984,217) ------------ ------------ Total deferred tax assets .................. 9,394,626 8,765,303 ------------ ------------ Deferred Tax Liabilities - ------------------------ VLP asset basis differences ................ -- (1,992,584) Palomino Park asset basis differences ...... (846,397) -- Wellsford/Whitehall net income in excess of taxable income ....................... (1,874,731) (2,179,562) Other ...................................... (89,558) (127,712) ------------ ------------ Total deferred tax liabilities ............. (2,810,686) (4,299,858) ------------ ------------ Net deferred tax asset ..................... $ 6,583,940 $ 4,465,445 ============ ============
SFAS 109 requires a valuation allowance to reduce the deferred tax assets if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, management has determined that a $17,472,331 and $18,984,217 valuation allowance at December 31, 2000 and 1999, respectively, is necessary. The valuation allowance relates to the NOL carryforwards and the deferred compensation arrangements.
9. TRANSACTIONS WITH AFFILIATES
The Company earned approximately $703,000, $517,000 and $36,000 in interest income and $600,000 $600,000 and $300,000 in management fees during the years ended December 31, 2000, 1999 and 1998, respectively, from Wellsford/Whitehall. In 2000, the Company also earned approximately $86,000 of additional fees from Whitehall relating to asset acquisitions as provided for in the Amendments. Approximately $86,000 and $463,000 was due to the Company from Whitehall and Wellsford/Whitehall at December 31, 2000 and 1999, respectively.
In September 1999, the Company purchased a commercial liability insurance policy for all of the Company's assets, through an affiliate of Whitehall. The total billings related to this policy were approximately $166,000 and $45,000 for the years ended December 31, 2000 and 1999, respectively.
The seven VLP properties are managed by another affiliate of Whitehall. Management fees expensed during the years ended December 31, 2000, 1999 and 1998, were approximately $242,000, $140,000 and $115,000, respectively. Simultaneous with the VLP merger transaction in February 1998, the Company sold 13 of the 20 VLP properties to another affiliate of Whitehall for an aggregate of approximately $64,000,000.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSACTIONS WITH AFFILIATES (CONTINUED)
As part of the terms of the Merger, two of the Company's executive officers are on the board of directors of EQR. In addition, the president of EQR is a member of the Company's board of directors. EQR had a 14.15% and 20% interest in the Company's residential project in Denver, Colorado at December 31, 2000 and 1999, respectively.
The Company has direct and indirect investments in a real estate market research internet company, Reis Reports, Inc. ("Reis"), a leading provider of real estate market information to institutional investors. At December 31, 2000, the Company's aggregate investment in Reis was $6,575,000, or 22% of Reis' equity on an as converted basis. The primary shareholder of Reis is the brother of Mr. Lynford, Chairman of the Company. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. The Chairman, President and certain directors of the Company who have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis.
See Notes 6 and 13 for additional related party information.
10. SHAREHOLDERS' EQUITY
The Company has issued shares to executive officers and other employees through annual bonus and/or deferred compensation awards, as well as certain shares issued at the date of the Merger, pursuant to the Company's non-qualified deferred compensation plan. At December 31, 2000, an aggregate of 261,684 shares, which had an aggregate market value of approximately $5,467,000 at the respective dates of issuance, have been classified as Treasury Stock in the Company's consolidated financial statements. Such shares are held in a Rabbi Trust and are accounted for pursuant to existing accounting literature. The bonus awards vest immediately and the deferred compensation awards vest over various periods ranging from two to five years as long as the officer or employee is still employed by the Company. A summary of activity for the three years ended December 31, 2000 follows:
During the years ended December 31, 2000, 1999 and 1998, the Company recorded costs approximating $907,000, $848,000 and $135,000, respectively, pursuant to the issuances under the deferred compensation arrangements. Such amounts are included in General and Administrative expenses in the Company's consolidated financial statements.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAREHOLDERS' EQUITY (CONTINUED)
The Company implemented two separate programs to repurchase an aggregate of 1,000,000 outstanding shares of its common stock during 1999. One program allowed the Company to repurchase common shares on the open market, while the odd-lot share program offered identified eligible shareholders owning fewer than 50 shares the opportunity to sell all of their shares back to the Company. These programs resulted in 738,247 shares being repurchased and cancelled by December 31, 1999, at an average purchase price of $16.36 per common share.
In February 2000, the Company repurchased 1,286,816 shares of its outstanding common stock from an institutional investor for approximately $20,589,000 or $16.00 per common share. In April 2000, the Company's Board of Directors authorized the repurchase of up to 1,000,000 additional shares of its outstanding common stock. The Company intends to repurchase the shares from time to time by means of open market purchases depending on availability of shares, the Company's cash position, the price per share and other corporate matters. No minimum number or value of shares to be repurchased has been fixed. Pursuant to this program, 29,837 shares have been repurchased. Total shares repurchased during the year ended December 31, 2000 were 1,318,732, at an average purchase price of $16.01 per share.
In July 1999, the Company purchased 3,598 common shares at the current market price of $20.75 per share from an officer who resigned.
The Company issued an aggregate of 4,655 and 4,365 common shares during 2000 and 1999, as part of the non-cash compensation arrangements to the non-employee members of the Company's Board of Directors, which were valued in the aggregate at approximately $80,000 and $85,000, respectively.
In February 1998, the Company issued 1,675,000 shares of its common stock at $23.50 per share in connection with the VLP Merger.
In prior years, the Company had issued a total of 2,202,099 warrants (including 61,984 issued during 1999), to purchase shares of common stock to certain joint venture partners, including 2,128,099 to Whitehall and 74,000 to its partners in CVW. Pursuant to the December 2000 Amendments, the Whitehall Warrants were returned and cancelled. The remaining warrants are all exercisable and expire in 2003.
In May 2000, the Company exchanged the 169,903 shares of class A common stock held by EQR for a like number of shares of the Company's class A-1 common stock. The class A-1 common stock's par value is $0.02 per share and has rights substantially similar to the class A common stock.
Approximately $2,712,000 of the Company's retained earnings at December 31, 2000 relates to undistributed earnings of the Company's joint venture investments. Distributions from Second Holding are limited to 48% of earnings. The balance above principally reflects this retained amount.
The Company did not declare or distribute any dividends during 2000, 1999 or 1998.
11. SHARE OPTION PLANS
The Company has adopted certain incentive plans for the purpose of attracting and retaining the Company's directors, officers and employees. The Company has established share option and management incentive plans (the "Incentive Plans") which reserved 2,538,118 common shares for issuance under the Incentive Plans. Options granted under the Incentive Plans expire ten years from the date of grant, vest over periods ranging generally from six months to five years, and generally contain the right to receive reload options under certain conditions.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
The following table presents the changes in options outstanding by year, as well as other plan data:
Pursuant to SFAS 123, described in Note 2, the pro forma net income available to common shareholders as if the fair value approach to accounting for share-based compensation had been applied (as well as the assumptions to calculate fair value using the Black-Scholes option pricing model) is as follows:
(amounts in thousands, except per share amounts)
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's employee share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee share options.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with five of its officers. Such agreements are for terms which expire between 2001 and 2003, and provide for aggregate minimum annual fixed payments of approximately $1,059,000, $1,033,000 and $349,000 in 2001, 2002 and 2003, respectively.
As a commercial real estate owner, the Company and its principal joint venture are subject to potential environmental costs. At December 31, 2000, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
From time-to-time, legal actions are brought against the Company in the ordinary course of business. In the opinion of management, such matters will not have a material effect on the Company's financial condition, results of operations or cash flows.
In 1997 the Company adopted a defined contribution savings plan pursuant to Section 401 of the Internal Revenue Code. Under such a plan there are no prior service costs. All employees are eligible to participate in the plan after three months of service. Employer contributions are made based on a discretionary amount determined by the Company's management. Employer contributions, if any, are based upon the amount contributed by an employee. During the years ended December 31, 2000, 1999 and 1998, the Company made contributions of approximately $35,000, $43,000 and $12,000, respectively.
The Company is a tenant under operating leases for its New York and Denver offices. Rent expense was approximately $853,000, $812,000 and $233,000 for the years ended December 31, 2000, 1999 and 1998 which includes base rent plus other charges. Future minimum lease payments under operating leases at December 31, 2000 are as follows:
FOR THE YEARS ENDED DECEMBER 31, AMOUNT -------------------------------- ------ 2001.................................. $ 769,000 2002.................................. 758,000 2003.................................. 753,000 2004.................................. 815,000 2005.................................. 815,000 Thereafter............................ 2,310,000
The Company and its joint venture partner, Whitehall, each have made limited guarantees for certain debt obligations on behalf of Wellsford/Whitehall. The Company and Whitehall each have guaranteed joint and severally up to a 50% share of the principal amount of $24,500,000 and a 50% share of interest on the current outstanding balance of $224,250,000 on the term and mezzanine loans in the event of certain defaults or non-compliance by Wellsford/Whitehall.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 2000, the Company had capital commitments to certain joint venture investments. The Company may make additional equity investments subject to board approval if deemed prudent to do so to protect or enhance its existing investment. At December 31, 2000, capital commitments are as follows:
COMMITMENT AMOUNT ---------- ------ Wellsford/Whitehall equity.......... $ 8,468,000 Wellsford/Whitehall loan............ 4,000,000 (A) Clairborne Prudential equity........ 10,208,000 (B)
- ----------
(A) Pursuant to the Amendments, the Company could provide for up to 40% of a $10,000,000 loan to, or equity investment in, the venture with its joint venture partner, Whitehall committed to fund the remaining $6,000,000. (B) Capital calls are subject to the Company's approval of such investments.
13. SEGMENT INFORMATION
The Company's operations are organized into three SBUs. The following table presents condensed balance sheet and operating data for these SBUs for 2000, 1999 and 1998:
(amounts in thousands)
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
(amounts in thousands)
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL ----------------------------------------------------
The Company's commercial property operations segment consists of Wellsford/Whitehall, which is accounted for on the equity method.
In 1997, at the time of the Spin-off, the Company owned six commercial office buildings, five of which were then vacant, containing an aggregate of approximately 949,400 square feet which were acquired for an aggregate of approximately $47,600,000 (the "WRP Commercial Properties").
In August 1997, the Company, in a joint venture with Whitehall, formed a private real estate operating company, Wellsford/Whitehall. The Company contributed the WRP Commercial Properties and Whitehall contributed four commercial properties upon formation of Wellsford/Whitehall. Prior to the Amendments, the Company managed Wellsford/Whitehall on a day-to-day basis. The Company had a 39.7% interest in Wellsford/Whitehall at December 31, 2000.
In December 2000, the Company and Whitehall executed the Amendments, which, among other items, provided for the Company and Whitehall to extend their existing capital commitments to Wellsford/Whitehall for one year to December 31, 2001 and to provide an aggregate of $10,000,000 of additional financing or preferred equity to Wellsford/Whitehall through December 2003, if required. As a result of the Amendments, an affiliate of Whitehall replaced the Company as the managing member of Wellsford/Whitehall. All employees working on Wellsford/Whitehall business were transferred from the Company to WP Commercial, L.L.C. ("WP"), the new management company, which is owned by affiliates of Whitehall and senior management of WP. WP will provide management, construction, development and leasing services to Wellsford/Whitehall based upon an agreed upon fee schedule. WP will also provide similar services to a new venture formed by Whitehall (the "New Venture").
Wellsford/Whitehall discontinued payment of a $600,000 annual administrative fee to the Company as of December 31, 2000; however, Whitehall has agreed to pay the Company fees with respect to assets 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. Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's common stock, which had previously been issued to Whitehall, were returned and cancelled.
Under the terms of the Amendments, it is expected that Wellsford/Whitehall will not purchase any new real estate assets, except in limited cases, to replace certain assets being sold or acquisitions that compliment presently owned real estate assets. The Amendments provide for an orderly disposal of the Wellsford/Whitehall's assets and the Company and Whitehall agreed to a buy/sell agreement effective after December 31, 2003 with respect to any remaining assets.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table presents a condensed balance sheet and operating data for the Wellsford/Whitehall segment:
(amounts in thousands)
As of December 31, 2000, Wellsford/Whitehall owned and operated 40 office properties totaling approximately 4,953,000 square feet (including approximately 1,522,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
During the years ended December 31, 2000, 1999 and 1998, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts)
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In March 2000, Wellsford/Whitehall obtained a $23,500,000 loan from Principal Capital Management, L.L.C. for the rehabilitation of Gateway Tower, a 236,000 square foot, nine-story office building located at 401 North Washington Street, Rockville, Maryland. At December 31, 2000, $15,500,000 was drawn upon this loan. The non-recourse loan is secured by a first mortgage on the property, has a term of three years, plus two six-month extensions at Wellsford/Whitehall's option and bears interest at LIBOR + 3.50% per annum.
In September 2000, Wellsford/Whitehall obtained a $8,150,000 loan from Provident Bank of Maryland, of which $4,371,000 was drawn upon at December 31, 2000. The non-recourse loan, which will be used to rehabilitate the property, is secured by the leasehold interest in the 144,000 square foot Oakland Ridge office park, a four building office complex located in Columbia, Maryland, has a term of 2.5 years, plus one twelve-month extension at Wellsford/Whitehall's option and bears interest at LIBOR + 2.00% per annum, which is capitalized into the loan.
The Company made temporary advances to Wellsford/Whitehall during 2000 and 1999 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000 and 1999, respectively.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility. Under the new terms, $300,000,000 represents a senior secured credit facility bearing interest at LIBOR + 1.65% per annum and $75,000,000 represents a second mezzanine facility bearing interest at LIBOR + 3.20% per annum. As of December 31, 2000, approximately $244,250,000 was outstanding under the Wellsford/Whitehall Bank Facility (approximately $181,728,000 of which was under the senior facility). At March 31, 2000, the ability to draw on this facility expired. Wellsford/Whitehall exercised its right under the agreements to have the due date of both facilities extended for one year to December 15, 2001. Wellsford/Whitehall is presently seeking to refinance the facilities. The Wellsford/Whitehall Bank Facility provides for the meeting of certain operating and balance sheet covenants and limits the amount of distributions to members.
The Company is entitled to receive incentive compensation payable out of distributions made by Wellsford/Whitehall (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to the Company and Whitehall. Pursuant to the Amendments, the Company will be entitled to earn 53.3% to 57.5% of the Promote. To date, the Company has not earned or received any distribution of the Promote and there can be no assurance that such Promote will be earned or received.
In June 1999, the capital commitment requirements of Wellsford/Whitehall were modified from an aggregate of $150,000,000 ($75,000,000 by each partner) to an aggregate of $250,000,000. The Company's total portion is $85,000,000 of which $8,468,000 remained to be contributed as of December 31, 2000 and Whitehall's total portion is $165,000,000 of which $47,249,000 remained as of December 31, 2000.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In connection with the formation of Wellsford/Whitehall, the Company issued warrants (the "Whitehall Warrants") to Whitehall to purchase 2,066,115 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until August 28, 2002 and payable in cash or membership units in Wellsford/Whitehall. As part of the new capital commitment from Whitehall in 1999, the Company issued additional warrants to purchase an additional 61,984 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until May 28, 2004 and payable in cash. Pursuant to the Amendments, all 2,128,099 Whitehall warrants were returned and cancelled. In addition, Whitehall's right to convert $25,000,000 of membership units in Wellsford/Whitehall for shares of the Company's common stock, or cash at the Company's election, was eliminated.
As a condition to the formation of Wellsford/Whitehall in 1997, the Company had agreed with Whitehall to conduct its business and activities relating to office properties (but not other types of commercial properties) located in North America solely through its interest in Wellsford/Whitehall. Whitehall has agreed to waive this condition in connection with the Amendments.
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL ---------------------------------------------
At December 31, 2000, the Company had the following investments: (i) approximately $37,824,000 of direct debt investments which bore interest at an average yield of approximately 11.45% during 2000 and had an average remaining term to maturity of approximately five years; (ii) approximately $31,298,000 in companies which were organized to invest in debt instruments; and (iii) approximately $6,851,000 in a real estate e-commerce company and other real estate-related ventures. In addition, the Company owned and operated six commercial properties totaling approximately 482,000 square feet located in the Northeastern United States at December 31, 2000.
DEBT INVESTMENTS
277 PARK LOAN
In April 1997, the Company and Fleet National Bank originated an $80,000,000 loan (the "277 Park Loan") to entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 1,750,000 square foot office building located in New York City (the "277 Park Property"). The Company has advanced $25,000,000 pursuant to the 277 Park Loan. The 277 Park Loan is secured primarily by a pledge of the Equity Interests owned by the borrowers. The 277 Park Loan is subordinated to a 10-year $345,000,000 (unamortized balance of $327,004,000 at December 31, 2000) first mortgage loan (the "REMIC Loan") on the 277 Park Property.
The 277 Park Loan bears interest at the rate of 12.00% per annum for the first nine years of its term and at a floating rate during the tenth year equal to LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per annum, as elected by the borrowers. The principal amount of the 277 Park Loan and all accrued interest will be payable in May 2007; the REMIC Loan is also due in May 2007. The Company earned approximately $3,050,000, $3,042,000 and $3,042,000 per year of interest income from the 277 Park Loan during 2000, 1999 and 1998, respectively, or 12.2%, 10.1% and11.7% of its total non-joint venture revenues during such periods.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
PATRIOT LOAN
In September 1999, the Company and Fleet National Bank originated a $10,000,000 second mortgage loan. Pursuant to this second mortgage loan, the Company advanced $5,000,000 (its 50% share) which is subordinate to a $75,000,000 first mortgage with Fleet National Bank (unamortized balance of $73,668,000 at December 31, 2000). The loan bears interest at LIBOR + 4.75% per annum with payments of interest only through August 2001 and principal and interest based on a 25-year amortization through the loan's maturity in July 2002 (the "Patriot Loan"). The Patriot Loan is secured by a second mortgage lien on a 608,000 square foot mixed-use property in Boston, Massachusetts. The Company earned approximately $564,000 and $189,000 of interest income from the Patriot Loan during 2000 and 1999, respectively, or 2.3% and 0.6% of its total non-joint venture revenues during such periods.
THE ABBEY COMPANY CREDIT FACILITY
In August 1997, the Company and Morgan Guaranty Trust Company of New York ("MGT") originated a $70,000,000 credit facility secured by first mortgages (the "Abbey Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May 1998, the Company and MGT expanded the Abbey Credit Facility to $120,000,000. In December 1998, Abbey repaid $20,000,000, thereby reducing the total available balance to $100,000,000. In September 1999, an additional $83,500,000 was repaid, thereby reducing the total available balance to $16,500,000. Advances under the facility were made for up to 65% of the value of the borrowing base collateral which consisted of first mortgage loans on three properties (one each of office, industrial and retail), all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance was approximately $4,300,000 at December 31, 1999. In August 2000, the remaining balance was repaid and the facility was terminated.
The Company was entitled to interest on its advances under the Abbey Credit Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000, $2,941,000 and $3,920,000 of interest income from the Abbey Credit Facility during 2000, 1999 and 1998, respectively, or 1.2%, 9.8% and 15.1% of its total non-joint venture revenues during such periods.
SAFEGUARD CREDIT FACILITY
In December 1998, the Company and MGT originated a $90,000,000 credit facility secured by cross-collateralized first mortgages on nine properties (the "Safeguard Credit Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit Facility which was made available to Safeguard until April 2001 was terminated on January 30, 2001 when the outstanding balance of $2,900,000 was repaid. Advances under the facility were made for up to 75% of the value of the borrowing base collateral which consists of nine self-storage properties, totaling approximately 608,000 square feet. The Company was entitled to interest on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
Approximately $5,900,000 had been advanced by the Company under the Safeguard Credit Facility at December 31, 1998, with additional advances made of approximately $2,200,000 through March 1999, at which time, the loan with a balance of $8,100,000 was contributed to the Company's joint venture investment, Second Holding. This venture also assumed the first $25,000,000 of the Company's commitment to fund additional advances under the Safeguard Credit Facility (including amounts advanced through December 31, 1999). The Company retained the remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard in September 1999 and was outstanding at December 31, 2000 and 1999, respectively. The Company earned approximately $306,000, $292,000 and $46,000 of interest income from the Safeguard Credit Facility during 2000, 1999 and 1998, respectively, or 1.2%, 1.0% and 0.2% of its total non-joint venture revenues during such periods.
DEBARTOLO LOAN
In July 1998, the Company, Bank One, N.A. and several other financial institutions originated a $175,000,000 loan, in which the Company had an $18,000,000 participation (the "DeBartolo Loan"), to entities owned by Simon DeBartolo Group, L.P. The DeBartolo Loan is secured by partnership units in Simon DeBartolo Group, L.P., the operating partnership of a real estate investment trust which owns shopping malls nationwide. The DeBartolo Loan bears interest at 8.547% per annum, is payable quarterly, pays principal based on a 20-year amortization schedule and is due in July 2008. In March 1999, the amortized loan balance of approximately $17,600,000 was contributed to Second Holding. The Company earned approximately $360,000 and $716,000 of interest income from the DeBartolo Loan during 1999 and 1998, respectively, or 1.2% and 2.8% of its non-joint venture revenues during such periods.
WOODLANDS LOAN
In December 1997, the Company, Fleet National Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders made available to the owners and developers of a 25,000 acre master-planned residential community located north of Houston (the "Woodlands Property"), loans in the aggregate principal amount of $369,000,000 (the "Woodlands Loan"). The Woodlands Loan consisted of a revolving credit loan in the principal amount of $179,000,000 (the "Revolving Loan"), a secured term loan in the principal amount of $130,000,000 (the "Secured Loan"), and a second secured term loan in the principal amount of $60,000,000 (the "Second Secured Loan"). The Company advanced $15,000,000 pursuant to the Second Secured Loan. The Second Secured Loan was subordinate to the Revolving Loan and the Secured Loan and bore interest equal to LIBOR + 4.40% per annum. The principal amount of the Woodlands Second Secured Loan was repaid in full prior to December 31, 1999. The Company earned approximately $1,295,000 and $1,517,000 of interest income from the Woodlands Second Secured Loan during 1999 and 1998, respectively, or 4.3% and 5.8% of its total non-joint venture revenues during such periods.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
REIT BRIDGE LOAN
In August 1998, the Company, Deutsche Bank, N.A. and certain other lenders originated a $100,000,000 unsecured loan in which the Company had a $15,000,000 participation (the "REIT Bridge Loan") to a publicly traded real estate investment trust which owned 22 regional malls, eight multifamily apartment properties and five office properties nationwide. This loan bore interest at 9.875% per annum and was due in February 1999, with two three-month extensions available to the borrower. In January 1999, the REIT Bridge Loan was modified to extend the maturity date to August 1999 and increased the interest rate to 12.00% per annum. The borrower paid a 1.50% loan fee at origination and a 1.00% loan fee upon modification. This loan was repaid in full in July 1999. The Company earned approximately $1,050,000 and $749,000 of interest income from the REIT Bridge Loan during 1999 and 1998, respectively, or 3.5% and 2.9% of its total non-joint venture revenues during such periods.
BROOMFIELD LOAN
In January 1999, the Company acquired a parcel of land in Broomfield, Colorado for approximately $7,200,000 pursuant to an outstanding standby commitment issued in 1998. In connection with this transaction, the Company collected approximately $401,000 of fees in 1998. In July 1999, the Company sold this land for $7,200,000 to a third party ("Buyer") and simultaneously collected an additional $1,100,000 in fees. The Company then purchased $11,740,000 of tax-exempt notes, bearing interest at 6.25% per annum and due in December 1999. These notes were issued by a quasi-governmental agency partially controlled by the Buyer and were guaranteed by a AA rated bank. The notes were repaid in full in December 1999. The Company earned approximately $1,555,000 and $401,000 on the Broomfield transaction during 1999 and 1998, respectively, or 5.2% and 1.5% of its total non-joint venture revenues during such periods.
SECOND HOLDING
The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to a 51% owned joint venture special purpose finance company ("SPFC"), Second Holding, with Liberty Hampshire owning 10% and another entity owning the remaining 39%. The 1999 contribution was comprised of two of the Company's debt investments, the $17,600,000 DeBartolo Loan and the $8,100,000 outstanding balance of the Safeguard Credit Facility, net of $1,500,000 of cash received back from Second Holding. The other partners contributed their respective shares of their capital contributions in cash.
The Company's investment in Second Holding, which is accounted for on the equity method, was approximately $27,868,000 and $30,932,000 at December 31, 2000 and 1999, respectively.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The following table presents a condensed balance sheet and operating data for Second Holding (1998 amounts are unaudited):
(amounts in thousands)
Second Holding has been organized to purchase investment and non-investment grade rated real estate debt. In September 2000 an affiliate of Second Holding privately placed a ten-year $150,000,000 junior subordinated bond issue. The bonds were issued at an effective annual interest rate of LIBOR + 0.90%. By December 31, 2000, $100,000,000 of medium term notes were issued at an effective annual interest rate of LIBOR + 0.06%.
By December 31, 2000, Second Holding invested $190,000,000 in a variety of collateralized debt obligations and commercial mortgage backed securities which earn interest at a weighted average interest rate of LIBOR + 0.55% per annum. Through February 28, 2001, Second Holding purchased an additional $35,000,000 of securities which earn interest at a weighted average interest rate of LIBOR + 0.52%. The aggregate investments of $225,000,000 have a weighted average life of approximately 7.1 years. Of the $225,000,000 purchased, $185,000,000 has a AAA rating with the remainder having a AA- or better.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
REIS REPORTS, INC.
The Company has direct and indirect investments in a real estate market research internet company, Reis Reports, Inc. ("Reis"), a leading provider of real estate market information to institutional investors. At December 31, 2000 the Company's aggregate investment in Reis was $6,575,000, or 22% of Reis' equity on an as converted basis. A portion of the investment is held directly by the Company and the remainder is held by Reis Capital Holdings, LLC ("Reis Capital"), a company which was organized to hold this investment. The Company has an approximate 51.1% non-controlling interest in Reis Capital at December 31, 2000. The following table details the components of the Company's and Reis Capital's investments in Reis.
At the time of the investments noted above, the management of Reis offered certain persons the opportunity to make an individual investment in Reis, including, but not limited to, certain directors and officers of the Company, or their affiliates, who purchased $410,000 of Series C Preferred in April 2000. The investments of the Company's officers and directors together with shares of common stock previously held by the Company's Chairman represent approximately 3.5% of Reis' equity, on an as converted basis upon completion of the aforementioned investments. Additionally, a company controlled by the Chairman of EQR purchased a 4.5% interest on that date. The president of EQR is a director of the Company. The Company's Chairman is the brother of the President of Reis. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. The Chairman, President and directors whom have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis.
One of the Company's other joint venture investments uses the services of Reis in making investment decisions. The joint venture incurred fees of $360,000 in connection with such services for each of the years ended December 31, 2000 and 1999.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
LIBERTY HAMPSHIRE
In July and August 1998, the Company invested a total of approximately $2,100,000 for an approximate 4.20% equity interest in Liberty Hampshire, which structures, establishes and provides management and services for SPFCs formed to invest in financial assets. In December 2000, the Company sold this interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The Company received $1,032,000 of cash and a note for the remaining balance of $4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and has scheduled annual principal and interest payments.
CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS
In January 1998, the Company formed CVW in which it had a 49% interest and acquired the same interest in a related real estate advisory and consulting firm. In September 2000, one of the two principals left CVW to pursue other employment and the venture was terminated. The Company will continue to conduct business relationships that CVW created.
CVW, together with Prudential Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance Company, established the Clairborne Investors Mortgage Investment Program ("Clairborne") to make opportunistic investments and to provide liquidity to lenders and participants in mortgage loan transactions. The parties agreed to contribute up to $150,000,000 to fund acquisitions approved by the parties, of which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW was to originate, co-invest, and manage the investments of the program.
The Company's original investment in these entities was $1,250,000 of cash and 74,000 five-year warrants to purchase the Company's common shares at $30.35 per share, valued at approximately $750,000 at that time. In November 1998, Clairborne acquired an approximate $17,000,000 participation in a $56,000,000 mortgage, bearing interest at LIBOR + 1.75% per annum and due in 3.5 years, at a significant discount to face value. The Company funded approximately $1,400,000 of the cost of this participation, which was prepaid entirely at the face amount during 1999 by the borrower.
FORDHAM TOWER LOAN
In October 2000, the Company and PREI organized a new venture which provided an aggregate of $34,000,000 of mezzanine financing for the construction of Fordham Tower, a 50-story, 244 unit, luxury condominium apartment project to be built on Chicago's near northside. The Company fully funded its share of the loan of $3,400,000. The loan, which matures in October 2003, bears interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and the Company and fees to the Company, based upon certain levels of returns on the project and is secured by a lien on equity interests in the borrower.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
OTHER INVESTMENTS
VALUE PROPERTY TRUST
In February 1998, the Company completed the merger with Value Property Trust ("VLP") (the "VLP Merger") for total consideration of approximately $169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP properties, which were under contract to an affiliate of Whitehall, were subsequently sold for an aggregate of approximately $64,000,000. The Company retained seven of the VLP properties with an allocated value upon purchase of approximately $38,300,000, containing an aggregate of approximately 597,000 square feet with one property located in California and the remaining six properties located in the northeastern United States. VLP had cash of $60,800,000 and other net assets of $5,900,000 at the close of the transaction. In October 1998, the Company obtained a $28,000,000 loan, which was cross-collateralized by the seven VLP properties, bore interest at LIBOR + 2.75% per annum and matures in October 2001.
During the fourth quarter of 2000, the Company made the strategic decision to sell the seven VLP properties. One of the properties was sold in December 2000 and two of the properties were sold in January 2001. The Company recorded a gain of approximately $4,943,000 on the December transaction which was offset by a provision for impairment of $4,725,000 recorded in 2000, attributable to expected sales proceeds being less than the respective carrying amounts on four of the remaining six unsold VLP properties at December 31, 2000. The Company repaid in full the $28,000,000 loan in December 2000 which was cross-collateralized by the seven properties and expensed all of the remaining unamortized deferred loan costs associated with the financing.
PROPERTY DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT ---------------------------------------------------------------
PALOMINO PARK
The Company currently owns an 85.85% interest in a five phase 1,800 unit class A multifamily development ("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. Effective October 1, 2000, EQR elected not to make a capital contribution attributable to the last three phases of Palomino Park and its ownership interest was reduced from 20.00% to 14.15%. In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,500,000. At that time, the Company obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in January 2008 and bears interest at a fixed rate of 6.92% per annum. Principal payments are based on a 30-year amortization schedule.
In November 1998, Phase II, the 304 unit phase known as Red Canyon, was completed at a cost of approximately $33,900,000. At that time, the Company acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage matures in December 2008 and bears interest at a fixed rate of 6.68% per annum. Principal payments are based on a 30-year amortization schedule.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In October 2000, Phase III, the 264 unit phase known as Silver Mesa was substantially completed. The Company made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, the Company has prepared 128 units to be sold and will begin to sell them upon receipt of appropriate approvals and will continue to rent the remaining 136 units during the sellout period until the initial inventory has been significantly reduced and additional units need to be prepared for sale. In conjunction with this decision, the Company made a payment of $2,075,000 to reduce the outstanding balance on the tax-exempt bonds in order to obtain the release of the Silver Mesa phase from the Palomino Park Bond collateral. The allocable cost associated with the units being rented and the units available for sale was approximately $22,301,000 and $21,850,000 at December 31, 2000, respectively. In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum, is collateralized by the unsold units, matures in December 2003 and provides for one six-month extension at the Company's option. Approximately 90% of sales proceeds per unit goes toward principal repayments until the loan is paid in full.
In February 2001, the Company commenced sales of units at Silver Mesa. Through February 28, 2001, 23 units were sold for gross proceeds of approximately $4,292,000, approximately $3,890,000 of which was used to pay down principal on the Silver Mesa Conversion Loan.
The estimated total costs of the remaining two multifamily development phases at Palomino Park and related infrastructure costs at completion of these phases, including the Company's gross investment at December 31, 2000, are as follows:
The fourth phase of this project is being developed pursuant to a fixed-price contract. The Company is committed to purchase 100% of the improvements upon completion. In addition, the Company was obligated to fund the first 20% of development costs on the phase as incurred.
SONTERRA AT WILLIAMS CENTRE ("SONTERRA")
From the time of the Spin-off, the Company held a $17,800,000 mortgage on, and option to purchase, a 344-unit class A residential apartment complex located in Tucson, Arizona.
In January 1998, the Company exercised its option and acquired Sonterra for approximately $20,500,000, including satisfaction of the mortgage. In February 1998, the Company closed on $16,400,000 of first mortgage financing (the "Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in March 2008. Principal payments were based on a 30-year amortization schedule.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In November 2000, the Company sold the Sonterra property for $22,550,000 and recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed the Sonterra Mortgage which had an unamortized balance of approximately $15,971,000 and paid the balance of the purchase price in cash.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the historical cost and fair value of the Company's financial instruments at December 31, 2000 and 1999:
(AMOUNTS IN THOUSANDS)
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
Summarized consolidated quarterly financial information for the years ended December 31, 2000 and 1999 is as follows:
Wellsford/Whitehall Group, L.L.C.
and Subsidiaries
Consolidated Financial Statements
DECEMBER 31, 2000
WITH REPORT OF INDEPENDENT AUDITORS
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. --------
Report of Independent Auditors............................................F-43
Consolidated Balance Sheets...............................................F-44
Consolidated Statements of Income.........................................F-45
Consolidated Statements of Changes in Members' Equity.....................F-46
Consolidated Statements of Cash Flows.....................................F-47
Notes to Consolidated Financial Statements................................F-49
REPORT OF INDEPENDENT AUDITORS
To the Members of Wellsford/Whitehall Group, L.L.C. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Wellsford/Whitehall Group, L.L.C. (formerly Wellsford/Whitehall Properties II, L.L.C.) and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in members' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellsford/Whitehall Group, L.L.C. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 9, 2001
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Wellsford/Whitehall Group, L.L.C. and subsidiaries (the "Company") was formed in May 1999 by the then members of Wellsford/Whitehall Properties II, L.L.C. ("Properties"). Properties was a joint venture between Wellsford Commercial Properties Trust ("WCPT"), a subsidiary of Wellsford Real Properties, Inc. ("WRP"), WHWEL Real Estate Limited Partnership ("WHWEL"), an affiliate of The Goldman Sachs Group Inc. (the "Whitehall Members"), and the Saracen Members (collectively, the "Properties' Members"). Properties (formerly Wellsford/Whitehall Properties, L.L.C.) was formed on August 28, 1997 as a private real estate investment company. WCPT intends to qualify as a real estate investment trust ("REIT").
On May 28, 1999, the Properties' Members assigned their interests in Properties to the Company and two affiliates of WHWEL contributed two office buildings, located in Warren, NJ with an aggregate value of approximately $7.9 million in exchange for membership units. No other changes occurred in the operations of the owned properties at that time.
On December 21, 2000, the Company's Members agreed to a number of modifications to the existing operating agreement, and WRP and the Whitehall Members entered into several other agreements. Among other items, WRP and the Whitehall Members agreed to extend their capital commitments to the Company for one year to December 31, 2001 and to provide an aggregate of $10 million of additional financing or preferred equity to the Company through December 2003, if required. An affiliate of the Whitehall Members replaced WCPT as the managing member of the Company. All employees working on Company business were transferred from WRP to WP Commercial, L.L.C. ("WP"), the new management company, which is owned by affiliates of the Whitehall Members and senior management of WP. At the same time, WHWEL transferred part of its interests in the Company to WP. WP will provide management, construction, development and leasing services to the Company based upon an agreed upon fee schedule and will also provide such services to a new venture organized by certain of the Whitehall Members ("New Venture").
The Company will no longer pay a $600,000 annual administrative fee to WRP after December 31, 2000; however, the Whitehall Members have agreed to separately pay WRP fees for assets sold by the Company equal to 25 basis points of the sales proceeds and up to 60 basis points (30 basis points are deferred pending certain hurdles being reached) for each purchase of real estate made by the New Venture or certain other affiliates of the Whitehall Members, until such purchases aggregate $400 million. The Whitehall Members also agreed to return to WRP approximately 2.1 million warrants to purchase common shares of WRP.
Under the terms of the agreements, it is expected that the Company will not purchase any new real estate assets, except in limited cases, to replace certain assets being sold or assets that compliment presently owned real estate assets. The Members agreed to an orderly disposal of the Company's assets and WCPT and the Whitehall Members agreed to a buy/sell agreement effective after December 31, 2003 with respect to any remaining assets. In connection with the agreements, the Company agreed to transfer to the New Venture three recently acquired assets at costs plus interest. These assets were held solely for the benefit of the New Venture and were acquired for a total of $15.2 million, net of $4 million seller financing on one asset. The assets are shown, net of aggregate deposits of $11.3 million received by the Company in December 2000, on the accompanying Consolidated Balance Sheets as real estate held for transfer to New Venture. The transfer occurred on January 4, 2001 at an aggregate amount of $16.5 million.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ORGANIZATION AND BUSINESS (CONTINUED)
On May 15, 1998, 13 office buildings located in suburban Boston with an aggregate value of approximately $148.7 million were contributed to Properties for a combination of cash, Series A convertible preferred membership units and membership units (the "Saracen Transaction"). In connection with this transaction, several shareholders of the Saracen Companies (the "Saracen Members") were issued both Series A convertible preferred membership units and membership units and Properties assumed a mortgage loan on six of the properties aggregating approximately $68.3 million.
The Company will terminate on December 31, 2045, unless sooner by the written consent of WHWEL, WXI/WWG Realty, L.L.C., W/W Group Holdings, L.L.C., WP and WCPT or by the triggering of the aforementioned buy/sell agreement.
The Company has sought to acquire commercial properties and create value through adaptive reuse. The Company believes that appropriate well-located commercial properties which are currently underperforming can be acquired on advantageous terms and repositioned with the expectation of achieving enhanced returns which are greater than returns which could be achieved by acquiring stabilized properties. Effective January 1, 2001, WP became the Manager of the Company on a day-to-day basis; certain major and operational decisions require the consent of the Members.
As of December 31, 2000, the Company owned and operated 40 office properties totaling approximately 4,953,000 square feet, including approximately 1,522,000 square feet under renovation. The properties are located in Northern New Jersey (19), Downtown and Suburban Boston (17), and Suburban Baltimore and Washington, DC (4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and Properties and its wholly owned subsidiaries for their respective periods of ownership. All significant inter-company accounts and transactions among the Company and Properties and their subsidiaries have been eliminated in consolidation. CASH AND CASH EQUIVALENTS. The Company considers all demand and money market accounts and short-term investments in government funds with an original maturity of three months or less when purchased to be cash and cash equivalents. RESTRICTED CASH. Restricted cash primarily consists of debt service reserve balances. REAL ESTATE AND DEPRECIATION. Real estate assets are stated at cost. Costs directly related to the acquisition and improvement of real estate are capitalized, including the purchase price, legal fees, acquisition costs, interest, property taxes and other operational costs during the period of development and until the lease up of the acquired development properties. Ordinary repairs and maintenance items are expensed as incurred. Replacements and betterments are capitalized and depreciated over their estimated useful lives. Tenant improvements and leasing commissions are capitalized and amortized over the terms of the related leases. Depreciation is computed over the expected useful lives of the depreciable property on a straight-line basis, principally 40 years for commercial properties and 5 to 12 years for furnishings and equipment. Statement of Financial Accounting Standard ("SFAS") 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 has not had an impact on the accompanying consolidated financial statements.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS. Deferred costs consist primarily of costs incurred to obtain financing. Such deferred financing costs are amortized over the expected term of the respective agreements; such amortization is included in interest expense in the accompanying Consolidated Statements of Income. FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments consist of cash and cash equivalents and long-term debt. The Company believes that the carrying amount of cash and cash equivalents approximates fair value due to the short maturity of this item. In addition, the Company believes that the carrying values of its senior secured credit facility, its secured mezzanine credit facility and certain mortgages approximate fair values because such debt consists of variable rate debt that reprices frequently. The Company believes that the carrying values of the remainder of the mortgage loans approximate fair values based upon various market data analysis. INTEREST RATE PROTECTION AGREEMENT. To limit the impact of certain changes in interest rates on its long-term debt, the Company entered into an interest rate protection agreement. This agreement limits the variable interest rate that can be charged on a notional amount of long-term debt. Amounts paid for this agreement are amortized over the term of the agreement and are included in interest expense. The fair value of the interest rate protection agreement and changes in the fair value as a result of changes in market interest rate are not recognized in the accompanying financial statements. INTEREST RATE SWAP AGREEMENT. To reduce the impact of certain changes in interest rates on its long-term debt, the Company entered into an interest rate swap agreement during 1998. This agreement involved the exchange of amounts based on a variable interest rate for amounts based on a fixed interest rate over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is settled quarterly and recognized as an adjustment to interest expense (the accrual accounting method). The fair value of the swap agreement and changes in the fair value as a result of changes in market interest rate are not recognized in the accompanying consolidated financial statements. There have been no gains or losses on the interest-rate swap agreement in 2000, 1999 or 1998. The swap agreement expired in 2000. PROFIT AND REVENUE RECOGNITION. Sales of real estate assets are recognized at closing, subject to the receipt of down payments and other requirements in accordance with applicable accounting guidelines. Commercial properties are leased under operating leases. Rental revenue is recognized on a straight-line basis over the terms of the respective leases. INCOME TAXES. The Company is a limited liability company as were the predecessor companies. In accordance with the tax law regarding such entities, each of the Company's membership unit holders is responsible for reporting their share of the Company's taxable income or loss on their separate tax returns. Accordingly, the Company has recorded no provision for Federal, state or local income taxes. PER UNIT DATA. Net income per membership unit is computed based upon the weighted average number of membership units outstanding during the period. The assumed conversion of the Series A convertible preferred membership units is dilutive in 1999, and anti-dilutive in 2000 and 1998. ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES was issued. In June1999, SFAS No. 137--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 (AN AMENDMENT OF FASB STATEMENT NO. 133) was issued. SFAS No. 137 extended the required date of adoption of SFAS No. 133 to the fiscal year beginning June 15, 2000. Although SFAS No. 137 permits early adoption, the Company will adopt SFAS No. 133 effective January 1, 2001. The Company does not anticipate that the adoption of SFAS No. 133 will have a material effect on its results of operations or financial position. RECLASSIFICATIONS. Certain reclassifications have been made to the prior period presentation to conform with the current year.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMERCIAL PROPERTIES
The Company owns the following commercial properties at December 31, 2000 and 1999:
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMERCIAL PROPERTIES (CONTINUED)
No individual tenant aggregated greater than 11% of rental revenue in 2000 or 7% in 1999.
The Company capitalizes interest related to buildings under renovation to the extent such assets qualify for capitalization. Total interest incurred and capitalized was $33,004,102 and $8,953,903, $28,627,209 and $5,867,396 and $20,385,672 and $2,973,069 respectively, for the years ended December 31, 2000, 1999 and 1998.
The Company sold the following buildings and properties:
4. LEASES
Office space in the properties is generally leased to tenants under lease terms which provide for the tenants to pay base rents plus increases in operating expenses in excess of specified amounts.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASES (CONTINUED)
Non-cancelable operating leases with tenants expire on various dates through 2016. The future minimum lease payments to be received under leases existing as of December 31, 2000, are as follows:
(amounts in thousands)
PROPERTIES COLLATERALIZING -------------------------- FOR THE YEARS ENDED DECEMBER 31, TOTAL BANK FACILITY OTHER - -------------------------------- ----- ------------- ----- 2001................ $ 74,433 $ 62,845 $ 11,588 2002................ 68,671 54,958 13,713 2003................ 64,363 51,046 13,317 2004................ 48,128 35,586 12,542 2005................ 40,004 27,725 12,279 Thereafter.......... 153,504 68,657 84,847 --------- ---------- ---------- Total............... $ 449,103 $ 300,817 $ 148,286 ========= ========== ==========
The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses which amounted to approximately $7,895,000, $6,543,000 and $4,878,000 for the years ended December 31, 2000, 1999 and 1998, respectively. These amounts have been included in rental income in the accompanying consolidated statements of income.
5. GROUND LEASES
The leasehold interests in two buildings totaling 291,000 square feet and 15.22 acres of developable land are subject to ground leases. At December 31, 2000, aggregate future minimum rental payments under the leases which expire in October 2066, April 2077 and January 2084, are as follows:
(amounts in thousands)
FOR THE YEARS ENDED DECEMBER 31, AMOUNT -------------------------------- ------ 2001................................ $ 215 2002................................ 216 2003................................ 218 2004................................ 231 2005................................ 233 Thereafter......................... 28,093 --------- Total............................... $ 29,206 =========
6. LONG TERM DEBT
The Company's long-term debt consisted of the following:
(amounts in thousands)
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG TERM DEBT (CONTINUED)
The Company's transactions described in Note 1 were funded primarily by capital contributions from WCPT and Whitehall, by approximately $47.6 million in debt which encumbered certain of the properties contributed by Whitehall (the "Atrium Loan") which was assumed by the Company, and by a mortgage ("Mortgage") between the Company and WRP. The Atrium Loan was repaid in 1997.
Pursuant to an unsecured loan, WRP had agreed to loan the Company up to approximately $86.3 million bearing interest at LIBOR + 3.00% until November 1997 and at LIBOR + 4.00% until maturity in June 1998 (the "Unsecured Loan"). This loan was repaid in June 1998. Interest expense on the Unsecured Loan was $145,321in 1998.
In December 1997, the Company obtained a $375 million loan facility (the "Prior Bank Facility") consisting of a secured term loan facility ("Secured Term Loan") of up to $225 million and a secured revolving credit facility ("Secured Revolving Credit Facility") of up to $150 million. The term loan facility bore interest at LIBOR + 1.60% and had a term of four years; the revolving credit facility bore interest at LIBOR + 2.50% and had a term of three years. Interest expense on the Prior Bank Facility was $7,456,062 in 1998.
In July 1998, the Company modified the Prior Bank Facility with Fleet National Bank and Goldman Sachs Mortgage to provide for a secured senior credit facility ("Secured Senior Credit Facility") of up to $300 million and a secured mezzanine credit facility ("Secured Mezzanine Credit Facility") of up to $75 million (collectively, the "Bank Facility"). The loans bear interest at LIBOR + 1.65% and LIBOR + 3.20%, respectively, and are now due on December 15, 2001 after a one year extension granted under the terms of the existing agreements, in December 2000. The proceeds from the Bank Facility were used to repay amounts outstanding under the Prior Bank Facility. No additional amounts can be borrowed under the Bank Facility after March 31, 2001. Interest expense on the Secured Senior Credit Facility and the Secured Mezzanine Credit Facility was $14,929,905 and $6,122,440, respectively, in 2000, $15,293,524 and $6,088,260, respectively, in 1999 and $6,643,428 and $2,697,381, respectively, in 1998. The 30-day LIBOR rate was 6.57% 6.30% and 4.94% at December 31, 2000, 1999 and 1998, respectively.
WCPT and WHWEL each have made limited guarantees of the Bank Facility on behalf of the Company. WCPT and WHWEL each have guaranteed joint and severally up to a 50% share of the principal amount of $24.5 million and 50% share of interest on the $375 million term and mezzanine loans in the event of certain defaults or non-compliance by the Company.
In connection with the Saracen transaction, the Company assumed a mortgage loan held by Nomura Asset Capital Corporation in the original amount of approximately $68.3 million (the "Nomura Loan"). The loan bears interest at a rate of 8.03% and requires monthly payments of principal and interest until maturity in February 2027.
During 2000 and 1999, the Company obtained eight mortgages to acquire and improve eight properties including one second mortgage provided by the seller on one property (the "Other Mortgage Loans"). The interest rates on the Other Mortgage Loans range from LIBOR + 2.05% to 10.50% and the maturity dates range from May 30, 2002 to May 31, 2019.
The Company has guaranteed the completion of the renovation of one of the properties encumbered by one of the mortgage loans and has agreed to indemnify the lender, Provident Bank of Maryland, from any losses resulting from the failure to complete the renovation.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG TERM DEBT (CONTINUED)
The Bank Facility and the Nomura Loan contain various customary covenants including the ratio of liabilities to assets, debt service coverage, minimum equity, and the amount of distributions that can be paid to Members among other covenants. As of December 31, 2000 and 1999, the Company was in compliance with the terms of covenants under all loan agreements.
The aggregate maturities for the Company's long-term debt obligations for each of the next five years and thereafter are as follows:
To reduce the impact of certain changes in interest rates on its long-term debt, the Company entered into two interest rate protection agreements and an interest rate swap agreement. One interest rate protection agreement caps LIBOR at 7.50% for up to $300 million through March 15, 2001 and for up to $200 million through May 15, 2001. The other interest rate protection agreement capped LIBOR at 7.69% for up to $64 million through June 15, 2000. The interest rate swap agreement fixed LIBOR at 5.90% for up to $220 million until May 15, 2000. The cost of these interest rate protection agreements is being amortized over their lives. The amortization of the interest rate protection agreements and the net settlement amount of the interest rate swap agreement, which is recorded as an adjustment to interest expense in 2000, 1999 and 1998, aggregated approximately $416,000, $1,354,000 and $459,000, respectively.
7. TRANSACTIONS WITH AFFILIATES
In connection with the formation of the Company in 1997 and the new capital commitment from Whitehall in 1999, WRP issued warrants to Whitehall to purchase a total of 2,128,098 shares of WRP's common stock at an exercise price of $24.20 per share, payable in cash or in exchange for membership units of the Company. These warrants were not exercised and were surrendered on December 21, 2000, pursuant to the agreements discussed in Note 1.
Under the terms of the joint venture, WCPT, as managing member of the Company, was entitled to an administrative fee of $600,000 per year for the reimbursement of salaries and costs incurred relating to the operation of the Company through December 31, 2000. Such fees were $600,000 in each of the years ended December 31, 2000 and 1999, respectively, and $300,000 for the year ended December 31, 1998.
The Company earned interest income of approximately $675,000 in 2000 at LIBOR + 4.00% based upon the total investment in the three real estate assets transferred to the New Venture on January 4, 2001, as discussed in Note 1.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Company incurred aggregate interest to WRP on short-term advances during the years ended December 31, 2000 and 1999 of approximately $703,000 and $517,000, respectively. The interest rate charged was LIBOR + 5.00%.
An affiliate of Whitehall performed asset management services for the Company for which the Company incurred fees of approximately $133,000 for the year ended December 31, 1998. This contract expired February 25, 1998.
Affiliates of the Saracen Members performed asset management and property management services for the Company. These fees amounted to approximately $649,000 for the year ended December 31, 1998. Fees paid during 1999 amounted to $495,000 which included asset management fees through January 21, 1999, when the asset management agreement was terminated. Upon termination, the Company agreed to pay $1 million in 2004, plus quarterly interest at 10% per annum paid currently. Property management fees amounted to approximately $528,000 for the year ended December 31, 2000.
At December 31, 2000, the Company has approximately $978,000 of receivables from its Members or their affiliates, which amount is included in receivables, prepaids and other assets on the accompanying consolidated balance sheets. At December 31, 1999, the Company had aggregate accrued expenses and other liabilities of approximately $463,000 due to Members or affiliated companies for unpaid fees, interest and other items.
Affiliates of the Saracen Members lease space at 7/57 Wells Avenue. Revenue related to these leases for the years ended December 31, 2000, 1999 and 1998, amounted to $44,826, $43,650 and $67,572, respectively.
Also, as part of the agreements described in Note 1, the Company entered into arrangements with WP beginning January 1, 2001, to pay for development, construction and leasing fees based upon a schedule of rates for each geographic area the Company operates in, as well as an administrative cost and expense management fee equal to 93 basis points of an agreed upon initial aggregate asset value of $700 million of the Company's real estate assets. The fee will be reduced six months after any asset is sold pursuant to an agreed upon formula. As part of the agreements described in Note 1, the Company entered into lease agreements with WP for office space at three buildings owned by the Company; such agreements provide for minimum annual lease payments aggregating approximately $323,000 beginning January 1, 2001.
See Notes 1, 6 and 9 for additional related party interest information.
8. MEMBERS' EQUITY
WRP, through WCPT, and WP are entitled to receive incentive compensation, payable out of distributions, made by the Company to WCPT and the Whitehall members (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to WCPT and Whitehall (as defined in the Company's Operating Agreement). To date, neither WRP nor WP have earned or received any distribution of the Promote.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MEMBERS' EQUITY (CONTINUED)
At December 31, 2000, WCPT and the Whitehall entities have committed to make additional equity contributions through December 31, 2001, of approximately $8,468,000 and $47,249,000 respectively, for new acquisitions, renovations and working capital. Also, WCPT or WRP and the Whitehall Members have agreed to contribute an aggregate of $10 million on a revolving, as needed basis ("Revolving Equity") through December 31, 2003. This Revolving Equity accrues dividends at a rate of LIBOR + 5.00% and is subordinate to the Series A convertible preferred equity, but is senior to the membership units.
At the formation of the Company, 2,505,000 membership units were issued to WCPT, representing its 50.1% interest, and 2,495,000 units were issued to Whitehall, representing its 49.9% interest. Subsequently, an additional 3,168,000 and 5,684,000 units were issued to WCPT and Whitehall (210,000 and 900,000, respectively, in 2000), respectively, in connection with net additional capital contributions used to fund acquisitions and renovations. The Members have established a price of $18.00 for membership units contributed after October 2000, subject to adjustment as returns of capital are made.
In connection with the Saracen Transaction, 468,557 membership units and 760,000 Series A convertible preferred membership units were issued to the Saracen Members. The membership units were issued at a price of $16.22 per membership unit. The Series A convertible preferred membership units are convertible into membership units at a price of $18.65 per membership unit. These units also provide for cumulative dividend payments of the greater of (a) 6% or (b) the dividend payable to membership unit holders, calculated on an as converted basis, payable quarterly in arrears, and have a liquidation preference of $25.00 per Series A convertible preferred membership unit plus accrued and unpaid distributions. In February 2000, the Company redeemed the 16,717 membership units and 27,098 Series A convertible preferred membership units held by one of the Saracen members for an aggregate amount of $750,000.
The number of membership units issued and outstanding are as follows:
DECEMBER 31, ------------ 2000 1999 1998 ---- ---- ---- WCPT...................... 5,673,012 5,463,413 4,744,028 Whitehall................. 8,178,620 7,279,111 4,727,740 Saracen Members........... 451,840 468,557 468,557 ---------- ---------- --------- Total..................... 14,303,472 13,211,081 9,940,325 ========== ========== =========
Distributions of $3,007,481 were declared on November 19, 1998 to membership unit holders on record as of that date. These distributions were paid during the first quarter 1999. During 2000 and 1999, additional distributions of $4,540,834 and $19,284,324, respectively, were declared, of which $2,253,520 and $5,323,534 remained unpaid at December 31, 2000 and 1999, respectively.
9. COMMITMENTS AND CONTINGENCIES
Under the terms of the Company's joint venture agreement, Whitehall may require the Company to sell any and all of its properties to an independent third party purchaser, subject to certain restrictions. In addition, Whitehall may trigger the sale of the Pointview project to either WCPT or Whitehall, subject to certain conditions. Subsequent to December 31, 2003, Whitehall may trigger the sale of all of the Company's membership units or remaining assets to either WCPT or Whitehall, subject to certain conditions.
WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
As a commercial real estate owner, the Company is subject to potential environmental costs. At December 31, 2000, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company's consolidated financial condition, consolidated results of operations or consolidated cash flows.
From time to time, legal actions are brought against the Company in the ordinary course of business. In the opinion of management, such matters will not have a material effect on the Company's consolidated financial condition, consolidated results of operations or consolidated cash flows.
The Company has management agreements with unaffiliated property management companies to manage the operations of the properties. Management fees are generally based on 2% to 3% of gross rentals collected and are generally terminable on 30 days notice.
See Notes 1, 6 and 7 for additional commitments and contingencies.
10. SUBSEQUENT EVENTS (UNAUDITED)
In November 2000, the Company executed an agreement to sell five properties located in suburban Boston, totaling 102,000 SF, for $18 million. The sale was completed in February 2001. The Company is also negotiating a contract to sell one property located in Portland, Maine, acquired in the same transaction as the five properties, for approximately $1.6 million. Such transaction is expected to close during the second quarter of 2001. These transactions should result in a net gain of approximately $3.6 million.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (amounts in thousands, except square footage and units)
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WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS)
The following is a reconciliation of real estate assets and accumulated depreciation:
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WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE IV MORTGAGE NOTES ON REAL ESTATE DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS)
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